ARROW FUNDS, 485BPOS, 1995-11-22

ARROW FUNDS
485BPOS, 1995-11-22

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1933 Act File No. 33-49007
1940 Act File No. 811-7041

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X

Pre-Effective Amendment No. ..........

Post-Effective Amendment No. 4 ..........

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X

Amendment No. 5 ..........................

ARROW FUNDS

(Exact Name of Registrant as Specified in Charter)

Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)

(412) 288-1900
(Registrant's Telephone Number)

John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)

It is proposed that this filing will become effective:

immediately upon filing pursuant to paragraph (b)
X on November 30, 1995 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a) (i)
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on pursuant to paragraph (a)(ii) of Rule 485.
-----------------

If appropriate, check the following box:

This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of
1940, and:

X filed the Notice required by that Rule on November 17, 1995; or
intends to file the Notice required by that Rule on or about
; or
------------
during the most recent fiscal year did not sell any securities pursuant
to Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to
Rule 24f-2(b)(2), need not file the Notice.

Copies to:

Thomas J. Donnelly, Esquire
Houston, Houston & Donnelly
2510 Centre City Tower
650 Smithfield Street
Pittsburgh, Pennsylvania 15222

CROSS-REFERENCE SHEET

This Amendment to the Registration Statement of the ARROW FUNDS, which
consists of four portfolios: (1) Arrow Equity Portfolio; (2) Arrow Fixed
Income Portfolio; (3) Arrow Municipal Income Protfolio; and (4) Arrow
Government Money Market Portfolio, is comprised of the following:

PART A. INFORMATION REQUIRED IN A PROSPECTUS.

Prospectus Heading
(Rule 404(c) Cross Reference)

Item 1. Cover Page...............(1-4) Cover Page.
Item 2. Synopsis.................(1,2,3) Synopsis, Risk Factors; (1,2,3)
Expenses of the Funds; (4) Summary of
Fund Expenses.
Item 3. Condensed Financial
Information.............(1-4) Financial Highlights, Performance
Information.
Item 4. General Description of
Registrant..............(4) General Information, Investment
Information, Investment Objective,
Investment Policies, Investment
Limitations, Regulatory Compliance;
(1,2,3) Synopsis, Objective of Each
Fund, Investment Policies, Portfolio
Investments and Strategies, Borrowing
Money, Diversification, Restricted and
Illiquid Securities, Repurchase
Agreements, Investing in Securities of
Other Investment Companies, When-Issued
and Delayed Delivery Transactions, Put
and Call Options, Futures and Options on
Futures, Lending of Portfolio
Securities, Investments in Foreign
Securities, Ratings.
Item 5. Management of the Fund...(1-4) Arrow Funds Information; (1,2,3)
Management of the Trust; (4) Arrow Funds
Information, Management of Arrow Funds;
(1-4) Administration of the Fund(s);
(1,2,3) Brokerage Transactions.
Item 6. Capital Stock and Other
Securities.............(1,2,3) Dividends and Distributions; (4)
Dividends, Capital Gains; (1-4)
Shareholder Information, Voting Rights,
Massachusetts Partmership Law, Effect of
Banking Laws, Tax Information, Federal
Income Tax; (1,2,3) Additional Tax
Information for Municipal Income Fund,
Other State and Local Taxes.

Item 7. Purchase of Securities Being
Offered.................(1-4) Net Asset Value; (1-4) Investing
in the Fund(s); (1,2,3) Distribution of
Shares of the Funds, Distribution Plan,
Shareholder Servicing Arrangements; (4)
Distribution of Fund Shares, Shareholder
Servicing Arrangements; (1,2,3) Share
Purchases, Minimum Investment Required,
What Shares Cost, Reducing/Eliminating
the Sales Charge, Systematic Investment
Program, Certificates and Confirmations;
(4) Minimum Investment Required, What
Shares Cost, Share Purchases, Systematic
Investment Plan, Certificates and
Confirmations; (1-4) Exchange Privilege;
(1,2,3) Purchases at Net Asset Value,
Dealer Concessions.
Item 8. Redemption or Repurchase.(1-4) Redeeming Shares, Through Mark
Twain, By Telephone, By Mail, Receiving
Payment, Systematic Withdrawal Program,
Accounts with Low Balances; (4)
Checkwriting.
Item 9. Pending Legal Proceedings None

PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.

Item 10. Cover Page...............(1-4) Cover Page.
Item 11. Table of Contents........(1-4) Table of Contents.
Item 12. General Information and
History.................(1-3) General Information about the
Trust. (4) General Information about the
Fund.
Item 13. Investment Objectives and
Policies................(1,2,3) Investment Objectives and
Policies of the Funds; (4) Investment
Objective.
Item 14. Management of the Fund...(1-4) Arrow Funds Management.
Item 15. Control Persons and Principal
Holders of Securities....Not applicable.
Item 16. Investment Advisory and Other
Services................(1-4) Investment Advisory Services;
Administrative Services; Custodian.
Item 17. Brokerage Allocation.....(1-4) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities..............Not applicable.
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered.................(1-4) Purchasing Shares; Determining Net
Asset Value; Redeeming Shares.
Item 20. Tax Status...............(1-4) Tax Status.
Item 21. Underwriters.............(1-4) Shareholder Servicing
Arrangements.
Item 22. Calculation of Performance
Data....................(1-4) Yield; (1,2,3) Total Return; (4)
Effective Yield; (3) Tax-Equivalent
Yield; (1-4) Performance Comparisons;
(1,2,3) Appendix.
Item 23. Financial Statements.....(1,2,3) Incorporated by reference to the
Combined Annual Report to Shareholders
of the Arrow Funds dated September 30,
1995, pursuant to Rule 411 under the
Securities Act of 1933. (File No. 811-
7041); (4) Filed in Part A.

ARROW
FUNDS

ARROW FUNDS

ARROW EQUITY PORTFOLIO
ARROW FIXED INCOME PORTFOLIO

ARROW MUNICIPAL
INCOME PORTFOLIO

Prospectus

Diversified Portfolios of
the Arrow Funds, an Open-End
Management Investment Company

November 30, 1995

<LOGO>MARK TWAIN BANK
INVESTMENT ADVISER

<LOGO>MARK TWAIN BANK
Federated Securities Corp., Distributor.

042749101
042749200
042749309
2110904A (11/95)

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, 1995, 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 by calling 1-800-866-6040. To obtain other
information, or make inquiries about any of the Funds, contact the Funds at the
address listed in the back of this prospectus.

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, 1995

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 ("CMOs") 8
Arrow Municipal Income Portfolio 9
Investment Policies 9
Acceptable Investments 9
Characteristics 10
Participation Interests 10
Variable Rate Municipal Securities 10
Municipal Securities 10
Investment Risks 11

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

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

Ratings 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 16

Distribution Plan 17

Shareholder Servicing Arrangements 17
Administration of the Funds 17

Administrative Services 17

Custodian 18
Transfer Agent and Dividend Disbursing Agent
and Portfolio Recordkeeping 18
Independent Auditors 18
Brokerage Transactions 18

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

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

Share Purchases 19
Through Mark Twain 19
Minimum Investment Required 19

What Shares Cost 19

Purchases at Net Asset Value 20
Dealer Concessions 20
Reducing/Eliminating the Sales Charge 20
Quantity Discounts and Accumulated Purchases 21
Letter of Intent 21
Reinvestment Privilege 21
Concurrent Purchases 21

Systematic Investment Program 21

Certificates and Confirmations 22
Dividends and Distributions 22

EXCHANGE PRIVILEGE 22
- ------------------------------------------------------

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

Through Mark Twain 23
By Telephone 23

By Mail 23

Receiving Payment 24

Systematic Withdrawal Program 24

Accounts with Low Balances 25

SHAREHOLDER INFORMATION 25
- ------------------------------------------------------
Voting Rights 25

Massachusetts Partnership Law 25

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 by any investor 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 MUNICIPAL
EQUITY INCOME INCOME
SHAREHOLDER TRANSACTION EXPENSES FUND FUND 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
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fees (after waiver)(2)...................................... 0.70% 0.59% 0.15%
12b-1 Fees (after waiver)(3)........................................... 0.00% 0.00% 0.00%
Total Other Expenses................................................... 0.58% 0.63% 0.94%
Total Fund Operating Expenses(4)................................... 1.28% 1.22% 1.09%
</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 management fee for the Equity Fund, Fixed Income Fund, and Municipal
Income Fund have been reduced to reflect the waivers by the investment adviser.
The maximum management fees for the Equity Fund, Fixed Income Fund and Municipal
Income Fund 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, the distributor plans to waive all 12b-1 fees.

(4) The Total Fund Operating Expenses of the Equity Fund, Fixed Income Fund and
Municipal Income Fund are 1.58%, 1.48%, and 1.89%, respectively, absent the
waivers detailed in notes (2) and (3).

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 $ 74 $103 $ 184
Fixed Income Fund........................................ $47 $ 72 $100 $ 178
Municipal Income Fund.................................... $46 $ 68 $ 93 $ 163
</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.

ARROW 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 10, 1995 on the Fund's
financial statements for the period ended September 30, 1995 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,
-----------------------------
1995 1994 1993(A)
------ ------ -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.74 $10.02 $10.00
- -------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------
Net investment income 0.10 0.07 0.04
- -------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 4.05 (0.25) 0.02
- ------------------------------------------------------------------------- ------ ------ -------
Total from investment operations 4.15 (0.18) 0.06
- -------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------
Distributions from net investment income (0.09) (0.07) (0.04 )
- -------------------------------------------------------------------------
Distributions from net realized gain on investment transactions -- (0.03) --
- ------------------------------------------------------------------------- ------ ------ -------
Total distributions (0.09) (0.10) (0.04 )
- ------------------------------------------------------------------------- ------ ------ -------
NET ASSET VALUE, END OF PERIOD $13.80 $ 9.74 $10.02
- ------------------------------------------------------------------------- ------ ------ -------
TOTAL RETURN (B) 42.90% (1.84)% 0.60 %
- -------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------
Expenses 1.28% 1.36% 1.32 %*
- -------------------------------------------------------------------------
Net investment income 0.90% 0.74% 0.62 %*
- -------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.30% 0.28% 0.30 %*
- -------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------
Net assets, end of period (000 omitted) $43,708 $30,282 $31,159
- -------------------------------------------------------------------------
Portfolio turnover 45% 127% 54 %
- -------------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

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

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

Further information about the Fund's performance is contained in the Fund's
annual report dated September 30, 1995, which can be obtained free of charge.

ARROW FIXED INCOME PORTFOLIO

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

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1995 1994 1993(A)
------ ------ -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.31 $10.75 $10.00
- -------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------
Net investment income 0.59 0.59 0.44
- -------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.75 (1.41) 0.75
- ------------------------------------------------------------------------- ------ ------ -------
Total from investment operations 1.34 (0.82) 1.19
- -------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------
Distributions from net investment income (0.59) (0.59) (0.44 )
- -------------------------------------------------------------------------
Distributions from net realized gain on investment transactions -- (0.03) --
- ------------------------------------------------------------------------- ------ ------ -------
Total distributions (0.59) (0.62) (0.44 )
- ------------------------------------------------------------------------- ------ ------ -------
NET ASSET VALUE, END OF PERIOD $10.06 $ 9.31 $10.75
- ------------------------------------------------------------------------- ------ ------ -------
TOTAL RETURN (B) 14.89% (7.85%) 12.09 %
- -------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------
Expenses 1.22% 1.15% 1.05 %*
- -------------------------------------------------------------------------
Net investment income 6.17% 5.86% 5.71 %*
- -------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.26% 0.26% 0.27 %*
- -------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------
Net assets, end of period (000 omitted) $30,661 $32,743 $42,715
- -------------------------------------------------------------------------
Portfolio turnover 33% 28% 28 %
- -------------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

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

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

Further information about the Fund's performance is contained in the Fund's
annual report dated September 30, 1995, which can be obtained free of charge.

ARROW MUNICIPAL INCOME PORTFOLIO

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

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1995 1994 1993(A)
------ ------ -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.87 $10.61 $10.00
- -------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------
Net investment income 0.46 0.47 0.32
- -------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.35 (0.72) 0.61
- ------------------------------------------------------------------------- ------ ------ -------
Total from investment operations 0.81 (0.25) 0.93
- -------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------
Distributions from net investment income (0.46) (0.47) (0.32 )
- -------------------------------------------------------------------------
Distributions from net realized gain on investment transactions -- (0.02) --
- ------------------------------------------------------------------------- ------ ------ -------
Total distributions (0.46) (0.49) (0.32 )
- ------------------------------------------------------------------------- ------ ------ -------
NET ASSET VALUE, END OF PERIOD $10.22 $ 9.87 $10.61
- ------------------------------------------------------------------------- ------ ------ -------
TOTAL RETURN (B) 8.46% (2.41%) 9.43 %
- -------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------
Expenses 1.09% 0.85% 0.72 %*
- -------------------------------------------------------------------------
Net investment income 4.70% 4.62% 4.71 %*
- -------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.80% 0.81% 0.85 %*
- -------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------
Net assets, end of period (000 omitted) $17,736 $23,187 $24,087
- -------------------------------------------------------------------------
Portfolio turnover 38% 27% 14 %
- -------------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

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

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

Further information about the Fund's performance is contained in the Fund's
annual report dated September 30, 1995, 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 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.

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 a nationally recognized statistical rating
organization ("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 ("BIF") or the Savings Association Insurance Fund ("SAIF"),
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 the: Farm Credit System, including the National
Bank for Cooperatives, Farm Credit Banks, and Banks for Cooperatives;
Federal Home Loan Banks; Federal Home Loan Mortgage Corporation; Federal
National Mortgage Association; Government National Mortgage Association;
Export-Import Bank of the United States; Commodity Credit Corporation;
Federal Financing Bank; The Student Loan Marketing Association; National
Credit Union Administration; and Tennessee Valley Authority.

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. As a matter of fundamental policy, which may not be
changed without shareholder approval, 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.

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.

There is the risk that when lending portfolio securities, the securities may not
be available to the Funds on a timely basis and the Funds may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.

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.

RATINGS

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.

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.

Mark Twain Bank acts as the investment adviser for the Funds. Mark Twain
Brokerage Services, Inc. is a wholly owned subsidiary of Mark Twain Bank.
Possible conflicts of interest could arise between

potential investors in the Funds due to the affiliation of Mark Twain Bank and
Mark Twain Brokerage Services, Inc. and/or their existing clients. Please read
this prospectus carefully before you invest or send money.

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
Adviser has undertaken to waive its fee up to the amount of the advisory
fee, if operating expenses, exceed 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, 1995, 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 ser-

vices) 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 FUNDS
- --------------------- -------------------------------------
<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 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, Boston, Massachusetts, 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.

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.

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. An investor 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 to purchase shares, investors may contact
a broker (1-800-866-6040) or private banker (1-800-436-3666), as appropriate.
Trust customers may contact their trust officer (314-889-0715). Texas residents
must telephone Federated Services Company at 1-800-618-8573.

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 by any investor 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 A SALES CHARGE AS A
PERCENTAGE OF 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
(normally 4:00 p.m. New York time) on the New York Stock Exchange, 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 the 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, Mark Twain Brokerage Services, Inc., or Mark Twain
Bank 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 toward
the dollar fulfillment of the letter of intent. Prior trade prices will not be
adjusted.

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.,
Mark Twain Bank, or the distributor must be notified by the shareholder 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.,
Mark Twain Bank, 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. or Mark Twain Bank.

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 charge once upon purchasing shares of any Fund, including
those shares obtained through the reinvestment of dividends, will not have to
pay a sales charge 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. In order to redeem shares, a shareholder may contact a broker
(1-800-866-6040) or private banker (1-800-436-3666), as appropriate. Trust
customers may contact their trust officer (314-889-0715). 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, 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 determine
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., Mark Twain Bank, 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 Lindbergh

St. Louis, MO 63131

A shareholder who is a private banking customer of Mark Twain Bank may redeem
shares by sending a written request to:

Mark Twain Bank

Attn: Private Banking

1630 South Lindbergh

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. or Mark
Twain Bank for assistance in redeeming by mail.

Shareholders requesting 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 their signatures guaranteed
by:

- a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the FDIC;

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

- a savings and loan association or savings bank whose deposits are insured
by the 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
signatures 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.

Redemption proceeds from purchases made by check are not available for seven
calendar days.

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 not less than $100. 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. 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 3, 1995, the Trust Division of Mark
Twain Bank, acting in various capacities for numerous accounts, was the owner of
record of approximately 2,983,534 shares (92.16%), 2,898,668 shares (98.20%) and
1,662,447 shares (96.82%) of the Equity Fund, the Fixed Income Fund and the
Municipal Income Fund, respectively, and therefore, may, for certain purposes,
be deemed to control the 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, as amended,
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, advertisements for the Funds may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Funds' 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 and Dividend Disbursing Agent
and Portfolio Recordkeeper
Federated Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- -----------------------------------------------------------------------------------------------
Independent Public Accountants
KPMG Peat Marwick LLP One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
- -----------------------------------------------------------------------------------------------
</TABLE>

ARROW FUNDS
PROSPECTUS

Arrow Funds
Arrow Equity Portfolio
Arrow Fixed Income Portfolio
Arrow Municipal Income Portfolio

November 30, 1995

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

Distributor

A subsidiary of FEDERATED INVESTORS

FEDERATED INVESTORS TOWER

PITTSBURGH, PA 15222-3779

042749101
042749200
042749309

2110904A (11/95)

ARROW FUNDS
ARROW GOVERNMENT MONEY MARKET PORTFOLIO
PROSPECTUS

A Diversified Portfolio of
the Arrow Funds, an Open-End,
Management Investment Company

November 30, 1995

[LOGO]
MARK TWAIN BANK
INVESTMENT ADVISER

[LOGO]
MARK TWAIN BANK
Investment Adviser
Federated Securities Corp., Distributor.
022749408
2110905A (11/95)

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 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 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,
1995 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 by calling 1-800-866-6040. To obtain other information, or make
inquiries about the Fund, contact the Fund at the address listed in the back of
this prospectus.

Prospectus dated November 30, 1995

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 and Dividend Disbursing
Agent and Portfolio Recordkeeping 6
Independent Auditors 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
Automatic Investments 7
Systematic Investment Plan 8
Certificates and Confirmations 8
Dividends 8
Capital Gains 8

EXCHANGE PRIVILEGE 8
- ------------------------------------------------------

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 21
- ------------------------------------------------------

ADDRESSES 22

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

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 ........................................................... 0.28%
Total Fund Operating Expenses............................................... 0.78%
</TABLE>

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 contingent
deferred sales charges..................................... $8 $25 $43 $ 97
</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.

ARROW GOVERNMENT MONEY MARKET PORTFOLIO

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

Reference is made to the Independent Auditors' Report on page 21.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1995 1994 1993(A)
------ ------ -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------
Net investment income 0.05 0.03 0.02
- ------------------------------------------------------ ------ ------ -------
LESS DISTRIBUTIONS
- ------------------------------------------------------
Distributions from net investment income (0.05) (0.03) (0.02 )
- ------------------------------------------------------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------ ----- ----- ------
TOTAL RETURN(B) 5.04% 2.90% 1.86 %
- ------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------
Expenses 0.78% 0.80% 0.73 %*
- ------------------------------------------------------
Net investment income 4.94% 2.86% 2.40 %*
- ------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------
Net assets, end of period (000 omitted) $206,580 $154,170 $151,311
- ------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

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

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

(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 Arrow Government Money Market Portfolio 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 must be in amounts of at least $100.

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 investment objective cannot be changed without
approval of shareholders. 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. 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, Farm Credit Bank,
and Student Loan Marketing Association.

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;

- 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.

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 into 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.

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 regulate 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.

Mark Twain Bank acts as the investment adviser for the Fund. Mark Twain
Brokerage Services, Inc. is a wholly owned subsidiary of Mark Twain Bank.
Possible conflicts of interest could arise between potential investors in the
Fund due to the affiliation of Mark Twain Bank and Mark Twain Brokerage
Services, Inc. and/or their existing clients. Please read this prospectus
carefully before you invest or send money.

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 its fee 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, 1995, 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 FUND
- --------------------------------------------------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 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, Boston, Massachusetts, 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.

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

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 must be in amounts of at least $100. 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 as of the close
of trading (normally 4:00 p.m., New York time), on the New York Stock Exchange,
Monday through Friday, except on 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. An investor may purchase shares of
the Fund through the appropriate subsidiary of Mark Twain Bancshares, Inc. as
described below. 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.

Purchase orders must be received by 11:00 a.m. (St. Louis time) in order to be
credited on the same day. Payment must be received by 2:00 p.m. (St. Louis time)
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. 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.

AUTOMATIC INVESTMENTS. Investors may establish accounts with their financial
institutions to have cash accumulations automatically invested in the Fund. The
investments may be made on predeter-
mined dates or when the investor's account reaches a certain level.
Participating financial institutions are responsible for prompt transmission of
orders relating to the program, and they may charge for their services.
Investors should read this prospectus along with the financial institution's
agreement or literature describing these services and fees.

SYSTEMATIC INVESTMENT PLAN

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. A shareholder may apply for participation in this program
through Mark Twain Brokerage Services, Inc., Mark Twain Bank, or directly
through the Fund.

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.

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
Brokerage Services, Inc. or Mark Twain Bank.

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 charge once upon purchasing shares of any fund, including
those shares obtained through the reinvestment of dividends, will not have to
pay a sales charge 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

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 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.

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 Lindbergh
St. Louis, MO 63131

A shareholder who is a private banking customer of Mark Twain Bank may redeem
shares by sending a written request to:

Mark Twain Bank
Attn: Private Banking
1630 South Lindbergh
St. Louis, MO 63131

Shareholders requesting 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 their signatures 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.

Redemption proceeds from purchases made by check are not available for seven
calendar days.

CHECKWRITING. Checkwriting may be available to certain shareholders with a
minimum balance of $10,000. For information on the availability of checkwriting
and related matters, contact Mark Twain Bank at 1-800-436-3666.

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 and the
amount of dividends paid and capital gains distributions with respect to Fund
shares, 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.

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 3, 1995, the Trust Division of Mark
Twain Bank, acting in various capacities for numerous accounts, was the owner of
record of 198,881,578 shares (97.35%) 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, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.

ARROW GOVERNMENT MONEY MARKET PORTFOLIO

PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
- ------------ ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
SHORT-TERM OBLIGATIONS--63.6%
- ------------------------------------------------------------------------------------
FEDERAL FARM CREDIT BANK--19.4%
----------------------------------------------------------------
$ 40,000,000 5.65%-5.80%, 10/2/1995-1/2/1996 $ 40,000,000
---------------------------------------------------------------- ------------
(a) FEDERAL FARM CREDIT BANK, DISCOUNT NOTES--0.5%
----------------------------------------------------------------
1,000,000 5.57%, 10/19/1995 997,215
---------------------------------------------------------------- ------------
(a) FEDERAL HOME LOAN BANK, DISCOUNT NOTES--14.4%
----------------------------------------------------------------
30,000,000 5.57%-6.30%, 10/2/1995-11/22/1995 29,869,229
---------------------------------------------------------------- ------------
(a) FEDERAL HOME LOAN MORTGAGE CORPORATION, DISCOUNT NOTES--9.6%
----------------------------------------------------------------
20,000,000 5.54%-5.58%, 10/6/1995-12/7/1995 19,889,145
---------------------------------------------------------------- ------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--2.4%
----------------------------------------------------------------
5,000,000 5.72%, 11/15/1995 5,000,000
---------------------------------------------------------------- ------------
(a) FEDERAL NATIONAL MORTGAGE ASSOCIATION, DISCOUNT NOTES--17.3%
----------------------------------------------------------------
36,000,000 5.50%-5.65%, 10/11/1995-1/16/1996 35,716,773
---------------------------------------------------------------- ------------
TOTAL SHORT-TERM OBLIGATIONS 131,472,362
---------------------------------------------------------------- ------------
MUTUAL FUND SHARES--0.1%
- ------------------------------------------------------------------------------------
38,715 SEI Government Portfolio (AT NET ASSET VALUE) 38,715
---------------------------------------------------------------- ------------
(b) REPURCHASE AGREEMENTS--41.4%
- ------------------------------------------------------------------------------------
43,000,000 Morgan Stanley & Co., Inc., 6.35%, dated 9/29/1995, due
10/2/1995 43,000,000
----------------------------------------------------------------
42,600,000 Sanwa Securities USA Co., LP, 6.25%, dated 9/29/1995, due
10/2/1995 42,600,000
---------------------------------------------------------------- ------------
TOTAL REPURCHASE AGREEMENTS 85,600,000
---------------------------------------------------------------- ------------
TOTAL INVESTMENTS, AT AMORTIZED COST AND VALUE $217,111,077+
---------------------------------------------------------------- ------------
</TABLE>

(a) Each issue shows the rate of discount at time of purchase.

(b) 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
($206,580,438) at September 30, 1995.

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

ARROW GOVERNMENT MONEY MARKET PORTFOLIO

STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in repurchase agreements $85,600,000
- ------------------------------------------------------------------
Investments in securities 131,511,077
- ------------------------------------------------------------------ -----------
Total investments, at amortized cost and value $217,111,077
- --------------------------------------------------------------------------------
Income receivable 347,312
- --------------------------------------------------------------------------------
Deferred expenses 24,965
- -------------------------------------------------------------------------------- ------------
Total assets 217,483,354
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Payable for investments purchased 10,000,000
- ------------------------------------------------------------------
Income distribution payable 870,135
- ------------------------------------------------------------------
Payable to Bank 7,974
- ------------------------------------------------------------------
Accrued expenses 24,807
- ------------------------------------------------------------------ -----------
Total liabilities 10,902,916
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 206,580,438 shares outstanding $206,580,438
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
$206,580,438 / 206,580,438 shares outstanding $1.00
- -------------------------------------------------------------------------------- ------------
</TABLE>

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

ARROW GOVERNMENT MONEY MARKET PORTFOLIO

STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------
Interest $9,982,988
- ---------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------
Investment advisory fee $872,930
- ----------------------------------------------------------------------
Administrative personnel and services fee 260,067
- ----------------------------------------------------------------------
Custodian fees 43,956
- ----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 36,077
- ----------------------------------------------------------------------
Directors'/Trustees' fees 3,591
- ----------------------------------------------------------------------
Auditing fees 11,977
- ----------------------------------------------------------------------
Legal fees 5,490
- ----------------------------------------------------------------------
Portfolio accounting fees 51,363
- ----------------------------------------------------------------------
Share registration costs 28,442
- ----------------------------------------------------------------------
Printing and postage 22,158
- ----------------------------------------------------------------------
Insurance premiums 11,343
- ----------------------------------------------------------------------
Miscellaneous 7,487
- ---------------------------------------------------------------------- --------
Total expenses 1,354,881
- ----------------------------------------------------------------------
Waivers of investment advisory fee (211)
- ---------------------------------------------------------------------- --------
Net expenses 1,354,670
- --------------------------------------------------------------------------------- ----------
Net investment income $8,628,318
- --------------------------------------------------------------------------------- ----------
</TABLE>

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

ARROW GOVERNMENT MONEY MARKET PORTFOLIO

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1995 1994
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------
Net investment income $ 8,628,318 $ 4,530,766
- --------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------
Distributions from net investment income (8,628,318) (4,530,766)
- --------------------------------------------------------------- ------------- -------------
SHARE TRANSACTIONS--
- ---------------------------------------------------------------
Proceeds from sale of shares 414,847,913 549,781,518
- ---------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
distributions declared 3 57
- ---------------------------------------------------------------
Cost of shares redeemed (362,437,660) (546,931,468)
- --------------------------------------------------------------- ------------- -------------
Change in net assets resulting from share transactions 52,410,256 2,850,107
- --------------------------------------------------------------- ------------- -------------
Change in net assets 52,410,256 2,850,107
- ---------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------
Beginning of period 154,170,182 151,320,075
- --------------------------------------------------------------- ------------- -------------
End of period $ 206,580,438 $ 154,170,182
- --------------------------------------------------------------- ------------- -------------
</TABLE>

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

ARROW GOVERNMENT MONEY MARKET PORTFOLIO

NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
(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.

(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.

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.
Investments in other open-end regulated investment companies are valued at
net asset value.
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 under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.

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 and/or
standards reviewed or 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.

INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Distributions to
shareholders are recorded on the ex-dividend date. 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").

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

ARROW GOVERNMENT MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
income. Accordingly, no provisions for federal tax are necessary.
Additionally, net capital losses of $146 attributable to security
transactions incurred after October 31, 1994 are treated as arising on
October 1, 1995, the first day of the Fund's next taxable year.

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.

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 over a period of five years from
the Fund's commencement date.

OTHER--Investment transactions are accounted for on the trade date.

(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). At
September 30, 1995, capital paid-in aggregated $206,580,438. Transactions in
shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
TRUST SHARES 1995 1994
- --------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Shares sold 414,847,913 549,781,518
- ---------------------------------------------------------------
Shares issued to shareholders in payment of distributions
declared 3 --
- ---------------------------------------------------------------
Shares redeemed (362,437,660) (546,922,476)
- --------------------------------------------------------------- ------------ ------------
Net change resulting from Trust share transactions 52,410,256 2,859,042
- --------------------------------------------------------------- ------------ ------------
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
INVESTMENT SHARES 1995 1994
- --------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Shares sold -- --
- ---------------------------------------------------------------
Shares issued to shareholders in payment of distributions
declared -- 57
- ---------------------------------------------------------------
Shares redeemed -- (8,992)
- --------------------------------------------------------------- ------------ ------------
Net change resulting from Investment share transactions -- (8,935)
- --------------------------------------------------------------- ------------ ------------
Net change resulting from Fund share transactions 52,410,256 2,850,107
- --------------------------------------------------------------- ------------ ------------
</TABLE>

ARROW GOVERNMENT MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------

(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. This 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.

TRANSFER AND DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING FEES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. This fee is based on the size, type, and number of accounts and
transactions made by shareholders.

FServ also maintains the Fund's accounting records for which it receives a fee.
The fee is based on the level of the Fund's average daily net assets for the
period, plus out-of-pocket expenses.

CUSTODIAN FEES--Mark Twain Bank is the Fund's custodian. The fee is based on the
level of the Fund's average daily 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 (the date the Fund first
became effective). For the period ended September 30, 1995, the Fund paid $3,241
pursuant to this agreement.

GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.

INDEPENDENT AUDITORS' REPORT

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

The Board of Trustees and Shareholders

ARROW FUNDS:

We have audited the statements of assets and liabilities, including the
portfolio of investments of the Arrow Government Money Market Portfolio, a
portfolio within Arrow Funds, as of September 30, 1995, and the related
statements of operations for the year then ended, the statement of changes in
net assets for each of the years in the two year period then ended, and the
financial highlights, which are presented on page 2 of this prospectus, for the
years or periods from December 9, 1992 (commencement of operations) to September
30, 1995. 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 the 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 financial highlights referred to
above present fairly, in all material respects, the financial position of the
Arrow Government Money Market Portfolio at September 30, 1995, and the results
of its operations for the year then ended, the changes in net assets for each of
the years in the two year period then ended, and the financial highlights for
the periods stated in the first paragraph, in conformity with generally accepted
accounting principles.

KPMG PEAT MARWICK LLP

Pittsburgh, Pennsylvania

November 10, 1995

ADDRESSES
- --------------------------------------------------------------------------------
<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 P.O. Box 8600
Boston, Massachusetts 2266-8600

- ------------------------------------------------------------------------------------------------
Independent Auditors
KPMG Peat Marwick LLP One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
- ------------------------------------------------------------------------------------------------
</TABLE>

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, 1995. 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, 1995

FEDERATED SECURITIES
CORP.

GENERAL INFORMATION ABOUT THE INVESTMENTS IN FOREIGN SECURITIES 19
TRUST 3 PORTFOLIO TURNOVER 19
INVESTMENT LIMITATIONS 19
INVESTMENT OBJECTIVE AND POLICIES OF
ARROW FUNDS MANAGEMENT 26
THE FUNDS 3
FUND OWNERSHIP 36
TYPES OF INVESTMENTS 3
TRUSTEES COMPENSATION 36
PORTFOLIO INVESTMENTS AND STRATEGIES
TRUSTEE LIABILITY 38
10
INVESTMENT ADVISORY SERVICES 38
FUTURES AND OPTIONS TRANSACTIONS10
FUTURES CONTRACTS 11 ADVISER TO THE FUNDS 38
STOCK INDEX OPTIONS 11 ADVISORY FEES 39
PUT OPTIONS ON FINANCIAL FUTURES
CONTRACTS 12
CALL OPTIONS ON FINANCIAL FUTURES
CONTRACTS 13
"MARGIN" IN FUTURES TRANSACTIONS14
PURCHASING PUT OPTIONS ON PORTFOLIO
SECURITIES 15
WRITING COVERED CALL OPTIONS ON
PORTFOLIO SECURITIES 15
OVER-THE-COUNTER OPTIONS 15
RESTRICTED AND ILLIQUID SECURITIES
15
TEMPORARY INVESTMENTS 16
REPURCHASE AGREEMENTS 17
REVERSE REPURCHASE AGREEMENTS 17
WHEN-ISSUED AND DELAYED DELIVERY
TRANSACTIONS 18
LENDING OF PORTFOLIO SECURITIES18

ADMINISTRATIVE SERVICES 40 APPENDIX 56

CUSTODIAN 40

SHAREHOLDER SERVICING ARRANGEMENTS 41

BROKERAGE TRANSACTIONS 41

PURCHASING SHARES 44

DISTRIBUTION PLAN 44
CONVERSION TO FEDERAL FUNDS 46
DETERMINING NET ASSET VALUE 46

DETERMINING MARKET VALUE OF
SECURITIES 46
REDEEMING SHARES 47

REDEMPTION IN KIND 47
TAX STATUS 48

THE FUNDS' TAX STATUS 48
SHAREHOLDERS' TAX STATUS 48
CAPITAL GAINS 49
TOTAL RETURN 49

YIELD 50

TAX-EQUIVALENT YIELD 50

TAX-EQUIVALENCY TABLE 51
PERFORMANCE COMPARISONS 53

FINANCIAL STATEMENTS 55

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.
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")) or deemed
---------

to be of comparable quality by the Fund's investment adviser. The investment
- ------------------------------------------------------------

portfolio consists of the following securities:

o corporate debt securities such as bonds, notes, and debentures;
o U.S. government securities, including U.S. Treasury bills, notes, and
bonds, and securities issued by agencies and instrumentalities of the U.S.
government;
o commercial paper; and
o 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, 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:
omunicipal notes and bonds and tax-exempt commercial paper;
oserial notes and bonds sold with a series of maturity dates;

otax anticipation notes and bonds sold to finance working capital needs of
municipalities in anticipation of receiving taxes at a later date;
obond anticipation notes sold in anticipation of the issuance of longer-
term bonds in the future;
oprerefunded 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
ogeneral 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:
oa high-quality underlying municipal security (of which the Fund takes
possession); or
oa high-quality issuer of the participation interest; or
oa 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.
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 Fund's 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 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, including the Municipal Income Fund, 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).
OVER-THE-COUNTER OPTIONS
The Funds, including the Municipal Income Fund, 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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o 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:
oinstruments 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
oprime 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.
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:
o less publicly available information about foreign issuers;
o credit risks associated with certain foreign governments;
o the lack of uniform financial accounting standards applicable to foreign
issuers;
o less readily available market quotations on foreign issues;
o the likelihood that securities of foreign issuers may be less liquid or
more volatile;
o generally higher foreign brokerage commissions; and
o 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 Fund's investment
objective, without regard to the length of time a particular security may
have been held. During the fiscal years ended September 30, 1995, and 1994,
the Equity, Fixed Income, and Municipal Income Funds' portfolio turnover
rates were 45%, 33%, and 38%, and 127%, 28%, and 27%, 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 the Equity and Fixed Income Funds
---------------------------- -

may enter into futures contracts. 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.
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).

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
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, with respect to the Fixed Income and Equity Funds, (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 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 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. No more than 2% of the Fund's net assets, to be included within

the overall 5% limit on investments in warrants, may be warrants which are
not listed on the New York Stock Exchange or the American Stock Exchange.
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 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 ARE LISTED WITH THEIR ADDRESSES, BIRTHDATES, PRESENT
------------

POSITIONS WITH ARROW FUNDS, AND PRINCIPAL OCCUPATIONS.

John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director, Trustee, or Managing General Partner of
the Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Trust .

Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's Hospital of
Pittsburgh; Director, Trustee, or Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.

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

Birthdate: June 23, 1937
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
Birthdate: July 4, 1918
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
Birthdate: May 18, 1922
Trustee

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

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh Medical Center - Downtown; Member,
Board of Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Director, Trustee, or Managing General Partner of the Funds.

Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, 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
Birthdate: October 22, 1930

President, Treasurer and Trustee

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

Peter E. Madden
Seacliff
562 Bellevue Avenue
Newport, RI

Birthdate: March 16, 1942
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.

Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds.

John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director, Trustee or Managing General Partner of the Funds.

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management Center;
Director, Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; founding Chairman, National Advisory Council for
Environmental Policy and Technology and Federal Emergency Management Advisory
Board.

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee

Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director, Trustee, or Managing General Partner of the Funds.

J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global 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
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; 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
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global Research
Corp.; Trustee, Federated Services Company; Executive Vice President, Secretary,
and Trustee, Federated Administrative Services; President and Trustee, Federated
Shareholder Services; Director, Federated Securities Corp.; Executive Vice
President and Secretary of the Funds.

Charles L. Davis, Jr.
Federated Investors Tower
Pittsburgh, PA
Birthdate: March 23, 1960

Vice President and Assistant Treasurer

Vice President, Federated Administrative Services; Vice President and Assistant
Treasurer of some of the Funds.

* 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.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs
Fund; Federated Equity Funds; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Master Trust; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government
Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund: 3-5
Years; 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; 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; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal
Securities Income Trust; Newpoint Funds; 111 Corcoran Funds; Peachtree Funds;
The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; 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; The
Virtus Funds; World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding shares of each
Fund.
As of November 3, 1995 the following shareholders of record owned 5% or more
shares of the Arrow Equity Fund: Mark Twain Trust Division, St. Louis,
Missouri, owned approximately 2,983,534 shares (92.16%); National Financial
Services for the exclusive benefit of their customers, New York, New York,
owned approximately 164,509 shares (5.08%).
As of November 3, 1995 the following shareholder of record owned 5% or more
of the Arrow Fixed Income Fund and the Arrow Municipal Income Fund: Mark
Twain Trust Division, St. Louis, Missouri, owned approximately 2,898,668
shares (98.20%) of the Arrow Fixed Income Fund and approximately 1,622,447
shares (96.82%) of the Arrow Municipal Income Fund.
TRUSTEES COMPENSATION

AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM

TRUST TRUST*#

John F. Donahue, $ 0
Chairman and Trustee
Thomas G. Bigley, $ 934
Trustee
John T. Conroy, Jr., $1,345
Trustee
William J. Copeland, $1,345
Trustee
James E. Dowd, $1,345
Trustee
Lawrence D. Ellis, M.D., $1,246
Trustee
Edward L. Flaherty, Jr., $1,345
Trustee
Edward D. Gonzales, $ 0
President, Treasurer
and Trustee
Peter E. Madden, $1,059
Trustee
Gregor F. Meyer, $1,246
Trustee
John E. Murray, Jr., $1,246
Trustee
Wesley W. Posvar, $1,246
Trustee
Marjorie P. Smuts, $1,246

Trustee

* Information is furnished for the fiscal year ended September 30, 1995. The
Trust is the only investment company in the Fund Complex.
# The aggregate compensation is provided for the Trust which is comprised of
four portfolios.
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, 1995, the Funds' Adviser earned
-

advisory fees of $253,371, $184,158, and $133,160 for the Equity Fund, the
Fixed Income Fund and the Municipal Income Fund, respectively, of which
$15,785, $3,366 and $105,456 were waived. 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 were 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, respectively, of which $10,480, $4,430 and
$84,267 were 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 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, 1995, the
-------------------------------------------------

Equity Fund, Fixed Income Fund and Municipal Income Fund incurred costs for
- -------------------------------------------------------- ------------------

administrative services of $52,746, $50,000, and $50,000, respectively. For
- --------------------------- ----------------

the fiscal year ended September 30, 1994, the Equity Fund, Fixed Income Fund
and Municipal Income Fund incurred costs for administrative services of
$50,000, $57,055 and $50,000, respectively. 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 Equity
----------

Fund, the Fixed Income Fund, and the Municipal Income Fund 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 may pay 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. These
------

fees, if paid, will be reimbursed by the Adviser, not the Funds.
- ----------------------------------------------------------------

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:
o advice as to the advisability of investing in securities;

o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser exercises reasonable business judgment in selecting brokers
-

who offer brokerage and research services to execute securities transactions.
It determines 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, 1995, the Equity Fund paid $42,563
-------------------------------------------------------------------

in brokerage commissions on brokerage transactions. For the fiscal year ended
- ----------------------- ----------------------------

September 30, 1994, the Equity Fund paid $111,324 in brokerage commissions 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 years ended September 30, 1995 and 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, 1995, brokers and administrators
----------------------------------------------------------

(financial institutions) received fees on behalf of the Equity Fund, the
- -------------------------------------------- ---------------------------

Fixed income Fund and the Municipal Income Fund in the amount of $84,456,
- ------------------------------------------------ --

$76,734 and $47,558, respectively, pursuant to the Plan, all of which were
-------------- --------------------

voluntarily waived. 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 in the amount of
$78,171, $95,223, and $61,650, respectively, pursuant to the Plan, all of
which were 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, in the amount of
--------------

$51,605, $69,858, and $35,179, respectively, pursuant to the Plan, all of
--------------

which were 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:
o for equity securities, according to the last sale price on a national
securities exchange, if available;
o in the absence of recorded sales for listed equity securities, according to
the mean between the last closing bid and asked prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o 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
o 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:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o 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 returns for the one-year period
-

ended September 30, 1995 and for the period from January 4, 1993 (date of
-

initial public investment) to September 30, 1995 were 37.95% and 11.94%,
-

respectively. The Fixed Income Fund's average annual total returns for the
-

one year period ended September 30, 1995 and for the period from January 4,
-

1993 (date of initial public investment) to September 30, 1995 were 10.84%
-

and 5.08%, respectively.
The Municipal Income Fund's average annual total returns for the one year
-

period ended September 30, 1995 and for the period from February 1, 1993
-

(date of initial public investment) to September 30, 1995 were 4.65% and
-

4.27%, 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, 1995 was 0.50%,
-

5.13%, and 3.91%, 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, 1995 was 6.47%. 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 1995
---------------------------------

MULTISTATE MUNICIPAL FUNDS
-------------------------------------

FEDERAL INCOME TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
=============================================================

Joint Return:$1-39,000 $39,001-94,250$94,251-143,600$143,601-256,600
-------- -------- ---------

Over $250,500
-

Single Return: $1-23,350 $23,351-56,550$56,551-117,950$117,951-256,500
--------- --------- -------- ---------

Over $256,500
=========

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%
----------------------------------------------------------

Note: The maximum marginal tax rate for each bracket was used in
-----------------------------------------------------------------

calculating the taxable yield equivalent. Furthermore, additional state and
---------------------------------------------------------------------------

local taxes paid on comparable taxable investments were not used to
-------------------------------------------------------------------

increase federal deductions.
----------------------------

The chart above is for illustrative purposes only. It is not an indicator
-------------------------------------------------------------------------

of past or future performance of Fund shares.
---------------------------------------------

* Some portion of the Fund's income may be subject to the federal
- ---------------------------------------------------------------

alternative minimum tax and state and local income taxes.
---------------------------------------------------------

PERFORMANCE COMPARISONS

Each Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in each Fund's expenses; and
o 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:
o 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.
o 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.
o 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.
o 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.

o 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.
o 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 charge.
------

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, 1995 are incorporated herein by reference to the
Combined Annual Report to Shareholders of the Arrow Funds dated September 30,
1995.

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:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
o 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.

AEF Cusip 042749101
--------

AFIP Cusip 042749200
------

AMIP Cusip 042749309
-------

2110904B (11/95)
-

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, 1995. 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, 1995

FEDERATED SECURITIES
CORP.

Distributor

SHAREHOLDER SERVICING ARRANGEMENTS 19

GENERAL INFORMATION ABOUT THE FUND 2 BROKERAGE TRANSACTIONS 20

INVESTMENT OBJECTIVE 2 PURCHASING SHARES 21

TYPES OF INVESTMENTS 2 CONVERSION TO FEDERAL FUNDS 22
WHEN-ISSUED AND DELAYED DELIVERY DETERMINING NET ASSET VALUE 22
TRANSACTIONS 3
USE OF THE AMORTIZED COST METHOD22
REPURCHASE AGREEMENTS 3
REDEEMING SHARES 24
REVERSE REPURCHASE AGREEMENTS 3
INVESTMENT LIMITATIONS 4 REDEMPTION IN KIND 24
ARROW FUNDS MANAGEMENT 7 TAX STATUS 25

FUND OWNERSHIP 15 THE FUND'S TAX STATUS 25
TRUSTEES COMPENSATION 16 SHAREHOLDERS' TAX STATUS 25
TRUSTEE LIABILITY 17 YIELD 26
INVESTMENT ADVISORY SERVICES 17
EFFECTIVE YIELD 26
ADVISER TO THE FUND 17
PERFORMANCE COMPARISONS 27
ADVISORY FEES 18
ADMINISTRATIVE SERVICES 19

CUSTODIAN 19

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 that 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 are
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.

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.

The Fund does not intend to invest in any restricted securities in the next
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 are listed with their addresses, birthdates, present
positions with Arrow Funds, and principal occupations.

the Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Trust .

John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
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.

James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds.

Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; President, Executive Vice
President and Treasurer of some of the Funds.

Peter E. Madden
Seacliff

562 Bellevue Avenue
Newport, RI
Birthdate: March 16, 1942
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.

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director, Trustee, or Managing General Partner of the Funds.

J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President

President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global 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
Birthdate: May 17, 1923
Vice President

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

Charles L. Davis, Jr.
Federated Investors Tower
Pittsburgh, PA
Birthdate: March 23, 1960

Vice President and Assistant Treasurer

Vice President, Federated Administrative Services; Vice President and Assistant
Treasurer of some of the Funds.

Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government
Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund: 3-5
Years; 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; 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; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal
Securities Income Trust; Newpoint Funds; 111 Corcoran Funds; Peachtree Funds;
The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; 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; The
Virtus Funds; World Investment Series, Inc.

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

As of November 3, 1995, the following shareholders owned 5% or more of the
outstanding shares of the Fund: Mark Twain Trust Division owned approximately
198,881,578 shares (97.35%).

TRUSTEES COMPENSATION

AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM
TRUST TRUST*#

John F. Donahue, $ 0
Chairman and Trustee
Thomas G. Bigley,$ 934
Trustee
John T. Conroy, Jr., $1,345
Trustee
William J. Copeland, $1,345
Trustee
James E. Dowd, $1,345
Trustee
Lawrence D. Ellis, M.D., $1,246
Trustee
Edward L. Flaherty, Jr., $1,345
Trustee
Edward D. Gonzales, $ 0
President, Treasurer
and Trustee
Peter E. Madden, $1,059
Trustee

Gregor F. Meyer, $1,246
Trustee
John E. Murray, Jr., $1,246
Trustee
Wesley W. Posvar,$1,246
Trustee
Marjorie P. Smuts, $1,246
Trustee

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 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 years ended September 30, 1995 and 1994, the Fund's Adviser
earned advisory fees of $872,930 and $788,681, of which $211 and $0 were 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 years ended September 30, 1995 and 1994, the Fund
incurred costs for administrative services of $260,067 and $236,784, none of
which were 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

The distributor may pay 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. These fees, if paid, will be
reimbursed by the Adviser, and not the Fund.

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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.

The Adviser exercises reasonable business judgment in selecting brokers who
offer brokerage and research services to execute securities transactions. It
determines 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
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.

For the fiscal years ended September 30, 1995, 1994 and for the period from
November 9, 1992 (start of business) through September 30, 1993, the Fund did
not pay any brokerage commissions on portfolio transactions.

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.
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 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:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o 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, 1995 was 5.07%.
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:

o 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;

o 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
o 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, 1995 was
5.20%. The Fund's effective yield is computed by compounding the unannualized
base period return by:

o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
PERFORMANCE COMPARISONS

The performance of the Fund depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments;
o changes in the Fund's expenses; and
o 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:
o 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.

o 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.
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.

PART C OTHER INFORMATION.

Item 24. Financial Statements and Exhibits:

(a) Financial Statements (Incorporated by reference to the
Combined Annual Report to Shareholders of the Arrow
Funds dated September 30, 1995 pursuant to Rule 411
under the Securities Act of 1933.) (File No. 811-7041)
(Portfolios 1, 2, 3);
(Filed in Part A.) (File No. 811-7041) (Portfolio 4).
(b) Exhibits:
(1) Copy of Declaration of Trust of the
Registrant;(1)
(i) Conformed copy of Amendment No. 1 to

Cusip 042749408
2110905B (11/95)

Declaration of Trust of Registrant; (5)
(2) Copy of By-Laws of the Registrant; (1)
(3) Not applicable;
(4) Conformed Copy of Specimen Certificates for Shares
of Beneficial Interest of the Registrant;(5)
(5) Conformed Copy of Investment Advisory Contract of
the Registrant; (4)
(6) Conformed Copy of Distributor's Contract of the
Registrant; (3)
(7) Not applicable;
(8) Conformed Copy of Custodian Agreement of the
Registrant; (4)
(9) (i) Conformed copy of Agreement for Fund
Accounting, Shareholder Recordkeping and Custody
Services Procurement; +
(ii) Conformed copy of Administrative Services
Agreement; (5)
(10) Conformed copy of Opinion and Consent of Counsel
as to legality of shares being registered;(2)
(11) (i) Conformed Copy of Consent of Independent
Auditors; +
(ii) Methodology and Procedures for Accounting for
Multiple Classes of Shares; (1)
(12) Not applicable;
(13) Conformed Copy of Initial Capital Understanding;
(2)
(14) Not applicable;
(15) (i) Copy of Distribution Plan; (3)
(ii) Form of 12b-1 Agreement; +

(16) Copy of Schedule for Computation of Fund
Performance Data; (3)
(17) Copy of Financial Data Schedule; +
(18) Not Applicable
(19) Conformed copy of Power of Attorney; (5)

Item 25. Persons Controlled by or Under Common Control with
Registrant:

None

+ All exhibits have been filed electronically.

1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed September 11, 1992
(File Nos. 33-49007 and 811-7041)
2. Response is incorporated by reference to Registrant's Pre-
Effective Amendment No. 1 on Form N-1A filed November 18, 1992
(File Nos. 33-49007 and 811-7041)
3. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 1 on Form N-1A filed May 27, 1993 (File
Nos. 33-49007 and 811-7041)
4. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 2 on Form N-1A filed November 24, 1993
(File Nos. 33-49007 and 811-7041).
5. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 3 on Form N-1A filed November 28, 1994
(File Nos. 33-49007 and 811-7041).

Item 26. Number of Holders of Securities:

Title of Class Number of Record Holders

Shares of beneficial interest
(no par value)

Arrow Equity Portfolio, as of
November 3, 1995 108

Arrow Fixed Income Portfolio,
as of November 3, 1995 28

Arrow Municipal Income Portfolio, 28
as of November 3, 1995

Arrow Government Money Market
Portfolio, as of November 3, 1995 5

Item 27. Indemnification: (2)

Item 28. Business and Other Connections of Investment Adviser:

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, 1995, 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 of Mark
Twain Bank manages two commingled funds with total assets of
over $18 million.

The principal executive officers and directors of the
Trust's Investment Adviser are set forth in the following
tables. Unless otherwise noted, the position listed under
other Substantial Business, Profession, Vocation, or
Employment is with Mark Twain Bank.

(1) (2) (3)
Other Substantial
Position with Business, Profession,
Name the Adviser Vocation or Employment

Peter F. Benoist Chairman Executive Vice President
and CEO and Director of Mark
Twain Bancshares, Inc.

Robert F. Borchert President and
Director

Kathryn Bader Senior Vice President

Ronald T. Barnes Senior Vice President

2. Response is incorporated by reference to Registrant's Pre-
Effective Amendment No. 1 on Form N-1A filed November 18, 1992
(File Nos. 33-49007 and 811-7041)

Thomas M. Fitzgerald Senior Vice President

Robert W. Holle Senior Vice President,
Secretary and Cashier

William T. Reeves Senior Vice President

Frederick Zimmer Senior Vice President

Sean P. McManus Senior Vice President

Kevin Cody Vice President and
Cheif Accounting Officer

Morton R. Bearman Director President,
Bearman Properties

Robert L. Boland Director President,
Robert L. Boland, Inc.

Edmund J. Boyce, Jr. Director President,
E.J. Boyce, Inc.

Charles S. Drew, Jr. Director Chairman,
The Daniel & Henry Co.

John P. Dubinsky Director President and CEO,
Mark Twain Bancshares,
Inc.

Paul A. Koch Director President,
Koch Construction Co.

Item 29. Principal Underwriters:

(a) Federated Securities Corp., the Distributor for shares of the
Registrant, also acts as principal underwriter for the
following open-end investment companies: American Leaders
Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Government Money Trust; BayFunds; The Biltmore
Funds; The Biltmore Municipal Funds; Blanchard Funds;
Blanchard Precious Metals, Inc.; Cash Trust Series, Inc.;
Cash Trust Series II; DG Investor Series; Edward D. Jones
& Co. Daily Passport Cash Trust; Federated ARMs Fund;
Federated Equity Funds; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust;
Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Master Trust;

Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust;
Federated Stock Trust; Federated Tax-Free Trust;
Federated Total Return Series, Inc.; Federated U.S.
Government Bond Fund; Federated U.S. Government
Securities Fund: 1-3 Years; Federated U.S. Government
Securities Fund: 3-5 Years;First Priority Funds; First
Union Funds; Fixed Income Securities, Inc.; Fortress
Adjustable Rate U.S. Government Fund, Inc.; Fortress
Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.;
Fountain Square Funds; Fund for U.S. Government
Securities, Inc.; Government Income Securities, Inc.;
High Yield Cash Trust; Independence One Mutual Funds;
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 Utility Fund,
Inc.; Liquid Cash Trust; Managed Series Trust; Marshall
Funds, Inc.; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; The Monitor Funds;
Municipal Securities Income Trust; Newpoint Funds; 111
Corcoran Funds; Peachtree Funds; The Planters Funds;
RIMCO Monument Funds; The Shawmut Funds; SouthTrust
Vulcan Funds; Star Funds; The Starburst Funds; The
Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; Tower Mutual Funds; 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; The
Virtus Funds; Vision Fiduciary Funds, Inc.; Vision Group
of Funds, Inc.; and World Investment Series, Inc.

Federated Securities Corp. also acts as principal
underwriter for the following closed-end investment
company: Liberty Term Trust, Inc.- 1999.

(b)

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant

Richard B. Fisher Director, Chairman, Chief Vice President Federated
Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary, and Asst.
Treasurer, Federated
Securities Corp.

Edward C. Gonzales Director, Executive VicePresident,
Federated Investors Tower President, Federated, Treasurer,
Pittsburgh, PA 15222-3779 Securities Corp. and Trustee

John W. McGonigle Director, Federated Executive Vice
Federated Investors Tower Securities Corp. President and

Pittsburgh, PA 15222-3779 Secretary

John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust, Federated
Pittsburgh, PA 15222-3779 Securities Corp.

Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp
Pittsburgh, PA 15222-3779

John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

G. Michael Cullen Vice President, --

Federated Investors Tower Federated Securites Corp.
Pittsburgh, PA 15222-3779

Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Michael D. Fitzgerald Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.

Pittsburgh, PA 15222-3779

Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

H. Joeseph Kenedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Steven A. La Versa Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

John C. Shelar, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jamie M. Teschner Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

J. Timothy Radcliff Assistant Vice President, --

Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Thomas R. Donahue Asstistant Secretary, --
Federated Investors Tower Assistant Treasurer,
Pittsburgh, PA 15222-3779 Federated Securities Corp.

Joseph M. Huber Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

David M. Taylor Assistant Secretary, Treasurer
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Item 30. Location of Accounts and Records: (2)

Item 31. Management Services: Not applicable.

Item 32. Undertakings:

Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of Trustees and
the calling of special shareholder meetings by shareholders.

Registrant hereby undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.

2. Response is incorporated by reference to Registrant's Pre-Effective Amendment
No. 1 on Form N-1A filed November 18, 1992 (File Nos. 33-49007 and 811-7041)

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, ARROW FUNDS, has duly caused
this Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Pittsburgh and Commonwealth
of Pennsylvania, on the 22nd day of November, 1995.

ARROW FUNDS

BY: /s/Gail Cagney
Gail Cagney, Assistant Secretary
Attorney in Fact for John F. Donahue
November 22, 1995

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following person in
the capacity and on the date indicated:

NAME TITLE DATE

By:/s/Gail Cagney
Gail Cagney Attorney In Fact November 22, 1995
ASSISTANT SECRETARY For the Persons
Listed Below

NAME TITLE

John F. Donahue* Chairman and Trustee
(Chief Executive Officer)

Glen R. Johnson* President

Edward C. Gonzales* Vice President and Treasurer
(Principal Financial and
Accounting Officer)

Thomas G. Bigley* Trustee

John T. Conroy, Jr.* Trustee

William J. Copeland* Trustee

James E. Dowd* Trustee

Lawrence D. Ellis, M.D.* Trustee

Edward L. Flaherty, Jr.* Trustee

Peter E. Madden* Trustee

Gregor F. Meyer* Trustee

Wesley W. Posvar* Trustee

Marjorie P. Smuts* Trustee

Exhibit 11 under N-1A
Exhibit 23 under Item 601/Reg SK

INDEPENDENT AUDITORS' CONSENT

The Board of Trustees
Arrow Funds:

With respect to the Prospectuses and Statements of Additional Information
included in this Post Effective Amendment No. 4 to the Registration Statement on
Form N-1A of the Arrow Funds, we consent to the use of our reports, dated
November 10, 1995, included herein and to the references to our Firm under the
headings "Financial Highlights" and "Administration of the Funds-Independent
Auditors" in Part A of the Registration Statement.

Arrow Government Money Market Portfolio
Arrow Equity Portfolio
Arrow Fixed Income Portfolio
Arrow Municipal Income Portfolio

/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania

Exhibit 9(i) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K

AGREEMENT
FOR
FUND ACCOUNTING,
SHAREHOLDER RECORDKEEPING,
AND
CUSTODY SERVICES PROCUREMENT

AGREEMENT made as of December 1, 1994, by and between those investment
companies listed on Exhibit 1 as may be amended from time to time, having
their principal office and place of business at Federated Investors Tower,
Pittsburgh, PA 15222-3779 (the "Trust"), on behalf of the portfolios
(individually referred to herein as a "Fund" and collectively as "Funds") of
the Trust, and FEDERATED SERVICES COMPANY, a Delaware business trust, having
its principal office and place of business at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779 (the "Company").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
with authorized and issued shares of capital stock or beneficial interest
("Shares"); and
WHEREAS, the Trust may desire to retain the Company to provide certain
pricing, accounting and recordkeeping services for each of the Funds,
including any classes of shares issued by any Fund ("Classes") if so indicated
on Exhibit 1, and the Company is willing to furnish such services; and
WHEREAS, the Trust may desire to appoint the Company as its transfer agent,
dividend disbursing agent if so indicated on Exhibit 1, and agent in
connection with certain other activities, and the Company desires to accept
such appointment; and
WHEREAS, the Trust may desire to appoint the Company as its agent to
select, negotiate and subcontract for custodian services from an approved list
of qualified banks if so indicated on Exhibit 1, and the Company desires to
accept such appointment; and
WHEREAS, from time to time the Trust may desire and may instruct the
Company to subcontract for the performance of certain of its duties and
responsibilities hereunder to State Street Bank and Trust Company or another
agent (the "Agent"); and
WHEREAS, the words Trust and Fund may be used interchangeably for those
investment companies consisting of only one portfolio;
NOW THEREFORE, in consideration of the premises and mutual covenants herein
contained, and intending to be legally bound hereby, the parties hereto agree
as follows:
SECTION ONE: FUND ACCOUNTING.
ARTICLE 1. APPOINTMENT.
The Trust hereby appoints the Company to provide certain pricing and
accounting services to the Funds, and/or the Classes, for the period and on
the terms set forth in this Agreement. The Company accepts such appointment
and agrees to furnish the services herein set forth in return for the
compensation as provided in Article 3 of this Section.
ARTICLE 2. THE COMPANY'S DUTIES.
Subject to the supervision and control of the Trust's Board of Trustees or
Directors ("Board"), the Company will assist the Trust with regard to fund
accounting for the Trust, and/or the Funds, and/or the Classes, and in
connection therewith undertakes to perform the following specific services;
A. Value the assets of the Funds using: primarily, market quotations,
including the use of matrix pricing, supplied by the independent pricing
services selected by the Company in consultation with the adviser, or
sources selected by the adviser, and reviewed by the board; secondarily,
if a designated pricing service does not provide a price for a security
which the Company believes should be available by market quotation, the
Company may obtain a price by calling brokers designated by the
investment adviser of the fund holding the security, or if the adviser
does not supply the names of such brokers, the Company will attempt on
its own to find brokers to price those securities; thirdly, for
securities for which no market price is available, the Pricing Committee
of the Board will determine a fair value in good faith. Consistent with
Rule 2a-4 of the 40 Act, estimates may be used where necessary or
appropriate. The Company's obligations with regard to the prices
received from outside pricing services and designated brokers or other
outside sources, is to exercise reasonable care in the supervision of
the pricing agent. The Company is not the guarantor of the securities
prices received from such agents and the Company is not liable to the
Fund for potential errors in valuing a Fund's assets or calculating the
net asset value per share of such Fund or Class when the calculations
are based upon such prices. All of the above sources of prices used as
described are deemed by the Company to be authorized sources of security
prices. The Company provides daily to the adviser the securities prices
used in calculating the net asset value of the fund, for its use in
preparing exception reports for those prices on which the adviser has
comment. Further, upon receipt of the exception reports generated by the
adviser, the Company diligently pursues communication regarding
exception reports with the designated pricing agents.
B. Determine the net asset value per share of each Fund and/or Class, at
the time and in the manner from time to time determined by the Board and
as set forth in the Prospectus and Statement of Additional Information
("Prospectus") of each Fund;
C. Calculate the net income of each of the Funds, if any;
D. Calculate capital gains or losses of each of the Funds resulting from
sale or disposition of assets, if any;
E. Maintain the general ledger and other accounts, books and financial
records of the Trust, including for each Fund, and/or Class, as required
under Section 31(a) of the 1940 Act and the Rules thereunder in
connection with the services provided by the Company;
F. Preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the
records to be maintained by Rule 31a-1 under the 1940 Act in connection
with the services provided by the Company. The Company further agrees
that all such records it maintains for the Trust are the property of the
Trust and further agrees to surrender promptly to the Trust such records
upon the Trust's request;
G. At the request of the Trust, prepare various reports or other financial
documents required by federal, state and other applicable laws and
regulations; and
H. Such other similar services as may be reasonably requested by the Trust.
ARTICLE 3. COMPENSATION AND ALLOCATION OF EXPENSES.
A. The Funds will compensate the Company for its services rendered pursuant
to Section One of this Agreement in accordance with the fees agreed upon
from time to time between the parties hereto. Such fees do not include
out-of-pocket disbursements of the Company for which the Funds shall
reimburse the Company upon receipt of a separate invoice. Out-of-pocket
disbursements shall include, but shall not be limited to, the items
agreed upon between the parties from time to time.
B. The Fund and/or the Class, and not the Company, shall bear the cost of:
custodial expenses; membership dues in the Investment Company Institute
or any similar organization; transfer agency expenses; investment
advisory expenses; costs of printing and mailing stock certificates,
Prospectuses, reports and notices; administrative expenses; interest on
borrowed money; brokerage commissions; taxes and fees payable to
federal, state and other governmental agencies; fees of Trustees or
Directors of the Trust; independent auditors expenses; Federated
Administrative Services and/or Federated Administrative Services, Inc.
legal and audit department expenses billed to Federated Services Company
for work performed related to the Trust, the Funds, or the Classes; law
firm expenses; or other expenses not specified in this Article 3 which
may be properly payable by the Funds and/or classes.
C. The compensation and out-of-pocket expenses shall be accrued by the Fund
and shall be paid to the Company no less frequently than monthly, and
shall be paid daily upon request of the Company. The Company will
maintain detailed information about the compensation and out-of-pocket
expenses by Fund and Class.
D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Trust and/or the Funds and a duly authorized officer of
the Company.
E. The fee for the period from the effective date of this Agreement with
respect to a Fund or a Class to the end of the initial month shall be
prorated according to the proportion that such period bears to the full
month period. Upon any termination of this Agreement before the end of
any month, the fee for such period shall be prorated according to the
proportion which such period bears to the full month period. For
purposes of determining fees payable to the Company, the value of the
Fund's net assets shall be computed at the time and in the manner
specified in the Fund's Prospectus.
F. The Company, in its sole discretion, may from time to time subcontract
to, employ or associate with itself such person or persons as the
Company may believe to be particularly suited to assist it in performing
services under this Section One. Such person or persons may be third-
party service providers, or they may be officers and employees who are
employed by both the Company and the Funds. The compensation of such
person or persons shall be paid by the Company and no obligation shall
be incurred on behalf of the Trust, the Funds, or the Classes in such
respect.
SECTION TWO: SHAREHOLDER RECORDKEEPING.
ARTICLE 4. TERMS OF APPOINTMENT.
Subject to the terms and conditions set forth in this Agreement, the Trust
hereby appoints the Company to act as, and the Company agrees to act as,
transfer agent and dividend disbursing agent for each Fund's Shares, and agent
in connection with any accumulation, open-account or similar plans provided to
the shareholders of any Fund ("Shareholder(s)"), including without limitation
any periodic investment plan or periodic withdrawal program.
As used throughout this Agreement, a "Proper Instruction" means a writing
signed or initialed by one or more person or persons as the Board shall have
from time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved. Oral instructions will be deemed
to be Proper Instructions if (a) the Company reasonably believes them to have
been given by a person previously authorized in Proper Instructions to give
such instructions with respect to the transaction involved, and (b) the Trust,
or the Fund, and the Company promptly cause such oral instructions to be
confirmed in writing. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices provided that the
Trust, or the Fund, and the Company are satisfied that such procedures afford
adequate safeguards for the Fund's assets. Proper Instructions may only be
amended in writing.
ARTICLE 5. DUTIES OF THE COMPANY.
The Company shall perform the following services in accordance with Proper
Instructions as may be provided from time to time by the Trust as to any Fund:
A. Purchases
(1) The Company shall receive orders and payment for the purchase of
shares and promptly deliver payment and appropriate documentation
therefore to the custodian of the relevant Fund, (the "Custodian").
The Company shall notify the Fund and the Custodian on a daily
basis of the total amount of orders and payments so delivered.
(2) Pursuant to purchase orders and in accordance with the Fund's
current Prospectus, the Company shall compute and issue the
appropriate number of Shares of each Fund and/or Class and hold
such Shares in the appropriate Shareholder accounts.
(3) For certificated Funds and/or Classes, if a Shareholder or its
agent requests a certificate, the Company, as Transfer Agent, shall
countersign and mail by first class mail, a certificate to the
Shareholder at its address as set forth on the transfer books of
the Funds, and/or Classes, subject to any Proper Instructions
regarding the delivery of certificates.
(4) In the event that any check or other order for the purchase of
Shares of the Fund and/or Class is returned unpaid for any reason,
the Company shall debit the Share account of the Shareholder by the
number of Shares that had been credited to its account upon receipt
of the check or other order, promptly mail a debit advice to the
Shareholder, and notify the Fund and/or Class of its action. In the
event that the amount paid for such Shares exceeds proceeds of the
redemption of such Shares plus the amount of any dividends paid
with respect to such Shares, the Fund and/the Class or its
distributor will reimburse the Company on the amount of such
excess.
B. Distribution
(1) Upon notification by the Funds of the declaration of any
distribution to Shareholders, the Company shall act as Dividend
Disbursing Agent for the Funds in accordance with the provisions of
its governing document and the then-current Prospectus of the Fund.
The Company shall prepare and mail or credit income, capital gain,
or any other payments to Shareholders. As the Dividend Disbursing
Agent, the Company shall, on or before the payment date of any such
distribution, notify the Custodian of the estimated amount required
to pay any portion of said distribution which is payable in cash
and request the Custodian to make available sufficient funds for
the cash amount to be paid out. The Company shall reconcile the
amounts so requested and the amounts actually received with the
Custodian on a daily basis. If a Shareholder is entitled to receive
additional Shares by virtue of any such distribution or dividend,
appropriate credits shall be made to the Shareholder's account, for
certificated Funds and/or Classes, delivered where requested; and
(2) The Company shall maintain records of account for each Fund and
Class and advise the Trust, each Fund and Class and its
Shareholders as to the foregoing.
C. Redemptions and Transfers
(1) The Company shall receive redemption requests and redemption
directions and, if such redemption requests comply with the
procedures as may be described in the Fund Prospectus or set forth
in Proper Instructions, deliver the appropriate instructions
therefor to the Custodian. The Company shall notify the Funds on a
daily basis of the total amount of redemption requests processed
and monies paid to the Company by the Custodian for redemptions.
(2) At the appropriate time upon receiving redemption proceeds from the
Custodian with respect to any redemption, the Company shall pay or
cause to be paid the redemption proceeds in the manner instructed
by the redeeming Shareholders, pursuant to procedures described in
the then-current Prospectus of the Fund.
(3) If any certificate returned for redemption or other request for
redemption does not comply with the procedures for redemption
approved by the Fund, the Company shall promptly notify the
Shareholder of such fact, together with the reason therefor, and
shall effect such redemption at the price applicable to the date
and time of receipt of documents complying with said procedures.
(4) The Company shall effect transfers of Shares by the registered
owners thereof.
(5) The Company shall identify and process abandoned accounts and
uncashed checks for state escheat requirements on an annual basis
and report such actions to the Fund.
D. Recordkeeping
(1) The Company shall record the issuance of Shares of each Fund,
and/or Class, and maintain pursuant to applicable rules of the
Securities and Exchange Commission ("SEC") a record of the total
number of Shares of the Fund and/or Class which are authorized,
based upon data provided to it by the Fund, and issued and
outstanding. The Company shall also provide the Fund on a regular
basis or upon reasonable request with the total number of Shares
which are authorized and issued and outstanding, but shall have no
obligation when recording the issuance of Shares, except as
otherwise set forth herein, to monitor the issuance of such Shares
or to take cognizance of any laws relating to the issue or sale of
such Shares, which functions shall be the sole responsibility of
the Funds.
(2) The Company shall establish and maintain records pursuant to
applicable rules of the SEC relating to the services to be
performed hereunder in the form and manner as agreed to by the
Trust or the Fund to include a record for each Shareholder's
account of the following:
(a) Name, address and tax identification number (and whether such
number has been certified);
(b) Number of Shares held;
(c) Historical information regarding the account, including
dividends paid and date and price for all transactions;
(d) Any stop or restraining order placed against the account;
(e) Information with respect to withholding in the case of a
foreign account or an account for which withholding is
required by the Internal Revenue Code;
(f) Any dividend reinvestment order, plan application, dividend
address and correspondence relating to the current maintenance
of the account;
(g) Certificate numbers and denominations for any Shareholder
holding certificates;
(h) Any information required in order for the Company to perform
the calculations contemplated or required by this Agreement.
(3) The Company shall preserve any such records required to be
maintained pursuant to the rules of the SEC for the periods
prescribed in said rules as specifically noted below. Such record
retention shall be at the expense of the Company, and such records
may be inspected by the Fund at reasonable times. The Company may,
at its option at any time, and shall forthwith upon the Fund's
demand, turn over to the Fund and cease to retain in the Company's
files, records and documents created and maintained by the Company
pursuant to this Agreement, which are no longer needed by the
Company in performance of its services or for its protection. If
not so turned over to the Fund, such records and documents will be
retained by the Company for six years from the year of creation,
during the first two of which such documents will be in readily
accessible form. At the end of the six year period, such records
and documents will either be turned over to the Fund or destroyed
in accordance with Proper Instructions.
E. Confirmations/Reports
(1) The Company shall furnish to the Fund periodically the following
information:
(a) A copy of the transaction register;
(b) Dividend and reinvestment blotters;
(c) The total number of Shares issued and outstanding in each
state for "blue sky" purposes as determined according to
Proper Instructions delivered from time to time by the Fund to
the Company;
(d) Shareholder lists and statistical information;
(e) Payments to third parties relating to distribution agreements,
allocations of sales loads, redemption fees, or other
transaction- or sales-related payments;
(f) Such other information as may be agreed upon from time to
time.
(2) The Company shall prepare in the appropriate form, file with the
Internal Revenue Service and appropriate state agencies, and, if
required, mail to Shareholders, such notices for reporting
dividends and distributions paid as are required to be so filed and
mailed and shall withhold such sums as are required to be withheld
under applicable federal and state income tax laws, rules and
regulations.
(3) In addition to and not in lieu of the services set forth above, the
Company shall:
(a) Perform all of the customary services of a transfer agent,
dividend disbursing agent and, as relevant, agent in
connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or
periodic withdrawal program), including but not limited to:
maintaining all Shareholder accounts, mailing Shareholder
reports and Prospectuses to current Shareholders, withholding
taxes on accounts subject to back-up or other withholding
(including non-resident alien accounts), preparing and filing
reports on U.S. Treasury Department Form 1099 and other
appropriate forms required with respect to dividends and
distributions by federal authorities for all Shareholders,
preparing and mailing confirmation forms and statements of
account to Shareholders for all purchases and redemptions of
Shares and other conformable transactions in Shareholder
accounts, preparing and mailing activity statements for
Shareholders, and providing Shareholder account information;
and
(b) provide a system which will enable the Fund to monitor the
total number of Shares of each Fund and/or Class sold in each
state ("blue sky reporting"). The Fund shall by Proper
Instructions (i) identify to the Company those transactions
and assets to be treated as exempt from the blue sky reporting
for each state and (ii) verify the classification of
transactions for each state on the system prior to activation
and thereafter monitor the daily activity for each state. The
responsibility of the Company for each Fund's and/or Class's
state blue sky registration status is limited solely to the
recording of the initial classification of transactions or
accounts with regard to blue sky compliance and the reporting
of such transactions and accounts to the Fund as provided
above.
F. Other Duties
(1) The Company shall answer correspondence from Shareholders relating
to their Share accounts and such other correspondence as may from
time to time be addressed to the Company;
(2) The Company shall prepare Shareholder meeting lists, mail proxy
cards and other material supplied to it by the Fund in connection
with Shareholder Meetings of each Fund; receive, examine and
tabulate returned proxies, and certify the vote of the
Shareholders;
(3) The Company shall establish and maintain facilities and procedures
for safekeeping of stock certificates, check forms and facsimile
signature imprinting devices, if any; and for the preparation or
use, and for keeping account of, such certificates, forms and
devices.
ARTICLE 6. DUTIES OF THE TRUST.
A. Compliance
The Trust or Fund assume full responsibility for the preparation,
contents and distribution of their own and/or their classes' Prospectus
and for complying with all applicable requirements of the Securities Act
of 1933, as amended (the "1933 Act"), the 1940 Act and any laws, rules
and regulations of government authorities having jurisdiction.
B. Share Certificates
The Trust shall supply the Company with a sufficient supply of blank
Share certificates and from time to time shall renew such supply upon
request of the Company. Such blank Share certificates shall be properly
signed, manually or by facsimile, if authorized by the Trust and shall
bear the seal of the Trust or facsimile thereof; and notwithstanding the
death, resignation or removal of any officer of the Trust authorized to
sign certificates, the Company may continue to countersign certificates
which bear the manual or facsimile signature of such officer until
otherwise directed by the Trust.

C. Distributions
The Fund shall promptly inform the Company of the declaration of any
dividend or distribution on account of any Fund's shares.
ARTICLE 7. COMPENSATION AND EXPENSES.
A. Annual Fee
For performance by the Company pursuant to Section Two of this
Agreement, the Trust and/or the Fund agree to pay the Company an annual
maintenance fee for each Shareholder account as agreed upon between the
parties and as may be added to or amended from time to time. Such fees
may be changed from time to time subject to written agreement between
the Trust and the Company. Pursuant to information in the Fund
Prospectus or other information or instructions from the Fund, the
Company may sub-divide any Fund into Classes or other sub-components for
recordkeeping purposes. The Company will charge the Fund the same fees
for each such Class or sub-component the same as if each were a Fund.
B. Reimbursements
In addition to the fee paid under Article 7A above, the Trust and/or
Fund agree to reimburse the Company for out-of-pocket expenses or
advances incurred by the Company for the items agreed upon between the
parties, as may be added to or amended from time to time. In addition,
any other expenses incurred by the Company at the request or with the
consent of the Trust and/or the Fund, will be reimbursed by the
appropriate Fund.
C. Payment
The compensation and out-of-pocket expenses shall be accrued by the Fund
and shall be paid to the Company no less frequently than monthly, and
shall be paid daily upon request of the Company. The Company will
maintain detailed information about the compensation and out-of-pocket
expenses by Fund and Class.
D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Trust and/or the Funds and a duly authorized officer of
the Company.
ARTICLE 8. ASSIGNMENT OF SHAREHOLDER RECORDKEEPING.
Except as provided below, no right or obligation under this Section Two may
be assigned by either party without the written consent of the other party.
A. This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
B. The Company may without further consent on the part of the Trust
subcontract for the performance hereof with (A) State Street Bank and
its subsidiary, Boston Financial Data Services, Inc., a Massachusetts
Trust ("BFDS"), which is duly registered as a transfer agent pursuant to
Section 17A(c)(1) of the Securities Exchange Act of 1934, as amended, or
any succeeding statute ("Section 17A(c)(1)"), or (B) a BFDS subsidiary
duly registered as a transfer agent pursuant to Section 17A(c)(1), or
(C) a BFDS affiliate, or (D) such other provider of services duly
registered as a transfer agent under Section 17A(c)(1) as Company shall
select; provided, however, that the Company shall be as fully
responsible to the Trust for the acts and omissions of any subcontractor
as it is for its own acts and omissions; or
C. The Company shall upon instruction from the Trust subcontract for the
performance hereof with an Agent selected by the Trust, other than BFDS
or a provider of services selected by Company, as described in (2)
above; provided, however, that the Company shall in no way be
responsible to the Trust for the acts and omissions of the Agent.
SECTION THREE: CUSTODY SERVICES PROCUREMENT.
ARTICLE 9. APPOINTMENT.
The Trust hereby appoints Company as its agent to evaluate and obtain
custody services from a financial institution that (i) meets the criteria
established in Section 17(f) of the 1940 Act and (ii) has been approved by the
Board as eligible for selection by the Company as a custodian (the "Eligible
Custodian"). The Company accepts such appointment.
ARTICLE 10. THE COMPANY AND ITS DUTIES.
Subject to the review, supervision and control of the Board, the Company
shall:
A. evaluate the nature and the quality of the custodial services provided
by the Eligible Custodian;
B. employ the Eligible Custodian to serve on behalf of the Trust as
Custodian of the Trust's assets substantially on the terms set forth as
the form of agreement in Exhibit 2;
C. negotiate and enter into agreements with the Custodians for the benefit
of the Trust, with the Trust as a party to each such agreement. The
Company shall not be a party to any agreement with any such Custodian;
D. establish procedures to monitor the nature and the quality of the
services provided by the Custodians;
E. continuously monitor the nature and the quality of services provided by
the Custodians; and
F. periodically provide to the Trust (i) written reports on the activities
and services of the Custodians; (ii) the nature and amount of
disbursement made on account of the Trust with respect to each custodial
agreement; and (iii) such other information as the Board shall
reasonably request to enable it to fulfill its duties and obligations
under Sections 17(f) and 36(b) of the 1940 Act and other duties and
obligations thereof.
ARTICLE 11. FEES AND EXPENSES.
A. Annual Fee
For the performance by the Company pursuant to Section Three of this
Agreement, the Trust and/or the Fund agree to pay the Company an annual
fee as agreed upon between the parties.
B. Reimbursements
In addition to the fee paid under Section 11A above, the Trust and/or
Fund agree to reimburse the Company for out-of-pocket expenses or
advances incurred by the Company for the items agreed upon between the
parties, as may be added to or amended from time to time. In addition,
any other expenses incurred by the Company at the request or with the
consent of the Trust and/or the Fund, will be reimbursed by the
appropriate Fund.
C. Payment
The compensation and out-of-pocket expenses shall be accrued by the Fund
and shall be paid to the Company no less frequently than monthly, and
shall be paid daily upon request of the Company. The Company will
maintain detailed information about the compensation and out-of-pocket
expenses by Fund.
D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Trust and/or the Funds and a duly authorized officer of
the Company.
ARTICLE 12. REPRESENTATIONS.
The Company represents and warrants that it has obtained all required
approvals from all government or regulatory authorities necessary to enter
into this arrangement and to provide the services contemplated in Section
Three of this Agreement.
SECTION FOUR: GENERAL PROVISIONS.
ARTICLE 13. DOCUMENTS.
A. In connection with the appointment of the Company under this Agreement,
the Trust shall file with the Company the following documents:
(1) A copy of the Charter and By-Laws of the Trust and all amendments
thereto;
(2) A copy of the resolution of the Board of the Trust authorizing this
Agreement;
(3) Specimens of all forms of outstanding Share certificates of the
Trust or the Funds in the forms approved by the Board of the Trust
with a certificate of the Secretary of the Trust as to such
approval;
(4) All account application forms and other documents relating to
Shareholders accounts; and
(5) A copy of the current Prospectus for each Fund.
B. The Fund will also furnish from time to time the following documents:
(1) Each resolution of the Board of the Trust authorizing the original
issuance of each Fund's, and/or Class's Shares;
(2) Each Registration Statement filed with the SEC and amendments
thereof and orders relating thereto in effect with respect to the
sale of Shares of any Fund, and/or Class;
(3) A certified copy of each amendment to the governing document and
the By-Laws of the Trust;
(4) Certified copies of each vote of the Board authorizing officers to
give Proper Instructions to the Custodian and agents for fund
accountant, custody services procurement, and shareholder
recordkeeping or transfer agency services;
(5) Specimens of all new Share certificates representing Shares of any
Fund, accompanied by Board resolutions approving such forms;
(6) Such other certificates, documents or opinions which the Company
may, in its discretion, deem necessary or appropriate in the proper
performance of its duties; and
(7) Revisions to the Prospectus of each Fund.
ARTICLE 14. REPRESENTATIONS AND WARRANTIES.
A. Representations and Warranties of the Company
The Company represents and warrants to the Trust that:
(1) It is a business trust duly organized and existing and in good
standing under the laws of the State of Delaware.
(2) It is duly qualified to carry on its business in the State of
Delaware.
(3) It is empowered under applicable laws and by its charter and by-
laws to enter into and perform this Agreement.
(4) All requisite corporate proceedings have been taken to authorize it
to enter into and perform its obligations under this Agreement.
(5) It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
(6) It is in compliance with federal securities law requirements and in
good standing as a transfer agent.
B. Representations and Warranties of the Trust
The Trust represents and warrants to the Company that:
(1) It is an investment company duly organized and existing and in good
standing under the laws of its state of organization;
(2) It is empowered under applicable laws and by its Charter and By-
Laws to enter into and perform its obligations under this
Agreement;
(3) All corporate proceedings required by said Charter and By-Laws have
been taken to authorize it to enter into and perform its
obligations under this Agreement;
(4) The Trust is an open-end investment company registered under the
1940 Act; and
(5) A registration statement under the 1933 Act will be effective, and
appropriate state securities law filings have been made and will
continue to be made, with respect to all Shares of each Fund being
offered for sale.
ARTICLE 15. STANDARD OF CARE AND INDEMNIFICATION.
A. Standard of Care
The Company shall be held to a standard of reasonable care in carrying
out the provisions of this Contract. The Company shall be entitled to
rely on and may act upon advice of counsel (who may be counsel for the
Trust) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice, provided that such
action is not in violation of applicable federal or state laws or
regulations, and is in good faith and without negligence.
B. Indemnification by Trust
The Company shall not be responsible for and the Trust or Fund shall
indemnify and hold the Company, including its officers, directors,
shareholders and their agents employees and affiliates, harmless against
any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liabilities arising out of or attributable to:
(1) The acts or omissions of any Custodian, Adviser, Sub-adviser or
other party contracted by or approved by the Trust or Fund,
(2) The reliance on or use by the Company or its agents or
subcontractors of information, records and documents in proper form
which
(a) are received by the Company or its agents or subcontractors
and furnished to it by or on behalf of the Fund, its
Shareholders or investors regarding the purchase, redemption
or transfer of Shares and Shareholder account information;
(b) are received by the Company from independent pricing services
or sources for use in valuing the assets of the Funds; or
(c) are received by the Company or its agents or subcontractors
from Advisers, Sub-advisers or other third parties contracted
by or approved by the Trust of Fund for use in the performance
of services under this Agreement;
(d) have been prepared and/or maintained by the Fund or its
affiliates or any other person or firm on behalf of the Trust.
(3) The reliance on, or the carrying out by the Company or its agents
or subcontractors of Proper Instructions of the Trust or the Fund.
(4) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws
or regulations of any state that such Shares be registered in such
state or in violation of any stop order or other determination or
ruling by any federal agency or any state with respect to the offer
or sale of such Shares in such state.
Provided, however, that the Company shall not be protected by this
Article 15.A. from liability for any act or omission resulting from
the Company's willful misfeasance, bad faith, negligence or
reckless disregard of its duties of failure to meet the standard of
care set forth in 15.A. above.
C. Reliance
At any time the Company may apply to any officer of the Trust or Fund
for instructions, and may consult with legal counsel with respect to any
matter arising in connection with the services to be performed by the
Company under this Agreement, and the Company and its agents or
subcontractors shall not be liable and shall be indemnified by the Trust
or the appropriate Fund for any action reasonably taken or omitted by it
in reliance upon such instructions or upon the opinion of such counsel
provided such action is not in violation of applicable federal or state
laws or regulations. The Company, its agents and subcontractors shall be
protected and indemnified in recognizing stock certificates which are
reasonably believed to bear the proper manual or facsimile signatures of
the officers of the Trust or the Fund, and the proper countersignature
of any former transfer agent or registrar, or of a co-transfer agent or
co-registrar.
D. Notification
In order that the indemnification provisions contained in this
Article 15 shall apply, upon the assertion of a claim for which either
party may be required to indemnify the other, the party seeking
indemnification shall promptly notify the other party of such assertion,
and shall keep the other party advised with respect to all developments
concerning such claim. The party who may be required to indemnify shall
have the option to participate with the party seeking indemnification in
the defense of such claim. The party seeking indemnification shall in no
case confess any claim or make any compromise in any case in which the
other party may be required to indemnify it except with the other
party's prior written consent.
ARTICLE 16. TERMINATION OF AGREEMENT.
This Agreement may be terminated by either party upon one hundred twenty
(120) days written notice to the other. Should the Trust exercise its rights
to terminate, all out-of-pocket expenses associated with the movement of
records and materials will be borne by the Trust or the appropriate Fund.
Additionally, the Company reserves the right to charge for any other
reasonable expenses associated with such termination. The provisions of
Article 15 shall survive the termination of this Agreement.
ARTICLE 17. AMENDMENT.
This Agreement may be amended or modified by a written agreement executed
by both parties.
ARTICLE 18. INTERPRETIVE AND ADDITIONAL PROVISIONS.
In connection with the operation of this Agreement, the Company and the
Trust may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Agreement as may in their joint opinion be
consistent with the general tenor of this Agreement. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall
be annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision
of the Charter. No interpretive or additional provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this Agreement.
ARTICLE 19. GOVERNING LAW.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the Commonwealth of Massachusetts
ARTICLE 20. NOTICES.
Except as otherwise specifically provided herein, Notices and other
writings delivered or mailed postage prepaid to the Trust at Federated
Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to the Company at
Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to such
other address as the Trust or the Company may hereafter specify, shall be
deemed to have been properly delivered or given hereunder to the respective
address.
ARTICLE 21. COUNTERPARTS.
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original.
ARTICLE 22. LIMITATIONS OF LIABILITY OF TRUSTEES AND SHAREHOLDERS OF THE TRUST.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Trust and signed by an authorized officer of the Trust, acting
as such, and neither such authorization by such Trustees nor such execution
and delivery by such officer shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, and the
obligations of this Agreement are not binding upon any of the Trustees or
Shareholders of the Trust, but bind only the appropriate property of the Fund,
or Class, as provided in the Declaration of Trust.
ARTICLE 23. LIMITATIONS OF LIABILITY OF TRUSTEES AND SHAREHOLDERS OF
THE COMPANY.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Company and signed by an authorized officer of the Company,
acting as such, and neither such authorization by such Trustees nor such
execution and delivery by such officer shall be deemed to have been made by
any of them individually or to impose any liability on any of them personally,
and the obligations of this Agreement are not binding upon any of the Trustees
or Shareholders of the Company, but bind only the property of the Company as
provided in the Declaration of Trust.
ARTICLE 24. ASSIGNMENT.
This Agreement and the rights and duties hereunder shall not be assignable
with respect to the Trust or the Funds by either of the parties hereto except
by the specific written consent of the other party.
ARTICLE 25. MERGER OF AGREEMENT.
This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof whether
oral or written.
ARTICLE 26. SUCCESSOR AGENT.
If a successor agent for the Trust shall be appointed by the Trust, the
Company shall upon termination of this Agreement deliver to such successor
agent at the office of the Company all properties of the Trust held by it
hereunder. If no such successor agent shall be appointed, the Company shall at
its office upon receipt of Proper Instructions deliver such properties in
accordance with such instructions.
In the event that no written order designating a successor agent or Proper
Instructions shall have been delivered to the Company on or before the date
when such termination shall become effective, then the Company shall have the
right to deliver to a bank or trust company, which is a "bank" as defined in
the 1940 Act, of its own selection, having an aggregate capital, surplus, and
undivided profits, as shown by its last published report, of not less than
$2,000,000, all properties held by the Company under this Agreement.
Thereafter, such bank or trust company shall be the successor of the Company
under this Agreement.
ARTICLE 27. FORCE MAJEURE.
The Company shall have no liability for cessation of services hereunder or
any damages resulting therefrom to the Fund as a result of work stoppage,
power or other mechanical failure, natural disaster, governmental action,
communication disruption or other impossibility of performance.
ARTICLE 28. ASSIGNMENT; SUCCESSORS.
This Agreement shall not be assigned by either party without the prior
written consent of the other party, except that either party may assign to a
successor all of or a substantial portion of its business, or to a party
controlling, controlled by, or under common control with such party. Nothing
in this Article 28 shall prevent the Company from delegating its
responsibilities to another entity to the extent provided herein.
ARTICLE 29. SEVERABILITY.
In the event any provision of this Agreement is held illegal, void or
unenforceable, the balance shall remain in effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.

ATTEST: INVESTMENT COMPANIES
(LISTED ON EXHIBIT 1)

/s/ John W. McGonigle By: /s/ John F. Donahue
------- -- ---
John W. McGonigle John F. Donahue
Secretary Chairman

ATTEST: FEDERATED SERVICES COMPANY

/s/ Jeannette Fisher-Garber By: /s/ James J. Dolan
- -----
Jeannette Fisher-Garber James J. Dolan
Secretary President

EXHIBIT 1
CONTRACT
DATE INVESTMENT COMPANY
Portfolios

12/1/94 Arrow Funds
Arrow Equity Portfolio
Arrow Fixed Inxome Portfolio
Arrow Municipal Income Portfolio

Exhibit 15(ii)

RULE 12B-1 AGREEMENT

This Agreement is made between the Financial Institution executing this
Agreement ("Administrator") and Federated Securities Corp. ("FSC") for the
mutual funds (referred to individually as the "Fund" and collectively as the
"Funds") for which FSC serves as Distributor of shares of beneficial interest or
capital stock ("Shares") and which have adopted a Rule 12b-1 Plan ("Plan") and
approved this form of agreement pursuant to Rule 12b-1 under the Investment
Company Act of 1940. In consideration of the mutual covenants hereinafter
contained, it is hereby agreed by and between the parties hereto as follows:

1. FSC hereby appoints Administrator to render or cause to be rendered
sales and administrative support services to the Funds and their shareholders.

2. The services to be provided under Paragraph 1 may include, but are not
limited to, the following:

(a) communicating account openings through computer terminals located
on the Administrator's premises ("computer terminals"), through a toll-
free telephone number or otherwise;

(b) communicating account closings via the computer terminals, through a
toll-free telephone number or otherwise;

(d) entering redemption transactions through the computer terminals,
through a toll-free telephone number or otherwise;

(e) electronically transferring and receiving funds for Fund Share
purchases and redemptions, and confirming and reconciling all such
transactions;

(f) reviewing the activity in Fund accounts;

(g) providing training and supervision of its personnel;

(h) maintaining and distributing current copies of prospectuses and
shareholder reports;

(i) advertising the availability of its services and products;

(j) providing assistance and review in designing materials to send to
customers and potential customers and developing methods of making such
materials accessible to customers and potential customers; and

(k) responding to customers' and potential customers' questions about
the Funds.

The services listed above are illustrative. The Administrator is not required
to perform each service and may at any time perform either more or fewer
services than described above.

3. During the term of this Agreement, FSC will pay the Administrator fees
for each Fund as set forth in a written schedule delivered to the Administrator
pursuant to this Agreement. FSC's fee schedule for Administrator may be changed
by FSC sending a new fee schedule to Administrator pursuant to Paragraph 12 of
this Agreement. For the payment period in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the fee on
the basis of the number of days that the Rule 12b-1 Agreement is in effect
during the quarter.

4. The Administrator will not perform or provide any duties which would
cause it to be a fiduciary under Section 4975 of the Internal Revenue Code, as
amended. For purposes of that Section, the Administrator understands that any
person who exercises any discretionary authority or discretionary control with
respect to any individual retirement account or its assets, or who renders
investment advice for a fee, or has any authority or responsibility to do so, or
has any discretionary authority or discretionary responsibility in the
administration of such an account, is a fiduciary.

5. The Administrator understands that the Department of Labor views ERISA
as prohibiting fiduciaries of discretionary ERISA assets from receiving
administrative service fees or other compensation from funds in which the
fiduciary's discretionary ERISA assets are invested. To date, the Department of
Labor has not issued any exemptive order or advisory opinion that would exempt
fiduciaries from this interpretation. Without specific authorization from the
Department of Labor, fiduciaries should carefully avoid investing discretionary
assets in any fund pursuant to an arrangement where the fiduciary is to be
compensated by the fund for such investment. Receipt of such compensation could
violate ERISA provisions against fiduciary self-dealing and conflict of interest
and could subject the fiduciary to substantial penalties.

6. The Administrator agrees not to solicit or cause to be solicited
directly, or indirectly at any time in the future, any proxies from the
shareholders of any or all of the Funds in opposition to proxies solicited by
management of the Fund or Funds, unless a court of competent jurisdiction shall
have determined that the conduct of a majority of the Board of Directors or
Trustees of the Fund or Funds constitutes willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties. This paragraph 6 will survive
the term of this Agreement.

7. With respect to each Fund, this Agreement shall continue in effect for
one year from the date of its execution, and thereafter for successive periods
of one year if the form of this Agreement is approved at least annually by the
Directors or Trustees of the Fund, including a majority of the members of the
Board of Directors or Trustees of the Fund who are not interested persons of the
Fund and have no direct or indirect financial interest in the operation of the
Fund's Plan or in any related documents to the Plan ("Disinterested Directors or
Trustees") cast in person at a meeting called for that purpose.

8. Notwithstanding paragraph 7, this Agreement may be terminated as
follows:

(a) at any time, without the payment of any penalty, by the vote of a
majority of the Disinterested Directors or Trustees of the Fund or by a
vote of a majority of the outstanding voting securities of the Fund as
defined in the Investment Company Act of 1940 on not more than sixty (60)
days' written notice to the parties to this Agreement;

(b) automatically in the event of the Agreement's assignment as defined
in the Investment Company Act of 1940 or upon the termination of the
"Administrative Support and Distributor's Contract" or "Distributor's
Contract" between the Fund and FSC; and

c) by either party to the Agreement without cause by giving the other
party at least sixty (60) days' written notice of its intention to
terminate.

9. The termination of this Agreement with respect to any one Fund will not
cause the Agreement's termination with respect to any other Fund.

10. The Administrator agrees to obtain any taxpayer identification number
certification from its customers required under Section 3406 of the Internal
Revenue Code, and any applicable Treasury regulations, and to provide FSC or its
designee with timely written notice of any failure to obtain such taxpayer
identification number certification in order to enable the implementation of any
required backup withholding.

11. This Agreement supersedes any prior service agreements between the
parties for the Funds.

12. This Agreement may be amended by FSC from time to time by the following
procedure. FSC will mail a copy of the amendment to the Administrator's
address, as shown below. If the Administrator does not object to the amendment
within thirty (30) days after its receipt, the amendment will become part of the
Agreement. The Administrator's objection must be in writing and be received by
FSC within such thirty days.

13. This Agreement shall be construed in accordance with the Laws of the
Commonwealth of Pennsylvania.

[ADMINISTRATOR]

Address

City State Zip Code

Dated: By:
----------------------- ------------------------------
Authorized Signature

Title

Print Name of Authorized Signature

FEDERATED SECURITIES CORP.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

By:
------------------------------
Richard B. Fisher, President

MARK TWAIN FUNDS
EXHIBIT A to 12b-1 Agreement with
Federated Securities Corp. ("FSC")

Portfolios

FSC will pay Administrator fees for the following portfolios (the "Funds")
effective as of the dates set forth below:

Name Date

Mark Twain Equity Portfolio September 1, 1992

Mark Twain Fixed Income Portfolio September 1, 1992

Mark Twain Government Money Market Portfolio September 1, 1992
Investment Shares

Mark Twain Municipal Income Portfolio September 1, 1992

Administrative Fees

1. During the term of this Agreement, FSC will pay Administrator a
quarterly fee in respect of each Fund. This fee will be computed at the annual
rate of 0.25% for the Mark Twain Equity Portfolio, Mark Twain Fixed Income
Portfolio and Mark Twain Municipal Income Portfolio, and at the annual rate of
0.40% for the Investment Shares of Mark Twain Government Money Market Portfolio
of the average net asset value of Shares held during the quarter in accounts for
which the Administrator provides services under this Agreement, so long as the
average net asset value of Shares in each Fund during the quarter equals or
exceeds such minimum amount as FSC shall from time to time determine and
communicate in writing to the Administrator.

2. For the quarterly period in which the Agreement becomes effective or
terminates, there shall be an appropriate proration of any fee payable on the

<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> Arrow Funds
Arrow Government Money Market Portfolio

<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Sep-30-1995
<PERIOD-END> Sep-30-1995
<INVESTMENTS-AT-COST> 217,111,077
<INVESTMENTS-AT-VALUE> 217,111,077
<RECEIVABLES> 347,312
<ASSETS-OTHER> 24,965
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 217,483,354
<PAYABLE-FOR-SECURITIES> 10,000,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 902,916
<TOTAL-LIABILITIES> 10,902,916
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 206,580,438
<SHARES-COMMON-PRIOR> 154,170,182
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 206,580,438
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9,982,988
<OTHER-INCOME> 0
<EXPENSES-NET> 1,354,670
<NET-INVESTMENT-INCOME> 8,628,318
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 8,628,318
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 414,847,913
<NUMBER-OF-SHARES-REDEEMED> 362,437,660
<SHARES-REINVESTED> 3
<NET-CHANGE-IN-ASSETS> 52,410,256
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 872,930
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,354,881
<AVERAGE-NET-ASSETS> 179,404,460
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.050
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.050
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 0.78
<AVG-DEBT-OUTSTANDING> 0
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<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> Arrow Funds
Arrow Equity Portfolio

<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Sep-30-1995
<PERIOD-END> Sep-30-1995
<INVESTMENTS-AT-COST> 31,109,047
<INVESTMENTS-AT-VALUE> 43,368,305
<RECEIVABLES> 335,931
<ASSETS-OTHER> 23,855
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<TOTAL-ASSETS> 43,728,091
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 20,423
<TOTAL-LIABILITIES> 20,423
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32,169,593
<SHARES-COMMON-STOCK> 3,166,785
<SHARES-COMMON-PRIOR> 3,109,853
<ACCUMULATED-NII-CURRENT> 35,180
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<ACCUMULATED-NET-GAINS> (756,363)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,259,258
<NET-ASSETS> 43,707,668
<DIVIDEND-INCOME> 583,628
<INTEREST-INCOME> 152,210
<OTHER-INCOME> 0
<EXPENSES-NET> 431,528
<NET-INVESTMENT-INCOME> 304,310
<REALIZED-GAINS-CURRENT> 1,393,153
<APPREC-INCREASE-CURRENT> 10,831,819
<NET-CHANGE-FROM-OPS> 12,529,282
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 291,654
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,078,775
<NUMBER-OF-SHARES-REDEEMED> 1,023,386
<SHARES-REINVESTED> 1,543
<NET-CHANGE-IN-ASSETS> 13,425,972
<ACCUMULATED-NII-PRIOR> 22,524
<ACCUMULATED-GAINS-PRIOR> (2,149,516)
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<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 253,371
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 531,769
<AVERAGE-NET-ASSETS> 33,965,160
<PER-SHARE-NAV-BEGIN> 9.740
<PER-SHARE-NII> 0.100
<PER-SHARE-GAIN-APPREC> 4.050
<PER-SHARE-DIVIDEND> 0.090
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 13.800
<EXPENSE-RATIO> 1.28
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> Arrow Funds
Arrow Fixed Income Portfolio

<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Sep-30-1995
<PERIOD-END> Sep-30-1995
<INVESTMENTS-AT-COST> 29,988,368
<INVESTMENTS-AT-VALUE> 30,263,158
<RECEIVABLES> 553,077
<ASSETS-OTHER> 7,200
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<TOTAL-ASSETS> 30,823,435
<PAYABLE-FOR-SECURITIES> 0
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<OTHER-ITEMS-LIABILITIES> 161,985
<TOTAL-LIABILITIES> 161,985
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 31,164,870
<SHARES-COMMON-STOCK> 3,046,535
<SHARES-COMMON-PRIOR> 3,518,071
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 274,790
<NET-ASSETS> 30,661,450
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,270,384
<OTHER-INCOME> 0
<EXPENSES-NET> 375,274
<NET-INVESTMENT-INCOME> 1,895,110
<REALIZED-GAINS-CURRENT> (595,593)
<APPREC-INCREASE-CURRENT> 2,957,493
<NET-CHANGE-FROM-OPS> 4,257,010
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,895,110
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 625,388
<NUMBER-OF-SHARES-REDEEMED> 1,100,149
<SHARES-REINVESTED> 3,225
<NET-CHANGE-IN-ASSETS> (2,081,497)
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-EXPENSE> 455,374
<AVERAGE-NET-ASSETS> 30,797,632
<PER-SHARE-NAV-BEGIN> 9.310
<PER-SHARE-NII> 0.590
<PER-SHARE-GAIN-APPREC> 0.750
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<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.060
<EXPENSE-RATIO> 1.22
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<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> Arrow Funds
Arrow Municipal Income Portfolio

<PERIOD-TYPE> 12-MOS
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</TABLE>