ARROW FUNDS, 485BPOS, 1996-11-29

ARROW FUNDS
485BPOS, 1996-11-29

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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. 5 .......... X

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X

Amendment No. 6 .......................... X

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, 1996 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 15, 1996; 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 Portfolio; 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.
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 Partnership
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,
1996, pursuant to Rule 411 under the
Securities Act of 1933. (File No. 811-
7041); (4) Filed in Part A.

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, 1996, which has also
been filed with the Securities and Exchange Commission ("SEC"). 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. The Combined Statement of Additional Information, material
incorporated by reference into this document, and other information
regarding the Funds is maintained electronically with the SEC at Internet
Web site (http://www.sec.gov).

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

Prospectus dated November 30, 1996

TABLE OF CONTENTS
SYNOPSIS 1
SUMMARY OF FUND EXPENSES 2
FINANCIAL HIGHLIGHTS 3
OBJECTIVE OF EACH FUND 6
Arrow Equity Portfolio 6
Investment Policies 6
Arrow Fixed Income Portfolio 7
Investment Policies 7
Arrow Municipal Income Portfolio 9
Investment Policies 9
PORTFOLIO INVESTMENTS AND STRATEGIES 11
Borrowing Money 11
Diversification 11
Restricted and Illiquid Securities 11
Repurchase Agreements 11
Investing in Securities of Other
Investment Companies 12
When-Issued and Delayed Delivery
Transactions 12
Put and Call Options 12
Futures and Options on Futures 13
Lending of Portfolio Securities 14
Investments in Foreign Securities 14
Ratings 14
ARROW FUNDS INFORMATION 15
Management of the Trust 15
Distribution of Shares of the Funds 16
Administration of the Funds 17
Brokerage Transactions 18
NET ASSET VALUE 18
INVESTING IN THE FUNDS 18
Share Purchases 18
Minimum Investment Required 19
What Shares Cost 19
Reducing/Eliminating the Sales Charge 20
Systematic Investment Program 21
Certificates and Confirmations 21
Dividends and Distributions 21
EXCHANGE PRIVILEGE 21
REDEEMING SHARES 22
Through Mark Twain 22
Systematic Withdrawal Program 23
Accounts with Low Balances 24
SHAREHOLDER INFORMATION 24
Voting Rights 24
Massachusetts Partnership Law 24
EFFECT OF BANKING LAWS 25
TAX INFORMATION 25
Federal Income Tax 25
Additional Tax Information for
Municipal Income Fund 26
PERFORMANCE INFORMATION 26
ADDRESSES 27

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."

SUMMARY OF FUND EXPENSES

<TABLE>
<CAPTION>
FIXED MUNICIPAL
EQUITY INCOME INCOME
SHAREHOLDER TRANSACTION EXPENSES FUND FUND FUND
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)(1) 3.50% 3.50% 3.50%
Maximum Sales Charge 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, None None None
as applicable)
Redemption Fee (as a percentage of amount None None None
redeemed, if applicable)
Exchange Fee None None None
<CAPTION>

ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C> <C>
Management Fee (after waiver if 0.75% 0.60% 0.11%
applicable)(2)
12b-1 Fees (after waiver)(3) 0.00% 0.00% 0.00%
Total Other Expenses 0.39% 0.65% 1.21%
Total Fund Operating Expenses(4) 1.14% 1.25% 1.32%
</TABLE>

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

(2) The management fee for the Municipal Income Fund is reduced to reflect
the voluntary waiver by the investment adviser. The maximum management fee
for the Municipal Income Fund is 0.70%.

(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 Annual Operating Expenses in the table above are based on expenses
expected during the fiscal year ending September 30, 1997. The Total Fund
Operating Expenses for the Equity Fund, Fixed Income Fund and Municipal
Income Fund were 1.17%, 1.27% and 1.20%, respectively, for the fiscal year
ended September 30, 1996. The Total Fund Operating Expenses of the Equity
Fund, Fixed Income Fund, and Municipal Income Fund are expected to be
1.39%, 1.50%, and 2.16%, respectively, absent the voluntary 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 of the Fund 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."

Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.

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 maximum sales charge. The Funds charge no contingent deferred
sales charge.

1 YEAR 3 YEARS 5 YEARS 10 YEARS

Equity Fund $46 $70 $ 96 $169
Fixed Income Fund 47 73 101 181
Municipal Income Fund 48 75 105 188

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 6, 1996 on the Fund's
financial statements for the period ended September 30, 1996 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,
1996 1995 1994 1993(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.80 $ 9.74 $10.02 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.12 0.10 0.07 0.04
Net realized and unrealized gain (loss)
on investments 1.32 4.05 (0.25) 0.02
Total from investment operations 1.44 4.15 (0.18) 0.06
LESS DISTRIBUTIONS
Distributions from net investment income (0.11) (0.09) (0.07) (0.04)
Distributions from net realized gain on
investments (0.07) -- (0.03) --
Total distributions (0.18) (0.09) (0.10) (0.04)
NET ASSET VALUE, END OF PERIOD $15.06 $13.80 $ 9.74 $10.02
TOTAL RETURN(B) 10.48% 42.90% (1.84%) 0.60%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.17% 1.28% 1.36% 1.32%*
Net investment income 0.86% 0.90% 0.74% 0.62%*
Expense waiver/reimbursement(c) 0.28% 0.30% 0.28% 0.30%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $55,573 $43,708 $30,282 $31,159
Average commission rate paid $0.0756 -- -- --
Portfolio turnover 5% 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 charge 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, 1996, which can be obtained free of
charge.

ARROW FIXED INCOME 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 6, 1996 on the Fund's
financial statements for the period ended September 30, 1996 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,
1996 1995 1994 1993(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.06 $ 9.31 $10.75 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.57 0.59 0.59 0.44
Net realized and unrealized gain
(loss) on investments (0.36) 0.75 (1.41) 0.75
Total from investment operations 0.21 1.34 (0.82) 1.19
LESS DISTRIBUTIONS
Distributions from net investment
income (0.57) (0.59) (0.59) (0.44)
Distributions from net realized gain
on investment transactions -- -- (0.03) --
Total distributions (0.57) (0.59) (0.62) (0.44)
NET ASSET VALUE, END OF PERIOD $ 9.70 $10.06 $ 9.31 $10.75
TOTAL RETURN(B) 2.12% 14.89% (7.85%) 12.09%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.27% 1.22% 1.15% 1.05%*
Net investment income 5.84% 6.17% 5.86% 5.71%*
Expense waiver/reimbursement(c) 0.26% 0.26% 0.26% 0.27%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $28,708 $30,661 $32,743 $42,715
Portfolio turnover 55% 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 charge 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, 1996, which can be obtained free of
charge.

ARROW MUNICIPAL INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Total from investment operations 0.51 0.81 (0.25) 0.93
LESS DISTRIBUTIONS
Distributions from net investment income (0.47) (0.46) (0.47) (0.32)
Distributions from net realized gain on
investments -- -- (0.02) --
Total distributions (0.47) (0.46) (0.49) (0.32)
NET ASSET VALUE, END OF PERIOD $10.26 $10.22 $ 9.87 $10.61
TOTAL RETURN(B) 5.04% 8.46% (2.41%) 9.43%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.20% 1.09% 0.85% 0.72%*
Net investment income 4.49% 4.70% 4.62% 4.71%*
Expense waiver/reimbursement(c) 0.84% 0.80% 0.81% 0.85%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $14,947 $17,736 $23,187 $24,087
Portfolio turnover 20% 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 charge 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, 1996, 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;

* notes, bonds, and discount notes issued or guaranteed by U.S. government
agencies and instrumentalities, supported by the full faith and credit of
the United States;

* notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding; and

* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities.

Some obligations issued or guaranteed by agencies or instrumentalities of
the U.S. government 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
charged 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 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.

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 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 indices that reflect the market
value of common stock of the firms included in the indices. 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 Equity Fund -- 0.75%; the Fixed Income Fund -- 0.60%; and
the Municipal Income Fund -- 0.70%. 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 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, 1996, Mark Twain Bank managed assets in excess of $1.4
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 $16 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.

On October 27, 1996, Mark Twain Bancshares Inc., the parent company of Mark
Twain Bank, entered into a definitive agreement whereby Mark Twain
Bancshares Inc. would merge with Mercantile Bancorp Inc., a bank holding
company headquartered in St. Louis (the "Merger"). As a result, upon
completion of the Merger, all existing subsidiaries of Mark Twain Bancshares
Inc., including Mark Twain Bank, will be merged into Mercantile Bancorp Inc.
and its subsidiaries. The Merger is expected to be completed in the second
quarter of 1997, pending approval by both companies' shareholders as well as
the receipt of various regulatory approvals and the completion of other
closing conditions.

The Merger will result in a termination of the Adviser's current investment
advisory contract with the Arrow Funds. Accordingly, prior to the completion
of the Merger, the Trustees of the Funds will meet to consider matters
relating the Merger. It is anticipated that a Special Meeting of Fund
shareholders will be held to seek, among other things, approval of a new
investment advisory contract with a subsidiary of Mercantile Bancorp Inc. It
is anticipated that shareholders of a certain record date in 1997 will
receive proxy materials discussing these matters in detail, and will be
entitled to vote at the Special Meeting.

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 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.

OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. 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.

ADMINISTRATION OF THE FUNDS

ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services
(including certain legal and financial reporting services) necessary to
operate each Fund. Federated Administrative Services provides these at an
annual rate as specified below:
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS OF THE FUNDS
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of $750 million

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

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. A customer of
Mark Twain Bancshares, Inc. may purchase shares of the Funds through the
appropriate subsidiary of Mark Twain Bancshares, Inc. as described below. In
connection with the sale of shares of the Funds, the distributor may from
time to time offer certain items of nominal value to any shareholder or
investor. The Funds reserve the right to reject any purchase request.

THROUGH MARK TWAIN. To place an order for shares, investors may contact a
broker (1-800-866-6040), or a 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
PUBLIC OFFERING NET AMOUNT
AMOUNT OF TRANSACTION PRICE 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 or by 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.
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 Bank, or a check will be sent to the address of record. In no event
will proceeds be wired or a check sent more than seven days after a proper
request for redemption has been received. If at any time a Fund shall
determine it necessary to 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
signature guarantees from the above institutions. The Funds may elect in the
future to limit eligible signature guarantors to institutions that are
members of a signature guarantee program. The Funds and their transfer agent
reserve the right to amend these standards at any time without notice.

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

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 Brokerage Services, Inc. Due to the fact that shares are
sold with a sales charge, it is not advisable for shareholders to be
purchasing shares while participating in this program.

ACCOUNTS WITH LOW BALANCES

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

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

SHAREHOLDER INFORMATION

VOTING RIGHTS

Each share of a Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each Fund in
the Trust have equal voting rights, except that in matters affecting only a
particular Fund, only shares of that Fund are entitled to vote. As a
Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust or a Fund's operation and for the election of Trustees
under certain circumstances. As of November 4, 1996, the Trust Division of
Mark Twain Bank, acting in various capacities for numerous accounts, was the
owner of record of approximately 3,393,639 shares (90.54%) of the Equity
Fund, 2,893,146 shares (98.21%) of the Fixed Income Fund, and 1,359,293
shares (96.04%) of the Municipal Income Fund, 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 the Trustees or by 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.

Some entities providing services to the Fund are subject to such banking
laws and regulations. They believe that they may perform those services for
any Fund contemplated by any agreement entered into with the Trust without
violating those 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 these entities 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 means of continuing available investment
services. It is not expected that a Fund's shareholders would suffer any
adverse financial consequences 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.

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

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

[Graphic}

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, 1996

Mark Twain Bank
Investment Adviser

[Graphic]

Mark Twain Bank
Investment Adviser
Federated Securities Corp., Distributor.
Cusip 042749101
Cusip 042749200
Cusip 042749309
2110904A (11/96)

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, 1996 with the Securities and Exchange Commission ("SEC"). 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.
The Statement of Additional Information, material incorporated by reference
into this document, and other information regarding the Fund is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).

Prospectus dated November 30, 1996

TABLE OF CONTENTS
<TABLE>
<S> <C>
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 6
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 9
Receiving Payment 10
Checkwriting 10
Systematic Withdrawal Program 10
Accounts with Low Balances 11
SHAREHOLDER INFORMATION 11
Voting Rights 11
Massachusetts Partnership Law 11
EFFECT OF BANKING LAWS 12
TAX INFORMATION 12
Federal Income Tax 12
PERFORMANCE INFORMATION 13
FINANCIAL STATEMENTS 14
INDEPENDENT AUDITORS' REPORT 21
ADDRESSES 22
</TABLE>

SUMMARY OF FUND EXPENSES

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) None
Maximum Sales Charge 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
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
</TABLE>

ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C>
Management Fee 0.50%
12b-1 Fees None
Total Other Expenses 0.25%
Total Fund Operating Expenses 0.75%
</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 "ARROW FUNDS INFORMATION" AND "INVESTING IN THE FUND."
WIRE-TRANSFERRED REDEMPTIONS MAY BE SUBJECT TO ADDITIONAL FEES.
<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 charge $8 $24 $42 $93
</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,
1996 1995 1994 1993(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.05 0.05 0.03 0.02
LESS DISTRIBUTIONS
Distributions from net investment income (0.05) (0.05) (0.03) (0.02)
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
TOTAL RETURN(B) 4.78% 5.04% 2.90% 1.86%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.75% 0.78% 0.80% 0.73%*
Net investment income 4.70% 4.94% 2.86% 2.40%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $213,242 $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 charge 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 complying with the various requirements
of Rule 2a-7 under the Investment Company Act of 1940 which regulates money
market mutual funds and 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;

* notes, bonds, and discount notes issued or guaranteed by U.S. government
agencies or instrumentalities supported by the full faith and credit of the
United States;

* notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding; and

* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities.

* 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.

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. 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 interests 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 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 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, 1996, Mark Twain Bank managed assets in
excess of $1.4 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 $16 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

<TABLE>
<CAPTION>
AVERAGE AGGREGATE
MAXIMUM DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FUND
<C> <S>
.15% on the first $250 million
.125% on the next $250 million
.10% on the next $250 million
.075% 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.

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 bank trust officer
(314-889-0715). Texas residents must telephone Federated Services Company at
1-800-618-8573.

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

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 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 4, 1996, the Trust
Division of Mark Twain Bank, acting in various capacities for numerous
accounts, was the owner of record of approximately 195,575,254 shares
(92.94%) 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 the Trustees 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
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.

EFFECT OF BANKING LAWS

Some entities providing services to the Fund are subject to such banking
laws and regulations. They believe that they may perform those services for
any Fund contemplated by any agreement entered into with the Trust without
violating those 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 these entities 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.

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.

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, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
<C> <S> <C>
GOVERNMENT AGENCIES--70.1%
$ 70,000,000 Federal Farm Credit Bank Bonds -- 32.8%
5.33% - 5.45%, 10/1/1996 - 1/2/1997 $ 70,000,000
30,000,000 (a)Federal Home Loan Bank Discount Notes -- 14.0%
5.26% - 5.33%, 10/21/1996 - 1/27/1997 29,758,378
20,000,000 (a)Federal Home Loan Mortgage Corp., Discount Notes -- 9.3%
5.22% - 5.65%, 10/1/1996 - 12/24/1996 19,878,200
15,000,000 Federal National Mortgage Association Bonds -- 7.0%
5.45% - 5.46%, 11/15/1996 - 2/13/1997 15,000,000
10,000,000 (a)Federal National Mortgage Association, Discount Note -- 4.6%
5.38%, 2/3/1997 9,813,194
5,000,000 (b)Student Loan Marketing Association Note -- 2.4%
5.38%, 10/1/1996 5,000,000
TOTAL GOVERNMENT AGENCIES 149,449,772
MUTUAL FUND SHARES -- 0.0%
73,170 SEI Government Money Market Portfolio (AT NET ASSET VALUE) 73,170
(C)REPURCHASE AGREEMENTS -- 36.8%
$ 38,500,000 Morgan Stanley & Co., Inc., 5.60%, dated 9/30/1996, due 10/1/1996 38,500,000
40,000,000 Sanwa-BGK Securities Co., 5.55%, dated 9/30/1996, due 10/1/1996 40,000,000
TOTAL REPURCHASE AGREEMENTS 78,500,000
TOTAL INVESTMENTS (AT AMORTIZED COST AND VALUE)(D) $ 228,022,942
</TABLE>

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

(b) Current rate and next reset date are shown.

(c) The repurchase agreements are fully collateralized by U.S. government
obligations based on market prices at the date of the portfolio.

(d) Also represents cost for federal tax purposes.

Note: The categories of investments are shown as a percentage of net assets
($213,242,398) at September 30, 1996.

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

ARROW GOVERNMENT MONEY MARKET PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES

SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C>

ASSETS:
Investments in repurchase agreements $ 78,500,000
Investments in securities 149,522,942
Total investments, at amortized cost and value $ 228,022,942
Cash 100
Income receivable 979,769
Deferred expenses 12,975
Total assets 229,015,786
LIABILITIES:
Payable for investments purchased 15,000,000
Income distribution payable 746,419
Accrued expenses 26,969
Total liabilities 15,773,388
NET ASSETS for 213,242,398 shares outstanding $ 213,242,398
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
$213,242,398 / 213,242,398 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, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 11,725,192
EXPENSES:
Investment advisory fee $ 1,083,949
Administrative personnel and services fee 314,728
Custodian fees 54,197
Transfer and dividend disbursing agent fees and expenses 38,438
Directors'/Trustees' fees 4,291
Auditing fees 13,021
Legal fees 5,165
Portfolio accounting fees 56,902
Share registration costs 15,677
Printing and postage 20,365
Insurance premiums 6,202
Miscellaneous 7,015
Total expenses 1,619,950
Waivers of investment advisory fee (303)
Net expenses 1,619,647
Net investment income $ 10,105,545
</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,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 10,105,545 $ 8,628,318
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (10,105,545) (8,628,318)
SHARE TRANSACTIONS--
Proceeds from sale of shares 710,893,017 414,847,913
Net asset value of shares issued to shareholders in payment of
distributions declared 103 3
Cost of shares redeemed (704,231,160) (362,437,660)
Change in net assets resulting from share transactions 6,661,960 52,410,256
Change in net assets 6,661,960 52,410,256
NET ASSETS:
Beginning of period 206,580,438 154,170,182
End of period $ 213,242,398 $ 206,580,438
</TABLE>

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

ARROW GOVERNMENT MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996

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 portfolios. The financial statements included
herein are only those of Arrow Government Money Market Portfolio (the
"Fund"), a diversified portfolio. The investment objective of the Fund is
current income consistent with stability of principal and liquidity. 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 -- Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.

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 income. Accordingly, no
provision for federal tax is necessary.

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.

USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.

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).

Transactions in shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995
<S> <C> <C>
Shares sold 710,893,017 414,847,913
Shares issued to shareholders in payment of distributions declared 103 3
Shares redeemed (704,231,160) (362,437,660)
Net change resulting from share transactions 6,661,960 52,410,256
</TABLE>

At September 30, 1996, capital paid-in aggregated $213,242,398.

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 the Fund's average daily net assets.

The adviser may voluntarily choose to waive any portion of its fee. The
adviser can modify or terminate this voluntary waiver at any time at its
sole discretion.

ADMINISTRATIVE FEE -- Federated Administrative Services ("FAS") provides the
Fund with certain administrative personnel and services. The fee paid to FAS
is based on the level of average aggregate net assets of the Fund for the
period.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES -- Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the
Fund. The fee paid to FSSC is based on the size, type, and number of
accounts and transactions made by shareholders.

PORTFOLIO ACCOUNTING FEES -- FServ 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 became effective). For the period ended September
30, 1996, the Fund paid $6,051 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 statement of assets and liabilities, including the
portfolio of investments of the Arrow Government Money Market Portfolio, a
portfolio within the Arrow Funds, as of September 30, 1996, and the related
statement of operations for the year then ended, the statements 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 21, 1992 (date of initial public
investment) to September 30, 1996. 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 audits.

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 the
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 out audits provide a reasonable
basis for our opinion.

In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the Arrow Government Money Market Portfolio at September 30,
1996, 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 6, 1996

ADDRESSES

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 02266-8600

Independent Auditors
KPMG Peat Marwick LLP One Mellon Bank Center
Pittsburgh, Pennsylvania 15219

ARROW FUNDS
ARROW GOVERNMENT
MONEY MARKET PORTFOLIO

Prospectus

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

November 30, 1996

MARK TWAIN BANK
INVESTMENT ADVISER

[Graphic]

Federated Securities Corp., Distributor.
Cusip 042749408

2110905A (11/96)
[Graphic]

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, 1996. 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, 1996
AEP Cusip 042749101
AFIP Cusip 042749200
AMIP Cusip 042749309
2110904B (11/96)

TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION ABOUT THE TRUST 1
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS
1
Types of Investments 1
Equity Fund 1
Fixed Income Fund 1
Municipal Income Fund 3
Portfolio Investments and Strategies 4
Futures and Options Transactions 4
Futures Contracts 4
Stock Index Options 4
Put Options on Financial Futures Contracts 4
Call Options on Financial Futures Contracts 5
"Margin" in Futures Transactions 5
Purchasing Put Options on Portfolio Securities 5
Writing Covered Call Options on
Portfolio Securities 6
Over-The-Counter Options 6
Restricted and Illiquid Securities 6
Temporary Investments 6
Repurchase Agreements 6
Reverse Repurchase Agreements 7
When-Issued and Delayed Delivery Transactions 7
Lending of Portfolio Securities 7
Investments in Foreign Securities 7
Portfolio Turnover 7
Investment Limitations 8
Investing in Securities of Other Investment Companies
9
ARROW FUNDS MANAGEMENT 10
Fund Ownership 14
Trustees Compensation 15
Trustee Liability 15
INVESTMENT ADVISORY SERVICES 15
Adviser to the Funds 15
Advisory Fees 16
ADMINISTRATIVE SERVICES 16
CUSTODIAN 16
SHAREHOLDER SERVICING ARRANGEMENTS 16
BROKERAGE TRANSACTIONS 16
PURCHASING SHARES 17
Distribution Plan 17
Conversion to Federal Funds 18
DETERMINING NET ASSET VALUE 18
Determining Market Value of Securities 18
REDEEMING SHARES 18
Redemption in Kind 18
TAX STATUS 19
The Funds' Tax Status 19
Shareholders' Tax Status 19
Capital Gains 19
TOTAL RETURN 19
YIELD 19
TAX-EQUIVALENT YIELD 20
Tax-Equivalency Table 20
PERFORMANCE COMPARISONS 21
Economic and Market Information 22
FINANCIAL STATEMENTS 22
APPENDIX 22
</TABLE>

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:

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

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

* commercial paper; and

* repurchase agreements.

MORTGAGE-RELATED ASSET-BACKED SECURITIES

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

ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")

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

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

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

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

RESETS OF INTEREST

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

CAPS AND FLOORS

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

The value of mortgage securities in which the Fund invests may be affected
if market interest rates rise or fall faster and farther than the allowable
caps or floors on the underlying residential mortgage loans. Additionally,
even though the interest rates on the underlying residential mortgages are
adjustable, amortization and prepayments may occur, thereby causing the
effective maturities of the mortgage securities in which the Fund invests to
be shorter than the maturities stated in the underlying mortgages.

MUNICIPAL INCOME FUND

CHARACTERISTICS OF INVESTMENTS

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

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

Examples of municipal securities are:

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

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

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

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

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

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

PARTICIPATION INTERESTS

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

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

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

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

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

VARIABLE RATE MUNICIPAL SECURITIES

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

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

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:

* the frequency of trades and quotes for the security;

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

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

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

TEMPORARY INVESTMENTS

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

MONEY MARKET INSTRUMENTS

The Funds may invest in the following money market instruments:

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

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

U.S. GOVERNMENT OBLIGATIONS

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

REPURCHASE AGREEMENTS

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

REVERSE REPURCHASE AGREEMENTS

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

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

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

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

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

LENDING OF PORTFOLIO SECURITIES

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

INVESTMENTS IN FOREIGN SECURITIES

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

* less publicly available information about foreign issuers;

* credit risks associated with certain foreign governments;

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

* less readily available market quotations on foreign issues;

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

* generally higher foreign brokerage commissions; and

* unreliable mail service between countries.

PORTFOLIO TURNOVER

Although the Funds do not intend to invest for the purpose of seeking
short-term profits, securities in their portfolios will be sold whenever the
adviser believes it is appropriate to do so in light of the 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,
1996, and 1995, the Equity, Fixed Income, and Municipal Income Funds'
portfolio turnover rates were 45%, 45%, and 55%, and 33%, 20%, and 38%,
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 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.

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 or Trustee of the
Funds.

Thomas G. Bigley

28th Floor, One Oxford Centre

Pittsburgh, PA

Birthdate: February 3, 1934

Trustee

Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee,
University of Pittsburgh; Director or Trustee of the Funds.

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; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.

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.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.

James E. Dowd

571 Hayward Mill Road

Concord, MA

Birthdate: May 18, 1922

Trustee

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

Lawrence D. Ellis, M.D.*

3471 Fifth Avenue, Suite 1111

Pittsburgh, PA

Birthdate: October 11, 1932

Trustee

Professor of Medicine, 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
or Trustee of the Funds.

Edward L. Flaherty, Jr.@

Miller, Ament, Henny & Kochuba

205 Ross Street

Pittsburgh, PA

Birthdate: June 18, 1924

Trustee

Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee 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 Shareholder Services Company; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer of some of the
Funds.

Peter E. Madden

One Royal Palm Way
100 Royal Palm Way

Palm Beach, FL

Birthdate: March 16, 1942

Trustee

Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.

Gregor F. Meyer

Miller, Ament, Henny & Kochuba
205 Ross Street

Pittsburgh, PA

Birthdate: October 6, 1926

Trustee

Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee 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 or Trustee of the Funds.

Wesley W. Posvar

1202 Cathedral of Learning

University of Pittsburgh

Pittsburgh, PA

Birthdate: September 14, 1925

Trustee

Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University, U.S. Space Foundation and Czech
Management Center; President Emeritus, University of Pittsburgh; Founding
Chairman, National Advisory Council for Environmental Policy and Technology,
Federal Emergency Management Advisory Board and Czech Management Center;
Director or Trustee of the Funds.

Marjorie P. Smuts

4905 Bayard Street

Pittsburgh, PA

Birthdate: June 21, 1935

Trustee

Public Relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee 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 Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds.
Mr. Donahue is the son of John F. Donahue, Chairman and Trustee of the
Company.

John W. McGonigle

Federated Investors Tower

Pittsburgh, PA

Birthdate: October 26, 1938

Executive Vice President , Secretary and Treasurer

Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and Secretary
of the Funds; Treasurer of some of the Funds.

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 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.

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

As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard Precious
Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated
Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders Fund,
Inc.; Federated ARMs Fund; Federated Equity Funds; Federated Equity Income
Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated
GNMA Trust; Federated Government Income Securities, Inc.; Federated
Government Trust; Federated High Income Bond Fund, Inc.; Federated High
Yield Trust; Federated Income Securities Trust; Federated Income Trust;
Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust;
Federated Master Trust; Federated Municipal Opportunities Fund, Inc.;
Federated Municipal Securities Fund, Inc.; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock and Bond Fund, Inc.; 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: 2-5 Years; Federated U.S.
Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed
Series Trust; Money Market Management, Inc.; Money Market Obligations Trust;
Money Market Trust; Municipal Securities Income Trust; Newpoint Funds;
Peachtree Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; The Planters Funds; The Starburst Funds; The Starburst
Funds II; The Virtus Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S. Government Securities;
Trust for U.S. Treasury Obligations; and World Investment Series, Inc.

FUND OWNERSHIP

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

As of November 4, 1996, the following shareholders of record owned 5% or
more shares of the Arrow Equity Fund: Mark Twain Trust Division, St. Louis,
Missouri, owned approximately 3,393,639 shares (90.54%); National Financial
Services for the exclusive benefit of their customers, New York, New York,
owned approximately 260,830 shares (6.96%).

As of November 4, 1996, 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 2,893,146
shares (98.21%) of the Arrow Fixed Income Fund and approximately 1,359,293
shares (96.04%) of the Arrow Municipal Income Fund.

TRUSTEES COMPENSATION

<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM
TRUST TRUST*#
<S> <C>
John F. Donahue, $0
Chairman and Trustee
Thomas G. Bigley, $1273.61
Trustee
John T. Conroy, Jr., $1397.73
Trustee
William J. Copeland, $1397.73
Trustee
James E. Dowd, $1397.73
Trustee
Lawrence D. Ellis, M.D., $1273.61
Trustee
Edward L. Flaherty, Jr., $1397.73
Trustee
Edward D. Gonzales, $0
President, Treasurer
and Trustee
Peter E. Madden, $1273.61
Trustee
Gregor F. Meyer, $1273.61
Trustee
John E. Murray, Jr., $1273.61
Trustee
Wesley W. Posvar, $1273.61
Trustee
Marjorie P. Smuts, $1273.61
Trustee
</TABLE>

* Information is furnished for the fiscal year ended September 30, 1996. 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, 1996, the Funds' Adviser earned
advisory fees of $368,254, $175,494, and $119,078 for the Equity Fund, the
Fixed Income Fund and the Municipal Income Fund, respectively, of which
$13,853, $3,239 and $100,366 were waived. 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.

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, 1996, the
Equity Fund, Fixed Income Fund and Municipal Income Fund incurred costs for
administrative services of $71,420, $50,011, and $50,011, respectively. For
the fiscal year ended September 30, 1995, the Equity Fund, Fixed Income Fund
and Municipal Income Fund, respectively, incurred costs for administrative
services of $52,746, $50,000 and $50,000. For the fiscal year ended
September 30, 1994, the Equity Fund, Fixed Income Fund and Municipal Income
Fund, respectively, incurred costs for administrative services of $50,000,
$57,500 and $50,000, 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

The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Funds or to the
Adviser and may include: advice as t the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers and dealers may be sued by
the Adviser or its affiliates 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. The Adviser exercises reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determines in good faith that commissions
charged by such persons are reasonable in relationship to the value of the
brokerage and research services provided.

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, 1996, 1995, and 1994 the Equity Fund
paid $71,770, $42,563, and $111,324, respectively, in brokerage commissions
on brokerage transactions.

For the fiscal years ended September 30, 1996, 1995, and 1994, 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, 1996, brokers and adminstrators
(financial institutions) earned fees on behalf of the Equity Fund, the Fixed
Income Fund and the Municipal Income Fund in the amount of $122,734,
$73,047, and $42,531, respectively, pursuant to the Plan, all of which was
voluntarily waived. For the fiscal year ended
September 30, 1995, brokers and administrators (financial institutions)
earned fees on behalf of the Equity Fund, the Fixed Income Fund, and the
Municipal Income Fund in the amounts of $84,456, $76,734, and $47,858,
respectively, pursuant to the Plan, all of which was voluntarily waived. For
the fiscal year ended September 30, 1994, brokers and administrators
(financial institutions) earned fees on behalf of the Equity Fund, the Fixed
Income Fund, and the Municipal Income Fund in the amounts of $78,171,
$95,223, and $61,650, respectively, pursuant to the Plan, all of which was
voluntarily waived.

CONVERSION TO FEDERAL FUNDS

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

DETERMINING NET ASSET VALUE

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

DETERMINING MARKET VALUE OF SECURITIES

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

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

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

* for unlisted equity securities, the latest bid prices;

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

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

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

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

The Funds will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Trustees determine in good faith
that another method of valuing option positions is necessary to appraise
their fair value. Over-the-counter put options will be valued at the mean
between the bid and the asked prices.
REDEEMING SHARES

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

REDEMPTION IN KIND

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

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

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

TAX STATUS

THE FUNDS' TAX STATUS

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

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

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

* invest in securities within certain statutory limits; and

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

SHAREHOLDERS' TAX STATUS

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

CAPITAL GAINS

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

TOTAL RETURN

The Equity Fund's average annual total returns for the one-year period ended
September 30, 1996 and for the period from January 4, 1993 (date of initial
public investment) to September 30, 1996 were 6.62%, and 11.55%,
respectively. The Fixed Income Fund's average annual total returns for the
one-year period ended September 30, 1996 and for the period from January 4,
1993 (date of initial public investment) to September 30, 1996 were -1.41%,
and 4.28%, respectively.

The Municipal Income Fund's average annual total returns for the one-year
period ended September 30, 1996 and for the period from February 1, 1993
(date of initial public investment) to September 30, 1996 were 1.37%, and
4.48%, 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 charge, 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, 1996 was 0.48%,
5.57%, and 4.92%, 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, 1996 was 8.15%. 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 1996
MULTISTATE MUNICIPAL FUNDS
FEDERAL INCOME TAX BRACKET:
<TABLE>
<CAPTION>
15.00% 28.00% 31.00% 36.00% 39.60%
<S> <C> <C> <C> <C> <C>
JOINT $1- $40,101- $96,901- $147,701- OVER
RETURN 40,100 96,900 147,700 263,750 263,750
SINGLE $1- $24,001- $58,151- $121,301- OVER
RETURN 24,000 58,150 121,300 263,750 263,750
<CAPTION>
Tax-Exempt
Yield Taxable Yield Equivalent
<C> <C> <C> <C> <C> <C>
1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50% 1.76% 2.08% 2.17% 2.34% 2.48%
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
7.00% 8.24% 9.72% 10.14% 10.94% 11.59%
7.50% 8.82% 10.42% 10.87% 11.72% 12.42%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
</TABLE>

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

* portfolio quality;

* average portfolio maturity;

* type of instruments in which the portfolio is invested;

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

* changes in each Fund's expenses; and

* various other factors.

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

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

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

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

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

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

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

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

Advertising and other promotional literature may include charts, graphs and
other illustrations using a Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, a Fund can
compare its performance, or performance for the types of securities in which
it invests, to a variety of other investment, such as bank savings accounts,
certificates of deposit, and Treasury bills.

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

ECONOMIC AND MARKET INFORMATION

Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how
such developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the
mutual fund industry, including the growth of the industry, from sources
such as the Investment Company Institute ("ICI"). For example, according to
the ICI, twenty-seven percent of American households are pursuing their
financial goals through mutual funds. these investors, as well as businesses
and institutions, have entrusted over $3 trillion to the more than 5,500
funds available.

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, 1996 are incorporated herein by reference to the
Combined Annual Report to Shareholders of the Arrow Funds dated September
30, 1996.

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 ampli-tude or there may
be other elements present which make the long term risks appear somewhat
larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.

BAA -- Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.

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

FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS

AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.

AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated 'AAA'. Because bonds
rated in the 'AAA' and 'AA' categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated 'F-1+'.

A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.

BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds
with higher ratings.

STANDARD AND POOR'S RATINGS GROUP MUNICIPAL NOTE RATINGS

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

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

MOODY'S INVESTORS SERVICE SHORT-TERM LOAN RATINGS

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

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

FITCH INVESTORS SERVICE, INC. SHORT-TERM DEBT RATINGS
F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.

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

F-2 -- Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as the "F-1" and "F-2" categories.

STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATING DEFINITIONS

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

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

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

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

* Leading market positions in well-established industries.

* High rates of return on funds employed.

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

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

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

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

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, 1996. 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, 1996
Cusip 042749408
2110905B (11/96)

TABLE OF CONTENTS

<TABLE>
<S> <C>
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE 1
Types of Investments 1
When-Issued and Delayed Delivery Transactions 1
Repurchase Agreements 1
Reverse Repurchase Agreements 1
Investment Limitations 2
ARROW FUNDS MANAGEMENT 3
Fund Ownership 7
Trustees Compensation 8
Trustee Liability 8
INVESTMENT ADVISORY SERVICES 8
Adviser to the Fund 8
Advisory Fee 9
BROKERAGE TRANSACTIONS 9
ADMINISTRATIVE SERVICES 10
CUSTODIAN 10
SHAREHOLDER SERVICING AGREEMENTS 10
PURCHASING SHARES 10
Conversion to Federal Funds 10
DETERMINING NET ASSET VALUE 10
Use of the Amortized Cost Method 10
Investment Restrictions 11
REDEEMING SHARES 11
Redemption in Kind 11
TAX STATUS 12
The Fund's Tax Status 12
Shareholders' Tax Status 12
YIELD 12
EFFECTIVE YIELD 12
PERFORMANCE COMPARISONS 13
Economic and Market Information 13
</TABLE>

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.

John F. Donahue@*

Federated Investors Tower

Pittsburgh, PA

Birthdate: July 28, 1924

Chairman and Trustee

Thomas G. Bigley

28th Floor, One Oxford Centre

Pittsburgh, PA

Birthdate: February 3, 1934

Trustee

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

William J. Copeland

One PNC Plaza - 23rd Floor

Pittsburgh, PA

Birthdate: July 4, 1918

Trustee

James E. Dowd

571 Hayward Mill Road

Concord, MA

Birthdate: May 18, 1922

Trustee

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

Lawrence D. Ellis, M.D.*

3471 Fifth Avenue, Suite 1111

Pittsburgh, PA

Birthdate: October 11, 1932

Trustee

Edward L. Flaherty, Jr.@

Miller, Ament, Henny & Kochuba

205 Ross Street

Pittsburgh, PA

Birthdate: June 18, 1924

Trustee

Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.

Edward C. Gonzales *

Federated Investors Tower

Pittsburgh, PA

Birthdate: October 22, 1930

President, Treasurer and Trustee

Peter E. Madden

One Royal Palm Way

100 Royal Palm Way

Palm Beach, FL

Birthdate: March 16, 1942

Trustee

Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.

Gregor F. Meyer

Miller, Ament, Henny & Kochuba

205 Ross Street

Pittsburgh, PA

Birthdate: October 6, 1926

Trustee

Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee 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 or Trustee of the Funds.

Wesley W. Posvar

1202 Cathedral of Learning

University of Pittsburgh

Pittsburgh, PA

Birthdate: September 14, 1925

Trustee

Marjorie P. Smuts

4905 Bayard Street

Pittsburgh, PA

Birthdate: June 21, 1935

Trustee

J. Christopher Donahue

Federated Investors Tower

Pittsburgh, PA

Birthdate: April 11, 1949

Executive Vice President

John W. McGonigle

Federated Investors Tower

Pittsburgh, PA

Birthdate: October 26, 1938

Executive Vice President, Secretary and Treasurer

Richard B. Fisher

Federated Investors Tower

Pittsburgh, PA

Birthdate: May 17, 1923

Vice President

Charles L. Davis, Jr.

Federated Investors Tower

Pittsburgh, PA

Birthdate: March 23, 1960

Vice President and Assistant Treasurer

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.

@ 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.

FUND OWNERSHIP

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

As of November 4, 1996, the following shareholders owned 5% or more of the
outstanding shares of the Fund: Mark Twain Trust Division, St. Louis,
Missouri, owned approximately 195,575,254 shares (92.94%); and Martab & Co,
St. Louis, Missouri owned approximately 14,857,850 shares (7.06%).

TRUSTEES COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM
TRUST TRUST*#
<S> <C>
John F. Donahue, $0
Chairman and Trustee
Thomas G. Bigley, $1273.61
Trustee
John T. Conroy, Jr., $1397.73
Trustee
William J. Copeland, $1397.73
Trustee
James E. Dowd, $1397.73
Trustee
Lawrence D. Ellis, M.D., $1273.61
Trustee
Edward L. Flaherty, Jr., $1397.73
Trustee
Edward D. Gonzales, $0
President, Treasurer
and Trustee
Peter E. Madden, $1273.61
Trustee
Gregor F. Meyer, $1273.61
Trustee
John E. Murray, Jr., $1273.61
Trustee
Wesley W. Posvar, $1273.61
Trustee
Marjorie P. Smuts, $1273.61
Trustee
</TABLE>

* Information is furnished for the fiscal year ended September 30, 1996. 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

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, 1996, 1995, and 1994, the Fund's
Adviser earned advisory fees of $1,083,949, $872,930, and $788,681, of which
$303, $218 and $0 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 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.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the Adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The Adviser makes decisions on portfolio transactions and selects
brokers and dealers subject to guidelines established by the Trustees. The
Adviser may select brokers and dealers who offer brokerage and research
services. these services may be furnished directly to the Fund or to the
Adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers and dealers may be used by
the Adviser or its affiliates 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. The Adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer brokerage and research
services to execute securities transactions. They determines in good faith
that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. For the fiscal
years ended September 30, 1996, 1995, and 1994, the Fund did not pay any
brokerage commissions on portfolio transactions.

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.

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, 1996, 1995
and 1994, the Fund incurred costs for administrative services of $314,728,
$260,067, and $236,784, none of which were 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

PURCHASING SHARES

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

CONVERSION TO FEDERAL FUNDS

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

DETERMINING NET ASSET VALUE

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

USE OF THE AMORTIZED COST METHOD

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

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

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

MONITORING PROCEDURES

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

INVESTMENT RESTRICTIONS

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

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

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

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

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

REDEEMING SHARES

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

REDEMPTION IN KIND

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

TAX STATUS

THE FUND'S TAX STATUS

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

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

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

* invest in securities within certain statutory limits; and

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

SHAREHOLDERS' TAX STATUS

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

CAPITAL GAINS

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

YIELD

The Fund's yield for the seven-day period ended September 30, 1996 was
4.64%. The Fund calculates the yield daily, based upon the seven days ending
on the day of the calculation, called the "base period." This yield is
computed by:

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

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

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

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

EFFECTIVE YIELD

The Fund's effective yield for the seven-day period ended September 30, 1996
was 4.75%. The Fund's effective yield is computed by compounding the
unannualized base period return by:

* adding 1 to the base period return;

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

* subtracting 1 from the result.

PERFORMANCE COMPARISONS

The performance of the Fund depends upon such variables as:

* portfolio quality;

* average portfolio maturity;
* type of instruments in which the portfolio is invested;

* changes in interest rates on money market instruments;

* changes in the Fund's expenses; and

* the relative amount of Fund cash flow.

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

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

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

ECONOMIC AND MARKET INFORMATION

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, 1996 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
Declaration of Trust of Registrant; (5)
(2) Copy of By-Laws of the Registrant; (1)
(3) Not applicable;
(4) Conformed Copy of Specimen Certificate 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 Recordkeeping and Custody Services
Procurement; (6)
(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; +
(12) Not applicable;
(13) Conformed Copy of Initial Capital Understanding; (2.)
(14) Not applicable;
(15) (i)Copy of Distribution Plan; (3)
(ii)Copy of 12b-1 Agreement; (6)
(16) 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 34, 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).
6. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 4 on Form N-1A filed November 22, 1995 (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 4, 1996 103

Arrow Fixed Income Portfolio,
as of November 4, 1996 29

Arrow Municipal Income Portfolio,
as of November 4, 1996 23

Arrow Government Money Market
Portfolio, as of November 4, 1996 9

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, 1996, Mark Twain
Bank managed assets in excess of $1.4 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 $16 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
Chief 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: 111 Corcoran Funds;
Annuity Management Series; Arrow Funds; Automated Government
Money Trust; BayFunds; Blanchard Funds; Blanchard Precious
Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series,
Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated Adjustable Rate U.S.
Government Fund, Inc.; Federated American Leaders Fund, Inc.;
Federated ARMs Fund; Federated Equity Funds; Federated Equity
Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government
Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield
Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios;
Federated Investment Trust; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated
Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.;
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: 2-5 Years;
Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed
Income Securities, Inc.; High Yield Cash Trust; Independence
One Mutual Funds; Intermediate Municipal Trust; International
Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty U.S. Government Money Market Trust;
Liquid Cash Trust; Managed Series Trust; Marshall Funds,
Inc.; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds;
SouthTrust Vulcan Funds; Star Funds; Targeted Duration Trust;
Tax-Free Instruments Trust; The Biltmore Funds; The Biltmore
Municipal Funds; The Monitor Funds; The Planters Funds; The
Starburst Funds; The Starburst Funds II; The Virtus Funds;
Tower Mutual Funds; Trust for Financial Institutions; Trust
for Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligations;
Vision Group of Funds, Inc.; andWorld Investment Series, Inc.

(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 ViceExecutive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.

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

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

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

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

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

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

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 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 29th day of November,
1996.

ARROW FUNDS

BY: /s/ Gail Cagney
Gail Cagney, Assistant Secretary
Attorney in Fact for John F. Donahue
November 29, 1996

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 29, 1996
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)

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

* By Power of Attorney

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

INDEPENDENT AUDITORS' CONSENT

To the Board of Trustees
Arrow Funds:

With respect to the Prospectuses and statements of Additional Information
included in this Post Effective Amendment No. 5 to the Registration
Statement (No. 33-490073) on Form N-1A of the Arrow Funds, we consent to
the use of our reports, dated November 6, 1996, 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

KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
November 26, 1996

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> Arrow Funds
Arrow Equity Portfolio

<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Sep-30-1996
<PERIOD-END> Sep-30-1996
<INVESTMENTS-AT-COST> 43,246,709
<INVESTMENTS-AT-VALUE> 55,494,132
<RECEIVABLES> 108,675
<ASSETS-OTHER> 2,988
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 55,605,795
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 33,043
<TOTAL-LIABILITIES> 33,043
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 39,609,476
<SHARES-COMMON-STOCK> 3,690,543
<SHARES-COMMON-PRIOR> 3,166,785
<ACCUMULATED-NII-CURRENT> 77,739
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,638,114
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,247,423
<NET-ASSETS> 55,572,752
<DIVIDEND-INCOME> 768,953
<INTEREST-INCOME> 230,196
<OTHER-INCOME> 0
<EXPENSES-NET> 575,368
<NET-INVESTMENT-INCOME> 423,781
<REALIZED-GAINS-CURRENT> 4,612,534
<APPREC-INCREASE-CURRENT> (11,835)
<NET-CHANGE-FROM-OPS> 5,024,480
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 381,222
<DISTRIBUTIONS-OF-GAINS> 218,057
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 867,438
<NUMBER-OF-SHARES-REDEEMED> 346,978
<SHARES-REINVESTED> 3,298
<NET-CHANGE-IN-ASSETS> 11,865,084
<ACCUMULATED-NII-PRIOR> 35,180
<ACCUMULATED-GAINS-PRIOR> (756,363)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 368,254
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 711,955
<AVERAGE-NET-ASSETS> 49,245,882
<PER-SHARE-NAV-BEGIN> 13.800
<PER-SHARE-NII> 0.120
<PER-SHARE-GAIN-APPREC> 1.320
<PER-SHARE-DIVIDEND> 0.110
<PER-SHARE-DISTRIBUTIONS> 0.070
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.060
<EXPENSE-RATIO> 1.17
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 03
<NAME> Arrow Funds
Arrow Fixed Income Portfolio

<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Sep-30-1996
<PERIOD-END> Sep-30-1996
<INVESTMENTS-AT-COST> 28,911,703
<INVESTMENTS-AT-VALUE> 28,343,263
<RECEIVABLES> 540,372
<ASSETS-OTHER> 3,793
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 28,887,428
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 179,097
<TOTAL-LIABILITIES> 179,097
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 30,239,296
<SHARES-COMMON-STOCK> 2,960,612
<SHARES-COMMON-PRIOR> 3,046,535
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (962,525)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (568,440)
<NET-ASSETS> 28,708,331
<DIVIDEND-INCOME> 43,219
<INTEREST-INCOME> 2,032,179
<OTHER-INCOME> 0
<EXPENSES-NET> 369,658
<NET-INVESTMENT-INCOME> 1,705,740
<REALIZED-GAINS-CURRENT> (184,315)
<APPREC-INCREASE-CURRENT> (843,230)
<NET-CHANGE-FROM-OPS> 678,195
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,705,740
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 661,379
<NUMBER-OF-SHARES-REDEEMED> 750,074
<SHARES-REINVESTED> 2,772
<NET-CHANGE-IN-ASSETS> (1,953,119)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (778,210)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 175,494
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 445,944
<AVERAGE-NET-ASSETS> 29,330,216
<PER-SHARE-NAV-BEGIN> 10.060
<PER-SHARE-NII> 0.570
<PER-SHARE-GAIN-APPREC> (0.360)
<PER-SHARE-DIVIDEND> 0.570
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.700
<EXPENSE-RATIO> 1.27
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

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<NAME> Arrow Funds
Arrow Government Money Market Portfolio

<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Sep-30-1996
<PERIOD-END> Sep-30-1996
<INVESTMENTS-AT-COST> 228,022,942
<INVESTMENTS-AT-VALUE> 228,022,942
<RECEIVABLES> 979,769
<ASSETS-OTHER> 13,075
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 229,015,786
<PAYABLE-FOR-SECURITIES> 15,000,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 773,388
<TOTAL-LIABILITIES> 15,773,388
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 213,242,398
<SHARES-COMMON-STOCK> 213,242,398
<SHARES-COMMON-PRIOR> 206,580,438
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 213,242,398
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,725,192
<OTHER-INCOME> 0
<EXPENSES-NET> 1,619,647
<NET-INVESTMENT-INCOME> 10,105,545
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 10,105,545
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 10,105,545
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 710,893,017
<NUMBER-OF-SHARES-REDEEMED> 704,231,160
<SHARES-REINVESTED> 103
<NET-CHANGE-IN-ASSETS> 6,661,960
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,083,949
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,619,950
<AVERAGE-NET-ASSETS> 216,406,616
<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> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 04
<NAME> Arrow Funds
Arrow Municipal Income Portfolio

<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Sep-30-1996
<PERIOD-END> Sep-30-1996
<INVESTMENTS-AT-COST> 14,412,250
<INVESTMENTS-AT-VALUE> 14,772,383
<RECEIVABLES> 251,546
<ASSETS-OTHER> 2,472
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 15,026,401
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 79,440
<TOTAL-LIABILITIES> 79,440
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,948,278
<SHARES-COMMON-STOCK> 1,456,209
<SHARES-COMMON-PRIOR> 1,735,819
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (361,450)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 360,133
<NET-ASSETS> 14,946,961
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 967,102
<OTHER-INCOME> 0
<EXPENSES-NET> 203,394
<NET-INVESTMENT-INCOME> 763,708
<REALIZED-GAINS-CURRENT> 70,342
<APPREC-INCREASE-CURRENT> (648)
<NET-CHANGE-FROM-OPS> 833,402
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 763,708
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 126,133
<NUMBER-OF-SHARES-REDEEMED> 407,947
<SHARES-REINVESTED> 2,204
<NET-CHANGE-IN-ASSETS> (2,789,524)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (431,792)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 119,078
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 346,291
<AVERAGE-NET-ASSETS> 16,997,072
<PER-SHARE-NAV-BEGIN> 10.220
<PER-SHARE-NII> 0.470
<PER-SHARE-GAIN-APPREC> 0.040
<PER-SHARE-DIVIDEND> 0.470
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<PER-SHARE-NAV-END> 10.260
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>