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

	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. 

11. Purchase securities of other investment companies, except in 
connection with a merger, consolidation, acquisition or 
reorganization. 
    
	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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