Smith Barney
Arizona Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010

Statement of Additional Information 	September 26, 1997
							As Amended May 18, 1998
							s Amended June 19, 1998

	This Statement of Additional Information (the "SAI") expands upon and 
supplements the information contained in the current Prospectus of Smith 
Barney Arizona Municipals Fund Inc. (the "Fund''), dated September 26, 1997, 
as amended or supplemented from time to time, and should be read in 
conjunction with the Fund's Prospectus. The Fund's Prospectus may be obtained 
from a Smith Barney Financial Consultant or by writing or calling the Fund at 
the address or telephone number set forth above. This SAI, although not in 
itself a prospectus, is incorporated by reference into the Prospectus in its 
entirety.

TABLE OF CONTENTS

For ease of reference the same section headings are used in both the 
Prospectus and the SAI, except where shown below:
Management of the 
Fund.......................................................................
 ........		  1
Investment Objective and Management 
Policies.............................................		  5
Municipal Bonds (See in the Prospectus "Investment Objective and 
Management  
Policies'')...................................................................
 .............. 		11
Purchase of 
Shares........................................................................
 ................		13
Redemption of 
Shares........................................................................
 ............		14
Distributor (See in the Prospectus "Management of the 
Fund").......................		15
Valuation of 
Shares........................................................................
 ...............		16
Exchange 
Privilege.....................................................................
 ...................		17
Performance Data (See in the Prospectus 
"Performance'')..............................		17
Taxes (See in the Prospectus "Dividends, Distributions and 
Taxes'')..............		21
Additional 
Information................................................................
 ..................		24
Financial 
Statements.................................................................
 ....................		24
Appendix...................................................................
 ...................................		A1

MANAGEMENT OF THE FUND

The executive officers of the Fund are employees of certain of the 
organizations that provide services to the Fund. These organizations are as 
follows:
Name	Service
Smith Barney Inc.
  ("Smith Barney'').......................................................
	Distributor
Mutual Management Corp.
("MMC'')...............................................................
	Investment Manager and
PNC Bank, National Association	Administrator
  
("PNC'').....................................................................
	Custodian
First Data Investor Services Group, Inc. 
("First 
Data'')...............................................................
	Transfer Agent

These organizations and the functions they perform for the Fund are 
discussed in the Prospectus and in this SAI.

Directors and Executive Officers of the Fund

The names of the Directors and executive officers of the Fund, together with 
information as to their principal business occupations during the past five 
years, are shown below. Each Director who is an "interested person'' of the 
Fund, as defined in the Investment Company Act of 1940, as amended (the "1940 
Act''), is indicated by an asterisk.

Herbert Barg, Director (Age 74). Private Investor. His address is 273 
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.

Alfred J. Bianchetti, Director (Age 75). Retired; formerly Senior 
Consultant to Dean Witter Reynolds Inc. His address is 19 Circle End Drive, 
Ramsey, New Jersey 07446.

Martin Brody, Director (Age 76). Consultant, HMK Associates; Retired Vice 
Chairman of the Board of Restaurant Associates Corp.; His address is c/o HMK 
Associates, 30 Columbia Turnpike, Florham Park, New Jersey  07932.

Dwight B. Crane, Director (Age 60). Professor, Harvard Business School. His 
address is c/o Harvard Business School, Soldiers Field Road, Boston, 
Massachusetts 02163.

Burt N. Dorsett, Director (Age 67). Managing Partner of Dorsett McCabe 
Management, Inc., an investment counseling firm; Director of Research 
Corporation Technologies, Inc., a non-profit patent-clearing and licensing 
firm. His address is 201 East 62nd Street,  New York, New York 10021.

Elliot S. Jaffe, Director (Age 71). Chairman of the Board and Chief 
Executive Officer of The Dress Barn, Inc. His address is 30 Dunnigan Drive, 
Suffern, New York 10901.

Stephen E. Kaufman, Director (Age 66). Attorney. His address is 277 Park 
Avenue, New York, New York 10172.

Joseph J. McCann, Director (Age 67). Financial Consultant; Retired 
Financial Executive of Ryan Homes Inc.. His address is 200 Oak Park Place, 
Pittsburgh, Pennsylvania 15243.

*Heath B. McLendon, Chairman of the Board and Investment Officer (Age 64). 
Managing Director of Smith Barney and Chairman of Smith Barney Strategy 
Advisers Inc.; President of MMC and Travelers Investment Advisor, Inc. 
("TIA"); prior to July 1993, Senior Executive Vice President of Shearson 
Lehman Brothers Inc. ("SLB''), Vice Chairman of Shearson Asset Management 
Division;  Mr. McLendon is Chairman of the Board and Investment Officer of 42 
Smith Barney Mutual Funds.  His address is 388 Greenwich Street, New York, New 
York 10013.

Cornelius C. Rose, Jr., Director (Age 64). Chairman of the Board, Cornelius 
C. Rose Associates, Inc., financial consultants, and Chairman of Performance 
Learning Systems, an educational consultant. His address is P.O. Box 355, Fair 
Oaks, Enfield, New Hampshire 03748.

James J. Crisona, Director emeritus (Age 90). Attorney; formerly Justice of 
the Supreme Court of the State of New York.  His address is 118 East 60th 
Street, New York, New York  10022.

Lewis E. Daidone, Senior Vice President and Treasurer (Age 40). Managing 
Director of Smith Barney; Director and Senior Vice President of MMC and TIA.  
Mr. Daidone serves as Senior Vice President and Treasurer of 42 Smith Barney 
Mutual Funds.  His address is 388 Greenwich Street, New York, New York 10013.

Lawrence T. McDermott, Vice President and Investment Officer (Age 49). 
Investment Officer of MMC; prior to July 1993, Managing Director of SLB.  Mr. 
McDermott also serves as Investment Officer of 6 Smith Barney Mutual Funds.  
His address is 388 Greenwich Street, New York, New York 10013.

Christina T. Sydor, Secretary (Age 46). Managing Director of Smith Barney; 
General Counsel and Secretary of MMC and TIA.  Ms. Sydor serves as Secretary 
of 41 Smith Barney Mutual Funds.  Her address is 388 Greenwich Street, New 
York, New York 10013.

As of  September 5, 1997, the Directors and officers of the Fund as a group 
owned less than 1% of the outstanding common stock of the Fund. As of 
September 5, 1997,  to the knowledge of the Fund and the Board, the following 
shareholders or "group" (as that term is used in Section 13(d) of the 
Securities Act of 1934) beneficially owned more than 5% of the outstanding 
shares of the Fund: 

CLASS C SHARES

American Western Trading Co.
6531 N. 3rd Ave. #15
Phoenix, AZ 85013-1258
owned 28,440.238 (35.85%) shares

Rachel Fritch Harris & Richard
Franklin Harris Co. TTEES
FBO Rachel Fritch Harris Trust
U/A/D 5/1/89
7046 N. 59th Place
Scottsdale, AZ 85253-3412
owned 11,355.861(14.29%) shares

Margaret Kane and Nicholas Wyatt
Ten by Ent
Tax Account
PO Box 274
Arivaca, AZ 85601-0274
owned 11,126.832(14.03%) shares

GT Kearney TTEE
FBO Glenn T. Kearney Trust
U/A/D 8/11/93
101 S. Yucca Street, #156
Chandler, AZ 85224-8177
owned 7,524.113(9.49%) shares

Peter Browne
Hilda Browne JTWROS
3031 N. Civic Center
Plaza Apt. 260
Scottsdale, AZ 85251-7910
owned 7,182.432 (9.06%) shares

Kathleen Reardon and
Robert Nichol JTWROS
2925 Ranchero Drive
Lake Havasu City, AZ 86406-6130
owned 6,683.365(8.43%) shares

Each Director also serves as a director, trustee and/or general partner of 
certain other mutual funds for which Smith Barney serves as distributor.  No 
Director, officer or employee of Smith Barney or of any parent or subsidiary 
receives any compensation from the Fund for serving as an officer or Director 
of the Fund. The Fund pays each Director who is not an officer, director or 
employee of Smith Barney or any of its affiliates a fee of $1,000 per annum 
plus $100 per in-person meeting and $100 per telephonic meeting.  Each 
Director emeritus who is not an officer, director or employee of Smith Barney 
or any of its affiliates receives a fee of $500 per annum plus $50 per meeting 
attended. During the Fund's last fiscal year aggregate compensation paid by 
the Fund to Directors achieving emeritus status totaled $800.  All Directors 
are reimbursed for travel and out-of-pocket expenses incurred to attend such 
meetings.

For the fiscal year ended May 31, 1997, the Directors of the Fund were paid 
the following compensation: 

			Total
		Pension or	Compensation	Number of
		Retirement	from Fund	Funds for
	Aggregate	Benefits Accrued	and Fund	Which 
	director
	Compensation 	as part of 	Complex	Serves Within
Name of Person	  from Fund 	  Fund Expenses  	Paid to Directors	 Fund Complex 

Herbert Barg	$1,700	$0	$100,550	16
Alfred  Bianchetti	1,600	0	49,800	11
Martin Brody	1,500	0	119,600	19
Dwight Crane	1,600	0	137,725	22
Burt Dorsett+	1,600	0	46,900	11
Elliot Jaffe	1,600	0	49,600	11
Stephen Kaufman	1,700	0	86,050	13
Joseph McCann	1,700	0	50,700	11
Heath McLendon++	0	0	0	41
Cornelius Rose	1,700	0	50,800	11
	

+	Pursuant to the Fund's deferred compensation plan, Mr. Dorsett has elected 
to defer some or all of the compensation due to him from the Fund: $800.  
As of January 1, 1997, Mr. Dorsett has elected not to defer his future 
compensation.
++   Designates an "interested" Director.

Investment Manager and Administrator-MMC

MMC serves as investment manager to the Fund. MMC is a wholly owned subsidiary 
of Smith Barney Holdings Inc. ("Holdings'') and  Holdings is a wholly owned 
subsidiary of Travelers Group Inc. ("Travelers''). The advisory agreement is 
dated July 30, 1993 (the "Advisory Agreement'') and was most recently approved 
by the Board of Directors, including a majority of those Directors who are not 
"interested persons'' of the Fund or MMC ("Independent Directors"), on July 
16, 1997. The services provided by MMC under the Advisory Agreement are 
described in the Prospectus under "Management of the Fund.'' MMC pays the 
salary of any officer or employee who is employed by both it and the Fund and 
bears all expenses in connection with the performance of its services.

	The Fund pays MMC a fee for investment advisory services at the annual 
rate of 0.30% of the value of its daily net assets.  Prior to November 17, 
1995, as compensation for investment advisory services, the Fund paid MMC a 
fee computed daily and paid monthly at the following annual rates of the 
Fund's average daily net assets: 0.35% up to $500 million; and 0.32% in excess 
of $500 million.  For the 1995, 1996 and 1997 fiscal years, the Fund paid  
$220,638, $218,249 and $184,078, respectively, in investment advisory fees. 
MMC and its predecessors voluntarily waived investment advisory fees for the 
fiscal years ended May 31, 1995 and 1996 in the amounts of  $73,668 and 
$64,184, respectively. 

MMC also serves as administrator to the Fund pursuant to a written 
agreement dated April 20, 1994 (the "Administration Agreement''), which was 
most recently approved by the Fund's Board of Directors, including a majority 
of Independent Directors on July 16, 1997. The Boston Company Advisors, Inc. 
("Boston Advisors") served as sub-administrator to the Fund  from April 21, 
1994 through June 16, 1995.  Under the sub-administration agreement, Boston 
Advisors was paid a portion of the administration fee paid by the Fund to MMC 
at a rate agreed upon from time to time between MMC and Boston Advisors.  The 
services provided by MMC under the Administration Agreement are described in 
the Prospectus under "Management of the Fund."  MMC pays the salary of any 
officer and employee who is employed by both it and the Fund and bears all 
expenses in connection with the performance of its services.

As compensation for administrative services rendered to the Fund, MMC 
received a fee paid monthly at the following annual percentage of average 
daily net assets: 0.20% up to $500 million; and 0.18% thereafter. For the 
fiscal years ended May 31, 1995, 1996 and 1997, the Fund paid MMC $83,984, 
$88,133 and $122,719, respectively, in administration fees. MMC and its 
predecessors voluntarily waived administrative fees for the fiscal years ended 
May 31, 1995 and 1996 in the amounts of  $42,095 and $46,226, respectively.

The Fund bears expenses incurred in its operations, including: taxes, 
interest, brokerage fees and commissions, if any; fees of Directors who are 
not officers, directors, shareholders or employees of Smith Barney or MMC; SEC 
fees and state Blue Sky qualification fees; charges of custodian; transfer and 
dividend disbursing agent's fees; certain insurance premiums; outside auditing 
and legal expenses; costs of maintaining corporate existence; costs of 
investors services (including allocated telephone and personnel expenses); 
costs of preparation and printing of prospectuses for regulatory purposes and 
for distribution to existing shareholders; costs of shareholders' reports and 
shareholder meetings; and meetings of the officers or Board of Directors of 
the Fund.

MMC and the Fund have agreed that if in any fiscal year the aggregate 
expenses of the Fund (including fees payable pursuant to the Advisory 
Agreement and Administration Agreement, but excluding interest, taxes and 
brokerage fees paid pursuant to the Fund's services and distribution plan, 
and, with the prior written consent of the necessary state securities 
commissions, extraordinary expenses) exceed the expense limitation of any 
state having jurisdiction over the Fund, MMC will, to the extent required by 
state law, reduce its fees by the amount of such excess expenses. Such fee 
reductions, if any, will be reconciled on a monthly basis. No fee reduction 
was required for the 1995, 1996 and 1997 fiscal years.

COUNSEL AND AUDITORS

Willkie Farr & Gallagher serves as legal counsel to the Fund.  The Independent 
Directors have selected Stroock & Stroock & Lavan LLP as their legal counsel.

KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has been 
selected as the Fund's independent auditor to examine and report on the Fund's 
financial statements and highlights for the fiscal year ending May 31, 1998.


INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES

The Prospectus discusses the Fund's investment objective and the policies it 
employs to achieve that objective. The following discussion supplements the 
description of the Fund's investment policies in the Prospectus.
 
	Under normal market conditions, the Fund will invest at least 80% of its 
total assets in municipal securities rated no lower that Baa, MIG 3 or Prime-1 
by Moody's Investors Service, Inc. ("Moody's") or BBB, SP-2 or A-1 by Standard 
& Poor's Ratings Group ("S&P"), or the equivalent of another nationally 
recognized statistical ratings organization ("NRSRO") or unrated obligations 
of comparable quality. The balance of the Fund's assets may be invested in 
securities rated as los as C by Moody's, D by S&P or the equivalent from 
another NRSRO.  A description of the ratings of Moody's and S&P is contained 
in the Appendix to this SAI. 

	Use of Ratings as Investment Criteria. In general, the ratings of 
Moody's, S&P or another NRSRO represent the opinions of those agencies as to 
the quality of the securities and short-term investments which they rate. It 
should be emphasized, however, that such ratings are relative and subjective, 
are not absolute standards of quality and do not evaluate the market risk of 
securities. These ratings will be used by the Fund as initial criteria for the 
selection of portfolio securities, but the Fund also will rely upon the 
independent advice of MMC to evaluate potential investments. Among the factors 
which will be considered are the long-term ability of the issuer to pay 
principal and interest and general economic trends. To the extent the Fund 
invests in lower rated and comparable unrated securities, the Fund's 
achievement of its investment objective may be more dependent on MMC's credit 
analysis of such securities than would be the case for a portfolio consisting 
entirely of higher rated securities.

	Subsequent to its purchase by the Fund, an issue of securities may cease 
to be rated or its rating may be reduced below the rating given at the time 
the securities were acquired by the Fund. Neither event will require the sale 
of such securities by the Fund, but MMC will consider such event in its 
determination of whether the Fund should continue to hold such securities. In 
addition, to the extent the ratings change as a result of changes in such 
organizations or their rating systems or due to a corporate restructuring of 
Moody's, S&P or another NRSRO, the Fund will attempt to use comparable ratings 
as standards for its investments in accordance with its investment objective 
and policies.

	The Fund generally may invest up to 20% of its total assets in 
securities rated below Baa, MIG 3 or Prime-1 (P-1) by Moody's or BBB, SP-2 or 
A-1 by S&P, or in unrated securities of comparable quality or the equivalent 
from another NRSRO.  Such securities (a) will likely have some quality and 
protective characteristics that, in the judgment of the rating organization, 
are outweighed by large uncertainties or major risk exposures to adverse 
conditions and (b) are predominantly speculative with respect to the issuer's 
capacity to pay interest and repay principal in accordance with the terms of 
the obligations.

	Zero coupon securities involve special considerations.  Zero coupon 
securities are debt obligations which do not entitle the holder to any 
periodic payments of interest prior to maturity of a specified cash payment 
date when the securities begin paying current interest (the "cash payment 
date") and therefore are issued and traded at a discount from their face 
amounts or par values.  The discount varies depending on the time remaining 
until maturity or cash payment date, prevailing interest rates, liquidity of 
the security and the perceived credit quality of the issuer.  The discount, in 
the absence of financial difficulties of the issuer, decreases as the final 
maturity or cash payment date of the security approaches.  The market prices 
of zero coupon securities generally are more volatile than the market prices 
of other debt securities that pay interest periodically and are likely to 
respond to changes in interest rates to a greater degree than do debt 
securities having similar maturities and credit quality.  The credit risk 
factors pertaining to low-rated securities also apply to low-rated zero coupon 
bonds.  Such zero coupon bonds carry an additional risk in that, unlike bonds 
which pay interest throughout the period to maturity, the Fund will realize no 
cash until the cash payment date unless a portfolio of such securities is sold 
and, if the issuer defaults, the Fund may obtain no return at all on its 
investment.

	Current Federal income tax laws may require the holder of a zero coupon 
security to accrue income with respect to that security prior to the receipt 
of cash payments.  To maintain its qualification as a registered investment 
company and avoid liability for Federal income taxes, the Fund may be required 
to distribute income accrued with respect to zero coupon securities and may 
have to dispose of portfolio securities under disadvantageous circumstances in 
order to generate cash to satisfy these distribution requirements.

	When-Issued Purchases and Firm Commitment Agreements. When the Fund 
purchases new issues of municipal securities on a when-issued basis, a 
segregated account equal to the amount of the commitment will be established 
by the Fund's custodian.  The segregated assets may consist of cash, equity 
securities or debt securities of any grade having a value equal to or greater 
than the Fund's purchase commitments, provided such securities, having a value 
equal to or greater than the Fund's purchase commitments, provide such 
securities have been determined by MMC to be liquid and unencumbered and 
marked to market daily, pursuant to guidelines established by the Directors.  
If the value of securities in the account should decline, additional cash or 
securities will be placed in the account so that the market value of the 
account will equal the amount of such commitments by the Fund on a daily 
basis.

	Securities purchased on a when-issued basis and the securities held in 
the Fund's portfolio are subject to changes in market value based upon various 
factors, including changes in the level of market interest rates. Generally, 
the value of such securities will fluctuate inversely to changes in interest 
rates (i.e., they will appreciate in value when market interest rates decline, 
and decrease in value when market interest rates rise). For this reason, 
placing securities rather than cash in a segregated account may have a 
leveraging effect on the Fund's net assets. That is, to the extent the Fund 
remains substantially fully invested in securities at the same time that it 
has committed to purchase securities on a when-issued basis, there will be 
greater fluctuations in its net assets than if it had set aside cash to 
satisfy its purchase commitment.

	Upon the settlement date of the when-issued securities, the Fund 
ordinarily will meet its obligation to purchase the securities from available 
cash flow or from use of the cash (or liquidation of securities) held in the 
segregated account or sale of other securities. Although it normally would not 
expect to do so, the Fund also may meet its obligation from the sale of the 
when-issued securities themselves (which may have a current market value 
greater or less than the Fund's payment obligation). Sale of securities to 
meet such obligations carries with it a greater potential for the realization 
of net capital gains, which are not exempt from Federal income tax.

	When the Fund engages in when-issued transactions, it relies on the 
seller to consummate the trade. Failure of the seller to do so may result in 
the Fund's incurring a loss of opportunity to obtain a price considered to be 
advantageous.

	The Fund also may enter into firm commitment agreements for the purchase 
of securities at an agreed-upon price on a specified future date. During the 
time that the Fund is obligated to purchase such securities, it will maintain 
in a segregated account with the Fund's custodian in an aggregate value 
sufficient to make payment for the securities.  The segregated assets may 
consist of cash, U.S. government securities, equity securities or debt 
obligations of any grade so long as such assets are liquid , unencumbered and 
marked to market daily. 

	Puts or Stand-by Commitments. As discussed in the Prospectus, the Fund 
may acquire puts or stand-by commitments which will enable the Fund to improve 
its portfolio liquidity by providing a ready market for certain municipal 
securities in its portfolio at an acceptable price. The price the Fund pays 
for municipal securities with puts generally is higher than the price which 
otherwise would be paid for the municipal securities alone. The put generally 
is for a shorter term than the maturity of the municipal security and does not 
restrict in any way the Fund's ability to dispose of (or retain) the municipal 
security.

	In order to ensure that the interest on municipal securities subject to 
puts is tax-exempt for the Fund, the Fund will limit its use of puts in 
accordance with current interpretations or rulings of the Internal Revenue 
Service (the "IRS"). The IRS has issued a ruling (Rev. Rule. 82-144) in which 
it determined that a regulated investment company was the owner for tax 
purposes of municipal securities subject to puts (with the result that 
interest on those securities would not lose its tax-exempt status when paid to 
the company). The IRS position in Rev. Rule. 82-144 relates to a particular 
factual situation, including that (a) the municipal securities with puts were 
purchased at prices higher than the underlying municipal securities without 
puts, (b) a relatively small number of the municipal securities owned by the 
company were subject to puts, (c) the puts were nonassignable and terminated 
upon disposal of the underlying securities by the company, (d) the puts were 
for periods substantially less than the terms of the underlying securities, 
(e) the puts did not include call arrangements or restrict the disposal of the 
underlying securities by the company and gave the seller no rights in the 
underlying securities, and (f) the securities were acquired by the company for 
its own account and not as security for a loan from the seller.

	Because it is difficult to evaluate the likelihood of exercise or the 
potential benefit of a put, it is expected that puts will be determined to 
have a "value" of zero, regardless of whether any direct or indirect 
consideration was paid. Where the Fund has paid for a put, its cost will be 
reflected as unrealized depreciation in the underlying security for the period 
during which the commitment is held, and therefore would reduce any potential 
gains on the sale of the underlying security by the cost of the put. There is 
a risk that the seller of the put may not be able to repurchase the security 
upon exercise of the put by the Fund.

	Temporary Investments. When the Fund is maintaining a defensive 
position, the Fund may invest in short-term investments ("Temporary 
Investments") consisting of tax-exempt securities in the form of notes of 
municipal issuers having, at the time of purchase, a rating within the three 
highest grades of Moody's, S&P or another NRSRO or, if not rated, having an 
issue of outstanding municipal bonds of Arizona issuers rated within the three 
highest grades by Moody's S&P or the equivalent from another NRSRO and certain 
taxable short-term instruments having quality characteristics comparable to 
those for tax-exempt investments.  The Fund may invest in Temporary 
Investments for defensive reasons in anticipation of a market decline.  At no 
time will more than 20% of the Fund's total assets be invested in Temporary 
Investments unless the Fund has adopted a defensive investment policy.  The 
Fund intends, however, to purchase tax-exempt Temporary Investments pending 
the investing of the proceeds of the sale of portfolio securities or shares of 
the Fund's common stock, or in order to have highly liquid securities 
available to meet anticipated redemptions.  For the fiscal year ended May 31, 
1997, the Fund did not invest in taxable Temporary Investments.

	From time to time on a temporary basis, the Fund may invest in fixed-
income obligations on which the interest is subject to Federal income tax. 
Except when the Fund is in a "defensive" investment position, it will not 
purchase a taxable security if, as a result, more than 20% of its total assets 
would be invested in taxable securities. This limitation is a fundamental 
policy of the Fund, that is, it may not be changed without a majority vote of 
the shareholders of the outstanding securities of the Fund. Temporary taxable 
investments of the Fund may consist of U.S. government securities, commercial 
paper rated A-1 by S&P or Prime-1 by Moody's, corporate obligations rated AAA 
or AA by S&P or Aaa or Aa by Moody's or the equivalent from another NRSRO, 
certificates of deposit or bankers' acceptances of domestic banks or thrift 
institutions with at least $1 billion in assets, or repurchase agreements with 
certain banks or dealers. Repurchase agreements may be entered into with 
respect to any securities eligible for investment by the Fund, including 
municipal securities. 

	Repurchase Agreements. The Fund may enter into repurchase agreements 
with banks which are the issuers of instruments acceptable for purchase by the 
Fund and with certain dealers on the Federal Reserve Bank of New York's list 
of reporting dealers. A repurchase agreement is a contract under which the 
buyer of a security simultaneously commits to resell the security to the 
seller at an agreed-upon price on an agreed-upon date. Under the terms of a 
typical repurchase agreement, the Fund would acquire an underlying debt 
obligation for a relatively short period of time (usually not more than seven 
days) subject to an obligation of the seller to repurchase, and the Fund to 
resell, the obligation at an agreed-upon price and time, thereby determining 
the yield during the Fund's holding period.  Under each repurchase agreement, 
the selling institution will be required to maintain the value of the 
securities subject to the repurchase agreement at not less than their 
repurchase price. Repurchase agreements could involve certain risks in the 
event of default or insolvency of the other party, including possible delays 
or restrictions upon the Fund's ability to dispose of the underlying 
securities, the risk of a possible decline in the value of the underlying 
securities during the period in which the Fund seeks to assert its rights to 
them, the risk of incurring expenses associated with asserting those rights 
and the risk of losing all or part of the income from the agreement. In 
evaluating these potential risks, MMC, acting under the supervision of the 
Fund's Board of Directors, reviews on an ongoing basis the value of the 
collateral and the creditworthiness of those banks and dealers with which the 
Fund enters into repurchase agreements.


Investment Restrictions

The Fund has adopted the following investment restrictions for the protection 
of shareholders. Restrictions 1 through 7 below are fundamental policies, and 
may not be changed without the approval of the holders of a majority of the 
outstanding shares of the Fund, defined as the lesser of (a) 67% of the Fund's 
shares present at a meeting, if the holders of more than 50% of the 
outstanding shares of the Fund are present or represented by proxy, or (b) 
more than 50% of the Fund's outstanding shares. The remaining restrictions may 
be changed by the Fund's Board of Directors at any time.

The Fund may not:

1.  Invest in a manner that would cause it to fail to be a "diversified 
company" under the 1940 Act and the rules, regulations and orders thereunder.

2. Issue "senior securities" as defined in the 1940 Act and the rules, 
regulations and orders thereunder, except as permitted under the 1940 Act and 
the rules, regulations and orders thereunder
 
3. Invest more than 25% of its total assets in securities, the issuers of 
which are in the same industry. For purposes of this limitation, U.S. 
government securities and securities of state or municipal governments and 
their political subdivisions are not considered to be issued by members of any 
industry.

4. Borrow money, except that (a) the Fund may borrow from banks for temporary 
or emergency (not leveraging) purposes, including the meeting of redemption 
requests which might otherwise require the untimely disposition of securities, 
and (b) the Fund may, to the extent consistent with its investment policies, 
enter into reverse repurchase agreements, forward roll transactions and similar 
investment strategies and techniques.  To the extent that it engages in 
transactions described in (a) and (b), the Fund will be limited so that no more 
than 33 1/3% of the value of its total assets (including the amount borrowed), 
valued at the lesser of cost or market, less liabilities (not including the 
amount borrowed) valued at the time the borrowing is made, is derived from such 
transactions.

5. Make loans.  This restriction does not apply to: (a) the purchase of debt 
obligations in which the Fund may invest consistent with its investment 
objectives and policies; (b) repurchase agreements; and (c) loans of its 
portfolio securities, to the fullest extent permitted under the 1940 Act.

6. Engage in the business of underwriting securities issued by other persons, 
except to the extent that the Fund may technically be deemed to be an 
underwriter under the Securities Act of 1933, as amended, in disposing of 
portfolio securities.

7. Purchase or sell real estate, real estate mortgages, commodities or 
commodity contracts, but this restriction shall not prevent the Fund from (a) 
investing in securities of issuers engaged in the real estate business or the 
business of investing in real estate (including interests in limited 
partnerships owning or otherwise engaging in the real estate business or the 
business of investing in real estate) and securities which are secured by real 
estate or interests therein; (b) holding or selling real estate received in 
connection with securities it holds or held; (c) trading in futures contracts 
and options on futures contracts (including options on currencies to the extent 
consistent with the Funds' investment objective and policies); or (d) investing 
in real estate investment trust securities.

8. Purchase any securities on margin (except for such short-term credits as are 
necessary for the clearance of purchases and sales of portfolio securities) or 
sell any securities short (except "against the box").  For purposes of this 
restriction, the deposit or payment by the Fund of underlying securities and 
other assets in escrow and collateral agreements with respect to initial or 
maintenance margin in connection with futures contracts and related options and 
options on securities, indexes or similar items is not considered to be the 
purchase of a security on margin. 

9. Purchase or otherwise acquire any security if, as a result, more than 15% 
of its net assets would be invested in securities that are illiquid. 

10. Invest in oil, gas or other mineral exploration or development programs. 


	Certain restrictions listed above permit the Fund to engage in 
investment practices that the Fund does not currently pursue. The Fund has no 
present intention of altering its current investment practices as otherwise 
described in the Prospectus and this Statement of Additional Information and 
any future change in those practices would require Board approval and 
appropriate notice to shareholders. If a percentage restriction is complied 
with at the time of investment, a later increase or decrease in the percentage 
of assets resulting from a change in values of portfolio securities or in the 
amount of the Fund's assets will not constitute a violation of such 
restriction. In order to permit the sale of the Fund's shares in certain 
states, the Fund may make commitments more restrictive than the restrictions 
described above. Should the Fund determine that any such commitment is no 
longer in the best interests of the Fund and its shareholders it will revoke 
the commitment by terminating sales of its shares in the state involved.

Portfolio Transactions

	Newly issued securities normally are purchased directly from the issuer 
or from an underwriter acting as principal. Other purchases and sales usually 
are placed with those dealers from which it appears the best price or 
execution will be obtained; those dealers may be acting as either agents or 
principals.  The purchase price paid by the Fund to underwriters of newly 
issued securities usually includes a concession paid by the issuer to the 
underwriter, and purchases of after-market securities from dealers normally 
are executed at a price between the bid and asked prices.  The Fund paid no 
brokerage commissions for the 1995, 1996 and 1997 fiscal years.

	Allocation of transactions, including their frequency, to various 
dealers is determined by MMC in its best judgment and in a manner deemed fair 
and reasonable to shareholders.  The primary considerations are availability 
of the desired security and the prompt execution of orders in an effective 
manner at the most favorable prices.  Subject to these considerations, dealers 
that provide supplemental investment research and statistical or other 
services to MMC may receive orders for portfolio transactions by the Fund.  
Information so received enables MMC to supplement its own research and 
analysis with the views and information of other securities firms.  Such 
information may be useful to MMC in serving both the Fund and other clients, 
and conversely, supplement information obtained by the placement of business 
of other clients may be useful to MMC in carrying out its obligations to the 
Fund.

	The Fund will not purchase municipal bonds during the existence of any 
underwriting or selling group relating thereto of which Smith Barney is a 
member, except to the extent permitted by the Securities and Exchange 
Commission ("SEC").  Under certain circumstances, the Fund may be at a 
disadvantage because of this limitation in comparison with other investment 
companies which have a similar investment objective but which are not subject 
to such limitation.

	While investment decisions for the Fund are made independently from 
those of the other accounts managed by MMC, investments of the type the Fund 
may make also may be made by such other accounts. When the Fund and one or 
more other accounts managed by MMC 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 MMC 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.

Portfolio Turnover

The Fund's portfolio turnover rate (the lesser of purchases or sales of 
portfolio securities during the year, excluding purchases or sales of short-
term securities, divided by the monthly average value of portfolio securities) 
generally is not expected to exceed 100%, but the portfolio turnover rate will 
not be a limiting factor whenever the Fund deems it desirable to sell or 
purchase securities. Securities may be sold in anticipation of a rise in 
interest rates (market decline) or purchased in anticipation of a decline in 
interest rates (market rise) and later sold. In addition, a security may be 
sold and another security of comparable quality may be purchased at 
approximately the same time in order to take advantage of what the Fund 
believes to be a temporary disparity in the normal yield relationship between 
the two securities. These yield disparities may occur for reasons not directly 
related to the investment quality of particular issues or the general movement 
of interest rates, such as changes in the overall demand for or supply of 
various types of tax-exempt securities. For the fiscal years ending May 31, 
1995, 1996 and 1997, the Fund's portfolio turnover rates were 21%, 22% and 27 
%, respectively. 

MUNICIPAL BONDS

General Information

	Municipal bonds generally are understood to include debt obligations 
issued to obtain funds for various public purposes, including the construction 
of a wide range of public facilities, refunding of outstanding obligations, 
payment of general operating expenses and extensions of loans to public 
institutions and facilities. Private activity bonds issued by or on behalf of 
public authorities to finance privately operated facilities are included 
within the term municipal bonds if the interest paid thereon qualifies as 
excludable from gross income (but not necessarily from alternative minimum 
taxable income) for Federal income tax purposes in the opinion of bond counsel 
to the issuer.

	The yields on municipal bonds are dependent upon a variety of factors, 
including general economic and monetary conditions, general money market 
conditions, general conditions of the municipal bond market, the financial 
condition of the issuer, the size of a particular offering, the maturity of 
the obligation offered and the rating of the issue. 

	Municipal bonds also are subject to the provisions of bankruptcy, 
insolvency and other laws affecting the rights and remedies of creditors, such 
as the Federal Bankruptcy Code, and laws, if any, that may be enacted by 
Congress or state legislatures extending the time for payment of principal or 
interest, or both, or imposing other constraints upon enforcement of the 
obligations or upon the ability of municipalities to levy taxes. There is also 
the possibility that, as a result of litigation or other conditions, the power 
or ability of any one or more issuers to pay, when due, principal of and 
interest on its, or their, municipal bonds may be materially affected.

	Interest on certain types of private activity bonds (generally small 
issues and obligations to finance certain exempt facilities which may be 
leased to or used by persons other than the issuer) will not be excluded from 
gross income for Federal income tax purposes when received by "substantial 
users" or persons related to "substantial users" as defined in the Internal 
Revenue Code of 1986, as amended (the "Code"). The term "substantial user" 
generally includes any "non-exempt person" who regularly uses in his or her 
trade or business as part of a facility financed from the proceeds of private 
activity bonds. The Fund may invest periodically in private activity bonds 
and, therefore, may not be an appropriate investment for entities which are 
substantial users of facilities financed by such bonds or "related persons" of 
substantial users. Generally, an individual will not be a related person of a 
substantial user under the Code unless the person or his or her immediate 
family (spouse, brothers, sisters, ancestors and lineal descendants) owns 
directly or indirectly in the aggregate more than 50% in value of the equity 
of the substantial user, although special related persons rules apply when the 
substantial user is a partnership or Subchapter S corporation.


	Special Considerations Relating to Arizona Municipal Securities. Some of 
the significant financial considerations relating to the Fund's investments in 
Arizona municipal securities are summarized below. This summary information is 
derived principally from official statements and prospectuses relating to 
securities offerings of the State of Arizona and various local agencies in 
Arizona, available as of the date of this SAI and does not purport to be a 
complete description of any of the considerations mentioned herein.  The 
accuracy and completeness of the information contained in such official 
statements and documents has not been independently verified and this summary 
is qualified by reference to the information from such documents.

	As of July 1996, Arizona's population stood at an estimated 4,297,775.  
Over the past five years, the population has grown at an average annual rate 
of nearly 2.9%.  Arizona Department of Economic Security projections call for 
a 2.5% increase for 1997 with net migration levels declining from their 
currently high rate.  Although 73% of the population growth is the result of 
net migration, the natural population growth rate of 0.9% still exceeds the 
national average of 0.6%.

	The State's principal economic sectors include services, manufacturing 
dominated by electrical, transportation and military equipment, government, 
trade, construction, finance, insurance and real estate, tourism and the 
military.
	
	The State's seasonally adjusted unemployment rate as of February 1997, 
stood at 5.0%, which is on par with the national rate of 5.0%.  Total wage and 
salary employment has grown at a3.8% average annual rate from 1990 to 1995, 
with annual gains of 6.7% and 5.4% respectively for 1994 and 1995.  Major 
expansions are presently underway by Microsoft, Charles Schwab, Intel, 
Microchip Technology and MCI.  However, there are signs that the rate of 
employment growth has begun to slow.  Total wage and salary employment is 
forecast to increase by more moderate rates of 3.3% in 1997 and 2.4% in 1998.  
The services sector is projected to experience the highest rate of growth over 
the next two years, with increases of 5.5% and 4.8%.  Manufacturing employment 
is expected to increase 2.9% and 0.9% over the same period while construction 
employment is expected to increase 0.2% in 1997 and decline 2.5% in 1998.  
This compares with construction employment increases of 21.6% in 1994 and 
10.6% in 1995.

	Due to the international diversification of Arizona's economy and the 
development of expanded tourism opportunities the State's economy is becoming 
less seasonal in nature. Exports rose 45.2% from 1993 to 1995 to $9.7 billion. 
To further promote Arizona exports, the Arizona Department of Commerce opened 
a foreign trade office in London in October 1995.  High-tech products account 
for about 75% of total exports.  This provides better options for both 
employers and employees.  

	Arizona is required by law to maintain a balanced budget. To achieve 
this objective, the State has, in the past, utilized a combination of spending 
reductions and tax increases.  Arizona's top individual income tax rate of 
6.9% is moderately high and there is no local income taxes levied by any city 
or county.  The general sales tax rate matches the US median at 5.0%, although 
county and city taxes push combined rates as high as 7.20%.  General 
governmental revenues totaled about $10.32 billion for June 30,1996, a 7.2%  
increase over 1995.  The higher sales tax revenues are reflective of statewide 
economic growth, while the rise in motor vehicle and fuel taxes resulted from 
increases in vehicle registrations and vehicle usage.  

	The general fund ended the June 30, 1996 fiscal year with a $628.2 
million unreserved fund balance, which is about 8.5 % of general fund 
revenues.  In addition, there is a $309.3 million reserved fund balance that 
includes $233.1 million for a "rainy day fund" established by the State 
Legislature in 1991.  The fund is capped at 15% of general fund revenue and is 
funded by a formula comparing real net personal income growth to a seven year 
trend.

	Arizona's state constitution limits the amount of debt that may be 
contracted by the State to $350,000. However, certain other issuers have the 
power to issue obligations which affect the whole or large portions of the 
State. For example, the Transportation Board of the State of Arizona 
Department of Transportation may issue debt for highways which is paid from 
revenues generated from state gasoline taxes. Salt River Project Agricultural 
& Improvement District, an agricultural improvement district that operates the 
Salt River Project (a Federal reclamation project and an electric system which 
generates, purchases, and distributes electric power to residential, 
commercial, industrial, and agricultural power users in a 2,900 square-mile 
service area around Phoenix), may issue debt payable from a number of sources.

	Arizona has no general obligation debt.  Revenue bonds have been issued 
by the Arizona Depaartment of Transportation ("ADOT"), three state 
universities, the Arizona Power Authority and the University Medical Center.  
The total par value of outstanding revenue bonds is approximately $2.2 
billion.  

	Outstanding ADOT  issues total approximately $1.5 billion and include 
highway revenue bonds secured by a pledge of motor vehicle related fuel fees 
of the state highway fund and by transportation excise taxes collected by the 
Arizona Department of Revenue on behalf of Maricopa County.  Virtually all of 
the numerous ADOT issues are insured and carry underlying ratings by S&P 
ranging from "A-" on subordinate excise tax issues to "AA-" on senior lien 
issues.

	Arizona has issued certificates of participation ("COPs") currently 
outstanding in the amount of $429 million, to finance construction or 
improvements to office buildings, higher education facilities and prisons.  
The lease payments are subject to annual appropriation by the State 
Legislature.  Nearly all of the outstanding COPs are insured and carry  S&P's 
underlying ratings ranging from "A-" to "A+", depending on a particular 
project.

	Arizona's state constitution also restricts the debt of certain of the 
State's political subdivisions. No county, city, town, school district, or 
other municipal corporation of the State may for any purpose become indebted 
in any manner in an amount exceeding six percent of the taxable property in 
such county, city, town, school district, or other municipal corporation 
without the assent of a majority of the qualified electors thereof voting at 
an election provided by law to be held for that purpose; provided, however, 
that (a) under no circumstances may any county or school district of the State 
become indebted in an amount exceeding fifteen percent (or thirty percent in 
the case of a unified school district) of such taxable property and (b) any 
incorporated city or town of the State with such assent may be allowed to 
become indebted up to a twenty percent additional amount for supplying such 
city or town with (i) water, artificial light, or sewers, when the works for 
supplying such water, light, or sewers are or shall be owned and controlled by 
the municipality, (ii) the acquisition and development by the incorporated 
city or town of land or interests therein for open space preserves, parks, 
playgrounds and recreational facilities, or (iii) the construction, 
reconstruction, improvement or acquisition of streets, highways or bridges or 
interests in land for rights-of-way for streets, highways or bridges. 
Irrigation, power, electrical, agricultural improvement, drainage, flood 
control and tax levying public improvement districts are, however, exempt from 
such restrictions of the constitution.

	Annual property tax levies for the payment of general obligation bonded 
indebtedness of political subdivisions are unlimited as to rate or amount. 
Other obligations may be issued by such entities, sometimes without an 
election, which are payable from, among other sources, project revenues, 
special assessments and excise taxes.

	Arizona's local governmental entities are subject to certain other 
limitations on their ability to assess taxes and levies which could affect 
their ability to meet their financial obligations. Subject to certain 
exceptions, the maximum amount of property taxes levied by any Arizona county, 
city, town or community college district for their operations and maintenance 
expenditures cannot exceed the amount levied in a preceding year by more than 
two percent. Certain taxes are specifically exempt from this limit, including 
taxes levied for debt service payments. 


PURCHASE OF SHARES 

Volume Discounts

The schedule of sales charges on Class A shares described in the Prospectus 
applies to purchases made by any "purchaser,'' which is defined to include the 
following: (a) an individual; (b) an individual's spouse and his or her 
children purchasing shares for his or her own account; (c) a trustee or other 
fiduciary purchasing shares for a single trust estate or single fiduciary 
account; (d) a pension, profit-sharing or other employee benefit plan 
qualified under Section 401(a) of the Code and qualified employee benefit 
plans of employers who are "affiliated persons'' of each other within the 
meaning of the 1940 Act; (e) tax-exempt organizations enumerated in Section 
501(c)(3) or (13) of the Code; and (f) a trustee or other professional 
fiduciary (including a bank, or an investment adviser registered with the SEC 
under the Investment Advisers Act of 1940, as amended) purchasing shares of 
the Fund for one or more trust estates or fiduciary accounts. Purchasers who 
wish to combine purchase orders to take advantage of volume discounts should 
contact a Smith Barney Financial Consultant.

Combined Right of Accumulation

Reduced sales charges, in accordance with the schedule in the Prospectus, 
apply to any purchase of Class A shares if the aggregate investment in Class A 
shares of the Fund and in Class A shares of other Smith Barney Mutual Funds 
that are offered with a sales charge, including the purchase being made, of 
any purchaser is $25,000 or more. The reduced sales charge is subject to 
confirmation of the shareholder's holdings through a check of appropriate 
records. The Fund reserves the right to terminate or amend the combined right 
of accumulation at any time after written notice to shareholders. For further 
information regarding the right of accumulation, shareholders should contact a 
Smith Barney Financial Consultant.

Determination of Public Offering Price

The Fund offers its shares to the public on a continuous basis. The public 
offering price for a Class A and Class Y share of the Fund is equal to the net 
asset value per share at the time of purchase, plus for Class A shares an 
initial sales charge based on the aggregate amount of the investment. The 
public offering price for a Class B and Class C share (and Class A share 
purchases, including applicable rights of accumulation, equaling or exceeding 
$500,000), is equal to the net asset value per share at the time of purchase 
and no sales charge is imposed at the time of purchase. A contingent deferred 
sales charge ("CDSC''), however, is imposed on certain redemptions of Class B 
and Class C shares, and Class A shares when purchased in amounts exceeding 
$500,000. The method of computation of the public offering price is shown in 
the Fund's financial statements, incorporated by reference in their entirety 
into this Statement of Additional Information.


REDEMPTION OF SHARES

The right of redemption may be suspended or the date of payment postponed (a) 
for any period during which the New York Stock Exchange, Inc. ("NYSE'') is 
closed (other than for customary weekend and holiday closings), (b) when 
trading in markets the Fund normally utilizes is restricted, or an emergency 
exists, as determined by the SEC, so that disposal of the Fund's investments 
or determination of net asset value is not reasonably practicable or (c) for 
such other periods as the SEC by order may permit for protection of the Fund's 
shareholders.

Distribution in Kind

If the Board of Directors of the Fund determines that it would be detrimental 
to the best interests of the remaining shareholders to make a redemption 
payment wholly in cash, the Fund may pay, in accordance with SEC rules, any 
portion of a redemption in excess of the lesser of $250,000 or 1% of the 
Fund's net assets by a distribution in kind of portfolio securities in lieu of 
cash. Securities issued as a distribution in kind may incur brokerage 
commissions when shareholders subsequently sell those securities.

Automatic Cash Withdrawal Plan

An automatic cash withdrawal plan (the "Withdrawal Plan'') is available to 
shareholders who own shares with a value of at least $10,000 and who wish to 
receive specific amounts of cash monthly or quarterly. Withdrawals of at least 
$50 may be made under the Withdrawal Plan by redeeming as many shares of the 
Fund as may be necessary to cover the stipulated withdrawal payment. Any 
applicable CDSC will not be waived on amounts withdrawn by shareholders that 
exceed 1.00% per month of the value of a shareholder's shares at the time the 
Withdrawal Plan commences. (With respect to Withdrawal Plans in effect prior 
to November 7, 1994, any applicable CDSC will be waived on amounts withdrawn 
that do not exceed 2.00% per month of the value of a shareholder's shares that 
are subject to a CDSC.) To the extent withdrawals exceed dividends, 
distributions and appreciation of a shareholder's investment in the Fund, 
there will be a reduction in the value of the shareholder's investment, and 
continued withdrawal payments will reduce the shareholder's investment and may 
ultimately exhaust it. Withdrawal payments should not be considered as income 
from investment in the Fund. Furthermore, as it generally would not be 
advantageous to a shareholder to make additional investments in the Fund at 
the same time he or she is participating in the Withdrawal Plan, purchases by 
such shareholder in amounts of less than $5,000 ordinarily will not be 
permitted.  All dividends and distributions on shares in the Withdrawal Plan 
are reinvested automatically at net asset value in additional shares of the 
Fund.

Shareholders who wish to participate in the Withdrawal Plan and who hold 
their shares in certificate form must deposit their share certificates with 
First Data as agent for Withdrawal Plan members. All other investors should 
contact a Smith Barney Financial Consultant. A shareholder who purchases 
shares directly through First Data may continue to do so and applications for 
participation in the Withdrawal Plan must be received by First Data no later 
than the eighth day of the month to be eligible for participation beginning 
with that month's withdrawal.

DISTRIBUTOR

Smith Barney serves as the Fund's distributor on a best efforts basis pursuant 
to a written agreement (the "Distribution Agreement'') which was most recently 
approved by the Fund's Board of Directors on July 16, 1997. For the fiscal 
years ended May 31, 1995, 1996 and 1997, Smith Barney received, approximately 
$51,000, $62,000 and $32,000, respectively, in sales charges from the sale of 
the Fund's Class A shares, and did not reallow any portion thereof to dealers. 
For the fiscal years ended May 31, 1995, 1996 and 1997, Smith Barney, received 
approximately $29,000, $55,000 and $79,000, respectively, representing CDSC on 
redemptions of the Fund's Class B shares.

When payment is made by the investor before settlement date, unless 
otherwise noted by the investor, the funds will be held as a free credit 
balance in the investor's brokerage account and Smith Barney may benefit from 
the temporary use of the funds. The investor may designate another use for the 
funds prior to settlement date, such as an investment in a money market fund 
(other than Smith Barney Exchange Reserve Fund) of the Smith Barney Mutual 
Funds. If the investor instructs Smith Barney to invest in a Smith Barney 
money market fund, the amount of the investment will be included as part of 
the average daily net assets of both the Fund and the money market fund, and 
affiliates of Smith Barney that serve the funds in an investment advisory or 
administrative capacity will benefit from the fact they are receiving fees 
from both such investment companies for managing these assets, computed on the 
basis of their average daily net assets. The Fund's Board of Directors has 
been advised of the benefits to Smith Barney resulting from these settlement 
procedures and will take such benefits into consideration when reviewing the 
Advisory, Administration and Distribution Agreements for continuance.

For the fiscal year ended May 31, 1997, Smith Barney incurred distribution 
expenses totaling approximately $154,293, consisting of approximately $13,846 
for advertising, $2,309 for printing and mailing of prospectuses, $88,214 for 
support services, $49,862 to Smith Barney Financial Consultants, and $62, for 
accruals for interest on the excess of Smith Barney expenses incurred in 
distribution of the Fund's shares over the sum of the distribution fees and 
CDSC received by Smith Barney from the Fund.

Distribution Arrangements

To compensate Smith Barney for the services it provides and for the expense it 
bears under the Distribution Agreement, the Fund has adopted a services and 
distribution plan (the "Plan'') pursuant to Rule 12b-1 under the 1940 Act. 
Under the Plan, the Fund pays Smith Barney a service fee, accrued daily and 
paid monthly, calculated at the annual rate of 0.15% of the value of the 
Fund's average daily net assets attributable to the Class A, Class B and Class 
C shares. In addition, the Fund pays Smith Barney a distribution fee primarily 
intended to compensate Smith Barney for its initial expense of paying 
Financial Consultants a commission upon sales of those shares. The Class B 
distribution fee is calculated at the annual rate of 0.50% of the value of the 
Fund's average net assets attributable to the shares of the Class. The Class C 
distribution fee is calculated at the annual rate of 0.55% of the value of the 
Fund's average net assets attributable to the shares of the Class.

	For the 1995, 1996 and 1997 fiscal years, Class A shares incurred 
$64,130, $65,532 and $59,503, respectively, in services fees.  For the 1995, 
1996 and 1997 fiscal years, the Class B shares incurred  $131,259, $149,271 
and $136,271, respectively, in service  and distribution fees. For the period 
from November 14, 1994 through May 31, 1995, and for the fiscal years ended 
May 31, 1996 and 1997, Class C shares incurred $645, $3,655 and $4,702 in 
services fees and distribution fees, respectively.

Under its terms, the Plan continues from year to year, provided such 
continuance is approved annually by vote of the Fund's Board of Directors, 
including a majority of the Independent Directors who have no direct or 
indirect financial interest in the operation of the Plan or in the 
Distribution Agreement. The Plan may not be amended to increase the amount of 
the service and distribution fees without shareholder approval, and all 
material amendments of the Plan also must be approved by the Directors and the 
Independent Directors in the manner described above. The Plan may be 
terminated with respect to a Class at any time, without penalty, by vote of a 
majority of the Independent Directors or by a vote of a majority of the 
outstanding voting securities of the Class (as defined in the 1940 Act). 
Pursuant to the Plan, Smith Barney will provide the Board of Directors with 
periodic reports of amounts expended under the Plan and the purpose for which 
such expenditures were made. 

VALUATION OF SHARES

Each Class' net asset value per share is calculated on each day, Monday 
through Friday, except days on which the NYSE is closed. The NYSE currently is 
scheduled to be closed on New Year's Day, Martin Luther King, Jr. Day, 
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, 
Thanksgiving and Christmas, and on the preceding Friday or subsequent Monday 
when one of these holidays falls on a Saturday or Sunday, respectively. 
Because of the differences in distribution fees and Class-specific expenses, 
the per share net asset value of each Class may differ. The following is a 
description of the procedures used by the Fund in valuing its assets.

The valuation of the Fund's assets is made by MMC after consultation with 
an independent pricing service (the "Service'') approved by the Board of 
Directors. When, in the judgment of the Service, quoted bid prices for 
investments are readily available and representative of the bid side of the 
market, these investments are valued at the mean between the quoted bid and 
asked prices. Investments for which, in the judgment of the Service, there is 
no readily obtainable market quotation (which may constitute a majority of the 
portfolio securities) are carried at fair value as determined by the Service. 
For the most part, such investments are liquid and may be readily sold. The 
Service may employ electronic data processing techniques and/or a matrix 
system to determine valuations. The procedures of the Service are reviewed 
periodically by the officers of the Fund under the general supervision and 
responsibility of the Board of Directors, which may replace any such Service 
at any time if it determines it to be in the best interest of the Fund to do 
so.

EXCHANGE PRIVILEGE

Except as noted below, shareholders of certain Smith Barney Mutual Funds may 
exchange all or part of their shares for shares of the same Class of other 
Smith Barney Mutual Funds, to the extent such shares are offered for sale in 
the shareholder's state of residence, on the basis of relative net asset value 
per share at the time of exchange as follows:

A. 	Class A shares of any fund acquired by a previous exchange of shares 
purchased with a sales charge may be exchanged for Class A shares of any 
of the other funds.

B. 	Class B shares of any fund may be exchanged without a sales charge.  
Class B shares of the Fund exchanged for Class B shares of another fund 
will be subject to the higher applicable CDSC of the two funds and, for 
purposes of calculating CDSC rates and conversion periods, will be 
deemed to have been held since the date the shares being exchanged were 
deemed to be purchased.

C.	Class Y and Class A shareholders of the Fund who wish to exchange all or 
a portion of 	their shares of the respective Class in any of the Smith 
Barney Mutual Funds listed  in the 	"Exchange Privilege" section of  the 
Fund's Prospectus may do so without the imposition 	of any charge.

Dealers other than Smith Barney must notify First Data of the investor's 
prior ownership of Class A shares of Smith Barney High Income Fund and the 
account number in order to accomplish an exchange of shares of Smith Barney 
High Income Fund under paragraph A above.

The exchange privilege enables shareholders to acquire shares of the same 
Class in a fund with different investment objectives when they believe that a 
shift between funds is an appropriate investment decision. This privilege is 
available to shareholders residing in any state in which the fund shares being 
acquired may legally be sold. Prior to any exchange, the shareholder should 
obtain and review a copy of the current prospectus of each fund into which an 
exchange is being considered. Prospectuses may be obtained from a Smith Barney 
Financial Consultant.

Upon receipt of proper instructions and all necessary supporting documents, 
shares submitted for exchange are redeemed at the then-current net asset value 
and, subject to any applicable CDSC, the proceeds are immediately invested, at 
a price as described above, in shares of the fund being acquired. Smith Barney 
reserves the right to reject any exchange request. The exchange privilege may 
be modified or terminated at any time after written notice to shareholders.


PERFORMANCE DATA

From time to time, the Fund may quote yield or total return of a Class in 
advertisements or in reports and other communications to shareholders. The 
Fund may include comparative performance information in advertising or 
marketing the Fund's shares. Such performance information may be included in 
the following industry and financial publications: Barron's, Business Week, 
CDA Investment Technologies, Inc., Changing Times, Forbes, Fortune, 
Institutional Investor, Investors Daily, Money, Morningstar Mutual Fund 
Values, The New York Times, USA Today and The Wall Street Journal. To the 
extent any advertisement or sales literature of the Fund describes the 
expenses or performance of any Class, it will also disclose such information 
for the other Classes.

Yield

A Class' 30-day yield figure described below is calculated according to a 
formula prescribed by the SEC. The formula can be expressed as follows:

YIELD =2 [(a-b +1)6-1]
						 cd

Where:	 a = dividends and interest earned during the period.
		 b = expenses accrued for the period (net of reimbursement).
		 c = the average daily number of shares outstanding during the 
period that were 	  	       entitled to receive dividends.
	 d = the maximum offering price per share on the last day of the 
period.

For the purpose of determining the interest earned (variable "a'' in the 
formula) on debt obligations that were purchased by the Fund at a discount or 
premium, the formula generally calls for amortization of the discount or 
premium. The amortization schedule will be adjusted monthly to reflect changes 
in the market values of the debt obligations.

The Fund's equivalent taxable 30-day yield for a Class of shares is 
computed by dividing that portion of the Class' 30-day yield which is tax-
exempt by one minus a stated income tax rate and adding the product to that 
portion, if any, of the Class' yield that is not tax-exempt.

The yields on municipal securities are dependent upon a variety of factors, 
including general economic and monetary conditions, conditions of the 
municipal securities market, size of a particular offering, maturity of the 
obligation offered and rating of the issue. Investors should recognize that in 
periods of declining interest rates the Fund's yield for each Class of shares 
will tend to be somewhat higher than prevailing market rates, and in periods 
of rising interest rates the Fund's yield for each Class of shares will tend 
to be somewhat lower. Also, when interest rates are falling, the inflow of net 
new money to the Fund from the continuous sale of its shares will likely be 
invested in portfolio instruments producing lower yields than the balance of 
the Fund's portfolio, thereby reducing the current yield of the Fund. In 
periods of rising interest rates, the opposite can be expected to occur.

The Fund's yield for Class A, Class B and Class C shares for the 30-day 
period ended May 31, 1997 was 4.74%, 4.42% and 4.39%, respectively.  The 
equivalent taxable yield for Class A, Class B and Class C shares for that same 
period was 8.65%, 8.07% and 8.01%, respectively, assuming the payment of 
Federal income taxes at a rate of 39.6% and Arizona taxes at a rate of 5.6%.

Average Annual Total Return

"Average annual total return'' figures are computed according to a formula 
prescribed by the SEC. The formula can be expressed as follows:

P (1+T) n = ERV



	Where:	P = a hypothetical initial payment of $1,000.
		T = average annual total return.
		n = number of years.
	       ERV = Ending Redeemable Value of a hypothetical $1,000 investment 
made at the 			       beginning of a 1-, 5- or 10-year period 
at the end of the 1-, 5- or 10-year 			       period (or 
fractional portion thereof), assuming reinvestment of all 				       
dividends and distributions.

The average annual total return for Class A shares was as follows for the 
periods indicated: 

	3.78% for the one-year period beginning June 1, 1996 through May 31, 
1997.

	6.15% per annum during the five-year period beginning June 1, 1992 
through May 31, 1997.

	7.05% per annum during the period from the Fund's commencement of 
operations on June 1, 1987 through May 31, 1997.

These Class A average annual total return figures assume that the maximum 
4.00% sales charge has been deducted from the investment at the time of 
purchase. [Had the investment advisory, sub-investment advisory and/or 
administration fees not been partially waived (and assuming that the maximum 
4.00% sales charge had not been deducted),] the Class A's average annual total 
return would have been 8.06%, 7.02% and 7.49%, respectively, for those same 
periods.


The average annual total return for Class B shares was as follows for the 
periods indicated: 

	3.03% for the one-year period beginning June 1, 1996 through May 31, 
1997.

	6.08% per annum for the period beginning November 6, 1992 through May 31, 
1997.

These average annual total return figures assume that the maximum 
applicable CDSC has been deducted from the investment. [Had the investment 
advisory and sub-investment advisory and/or administration fees not been 
partially waived and the CDSC had not been deducted,] the average annual total 
return on the Fund's Class B shares would have been 7.53% and 6.26%, 
respectively, for those same periods.  

The average annual total return for Class C shares was as follows for the 
periods indicated: 

	6.49% for the one-year period beginning June 1, 1996 through May 31, 
1997.

	9.21% per annum for the period beginning December 8, 1994 through May 31, 
1997.

These average annual total return figures assume that the maximum applicable 
CDSC has been deducted from the investment.  If the CDSC had not been 
deducted, the average annual total return on the Fund's Class C shares would 
have been 7.49% and 9.21%, respectively for those same periods.
Performance will vary from time to time depending upon market conditions, 
the composition of the Fund's portfolio and operating expenses and the 
expenses exclusively attributable to the Class.  Consequently, any given 
performance quotation should not be considered representative of the Class' 
performance for any specified period in the future.  Because the performance 
will vary, it may not provide a basis for comparing an investment in the Class 
with certain bank deposits or other investments that pay a fixed yield for a 
stated period of time.  Investors comparing a  Class' performance with that of 
other mutual funds should give consideration to the quality and maturity of 
the respective investment companies' portfolio securities.  It is important to 
note that the total return figures set forth above are based on historical 
earnings and are not intended to indicate future performance. Each Class' net 
investment income changes in response to fluctuation in interest rates and the 
expenses of the Fund.

TAXES

The following is a summary of selected Federal income tax considerations that 
may affect the Fund and its shareholders. The summary is not intended as a 
substitute for individual tax advice and investors are urged to consult their 
own tax advisors as to the tax consequences of an investment in the Fund.

As described above and in the Prospectus, the Fund is designed to provide 
investors with current income which is excluded from gross income for Federal 
income tax purposes and exempt from Arizona personal income taxes. The Fund is 
not intended to constitute a balanced investment program and is not designed 
for investors seeking capital gains or maximum tax-exempt income irrespective 
of fluctuations in principal. Investment in the Fund would not be suitable for 
tax-exempt institutions, qualified retirement plans, H.R. 10 plans and 
individual retirement accounts since such investors would not gain any 
additional tax benefit from the receipt of tax-exempt income.

The Fund has qualified and intends to continue to qualify each year as a 
"regulated investment company'' under the Code. Provided that the Fund (a) 
qualifies as a regulated investment company and (b) distributes at least 90% 
of its taxable net investment income and net realized short-term capital 
gains, and 90% of its tax-exempt interest income (reduced by certain 
expenses), the Fund will not be liable for Federal and state income taxes to 
the extent its taxable net investment income and its net realized short-term 
and long-term capital gains, if any, are distributed to shareholders. Any such 
taxes paid by the Fund would reduce the amount of income and gains available 
for distribution to shareholders.

Because the Fund will distribute exempt-interest dividends, interest on 
indebtedness incurred by a shareholder to purchase or carry Fund shares is not 
deductible for Federal income and Arizona personal income tax purposes. If a 
shareholder receives exempt-interest dividends with respect to any share and 
if the share is held by the shareholder for six months or less, then, for 
Federal income tax purposes, any loss on the sale or exchange of such share, 
to the extent of the exempt-interest dividend, may be disallowed. In addition, 
the Code may require a shareholder, if he or she receives exempt-interest 
dividends, to treat as taxable income, a portion of certain otherwise non-
taxable social security and railroad retirement benefit payments. Furthermore, 
that portion of any dividends paid by the Fund which represent income derived 
from private activity bonds held by the Fund may not retain its Federal tax-
exempt status in the hands of a shareholder who is a "substantial user'' of a 
facility financed by such bonds, or a "related person'' thereof. Moreover, as 
noted in the Fund's Prospectus, some or all of the Fund's dividends and 
distributions may be a specific tax preference item, or a component of an 
adjustment item, for purposes of the Federal individual and corporate 
alternative minimum taxes Shareholders should consult their own tax advisors 
as to whether they are (a) "substantial users'' with respect to a facility or 
related to such users within the meaning of the Code and (b) subject to a 
Federal alternative minimum tax, the Federal "branch profits'' tax or the 
Federal "excess net passive income'' tax. 

As described above and in the Prospectus, the Fund may invest in municipal 
bond index and interest rate futures contracts and options on these futures 
contracts. The Fund anticipates that these investment activities would not 
prevent the Fund from qualifying as a regulated investment company. As a 
general rule, these investment activities will increase or decrease the amount 
of long-term and short-term capital gains or losses realized by the Fund and, 
accordingly, would affect the amount of capital gains distributed to the 
Fund's shareholders.

For Federal income tax purposes, gain or loss on the futures contracts and 
options described above (collectively referred to as "section 1256 
contracts'') is taxed pursuant to a special "mark-to-market'' system. Under 
the mark-to-market system, these instruments are treated as if sold at the 
Fund's fiscal year end for their fair market value. As a result, the Fund will 
be recognizing gains or losses before they are actually realized. As a general 
rule, gain or loss on section 1256 contracts generally is treated as 60% long-
term capital gain or loss and 40% short-term capital gain or loss, and, 
accordingly, the mark-to-market system generally will affect the amount of 
capital gains or losses taxable to the Fund and the amount of distributions to 
a shareholder. Moreover, if the Fund invests in both section 1256 contracts 
and offsetting positions in those contracts, which together constitute a 
straddle, then the Fund may be required to defer certain realized losses. The 
Fund expects that its activities with respect to section 1256 contracts and 
offsetting positions in those contracts will not cause it to be treated as 
recognizing a materially greater amount of capital gains than actually 
realized and will permit it to use substantially all of the losses of the Fund 
for the fiscal years in which the losses actually occur. 

While the Fund does not expect to realize a significant amount of net long-
term capital gains, any such gains will be distributed annually as described 
in the Prospectus. Such distributions ("capital gain dividends''), if any, 
will be taxable to shareholders as long-term capital gains, regardless of how 
long they have held Fund shares, and will be designated as capital gain 
dividends in a written notice mailed to shareholders after the close of the 
Fund's taxable year, that will separately identify the portion of capital 
gains dividends eligible for the reduced maximum 20% capital gains tax rate 
(generally gains on assets other than section 1256 contracts held by the Fund 
for more than 18 months). If a shareholder receives a capital gain dividend 
with respect to any share and if such share has been held by the shareholder 
for six months or less, then any loss (to the extent not disallowed pursuant 
to the other six month rule described above relating to exempt-interest 
dividends) on the sale or exchange of such share will be treated as a long-
term capital loss to the extent of the capital gain dividend.

If a shareholder incurs a sales charge when acquiring shares of the Fund, 
disposes of those shares within 90 days and acquires shares in a mutual fund 
for which the otherwise applicable sales charge is reduced by reason of a 
reinvestment right (that is, exchange privilege), the original sales charge 
will not be taken into account when computing gain or loss on the original 
shares to the extent the subsequent sales charge is reduced. The portion of 
the original sales charge that does not increase the shareholder's tax basis 
in the original shares would be treated as incurred with respect to the second 
acquisition and, as a general rule, will increase the shareholder's tax basis 
in the newly acquired shares. Furthermore, the same rule also applies to a 
disposition of the newly acquired shares made within 90 days of the second 
acquisition. This provision prevents a shareholder from immediately deducting 
the sales charge by shifting his or her investment in a family of mutual 
funds. 

Each shareholder will receive after the close of the calendar year an 
annual statement as to the Federal income tax and Arizona personal income tax 
status of his or her dividends and distributions from the Fund for the prior 
calendar year. These statements also will designate the amount of exempt-
interest dividends that is a specific preference item for purposes of the 
Federal individual and corporate alternative minimum taxes. Each shareholder 
also will receive, if appropriate, various written notices after the close of 
the Fund's prior taxable year as to the Federal income tax status of his or 
her dividends and distributions which were received from the Fund during the 
Fund's prior taxable year. Shareholders should consult their tax advisors as 
to any other state and local taxes that may apply to these dividends and 
distributions. The dollar amounts of dividends excluded or exempt from Federal 
income taxation or Arizona personal income taxation and the dollar amount of 
dividends subject to Federal income taxation or Arizona personal income 
taxation, if any, will vary for each shareholder depending upon the size and 
duration of each shareholder's investment in the Fund. In the event the Fund 
earns taxable net investment income, it intends to designate as taxable 
dividends the same percentage of each day's dividend as its actual taxable net 
investment income bears to its total net investment income earned for that 
year.

Investors considering buying shares of the Fund just prior to a record date 
for a capital gain distribution should be aware that, regardless of whether 
the price of the Fund shares to be purchased reflects the amount of the 
forthcoming distribution payment, any such payment will be a taxable 
distribution payment.

If a shareholder fails to furnish the Fund with a correct taxpayer 
identification number, fails to report fully dividend or interest income, or 
fails to certify to the Fund that he or she has provided a correct taxpayer 
identification number and that he or she is not subject to "backup 
withholding,'' then the shareholder may be subject to a 31% "backup 
withholding'' tax with respect to (a) taxable dividends and distributions, if 
any, and (b) proceeds of any redemption of Fund shares. An individual's 
taxpayer identification number is his or her social security number. The 
"backup withholding'' tax is not an additional tax and may be credited against 
a shareholder's Federal income tax liability.

Income distributions, including interest income and gains realized by the 
Fund upon disposition of investments paid from a "qualified investment fund'' 
are exempt from the Arizona personal income tax to the extent attributable to 
Arizona Municipal Securities or to obligations that are free from state or 
local taxation under Arizona or Federal laws ("Tax-Exempt Obligations''). A 
"qualified investment fund'' is any investment or trust company, or series of 
such investment company or trust registered with the SEC, which for the 
calendar year in which a distribution is paid, has no investments other than 
interest-bearing obligations, obligations issued at a discount, financial 
options, futures, forward contracts or other similar financial instruments 
related to interest-bearing obligations, obligations issued at a discount or 
related bond indices and cash and cash items, including receivables, and which 
has, at the close of each quarter of the taxable year, at least 80% of the 
aggregate principal amount of all of its investments, excluding financial 
options, futures, forward contracts, or other similar financial instruments 
related to interest-bearing obligations, obligations issued at a discount or 
bond indices related thereto as authorized under the Code, cash and cash 
items, such as receivables, invested in Arizona Municipal Securities or in 
Tax-Exempt Obligations. Furthermore, gains resulting from the redemption or 
sale of shares of the Fund to the extent attributable to interest or gain from 
obligations issued by Arizona or its local government entities or obligations 
which are free from state or local taxes under Arizona or Federal law, are 
exempt from the Arizona personal income tax.

The Arizona personal income tax is not applicable to corporations. For all 
corporations subject to the Arizona Corporation Business Tax, dividends and 
distributions from a "qualified investment fund'' are included in the net 
income tax base for purposes of computing the Corporation Business Tax. 
Furthermore, any gain upon the redemption or sale of Fund shares by a 
corporate shareholder is also included in the net income tax base for purposes 
of computing the Corporation Business Tax.

The foregoing is only a summary of certain tax considerations generally 
affecting the Fund and its shareholders, and is not intended as a substitute 
for careful tax planning. Shareholders are urged to consult their tax advisors 
with specific reference to their own tax situations.


ADDITIONAL INFORMATION

The Fund was incorporated under the laws of the State of Maryland on May 4, 
1987 and commenced operations on June 1, 1987 under the name Hutton Municipal 
Series Inc. On December 29, 1988, March 31, 1992,  July 30, 1993 and October 
14, 1994, the Fund changed its name to SLH Municipals Series Fund Inc., 
Shearson Lehman Brothers Arizona Municipals Fund Inc., Smith Barney Shearson 
Arizona Municipals Fund Inc. and Smith Barney Arizona Municipals Fund Inc., 
respectively.

PNC, located at Chestnut and 17th Streets, Philadelphia, Pennsylvania 
19103, serves as the custodian of the Fund. Under the custody agreement, PNC 
holds the Fund's portfolio securities and keeps all necessary accounts and 
records. For its services, PNC receives a monthly fee based upon the month-end 
market value of securities held in custody and also receives securities 
transaction charges. The assets of the Fund are held under bank custodianship 
in compliance with the 1940 Act.   								
								
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves 
as the Fund's transfer agent. Under the transfer agency agreement, First Data 
maintains the shareholder account records for the Fund, handles certain 
communications between shareholders and the Fund and distributes dividends and 
distributions payable by the Fund. For these services, First Data receives a 
monthly fee computed on the basis of assets of the Fund during the month and 
is reimbursed for out-of-pocket expenses.


FINANCIAL STATEMENTS

The Fund's Annual Report for the fiscal year ended May 31, 1997, accompanies 
this Statement of Additional Information and is incorporated herein by 
reference in its entirety.

APPENDIX

Description of S&P and Moody's ratings:

S&P Ratings for Municipal Bonds

S&P's Municipal Bond ratings cover obligations of states and political 
subdivisions. Ratings are assigned to general obligation and revenue bonds. 
General obligation bonds are usually secured by all resources available to the 
municipality and the factors outlined in the rating definitions below are 
weighed in determining the rating. Because revenue bonds in general are 
payable from specifically pledged revenues, the essential element in the 
security for a revenue bond is the quantity and quality of the pledged 
revenues available to pay debt service.

Although an appraisal of most of the same factors that bear on the quality of 
general obligation bond credit is usually appropriate in the rating analysis 
of a revenue bond, other factors are important, including particularly the 
competitive position of the municipal enterprise under review and the basic 
security covenants. Although a rating reflects S&P's judgment as to the 
issuer's capacity for the timely payment of debt service, in certain instances 
it may also reflect a mechanism or procedure for an assured and prompt cure of 
a default, should one occur, i.e., an insurance program, Federal or state 
guarantee or the automatic withholding and use of state aid to pay the 
defaulted debt service.

AAA

Prime -- These are obligations of the highest quality. They have the strongest 
capacity for timely payment of debt service.

General Obligation Bonds -- In a period of economic stress, the issuers will 
suffer the smallest declines in income and will be least susceptible to 
autonomous decline. Debt burden is moderate. A strong revenue structure 
appears more than adequate to meet future expenditure requirements. Quality of 
management appears superior.

Revenue Bonds -- Debt service coverage has been, and is expected to remain, 
substantial. Stability of the pledged revenues is also exceptionally strong, 
due to the competitive position of the municipal enterprise or to the nature 
of the revenues. Basic security provisions (including rate covenant, earnings 
test for issuance of additional bonds, and debt service reserve requirements) 
are rigorous. There is evidence of superior management.

AA

High Grade -- The investment characteristics of general obligation and revenue 
bonds in this group are only slightly less marked than those of the prime 
quality issues. Bonds rated AA have the second strongest capacity for payment 
of debt service.

A

Good Grade -- Principal and interest payments on bonds in this category are 
regarded as safe. This rating describes the third strongest capacity for 
payment of debt service. It differs from the two higher ratings because:

General Obligation Bonds -- There is some weakness, either in the local 
economic base, in debt burden, in the balance between revenues and 
expenditures, or in quality of management. Under certain adverse 
circumstances, any one such weakness might impair the ability of the issuer to 
meet debt obligations at some future date.

Revenue Bonds -- Debt service coverage is good, but not exceptional. Stability 
of the pledged revenues could show some variations because of increased 
competition or economic influences on revenues. Basic security provisions, 
while satisfactory, are less stringent. Management performance appears 
adequate.

BBB

Medium Grade -- Of the investment grade ratings, this is the lowest.

General Obligation Bonds -- Under certain adverse conditions, several of the 
above factors could contribute to a lesser capacity for payment of debt 
service. The difference between "A'' and "BBB'' ratings is that the latter 
shows more than one fundamental weakness, or one very substantial fundamental 
weakness, whereas the former shows only one deficiency among the factors 
considered.

Revenue Bonds -- Debt coverage is only fair. Stability of the pledged revenues 
could show substantial variations, with the revenue flow possibly being 
subject to erosion over time. Basic security provisions are no more than 
adequate. Management performance could be stronger.

BB, B, CCC and CC

Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately 
speculative with respect to capacity to pay interest and repay principal in 
accordance with the terms of the obligation. BB indicates the lowest degree of 
speculation and CC the highest degree of speculation. While such bonds will 
likely have some quality and protective characteristics, these are outweighed 
by large uncertainties or major risk exposures to adverse conditions.

C

The rating C is reserved for income bonds on which no interest is being paid.

D

Bonds rated D are in default, and payment of interest and/or repayment of 
principal is in arrears.

S&P's letter ratings may be modified by the addition of a plus or a minus 
sign, which is used to show relative standing within the major rating 
categories, except in the AAA-Prime Grade category.

S&P Ratings for Municipal Notes

Municipal notes with maturities of three years or less are usually given note 
ratings (designated SP-1, -2 or -3) by S&P to distinguish more clearly the 
credit quality of notes as compared to bonds. Notes rated SP-1 have a very 
strong or strong capacity to pay principal and interest. Those issues 
determined to possess overwhelming safety characteristics are given the 
designation of SP-1+. Notes rated SP-2 have a satisfactory capacity to pay 
principal and interest.

Moody's Ratings for Municipal Bonds

Aaa

Bonds that are Aaa are judged to be of the best quality. They carry the 
smallest degree of investment risk and are generally referred to as "gilt 
edge." 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 that are rated Aa are judged to be of high quality by all standards. 
Together with the Aaa group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of 
protection may not be as large as in Aaa securities or fluctuation of 
protective elements may be of greater amplitude or there may be other elements 
present which make the long-term risks appear somewhat larger than in Aaa 
securities.

A

Bonds that 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 that 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.

Ba

Bonds that are rated Ba are judged to have speculative elements; their future 
cannot be considered as well assured. Often the protection of interest and 
principal payments may be very moderate and thereby not well safeguarded 
during both good and bad times over the future. Uncertainty of position 
characterizes bonds in this class.

B

Bonds that are rated B generally lack characteristics of the desirable 
investment. Assurance of interest and principal payments or of maintenance of 
other terms of the contract over any long period of time may be small.

Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating 
classification from Aa through B. 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.

Caa

Bonds that are rated Caa are of poor standing. These issues may be in default 
or present elements of danger may exist with respect to principal or interest.

Ca

Bonds that are rated Ca represent obligations that are speculative in a high 
degree. These issues are often in default or have other marked short comings.

C

Bonds that are rated C are the lowest rated class of bonds, and issues so 
rated can be regarded as having extremely poor prospects of ever attaining any 
real investment standing.

Moody's Ratings for Municipal Notes

Moody's ratings for state and municipal notes and other short-term loans are 
designated Moody's Investment Grade ("MIG") and for variable rate demand 
obligations are designated Variable Moody's Investment Grade ("VMIG"). This 
distinction is in recognition of the differences between short-term credit 
risk and long-term credit risk. Loans bearing the designation MIG 1 or VMIG 1 
are of the best quality, enjoying strong protection by established cash flows 
of funds for their servicing or from established and broad-based access to the 
market for refinancing, or both. Loans bearing the designation MIG 2 or VMIG 2 
are of high quality, with ample margins of protection although not as large as 
the preceding group. Loans bearing the designation MIG 3 or VMIG 3 are of 
favorable quality, with all security elements accounted for, but lacking the 
undeniable strength of the preceding grades. Liquidity and cash flow may be 
tight and market access for refinancing, in particular, is likely to be less 
well established.

Description of S&P A-1+ and A-1 Commercial Paper Rating

The rating A-1+ is the highest, and A-1 the second highest, commercial paper 
rating assigned by S&P. Paper rated A-1+ must have either the direct credit 
support of an issuer or guarantor that possesses excellent long-term operating 
and financial strengths combined with strong liquidity characteristics 
(typically, such issuers or guarantors would display credit quality 
characteristics which would warrant a senior bond rating of AA- or higher), or 
the direct credit support of an issuer or guarantor that possesses above 
average long-term fundamental operating and financing capabilities combined 
with ongoing excellent liquidity characteristics. Paper rated A-1 by S&P has 
the following characteristics: liquidity ratios are adequate to meet cash 
requirements; long-term senior debt is rated A or better; the issuer has 
access to at least two additional channels of borrowing; basic earnings and 
cash flow have an upward trend with allowance made for unusual circumstances; 
typically, the issuer's industry is well established and the issuer has a 
strong position within the industry; and the reliability and quality of 
management are unquestioned.

Description of Moody's Prime-1 Commercial Paper Rating

The rating Prime-1 is the highest commercial paper rating assigned by Moody's. 
Among the factors considered by Moody's in assigning ratings are the 
following: (a) evaluation of the management of the issuer; (b) economic 
evaluation of the issuer's industry or industries and an appraisal of 
speculative-type risks which may be inherent in certain areas; (c) evaluation 
of the issuer's products in relation to competition and customer acceptance; 
(d) liquidity; (e) amount and quality of long-term debt; (f) trend of earnings 
over a period of ten years; (g) financial strength of a parent company and the 
relationships which exist with the issuer; and (h) recognition by the 
management of obligations which may be present or may arise as a result of 
public interest questions and preparations to meet such obligations.

 


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