MUNIYIELD ARIZONA FUND II INC, N-14, 1994-10-06

MUNIYIELD ARIZONA FUND II INC
N-14, 1994-10-06

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<PAGE>
As filed with the Securities and Exchange Commission on October 6, 1994
Securities Act File No. 33-
Investment Company Act File No. 811-7083

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-14
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933

/ /Pre-Effective Amendment No. / /Post-Effective Amendment No.
(Check appropriate box or boxes)

--------------------------------------------
MUNIYIELD ARIZONA FUND II, INC.
(Exact Name of Registrant as Specified in Charter)

--------------------------------------------
(609) 282-2000
(Area Code and Telephone Number)

-----------------------
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices:
Number, Street, City, State, Zip Code)

-----------------------
Arthur Zeikel
MuniYield Arizona Fund II, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)

-----------------------
Copies to:
Frank P. Bruno, Esq. Mark B. Goldfus, Esq.
Brown & Wood Merrill Lynch Asset Management, L.P.
One World Trade Center 800 Scudders Mill Road
New York, NY 10048-0557 Plainsboro, NJ 08543-9011

-----------------------
Approximate Date of Proposed Public Offering: As soon as practicable after
the Registration Statement becomes effective under the Securities Act of
1933.

-----------------------
<TABLE>

CALCULATION OF THE REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933:

Title of Securities Amount Being Proposed Maximum Proposed Maximum Amount of
Being Registered Registered(1) Offering Price Per Aggregate Offering Registration Fee
Unit(1)

<S> <C> <C> <C> <C>
Common Stock ($.10) par value 5,464,430 $ 12.37 $67,594,999 $13,519

Auction Market Preferred Stock, 694 $25,000(2) $17,350,000 $ 3,470
Series B

</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee.
(2) Represents the liquidation preference of a share of preferred stock
after the reorganization.

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.

<PAGE>

MUNIYIELD ARIZONA FUND II, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
--------------------------------------------------------

Form N-14 Item No.
- ------------------

Proxy Statement and
PART A Prospectus Caption
- ------ ------------------------

Item 1. Beginning of Registration Registration Statement
Statement and Outside Cover page; Prospectus
Front Cover Page of Cover Page
Prospectus

Item 2. Beginning and Outside Table of Contents
Back Cover Page of
Prospectus

Item 3. Synopsis Information and Summary; Risk Factors
Risk Factors and Special
Considerations

Item 4. Information About the Summary; The
Transaction Reorganization

Item 5. Information About the Prospectus Cover Page;
Registrant Summary; Comparison of
the Funds; Additional
Information

Item 6. Information About the Prospectus Cover Page;
Company Being Acquired Summary; Comparison of
the Funds; Additional
Information

Item 7. Voting Information Notice of Special
Meetings of
Stockholders;
Introduction; Summary;
Comparison of the
Funds; Information
Concerning the Special
Meetings; Additional
Information

Item 8. Interest of Certain Not Applicable
Persons and Experts

Item 9. Additional Information Not Applicable
Required for Reoffering
by Persons Deemed to be
Underwriters

Proxy Statement and
PART B Prospectus Caption
- ------ ----------------------

Item 10. Cover Page Not Applicable

Item 11. Table of Contents Not Applicable

Item 12. Additional Information Comparison of the Funds
About the Registrant

Item 13. Additional Information Comparison of the Funds
About the Company Being
Acquired

Item 14. Financial Statements Financial Statements

PART C
- ------

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.

<PAGE>
(Proxy Card Front) COMMON STOCK

MUNIYIELD ARIZONA FUND, INC.
BOX 9011
PRINCETON, NEW JERSEY 08543-9011

P R O X Y
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn
and Mark B. Goldfus as proxies, each with the power to appoint his
substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse hereof, all of the shares of Common Stock
of MuniYield Arizona Fund, Inc. (the "Fund") held of record by the
undersigned on October 21, 1994 at a special meeting of
stockholders of the Fund to be held on December 22, 1994, or any
adjournment thereof.

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
HEREIN DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2 AND 3.

(Continued and to be signed on the reverse side)

(Proxy Card Reverse)

1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield Arizona Fund II, Inc.
FOR / / AGAINST / / ABSTAIN / /

2. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:

FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to the for all nominees
contrary below) / / listed below / /

(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)

Herbert I. London, Robert R. Martin, Andre F. Perold, Arthur Zeikel

3. To consider and act upon a proposal to ratify the selection of Deloitte
& Touche LLP as the independent auditors of the Fund to serve for the
current fiscal year.
FOR / / AGAINST / / ABSTAIN / /

4. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.

Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should sign.
When signing as attorney or as executor,
administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in
full corporate name by president or other authorized
officer. If a partnership, please sign in
partnership name by authorized persons.

Dated: _________________________, 1994

X ____________________________________
Signature

X ____________________________________
Signature, if held jointly

PLEASE MARK BOXES OR (X) IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.

<PAGE>
(Proxy Card Front) AUCTION MARKET
PREFERRED STOCK
MUNIYIELD ARIZONA FUND, INC.
BOX 9011
PRINCETON, NEW JERSEY 08543-9011

P R O X Y
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn
and Mark B. Goldfus as proxies, each with the power to appoint his
substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse hereof, all of the shares of Auction
Market Preferred Stock of MuniYield Arizona Fund, Inc. (the "Fund")
held of record by the undersigned on October 21, 1994 at a special
meeting of stockholders of the Fund to be held on December 22,
1994, or any adjournment thereof.

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
HEREIN DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2 AND 3.

(Continued and to be signed on the reverse side)

(Proxy Card Reverse)

1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield Arizona Fund II, Inc.
FOR / / AGAINST / / ABSTAIN / /

2. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:

FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to the for all nominees
contrary below) / / listed below / /

(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)

Kenneth S. Axelson, Herbert I. London, Robert R. Martin, Joseph L. May,
Andre F. Perold, Arthur Zeikel

3. To consider and act upon a proposal to ratify the selection of Deloitte
& Touche LLP as the independent auditors of the Fund to serve for the
current fiscal year.
FOR / / AGAINST / / ABSTAIN / /

4. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.

Dated: _________________________, 1994

X ____________________________________
Signature

X ____________________________________
Signature, if held jointly

PLEASE MARK BOXES OR (X) IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.

<PAGE>
(Proxy Card Front) COMMON STOCK

MUNIYIELD ARIZONA FUND II, INC.
BOX 9011
PRINCETON, NEW JERSEY 08543-9011

P R O X Y
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn
and Mark B. Goldfus as proxies, each with the power to appoint his
substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse hereof, all of the shares of Common Stock
of MuniYield Arizona Fund II, Inc. (the "Fund") held of record by
the undersigned on October 21, 1994 at a special meeting of
stockholders of the Fund to be held on December 22, 1994, or any
adjournment thereof.

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
HEREIN DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2 AND 3.

(Continued and to be signed on the reverse side)

(Proxy Card Reverse)

1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield Arizona Fund, Inc.
FOR / / AGAINST / / ABSTAIN / /

2. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:

FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to the for all nominees
contrary below) / / listed below / /

(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)

Herbert I. London, Robert R. Martin, Andre F. Perold, Arthur Zeikel

3. To consider and act upon a proposal to ratify the selection of Deloitte
& Touche LLP as the independent auditors of the Fund to serve for the
current fiscal year.
FOR / / AGAINST / / ABSTAIN / /

4. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.

Dated: _________________________, 1994

X ____________________________________
Signature

X ____________________________________
Signature, if held jointly

PLEASE MARK BOXES OR (X) IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.

<PAGE>
(Proxy Card Front) AUCTION MARKET
PREFERRED STOCK
MUNIYIELD ARIZONA FUND II, INC.
BOX 9011
PRINCETON, NEW JERSEY 08543-9011

P R O X Y
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn
and Mark B. Goldfus as proxies, each with the power to appoint his
substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse hereof, all of the shares of Auction
Market Preferred Stock, Series A, of MuniYield Arizona Fund II,
Inc. (the "Fund") held of record by the undersigned on October 21,
1994 at a special meeting of stockholders of the Fund to be held on
December 22, 1994, or any adjournment thereof.

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
HEREIN DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2 AND 3.

(Continued and to be signed on the reverse side)

(Proxy Card Reverse)

1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield Arizona Fund, Inc.
FOR / / AGAINST / / ABSTAIN / /

2. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:

FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to the for all nominees
contrary below) / / listed below / /

(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)

Kenneth S. Axelson, Herbert I. London, Robert R. Martin, Joseph L. May,
Andre F. Perold, Arthur Zeikel

3. To consider and act upon a proposal to ratify the selection of Deloitte
& Touche LLP as the independent auditors of the Fund to serve for the
current fiscal year.
FOR / / AGAINST / / ABSTAIN / /

4. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.

Dated: _________________________, 1994

X ____________________________________
Signature

X ____________________________________
Signature, if held jointly

PLEASE MARK BOXES OR (X) IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.

<PAGE>
MUNIYIELD ARIZONA FUND, INC.
MUNIYIELD ARIZONA FUND II, INC.
BOX 9011
PRINCETON, NEW JERSEY 08543-9011

NOTICE OF SPECIAL MEETINGS OF STOCKHOLDERS
TO BE HELD ON DECEMBER 22, 1994

TO THE STOCKHOLDERS OF
MUNIYIELD ARIZONA FUND, INC.
MUNIYIELD ARIZONA FUND II, INC.:

NOTICE IS HEREBY GIVEN that special meetings of stockholders (the
"Meetings") of MuniYield Arizona Fund, Inc. ("Arizona I") and MuniYield
Arizona Fund II, Inc. ("Arizona II") will be held at the offices of Merrill
Lynch Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey
on (Thursday), December 22, 1994 at (9:00) A.M., New York time (for Arizona I)
and (9:30) A.M., New York time (for Arizona II) for the following purposes:

(1) To approve or disapprove an Agreement and Plan of
Reorganization (the "Agreement and Plan of Reorganization")
contemplating the acquisition of substantially all of the assets of
Arizona I by Arizona II, and the assumption of substantially all of
the liabilities of Arizona I by Arizona II, in exchange solely for
an equal aggregate value of shares of common stock of Arizona II
("Arizona II Common Stock") and shares of a newly-created series of
Auction Market Preferred Stock of Arizona II ("Arizona II Series B
AMPS") and a distribution of such Arizona II Common Stock to
holders of common stock of Arizona I and such Arizona II Series B
AMPS to the holders of Auction Market Preferred Stock of Arizona I
in liquidation of Arizona I. A vote in favor of this proposal also
will constitute a vote in favor of a liquidation and dissolution of
Arizona I and a termination of its registration under the
Investment Company Act of 1940;

(2) To elect a Board of Directors of each Fund to serve
for the ensuing year;

(3) To consider and act upon a proposal to ratify the
selection of Deloitte & Touche LLP to serve as independent auditors
of each Fund for its current fiscal year; and

(4) To transact such other business as properly may come
before the Meetings or any adjournment thereof.

A complete list of the stockholders of Arizona I or Arizona II, as
the case may be, entitled to vote at the Meetings will be available and open
to the examination of any stockholder of Arizona I or Arizona II,
respectively, for any purpose germane to the Meetings during ordinary
business hours from and after (October __), 1994, at the offices of Arizona
II, 800 Scudders Mill Road, Plainsboro, New Jersey.

You are cordially invited to attend the Meetings. Stockholders who
do not expect to attend the Meetings in person are requested to complete,
date and sign the enclosed form of proxy and return it promptly in the
envelope provided for that purpose. The enclosed proxy is being solicited on
behalf of the Boards of Directors of Arizona I and Arizona II.

By Order of the Boards of Directors

MARK B. GOLDFUS
Secretary

Plainsboro, New Jersey
Dated: October __, 1994

<PAGE>

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This Proxy Statement and Prospectus shall not constitute
an offer to sell or the solicitation of an offer to buy nor shall there be
any sale of these securities in any State in which such offer, solicitation
or sale would be unlawful prior to registration or qualification under the
securities laws of any such State.

SUBJECT TO COMPLETION
PRELIMINARY PROXY STATEMENT AND PROSPECTUS DATED OCTOBER 6, 1994

PROXY STATEMENT AND PROSPECTUS

MUNIYIELD ARIZONA FUND, INC.
MUNIYIELD ARIZONA FUND II, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(609) 282-2000

SPECIAL MEETINGS OF STOCKHOLDERS
DECEMBER 22, 1994

This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Boards of Directors of MuniYield
Arizona Fund, Inc., a Maryland corporation ("Arizona I"), and MuniYield
Arizona Fund II, Inc., a Maryland corporation ("Arizona II"), for use at
Special Meetings of Stockholders (the "Meetings") called to approve or
disapprove the proposed reorganization whereby (i) Arizona II will acquire
substantially all of the assets, and will assume substantially all of the
liabilities, of Arizona I, in exchange solely for an equal aggregate value of
newly-issued shares of Common Stock, with a par value of $.10 per share, of
Arizona II ("Arizona II Common Stock") and shares of a newly-created series
of Auction Market Preferred Stock ("AMPS") of Arizona II, with a par value of
$.10 per share and a liquidation preference of $25,000 per share plus an
amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) ("Arizona II Series B AMPS") to be issued by Arizona II;
(ii) the name of the surviving fund will be changed to "MuniYield Arizona
Fund, Inc."; and (iii) Arizona I will be deregistered and dissolved
(collectively, the "Reorganization"). Arizona I and Arizona II sometimes are
referred to herein collectively as the "Funds" and individually as a "Fund",
each as applicable and each as the context requires. This Proxy Statement
and Prospectus also is being furnished in connection with the election of a
Board of Directors of each Fund and the ratification of the selection of
independent auditors for each Fund.

This Proxy Statement and Prospectus serves as a prospectus of Arizona II
under the Securities Act of 1933, as amended (the "Securities Act"), in
connection with the issuance of Arizona II Common Stock and Arizona II Series
B AMPS in the Reorganization.

The aggregate net asset value of the Arizona II Common Stock to be
issued to the holders of shares of Common Stock, with a par value of $.10 per
share, of Arizona I ("Arizona I Common Stock") will equal the aggregate net
asset value of the shares of Arizona I Common Stock on the date of the
Reorganization. Similarly, it is intended that the aggregate liquidation
preference of the Arizona II Series B AMPS to be issued to the holders of
shares of AMPS of Arizona I, with a par value of $.05 per share and a
liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared)
("Arizona I AMPS") will equal the aggregate liquidation preference of the
Arizona I AMPS on the date of the Reorganization. Immediately upon the
receipt by Arizona II of Arizona I's assets and the assumption by Arizona II
of Arizona I's liabilities, Arizona I will be liquidated and Arizona II
Common Stock and Arizona II Series B AMPS will be distributed to Arizona I's
stockholders. Thereafter, Arizona I will terminate its registration under
the Investment Company Act of 1940, as amended (the "Investment Company
Act"), and will liquidate and dissolve in accordance with the laws of the
State of Maryland.

Both Arizona I and Arizona II are non-diversified, leveraged, closed-end
management investment companies with virtually identical investment
objectives. Both Arizona I and Arizona II seek to provide stockholders with
as high a level of current income exempt from Federal and Arizona income
taxes as is consistent with their respective investment policies and prudent
investment management. Arizona I and Arizona II seek to achieve their
respective investment objectives by investing primarily in a portfolio of
long-term, investment grade municipal obligations the interest on which, in
the opinion of bond counsel to the issuer, is exempt from Federal and Arizona
income taxes ("Arizona Municipal Bonds"). There can be no assurance that
after the Reorganization the surviving fund will achieve the investment
objective of either Arizona I or Arizona II.

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

This Proxy Statement and Prospectus sets forth concisely the information
about Arizona I and Arizona II that stockholders of Arizona I and Arizona II
should know before considering the Reorganization and should be retained for
future reference. Arizona I and Arizona II have authorized the solicitation
of proxies in connection with the Reorganization solely on the basis of this
Proxy Statement and Prospectus and the accompanying documents.

<PAGE>

Arizona I Common Stock and Arizona II Common Stock are listed on the
American Stock Exchange (the "AMEX") under the symbols "MZA" and "MZT",
respectively. Subsequent to the Reorganization, shares of Common Stock of
MuniYield Arizona Fund, Inc. will be listed on the AMEX under the symbol
("MZT"). Reports, proxy materials and other information concerning either
Fund may be inspected at the offices of the AMEX, 86 Trinity Place, New York,
New York 10006.

The address of the principal executive offices of both Arizona I and
Arizona II is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and the
telephone number is (609) 282-2000.

THE DATE OF THIS PROXY STATEMENT AND PROSPECTUS IS ____________, 1994.

2
<PAGE>

TABLE OF CONTENTS

Page
----
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

AGREEMENT AND PLAN OF REORGANIZATION
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RISK FACTORS AND SPECIAL CONSIDERATIONS . . . . . . . . . . . . . .
COMPARISON OF THE FUNDS . . . . . . . . . . . . . . . . . . . . . .
THE REORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . .

ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . .

SELECTION OF INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . .

INFORMATION CONCERNING THE SPECIAL MEETINGS . . . . . . . . . . . . . . .

ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . .

CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR . . . . . . . . .

LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . .

LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EXHIBIT I-- AGREEMENT AND PLAN OF REORGANIZATION BETWEEN MUNIYIELD
ARIZONA FUND, INC. AND MUNIYIELD ARIZONA FUND II, INC. . I-1

EXHIBIT II-- ECONOMIC AND FINANCIAL CONDITIONS IN ARIZONA . . . . . . II-1

EXHIBIT III-- RATINGS OF FIXED INCOME SECURITIES . . . . . . . . . . . III-1
3
<PAGE>
INTRODUCTION

This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Boards of Directors of Arizona I and
Arizona II for use at the Meetings to be held at the offices of Merrill Lynch
Asset Management, L.P. ("MLAM"), 800 Scudders Mill Road, Plainsboro, New
Jersey on December 22, 1994, at (9:00) A.M., New York time (for Arizona I)
and (9:30) A.M., New York time (for Arizona II). The mailing address for
both Arizona I and Arizona II is Box 9011, Princeton, New Jersey 08543-9011.
The approximate mailing date of this Proxy Statement and Prospectus is
_____________, 1994.

Any person giving a proxy may revoke it at any time prior to its
exercise by executing a superseding proxy, by giving written notice of the
revocation to the Secretary of Arizona I or Arizona II, as the case may be,
at the address indicated above or by voting in person at the Meetings. All
properly executed proxies received prior to the Meetings will be voted at the
Meetings in accordance with the instructions marked thereon or otherwise as
provided therein. Unless instructions to the contrary are marked, proxies
will be voted "FOR" each of the following proposals: (1) to approve the
Agreement and Plan of Reorganization between Arizona I and Arizona II (the
"Agreement and Plan of Reorganization"); (2) to elect a Board of Directors of
each Fund to serve for the ensuing year; and (3) to ratify the selection of
Deloitte & Touche LLP as the independent auditors of each Fund for the
current fiscal year.

With respect to proposal 1, approval of the Agreement and Plan of
Reorganization will require the affirmative vote of stockholders representing
more than 50% of the outstanding shares of Arizona I Common Stock and Arizona
I AMPS, voting together as a single class, and more than 50% of the
outstanding shares of Arizona I AMPS, voting separately as a class, as well
as the affirmative vote of stockholders representing more than 50% of the
outstanding shares of Arizona II Common Stock and AMPS of Arizona II, with a
par value of $.10 per share and a liquidation preference of $25,000 per share
plus an amount equal to accumulated but unpaid dividends thereon (whether or
not earned or declared) ("Arizona II AMPS"), voting together as a single
class, and more than 50% of the outstanding shares of Arizona II AMPS, voting
separately as a class. With respect to proposal 2, holders of shares of
Arizona I AMPS are entitled to elect two Directors of their Fund and holders
of shares of Arizona I Common Stock and Arizona I AMPS together are entitled
to elect the remaining Directors of their Fund; similarly, holders of shares
of Arizona II AMPS are entitled to elect two Directors of their Fund and
holders of shares of Arizona II Common Stock and Arizona II AMPS together are
entitled to elect the remaining Directors of their Fund. Assuming a quorum
is present, (x) election of the two Directors of Arizona I or Arizona II, as
the case may be, by the holders of shares of their respective AMPS, voting
separately as a class, will require the affirmative vote of the holders of a
majority of shares of their respective AMPS, represented at the Meetings and
entitled to vote; and (y) election of the remaining Directors of Arizona I or
Arizona II, as the case may be, will require the affirmative vote of the
holders of a majority of shares of their respective Common Stock and AMPS,
voting together as a single class, represented at the Meetings and entitled
to vote. With respect to proposal 3, approval of the ratification of the
selection of Deloitte & Touche LLP as the independent auditors of Arizona I
will require the affirmative vote of the holders of a majority of shares of
the Arizona I Common Stock and the Arizona I AMPS represented at the Meetings
and entitled to vote, voting together as a single class; similarly, approval
of the ratification of the selection of Deloitte & Touche LLP as the
independent auditors of Arizona II will require the affirmative vote of the
holders of a majority of shares of the Arizona II Common Stock and the Arizona
II AMPS represented at the Meetings and entitled to vote, voting together as
a single class.

The Boards of Directors of Arizona I and Arizona II have fixed the close
of business on October 21, 1994 as the record date for the determination of
stockholders entitled to notice of, and to vote at, the Meetings or any
adjournment thereof. Stockholders on the record date will be entitled to one
vote for each share held, with no shares having cumulative voting rights. As
of October 21, 1994, there were issued and outstanding ___________ shares of
Arizona I Common Stock, 347 shares of Arizona I AMPS, ____________ shares of
Arizona II Common Stock and 518 shares of Arizona II AMPS. To the knowledge
of the management of Arizona I and Arizona II, no person owned

<PAGE>
beneficially more than 5% of the respective outstanding shares of either
class of capital stock of Arizona I or Arizona II at such record date.

The Boards of Directors of Arizona I and Arizona II know of no business
other than that discussed in proposals 1, 2 and 3 above which will be
presented for consideration at the Meetings. If any other matter is properly
presented, it is the intention of the persons named in the enclosed proxy to
vote in accordance with their best judgment.

AGREEMENT AND PLAN OF REORGANIZATION

SUMMARY

The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus and is qualified in its entirety by
reference to the more complete information contained in this Proxy Statement
and Prospectus and in the Agreement and Plan of Reorganization, attached
hereto as
Exhibit I.

In this Proxy Statement and Prospectus, the term "Reorganization" refers
collectively to (i) the acquisition of the assets and the assumption of the
liabilities of Arizona I by Arizona II and the subsequent distribution of
Arizona II Common Stock and Arizona II Series B AMPS to the holders of
Arizona I Common Stock and Arizona I AMPS, respectively, (ii) the amendment
of the Articles of Incorporation of Arizona II to change its name to
"MuniYield Arizona Fund, Inc." and (iii) the subsequent deregistration and
dissolution of Arizona I.

At special meetings of the Boards of Directors of Arizona I and Arizona
II held on June 17, 1994, the Boards of Directors of Arizona I and Arizona II
deemed advisable a proposal that Arizona II acquire substantially all of the
assets, and assume substantially all of the liabilities, of Arizona I in
exchange solely for Arizona II Common Stock and Arizona II Series B AMPS to
be distributed to the stockholders of Arizona I in liquidation of Arizona I.
Subject to obtaining the necessary approvals from the Arizona I and Arizona
II stockholders, the Board of Directors of Arizona I approved the
deregistration of Arizona I under the Investment Company Act and its
dissolution under the laws of the State of Maryland, and the Board of
Directors of Arizona II approved an amendment to the Articles of
Incorporation of Arizona II to change its name to "MuniYield Arizona Fund,
Inc."

Both Arizona I and Arizona II seek to provide stockholders with as high
a level of current income exempt from Federal and Arizona income taxes as is
consistent with their respective investment policies and prudent investment
management. Both Arizona I and Arizona II seek to achieve their investment
objectives by investing primarily in a portfolio of Arizona Municipal Bonds.

Arizona I and Arizona II are both non-diversified, leveraged, closed-end
management investment companies registered under the Investment Company Act.
If the Arizona I and Arizona II stockholders approve the Reorganization,
Arizona II Common Stock and Arizona II Series B AMPS will be distributed to
Arizona I stockholders in exchange for the assets of Arizona I. After the
Reorganization, Arizona I will terminate its registration under the
Investment Company Act and its incorporation under Maryland law.

Based upon their evaluation of all relevant information, the Directors
of Arizona I and Arizona II have determined that the Reorganization will
benefit the holders of Common Stock of both Arizona I and Arizona II.
Specifically, after the Reorganization, Arizona I stockholders will remain
invested in a closed-end fund that has investment objectives and policies
virtually identical to those of Arizona I and which utilizes the same
management personnel. In addition, it is anticipated that both Arizona I and
Arizona II common stockholders will be subject to a
5
<PAGE>

reduced overall operating expense ratio based on the combined assets of the
surviving fund after the Reorganization. It is not anticipated that the
Reorganization directly will benefit the holders of shares of Arizona I AMPS
or Arizona II AMPS; however, the Reorganization will not adversely affect the
holders of shares of AMPS of either Fund and the expenses of the
Reorganization will not be borne by the holders of shares of AMPS of either
Fund.

In deciding to recommend the Reorganization, the Boards of Directors of
Arizona I and Arizona II took into account the investment objectives and
policies of both Arizona I and Arizona II, the expenses incurred both due to
the Reorganization and on an ongoing basis by the new and existing
stockholders of Arizona II and the potential benefits, including economies of
scale, to Arizona I and Arizona II common and preferred stockholders as a
result of the Reorganization. The Boards of Directors of Arizona I and
Arizona II, including all of the Directors who are not "interested persons",
as defined in the Investment Company Act, of Arizona I or Arizona II, have
determined that the Reorganization is in the best interests of the common and
preferred stockholders of Arizona I and Arizona II and that the interests of
such stockholders will not be diluted as a result of effecting the
Reorganization.

If all of the requisite approvals are obtained, it is anticipated that
the Reorganization will occur on December 29, 1994. Under the Agreement and
Plan of Reorganization, however, the Board of Directors of either Arizona I
or Arizona II may cause the Reorganization to be postponed or abandoned
should either Board determine that it is in the best interests of the
stockholders of either Arizona I or Arizona II, respectively, to do so. The
Agreement and Plan of Reorganization may be terminated, and the
Reorganization abandoned, whether before or after approval by the Funds'
stockholders, at any time prior to the Exchange Date (as defined below) (i)
by mutual consent of the Boards of Directors of Arizona I and Arizona II;
(ii) by the Board of Directors of Arizona I if any condition to Arizona I's
obligations has not been fulfilled or waived by such Board; or (iii) by the
Board of Directors of Arizona II if any condition to Arizona II's obligations
has not been fulfilled or waived by such Board.

6
<PAGE>

<TABLE>

PRO FORMA FEE TABLE FOR COMMON STOCKHOLDERS OF ARIZONA I, ARIZONA II
AND THE COMBINED FUND AS OF APRIL 30, 1994 (UNAUDITED)(A)

<CAPTION>
Actual Pro Forma for
Common Stockholder Arizona I Arizona II Combined Fund

<S> <C> <C> <C>
Transaction Expenses:
Maximum Sales Load (as a percentage of
the offering price) imposed on purchases
of Common Stock . . . . . . . . . . . . 5.50%(b) 5.50%(b) (c)
Dividend Reinvestment and Cash Purchase
Plan Fees . . . . . . . . . . . . . . . None None None
Annual Fund Operating Expenses (as a
percentage of average net assets for the six
months ended at April 30, 1994):
Investment Advisory Fees . . . . . . . . 0.50% 0.50% 0.50%
Other Expenses
Transfer Agent Fees . . . . . . . . 0.05% 0.07% 0.03%
Custodian Fee . . . . . . . . . . . 0.01 0.01 0.01
Miscellaneous . . . . . . . . . . . 0.38 0.46 0.34
Total Other Expenses . . . . . 0.44 0.54 0.38

Total Annual Operating Expenses . . . . . . . 0.94%(d) 1.04%(d) 0.88%

____________________
(a) No information is presented with respect to AMPS because AMPS are sold
at a fixed liquidation preference of $25,000 per share and investment
return is set at auction; therefore, neither Fund's expenses nor
expenses of the Reorganization will be borne by AMPS holders of either
Fund.

(b) Sales load charged in the Fund's initial offering, subject to reductions
for bulk purchases. Shares of Common Stock purchased on the secondary
market are not subject to sales loads, but may be subject to brokerage
commissions or other charges.

(c) No sales load will be charged on the issuance of shares in the
Reorganization. Shares of Common Stock are not available for purchase
from the Funds but may be purchased through a broker-dealer subject to
individually negotiated commission rates.

(d) Before expense reimbursement. Fund Asset Management, L.P., the
investment adviser for each Fund, has agreed voluntarily for an
indefinite period of time to reimburse each Fund for certain expenses.
Taking into account such voluntary reimbursement, the expense ratios for
Arizona I and Arizona II as of April 30, 1994 were 0.65% and 0.35%,
respectively. Such voluntary reimbursement may be reduced or
discontinued at any time.

</TABLE>
7
<PAGE>

<TABLE>
<CAPTION>
Example: CUMULATIVE EXPENSES PAID ON SHARES
OF COMMON STOCK FOR THE PERIOD OF:
----------------------------------

1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------

<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment,
including the maximum sales load of
$55 and assuming (1) an operating
expense ratio of 0.94% for Arizona I
shares and 1.04% for Arizona II
shares and (2) a 5% annual return
throughout the periods:

Arizona I. . . . . . . . . . . . . . . . $64 $83 $104 $164
Arizona II . . . . . . . . . . . . . . . $65 $86 $109 $175

Assuming the Reorganization had taken
place on April 30, 1994, an
investor would pay the following
expenses on a $1,000 investment,
including the maximum sales load of
$55 and assuming (1) an operating
expense ratio of 0.88% and (2) a 5%
annual return throughout the periods:

Combined Fund . . . . . . . . . . . . . . $63 $82 $101 $157

</TABLE>

The foregoing Fee Table is intended to assist investors in
understanding the costs and expenses that an Arizona I or Arizona II Common
Stockholder will bear directly or indirectly as compared to the costs and
expenses that would be borne by such investors taking into account the
Reorganization. The Example set forth above assumes shares of Common Stock
were purchased in the initial offerings and reinvestment of all dividends and
distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. See "Comparison of the
Funds" and "The Reorganization--Benefits to Arizona I Common Stockholders and
Arizona II Common Stockholders as a Result of the Reorganization".

8
<PAGE>
BUSINESS OF ARIZONA I Arizona I was incorporated under the laws of
the State of Maryland on June 7, 1993 and
commenced operations on July 30, 1993. Like
Arizona II, Arizona I is a non-diversified,
leveraged, closed-end management investment
company whose investment objective is to
provide stockholders with as high a level of
current income exempt from Federal and Arizona
income taxes as is consistent with its
investment policies and prudent investment
management. Furthermore, like Arizona II,
Arizona I seeks to achieve its investment
objective by investing primarily in a portfolio
of Arizona Municipal Bonds. See "Comparison of
the Funds--Investment Objectives and Policies".

Like Arizona II, Arizona I has outstanding both
Common Stock and AMPS. As of September 2,
1994, Arizona I had net assets of approximately
$49,596,838.

BUSINESS OF ARIZONA II Arizona II was incorporated under the laws of
the State of Maryland on August 24, 1993 and
commenced operations on October 29, 1993. Like
Arizona I, Arizona II is a non-diversified,
leveraged, closed-end management investment
company whose investment objective is to
provide stockholders with as high a level of
current income exempt from Federal and Arizona
income taxes as is consistent with its
investment policies and prudent investment
management. Furthermore, like Arizona I,
Arizona II seeks to achieve its investment
objective by investing primarily in a portfolio
of Arizona Municipal Bonds.

Like Arizona I, Arizona II has outstanding both
Common Stock and AMPS. As of September 2,
1994, Arizona II had net assets of
approximately $36,272,480.

COMPARISON OF THE FUNDS Investment Objectives and Policies. Arizona I
and Arizona II have virtually identical
investment objectives and policies, except that
Arizona I is required to maintain at least 80%
of its total assets in Arizona Municipal Bonds
while Arizona II is required to maintain at
least 65% of its total assets in Arizona
Municipal Bonds and at least 80% of its total
assets in Arizona Municipal Bonds and other
long-term municipal obligations exempt from
Federal income taxes, but not from Arizona
income taxes. As a practical matter, since
both Funds seek to pay interest exempt from
Arizona income taxes, both Funds seek to
maintain as much of their respective portfolios
invested in Arizona Municipal Bonds as
possible. As of April 30, 1994, 79.5% of
Arizona I's net assets and 90.4% of Arizona
II's net assets were invested in Arizona
Municipal Bonds.

Each Fund intends to maintain at least 75% of
its total assets in municipal obligations which
are rated investment grade or, if unrated, are
considered by the Fund's investment adviser to
be of comparable quality. Each Fund may invest
up to 25% of its total assets in municipal
obligations which are rated below investment
grade or, if unrated, are considered by the
Fund's investment adviser to be of comparable
quality. Such lower quality

9
<PAGE>
municipal obligations (commonly referred to as
"junk bonds") frequently are traded only in
markets where the number of potential purchasers
and sellers, if any, is very limited. The same
investment restrictions apply to both Arizona I
and Arizona II. See "Comparison of the Funds--
Investment Objectives and Policies".

Capital Stock. Arizona I and Arizona II each
has outstanding both Common Stock and AMPS.
Like Arizona II Common Stock, Arizona I Common
Stock is traded on the AMEX. As of June 30,
1994, the net asset value per share of the
Arizona I Common Stock was $12.41 and the
market price per share was $12.625, and as of
the same date, the net asset value per share of
the Arizona II Common Stock was $12.16 and the
market price per share was $13.125. Arizona I
AMPS and Arizona II AMPS have liquidation
preferences of $25,000 per share and are sold
principally at auction. See "Purchase
Procedures" and "Comparison of the Funds--
Capital Stock".

The interest rate for the initial dividend
period for the Arizona I AMPS was set at 2.75%
per annum at the end of the initial public
offering of the AMPS on August 25, 1993. The
first auction for the Arizona I AMPS is
scheduled to be held on Monday, August 29,
1994, after which it is expected that auctions
will be held every seven days, unless Arizona I
elects, subject to certain limitations, to have
a special dividend period. The interest rate
for the Arizona II AMPS for the initial
dividend period which ended on February 16,
1994 was 2.75% per annum, and since February 16
auctions have been held every seven days. As
of the most recent auction on August 24, 1994
the interest rate on the Arizona II AMPS was
2.90%.

Advisory Fees. The investment adviser for both
Arizona I and Arizona II is Fund Asset
Management, L.P. ("FAM"), formerly known as
Fund Asset Management, Inc. FAM is an
affiliate of MLAM, and both FAM and MLAM are
owned and controlled by Merrill Lynch & Co.,
Inc. ("ML & Co."). The principal business
address of FAM is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536. MLAM or FAM acts
as the investment adviser for more than 100
registered investment companies. FAM also
offers portfolio management and portfolio
analysis services to individuals and
institutions.

FAM is responsible for the management of each
Fund's investment portfolio and for providing
administrative services to each Fund. The same
personnel manage the portfolios of both Arizona
I and Arizona II. Vincent R. Giordano and
Kenneth A. Jacob serve as the portfolio
managers for both Funds.

Pursuant to separate investment advisory
agreements between each Fund and FAM, each Fund
pays FAM a monthly fee at the annual rate of
0.50% of such Fund's average weekly net assets.

Subsequent to the Reorganization, FAM will
continue to receive compensation at the rate of

10
<PAGE>

0.50% of the average weekly net assets of the
surviving Fund. See "Comparison of the Funds--
Management of the Funds".

Other Significant Fees. The Bank of New York
is the transfer agent, dividend disbursing
agent and registrar for both Arizona I and
Arizona II in connection with their respective
Common Stock, at the same rate for each Fund.
The Bank of New York also is the custodian for
the assets of Arizona I and Arizona II, at the
same rate for each Fund. The principal
business addresses of The Bank of New York are
101 Barclay Street, New York, New York 10286
(for its transfer agency services) and 110
Washington Street, New York, New York 10286
(for its custodial services).

IBJ Schroder Bank and Trust Company is the
transfer agent, registrar and auction agent for
both Arizona I and Arizona II in connection
with their respective AMPS, at the same rate
for each Fund. The principal business address
of IBJ Schroder Bank and Trust Company is One
State Street, New York, New York 10004. See
"Comparison of the Funds--Management of the
Funds".

Overall Expense Ratio. The overall operating
expense ratio as of April 30, 1994 for Arizona
I was 0.94% (0.65% after voluntary
reimbursement by FAM) and for Arizona II was
1.04% (0.35% after voluntary reimbursement by
FAM). If the Reorganization had taken place on
April 30, 1994, the overall operating expense
ratio for the combined fund on a pro forma
basis would have been 0.88%.

Purchases and Sales of Common Stock and AMPS.
Purchase and sale procedures for both Arizona I
Common Stock and Arizona II Common Stock are
identical, and investors typically purchase and
sell shares of Common Stock of such Funds
through a registered broker-dealer on the AMEX,
thereby incurring a brokerage commission set by
the broker-dealer. Alternatively, investors
may purchase or sell shares of Common Stock of
such Funds through privately negotiated
transactions with existing stockholders.

Purchase and sale procedures for Arizona I AMPS
and Arizona II AMPS also are identical. Such
AMPS generally are purchased and sold at
separate auctions conducted on a regular basis
by IBJ Schroder Bank and Trust Company, as the
auction agent for each Fund's AMPS (the
"Auction Agent"). Unless otherwise permitted
by the Funds, existing and potential holders of
AMPS only may participate in auctions through
their broker-dealers. Broker-dealers submit
the orders of their respective customers who
are existing and potential holders of AMPS to
the Auction Agent. On or prior to each auction
date for the AMPS (the business day next
preceding the first day of each dividend
period), each holder may submit orders to buy,
sell or hold AMPS to its broker-dealer.

11
<PAGE>

Outside of these auctions, shares of Arizona I
AMPS or Arizona II AMPS may be purchased or
sold through broker-dealers for the AMPS in a
secondary trading market maintained by the
broker-dealers. However, there can be no
assurance that a secondary market actually will
be developed and maintained by the broker-
dealers for either of the AMPS.

Ratings of AMPS. The Arizona I AMPS and the
Arizona II AMPS have each been assigned a
rating of AAA from Standard & Poor's
Corporation ("S&P") and Aa1 from Moody's
Investors Service, Inc. ("Moody's"). See
"Comparison of the Funds--Rating Agency
Guidelines"; Exhibit III--"Ratings of Fixed
Income Securities."

Portfolio Transactions. The portfolio
transactions in which Arizona I and Arizona II
may engage are identical, as are the procedures
for such transactions. See "Comparison of the
Funds--Portfolio Transactions".

Dividends and Distributions. The methods of
dividend payment and distributions are
identical for Arizona I and Arizona II, both
with respect to the Common Stock and the AMPS
of each Fund. See "Comparison of the Funds--
Dividends and Distributions".

Voting Rights. The corresponding voting rights
of the holders of shares of Arizona I Common
Stock and Arizona II Common Stock are
identical. Similarly, the corresponding voting
rights of the holders of shares of Arizona I
AMPS and Arizona II AMPS are identical. See
"Comparison of the Funds--Capital Stock".

Stockholder Services. An automatic dividend
reinvestment plan is available both to the
holders of shares of Arizona I Common Stock and
the holders of shares of Arizona II Common
Stock. The plans are identical for the two
Funds. See "Comparison of the Funds--Automatic
Dividend Reinvestment Plan". Other stockholder
services, including the provision of annual and
semi-annual reports, are the same for the two
Funds.

12
<PAGE>
<TABLE>
OUTSTANDING SECURITIES OF ARIZONA I AND ARIZONA II
AS OF JUNE 30, 1994
--------------------------------------------------

<CAPTION>
Amount Outstanding Exclusive
Amount Held By Registrant of Amount Shown in
Title of Class Amount Authorized* for Its Own Account Previous Column
<S> <C> <C> <C>
Arizona I

Common Stock 199,999,653 0 2,512,248

AMPS 347 0 347

Arizona II

Common Stock 199,999,482 0 1,867,043

AMPS 518 0 518

_______________
* The number of authorized shares of capital stock includes both the Common
Stock and the AMPS.

</TABLE>

TAX CONSIDERATIONS Arizona I and Arizona II have each received a
private letter ruling from the Internal Revenue
Service (the "IRS") with respect to the
Reorganization to the effect that, among other
things, for Federal income tax purposes Arizona
I stockholders will recognize no gain or loss
on the receipt of shares of Arizona II Common
Stock or Series B AMPS and neither Arizona I
nor Arizona II will recognize gain or loss on
the transfer of Arizona I assets in exchange
for Arizona II stock. The Reorganization
will not affect the status of Arizona II as a
regulated investment company. Arizona I will
liquidate pursuant to the Reorganization.

RISK FACTORS AND SPECIAL CONSIDERATIONS

Since both Arizona I and Arizona II invest primarily in a portfolio of
Arizona Municipal Bonds, any risks inherent in such investments are equally
applicable to both Funds and will be similarly pertinent to the combined fund
after the Reorganization. It is expected that the Reorganization itself will
not adversely affect the rights of holders of shares of Common Stock or AMPS
of either Fund or create additional risks.

SPECIAL CONSIDERATIONS RELATING TO ARIZONA MUNICIPAL BONDS

Arizona I and Arizona II ordinarily invest substantially all of their
total assets in Arizona Municipal Bonds and, therefore, they are more
susceptible to factors adversely affecting issuers of Arizona Municipal Bonds
than is a municipal bond investment company that is not concentrated in
issuers of Arizona Municipal Bonds to this degree. Economic activity in
Arizona, as in many other industrially developed states, tends to be more
cyclical than in some other states and in the nation as a whole. However,
diversification of the State's economy has helped enable the State to
maintain a moderate rate of growth. The ultimate effect of the Chapter 11
bankruptcies of three of the State's major employers cannot be predicted at
this time. FAM does not believe that the current economic conditions in
Arizona will have a significant adverse effect on either Fund's ability to
invest prudently in Arizona Municipal Bonds. See Exhibit II--"Economic and
Financial Conditions in Arizona."

13
<PAGE>

EFFECTS OF LEVERAGE

Utilization of leverage, through the issuance of AMPS, involves certain
risks to holders of Arizona I Common Stock and Arizona II Common Stock. For
example, each Fund's issuance of AMPS may result in higher volatility of the
net asset value of its Common Stock and potentially more volatility in the
market value of its Common Stock. In addition, fluctuations in the short-
term and medium-term dividend rates on, and the amount of taxable income
allocable to, the AMPS affect the yield to holders of Common Stock. So long
as each Fund, taking into account the costs associated with its AMPS and the
Fund's operating expenses, is able to realize a higher net return on its
investment portfolio than the then current dividend rate on the AMPS, the
effect of leverage is to cause holders of the Fund's Common Stock to realize
a higher current rate of return than if the Fund were not leveraged.
Similarly, since a pro rata portion of each Fund's net realized capital gains
on its investment assets generally is payable to holders of the Fund's Common
Stock, if increased net capital gains are realized by the Fund because of
increased capital for investment, the effect of leverage will be to increase
the amount of such gains distributed to holders of the Fund's Common Stock.
However, short-term, medium-term and long-term interest rates change from
time to time as does their relationship to each other (i.e., the slope of the
yield curve) depending upon such factors as supply and demand forces,
monetary and tax policies and investor expectations. Changes in such factors
could cause the relationship between short-term, medium-term and long-term
rates to change (i.e., to flatten or to invert the slope of the yield curve)
so that short-term and medium-term rates may increase substantially relative
to the long-term obligations in which each Fund may be invested. To the
extent that the current dividend rate on the AMPS approaches the net return
on a Fund's investment portfolio, the benefit of leverage to holders of
Common Stock is reduced, and if the current dividend rate on the AMPS were to
exceed the net return on a Fund's portfolio, the Fund's leveraged capital
structure would result in a lower rate of return to holders of Common Stock
than if the Fund were not leveraged. Similarly, since both the costs
associated with the issuance of AMPS and any decline in the value of a Fund's
investments (including investments purchased with the proceeds from any AMPS
offering) is borne entirely by holders of the Fund's Common Stock, the effect
of leverage in a declining market would result in a greater decrease in net
asset value to holders of Common Stock than if the Fund were not leveraged.
Such decrease in net asset value likely would be reflected in a greater
decline in the market price for shares of Common Stock.

In an extreme case, a decline in net asset value could affect each
Fund's ability to pay dividends on its Common Stock. Failure to make such
dividend payments could adversely affect the Fund's qualification for the
special tax treatment afforded regulated investment companies under the Code.

See "The Reorganization--Tax Consequences of the Reorganization." Each Fund
intends, however, to take all measures necessary to continue to make Common
Stock dividend payments. If a Fund's current investment income were not
sufficient to meet dividend requirements on either the Common Stock or the
AMPS, it could be necessary for the Fund to liquidate certain of its
investments. In addition, each Fund has the authority to redeem its AMPS for
any reason and may redeem all or part of its AMPS if (i) the Fund anticipates
that its leveraged capital structure will result in a lower rate of return
for any significant amount of time to holders of the Common Stock than that
obtainable if the Common Stock were unleveraged or (ii) the asset coverage
(as defined in the Investment Company Act) for the AMPS declines below 200%.
Redemption of the AMPS or insufficient investment income to make dividend
payments may reduce the net asset value of the Common Stock and require the
Fund to liquidate a portion of its investments at a time when it may be
disadvantageous, in the absence of such extraordinary circumstances, to do
so.

14
<PAGE>

PORTFOLIO MANAGEMENT

The portfolio management strategies of Arizona I and Arizona II are the
same. In the event of an increase in short-term or medium-term rates or
other change in market conditions to the point where a Fund's leverage could
adversely affect holders of Common Stock as noted above, or in anticipation
of such changes, each Fund may attempt to shorten the average maturity of its
investment portfolio, which would tend to offset the negative impact of
leverage on holders of its Common Stock. Each Fund also may attempt to
reduce the degree to which it is leveraged by redeeming AMPS pursuant to the
provisions of the Fund's Articles Supplementary establishing the rights and
preferences of the AMPS or otherwise purchasing shares of AMPS. Purchases
and sales or redemptions of AMPS, whether on the open market or in negotiated
transactions, are subject to limitations under the Investment Company Act.
If market conditions subsequently change, each Fund may sell previously
unissued shares of AMPS or shares of AMPS that the Fund previously issued but
later repurchased or redeemed.

RATINGS CONSIDERATIONS

Arizona I and Arizona II have received ratings of their AMPS of AAA from
S&P and Aa1 from Moody's. In order to maintain these ratings, the Funds may
be required to maintain portfolio holdings meeting specified guidelines of
such rating agencies. These guidelines may impose asset coverage
requirements that are more stringent than those imposed by the Investment
Company Act.

As recently described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred
stock obligations. The ratings on the AMPS are not recommendations to
purchase, hold or sell shares of AMPS, inasmuch as the ratings do not comment
as to market price or suitability for a particular investor, nor do the
rating agency guidelines described above address the likelihood that a holder
of shares of AMPS will be able to sell such shares in an Auction. The
ratings are based on current information furnished to Moody's and S&P by the
Funds and FAM and information obtained from other sources. The ratings may
be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. Neither the Arizona I Common Stock nor
the Arizona II Common Stock has been rated by a nationally recognized
statistical rating organization.

The Board of Directors of Arizona I or Arizona II, as the case may be,
without stockholder approval, may amend, alter or repeal any or all of the
various rating agency guidelines described herein in the event the Fund
receives confirmation from the rating agencies that any such amendment,
alteration or repeal would not impair the ratings then assigned to shares of
AMPS. See Exhibit III--"Ratings of Fixed Income Securities."

COMPARISON OF THE FUNDS

FINANCIAL HIGHLIGHTS

Arizona I
- ---------

The financial information in the table below, except for the period from
November 1, 1993 through April 30, 1994, which is unaudited and has been
provided by FAM, has been audited in conjunction with the annual audit of
the financial statements of the Fund by Deloitte & Touche LLP, independent
auditors.

15
<PAGE>

<TABLE>
<CAPTION>
For the Six Months Ended For the Period from July 30,
April 30, 1994 (unaudited) 1993++ to October 31, 1993
-------------------------- ---------------------------

<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value,
Beginning of period $14.82 $14.18
Net investment income .53 .27
Realized and unrealized
net gains or losses
on Common Stock (2.16) .77
------ ------
Total from investment
operations (1.63) 1.04
------ ------
Less dividends and distributions:
Dividends (from net
investment income)
Effect of dividends on AMPS
to common shareholders (.09) (.03)
To holders of Common Stock (.45) (.15)

------ ------
(.54) (.18)
------ ------
Distributions (from
capital gains)
Effect of dividends on AMPS to
common shareholders (.01) ---
To holders of Common Stock (.04) ---
------ ------
(.05) ---

Total distributions (.59) .18
------ ------

Capital Charge
From issuance of AMPS --- (.17)
From issuance of Common Stock (.05)
------
--- (.22)

------ ------
</TABLE>

16
<PAGE>

<TABLE>
<CAPTION>
For the Six Months Ended For the Period from July 30,
April 30, 1994 (unaudited) 1993++ to October 31, 1993
-------------------------- ----------------------------
<S> <C> <C>
Net asset value,
end of period $12.60 $14.82
====== =======
Per share market value,
end of period $13.25 $14.875
====== =======

TOTAL INVESTMENT RETURN**
Based on Market Price
Per Share (7.76%)+ 0.16%+
======== ========
Based on Net Asset Value
Per Share (11.96%)+ 5.56%+
======== ========

RATIOS/SUPPLEMENTAL DATA:***
Net Assets, end of period
(in thousands) $31,484 $36,602
======= =======
Ratio of total expenses, net
of reimbursement, to
average net assets .65%* 0%*
========= ========
Ratio of total expenses
to average net assets .94%* 1.09%*
========= ========

Ratio of net income
to average net assets 5.08%* 5.73%*
========= =========
Portfolio turnover rate 18.65% 16.91%
========= =========
__________________
*Annualized.
**Total investment returns based on market value, which
can be significantly greater or lesser than the net asset
value, result in substantially different returns. Total
investment returns exclude the effects of sales loads.
***Ratios to average net assets do not reflect the effect of
dividends to preferred stockholders.
+Aggregate total investment return.
++Commencement of operations.

</TABLE>

17
<PAGE>
Arizona II
- ----------

<TABLE>
<CAPTION>
For the Six Months Ended April For the Period from October 29,
30, 1994 (unaudited) 1993++ to October 31, 1993
------------------------------ -------------------------------

<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value,
Beginning of period $14.11 $14.18
------ ------
Net investment income .49 ---
Realized and unrealized
net gains or losses
on Common Stock (1.79) ---
------- ------

Total from investment
operations (1.30) ---
------- -------
Less dividends (from net
investment income)
Effect of dividends on AMPS
to common shareholders (.07) ---
To holders of Common Stock (.35) ---
-------
(.42) ---
-------
Total distributions (.42) (.07)
------- --------

Capital Charge
From issuance of AMPS (.17) ---
From issuance of Common Stock --- (.07)
(.17) (.07)
------- -------

</TABLE>

18
<PAGE>

<TABLE>
<CAPTION>
For the Six Months Ended April For the Period from October 29,
30, 1994 (unaudited) 1993++ to October 31, 1993
------------------------------ -------------------------------
<S> <C> <C>
Net asset value,
end of period $12.22 $14.11
-------- --------
Per share market value,
end of period $12.75 $15.00
-------- --------

TOTAL INVESTMENT RETURN**
Based on Market Price
Per Share (12.77%)+ 0.00%
-------- --------
Based on Net Asset Value
Per Share (11.13%)+ (0.49%)+
-------- --------
RATIOS/SUPPLEMENTAL DATA:***
Net Assets, end of period
(in thousands) $22,693 $25,506
-------- --------
Ratio of total expenses,
net of reimbursement,
to average net assets .35%* ---
-------- --------
Ratio of total expenses
to average net assets 1.04%* ---
-------- --------
Ratio of net income
to average net assets 5.12%* 0.2%
-------- --------
Portfolio turnover rate 169.70% 0%
-------- --------

__________________
*Annualized.
**Total investment returns based on market value, which
can be significantly greater or lesser than the net asset
value, result in substantially different returns. Total
investment returns exclude the effects of sales loads.
***Ratios to average net assets do not reflect the effect of
dividends to preferred stockholders.
+Aggregate total investment return.
++Commencement of operations.

</TABLE>

19
<PAGE>

PER SHARE DATA FOR ARIZONA I COMMON STOCK
TRADED ON THE AMERICAN STOCK EXCHANGE

<TABLE>
<CAPTION>
For the Period
From July 30, For the Quarter For the Quarter
1993+ to October Ended January Ended April
31, 1993 31,1994 30, 1994
---------------- --------------- ---------------

<S> <C> <C> <C>
High Sales Price $15.50 $15.25 $15.00
High Net Asset Value $15.05 $14.98 $14.92

Low Sales Price $14.625 $13.875 $11.50
Low Net Asset Value $14.13 $14.28 $11.90

+ Commencement of Operations
</TABLE>

PER SHARE DATA FOR ARIZONA II COMMON STOCK
TRADED ON THE AMERICAN STOCK EXCHANGE

<TABLE>
<CAPTION>
For the Quarter For the Quarter
Ended January Ended April
31,1994 30, 1994
--------------- ----------------

High Sales Price $15.00 $14.50
High Net Asset Value $14.67 $14.61

Low Sales Price $13.25 $12.00
Low Net Asset Value $13.97 $11.57

</TABLE>

As indicated in the tables above, during the periods since the inception
of the Funds, the Arizona I Common Stock and the Arizona II Common Stock
generally have been traded at prices close to net asset value, with small
premiums or discounts to net asset value being reflected in the market value
of the shares from time to time. Since the termination of share price
stabilization following each Fund's initial public offering, share prices for
Arizona I Common Stock have fluctuated between a maximum premium of 11.34%
and a maximum discount of (5.66%) and share prices for Arizona II Common
Stock have fluctuated between a maximum premium of 15.60% and a maximum
discount of (8.24%). Although there is no reason to believe that this
pattern should be affected by the Reorganization, it is not possible to state
whether shares of the surviving fund will trade at a premium or discount to
net asset value following the Reorganization, or what the extent of any such
premium or discount might be.

20
<PAGE>

INVESTMENT OBJECTIVES AND POLICIES

The structure, organization and investment policies of Arizona I and
Arizona II are virtually identical. Each Fund seeks as a fundamental
investment objective as high a level of current income exempt from Federal
and Arizona income taxes as is consistent with the Fund's investment policies
and prudent investment management. The sole technical difference in the
investment policies of the Funds is that Arizona I has adopted as a
fundamental policy that, except during interim periods pending investment of
the net proceeds of public offerings of the Fund's securities and during
temporary defensive periods, it will maintain at least 80% of its total
assets in Arizona Municipal Bonds. Arizona II seeks to achieve the same
investment objective but has adopted as a fundamental policy that, with the
same exceptions stated for Arizona I, it will maintain at least 65% of its
total assets in Arizona Municipal Bonds and at least 80% of its total assets
in Arizona Municipal Bonds and other long-term municipal obligations exempt
from Federal income taxes, but not from Arizona income taxes.

Except for the difference described in the preceding paragraph, the
investment objectives and policies of Arizona I and Arizona II are identical.

Each Fund seeks to achieve its investment objective by investing primarily in
a portfolio of Arizona Municipal Bonds. The investment objective of each
Fund is a fundamental policy that may not be changed without a vote of a
majority of the Fund's outstanding voting securities. At times, each Fund
may seek to hedge its portfolio through the use of futures and options
transactions to reduce volatility in the net asset value of its shares of
Common Stock.

Ordinarily, neither Fund intends to realize significant investment
income not exempt from Federal and Arizona income taxes. Each Fund seeks to
invest substantially all of its total assets in Arizona Municipal Bonds,
except at times when, in the judgment of FAM, Arizona Municipal Bonds of
sufficient quality and quantity are unavailable for investment by the Fund.
To the extent that suitable Arizona Municipal Bonds are not available for
investment by Arizona I or Arizona II, as determined by FAM, the Funds may
purchase long-term obligations issued by or on behalf of states, territories
and possessions of the United States and their political subdivisions,
agencies and instrumentalities paying interest which, in the opinion of bond
counsel to the issuer, is exempt from Federal but not Arizona income taxes.
Obligations exempt from Federal income taxes are referred to herein as
"Municipal Bonds." Unless otherwise indicated, references to Municipal Bonds
shall be deemed to include Arizona Municipal Bonds.

Each Fund, at all times, except during temporary defensive periods, will
maintain at least 75% of its total assets in Municipal Bonds which are rated
investment grade by a nationally recognized statistical rating organization
or, if unrated, are considered to be of comparable quality by FAM.
Additionally, each Fund may invest up to 25% of its total assets in Municipal
Bonds which are rated below investment grade by a nationally recognized
statistical rating organization or, if unrated, are considered to be of
comparable quality by FAM. Such lower quality Municipal Bonds frequently are
traded only in markets where the number of potential purchasers and sellers,
if any, is very limited. Each Fund may invest in certain tax-exempt
securities classified as "private activity bonds" (in general, bonds that
benefit non-governmental entities) that may subject certain investors in the
Fund to an alternative minimum tax.

The investment grade Municipal Bonds in which each Fund invests are
those Municipal Bonds rated at the date of purchase within the four highest
rating categories of S&P, Moody's or Fitch Investors Service, Inc. ("Fitch")
or, if unrated, are considered to be of comparable quality by FAM. In the
case of long-term debt, the investment grade rating categories are AAA
through BBB for S&P, Aaa through Baa for Moody's and AAA through BBB for
Fitch. In the case of short-term notes, the investment grade rating
categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-4 for Moody's
and F-1+ through F-3 for Fitch. In the case of tax-exempt commercial paper,
the investment grade rating categories are A-1+ through A-3 for S&P, Prime-1
through Prime-3 for Moody's and F-l+ through F-3 for Fitch. In the case of
variable rate demand obligations

21
<PAGE>

("VRDOs"), the investment grade rating categories are A-l+ through A-3 for
S&P, VMIG-1 through VMIG-4 for Moody's and F-1 through F-3 for Fitch.
Obligations ranked in the fourth highest rating category assigned long-term
debt or in an equivalent short-term rating category (BBB, SP-2 and A-3 for
S&P; Baa, MIG-4 and Prime-3 for Moody's; and BBB, F-3 and F-3 for Fitch),
while considered "investment grade," may have certain speculative
characteristics. There may be sub-categories or gradations indicating
relative standing within the rating categories set forth above. In assessing
the quality of Municipal Bonds with respect to the foregoing requirements,
FAM takes into account the nature of any letters of credit or similar credit
enhancement to which particular Municipal Bonds are entitled and the
creditworthiness of the financial institution which provided such credit
enhancement. See Exhibit III--"Ratings of Fixed Income Securities."

As noted above, each Fund may invest up to 25% of its assets in
Municipal Bonds which are rated below investment grade or, if unrated, are
considered to be of comparable quality by FAM. These high yield bonds
commonly are referred to as "junk bonds" and are regarded as predominantly
speculative as to the issuer's ability to make payments of principal and
interest. Consequently, although such bonds can be expected to provide
higher yields, they may be subject to greater market price fluctuations and
risk of loss of principal than lower yielding, higher rated fixed-income
securities. Such securities are particularly vulnerable to adverse changes
in the issuer's industry and in general economic conditions. Issuers of high
yield bonds may be highly leveraged and may not have available to them more
traditional methods of financing. The risk of loss due to default by the
issuer is significantly greater for the holders of these bonds because such
securities may be unsecured and may be subordinated to other creditors of the
issuer. In addition, while the high yield bonds in which each Fund may
invest normally do not include securities which, at the time of investment,
are in default or the issuers of which are in bankruptcy, there can be no
assurance that such events will not occur after the Fund purchases a
particular security, in which case the Fund may experience losses and incur
costs.

High yield bonds frequently have call or redemption features that permit
an issuer to repurchase such bonds from the Fund, which may decrease the net
investment income to the Fund and dividends to stockholders in the event that
the Fund is required to replace a called security with a lower yielding
security. The Fund may have difficulty disposing of certain high yield bonds
because there may be a thin trading market for such securities. Reduced
secondary market liquidity may have an adverse impact on market price and the
Fund's ability to dispose of particular issues when necessary to meet the
Fund's liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. In addition, market
quotations generally are available on many high yield bond issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.

The investments of Arizona I and Arizona II also may include VRDOs and
VRDOs in the form of participation interests ("Participating VRDOs") in
variable rate tax-exempt obligations held by a financial institution,
typically a commercial bank. The VRDOs in which each Fund may invest are
tax-exempt obligations (in the opinion of counsel to the issuer) which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest on a short
notice period not to exceed seven days. Participating VRDOs provide the Fund
with a specified undivided interest (up to 100%) of the underlying obligation
and the right to demand payment of the unpaid principal balance plus accrued
interest on the Participating VRDOs from the financial institution on a
specified number of days' notice, not to exceed seven days. There is,
however, the possibility that because of default or insolvency, the demand
feature of VRDOs or Participating VRDOs may not be honored. The Funds have
been advised by their counsel that the Funds should be entitled to treat the
income received on Participating VRDOs as interest from tax-exempt
obligations.

22
<PAGE>

The average maturity of each Fund's portfolio securities varies based
upon FAM's assessment of economic and market conditions. The net asset value
of the shares of common stock of a closed-end investment company, such as
each Fund, which invests primarily in fixed-income securities, changes as the
general levels of interest rates fluctuate. When interest rates decline, the
value of a fixed income portfolio can be expected to rise. Conversely, when
interest rates rise, the value of a fixed-income portfolio can be expected to
decline. Prices of longer-term securities generally fluctuate more in
response to interest rate changes than do short-term or medium-term
securities. These changes in net asset value are likely to be greater in the
case of a fund having a leveraged capital structure, such as each Fund.

On a temporary basis, each Fund may invest in short-term tax-exempt
securities, short-term U.S. Government securities, repurchase agreements or
cash. Such securities or cash will not exceed 20% of each Fund's total
assets except during interim periods pending investment of the net proceeds
of public offerings of the Fund's securities and temporary defensive periods
when, in the opinion of FAM, prevailing market or economic conditions
warrant.

Each Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that the Fund is not limited by such Act
in the proportion of its total assets that it may invest in securities of a
single issuer. However, each Fund's investments are limited so as to qualify
the Fund as a "regulated investment company" for purposes of the Code. See
"The Reorganization--Tax Consequences of the Reorganization." To qualify,
among other requirements, each Fund limits its investments so that, at the
close of each quarter of the taxable year, (i) not more than 25% of the
market value of the Fund's total assets are invested in the securities (other
than U.S. Government securities) of a single issuer, and (ii) with respect to
50% of the market value of its total assets, not more than 5% of the market
value of its total assets are invested in the securities (other than U.S.
Government securities) of a single issuer. A fund which elects to be
classified as "diversified" under the Investment Company Act must satisfy the
foregoing 5% requirement with respect to 75% of its total assets. To the
extent that Arizona I or Arizona II assumes large positions in the securities
of a small number of issuers, the Fund's yield may fluctuate to a greater
extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers.

DESCRIPTION OF MUNICIPAL BONDS

Municipal Bonds include debt obligations with remaining maturities of
greater than one year issued to obtain funds for various public purposes,
including construction of a wide range of public facilities, refunding of
outstanding obligations and obtaining funds for general operating expenses
and loans to other public institutions and facilities. In addition, certain
types of industrial development bonds are issued by or on behalf of public
authorities to finance various privately operated facilities, including
pollution control facilities. For purposes of this Proxy Statement and
Prospectus, such obligations are Municipal Bonds if the interest paid thereon
is exempt from Federal income tax, even though such bonds may be "private
activity bonds" as discussed below.

The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" or "special obligation" bonds. General
obligation bonds are secured by the issuer's pledge of faith, credit and
taxing power for the payment of principal and interest. Revenue or special
obligation bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as from the user of
the facility being financed. Industrial development bonds are in most cases
revenue bonds and generally do not constitute the pledge of the credit or
taxing power of the issuer of such bonds. The payment of the principal and
interest on such industrial development bonds depends solely on the ability
of the user of the facility financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed
as security for such

23
<PAGE>

payment. Municipal Bonds also may include "moral obligation" bonds which
normally are issued by special purpose public authorities. If an issuer of
moral obligation bonds is unable to meet its obligations, the repayment of
such bonds becomes a moral commitment but not a legal obligation of the state
or municipality in question.

Each Fund may purchase Municipal Bonds classified as "private activity
bonds" (in general, bonds that benefit non-governmental entities). Interest
received on certain tax-exempt securities which are classified as "private
activity bonds" may subject certain investors in the Fund to an alternative
minimum tax. There is no limitation on the percentage of each Fund's assets
that may be invested in Municipal Bonds which may subject certain investors
to an alternative minimum tax. See "The Reorganization--Tax Consequences of
the Reorganization". Also included within the general category of Municipal
Bonds are participation certificates issued by government authorities or
entities to finance the acquisition or construction of equipment, land and/or
facilities. The certificates represent participations in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively referred to as "lease obligations") relating to such equipment,
land or facilities. Although lease obligations do not constitute general
obligations of the issuer for which the issuer's unlimited taxing power is
pledged, a lease obligation frequently is backed by the issuer's covenant to
budget for, appropriate and make the payments due under the lease obligation.

However, certain lease obligations contain "non-appropriation" clauses which
provide that the issuer has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such
purpose on a yearly basis. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the event
of foreclosure might prove difficult. These securities represent a
relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional securities.

Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may
affect the availability of Municipal Bonds for investment by the Funds.

OTHER INVESTMENT POLICIES

Both Arizona I and Arizona II have adopted certain other policies as set
forth below:

Borrowings. Each Fund is authorized to borrow moneys in amounts of up
to 5% of the value of its total assets at the time of such borrowings;
provided, however, that each Fund is authorized to borrow moneys in excess of
5% of the value of its total assets for the purpose of repurchasing its
Common Stock or redeeming its AMPS. Borrowings by each Fund create an
opportunity for greater total return but, at the same time, increase exposure
to capital risk. In addition, borrowed funds are subject to interest costs
that may offset or exceed the return earned on the borrowed funds. For so
long as shares of a Fund's AMPS are rated by Moody's or S&P, unless it
receives written confirmation from Moody's or S&P, as the case may be, that
such action would not impair the ratings then assigned to the shares of AMPS
by Moody's or S&P, the issuing Fund will not borrow moneys except for the
purpose of clearing portfolio securities transactions (which borrowings under
any circumstances shall be limited to the lesser of $10 million and an amount
equal to 5% of the market value of the Fund's assets at the time of such
borrowings and which borrowings shall be repaid within 60 days and not be
extended or renewed).

When-Issued Securities and Delayed Delivery Transactions. Arizona I and
Arizona II may purchase or sell Municipal Bonds on a delayed delivery basis
or on a when-issued basis at fixed purchase or sale terms. These
transactions arise when securities are purchased or sold by a Fund with
payment and delivery taking place in the future. The purchase will be
recorded on the date that the Fund enters into the commitment, and the

24
<PAGE>

value of the obligation thereafter will be reflected in the calculation of
the Fund's net asset value. The value of the obligation on the delivery day
may be more or less than its purchase price. A separate account of the Fund
will be established with its custodian consisting of cash, cash equivalents
or liquid Municipal Bonds having a market value at all times at least equal
to the amount of the commitment.

Indexed and Inverse Floating Obligations. Arizona I and Arizona II may
invest in Municipal Bonds the return on which is based on a particular index
of value or interest rates. For example, each Fund may invest in Municipal
Bonds that pay interest based on an index of Municipal Bond interest rates or
based on the value of gold or some other product. The principal amount
payable upon maturity of certain Municipal Bonds also may be based on the
value of an index. To the extent a Fund invests in these types of Municipal
Bonds, the Fund's return on such Municipal Bonds will be subject to risk with
respect to the value of the particular index. Also, a Fund may invest in
so-called "inverse floating rate bonds" or "residual interest bonds" on which
the interest rates typically vary inversely with a short-term floating rate
(which may be reset periodically by a dutch auction, by a remarketing agent,
or by reference to a short-term tax-exempt interest rate index). Each Fund
may purchase original issue inverse floating rate bonds in both the primary
and secondary markets and also may purchase in the secondary market
synthetically-created inverse floating rate bonds evidenced by custodial or
trust receipts. Generally, interest rates on inverse floating rate bonds
will decrease when short-term rates increase, and will increase when
short-term rates decrease. Such securities have the effect of providing a
degree of investment leverage, since they may increase or decrease in value
in response to changes, as an illustration, in market interest rates at a
rate which is a multiple (typically two) of the rate at which fixed-rate,
long-term, tax-exempt securities increase or decrease in response to such
changes. As a result, the market values of such securities generally will be
more volatile than the market values of fixed-rate tax-exempt securities. To
seek to limit the volatility of these securities, the Fund may purchase
inverse floating rate bonds with shorter-term maturities or which contain
limitations on the extent to which the interest rate may vary. FAM believes
that indexed and inverse floating obligations represent a flexible portfolio
management instrument for the Funds which allows FAM to vary the degree of
investment leverage relatively efficiently under different market conditions.

Call Rights. Arizona I and Arizona II may purchase a Municipal Bond
issuer's right to call all or a portion of such Municipal Bond for mandatory
tender for purchase (a "Call Right"). A holder of a Call Right may exercise
such right to require a mandatory tender for the purchase of the related
Municipal Bonds, subject to certain conditions. A Call Right that is not
exercised prior to the maturity of the related Municipal Bond will expire
without value. The economic effect of holding both the Call Right and the
related Municipal Bond is identical to holding a Municipal Bond as a
non-callable security.

INFORMATION REGARDING FUTURES AND OPTIONS TRANSACTIONS

Each Fund may hedge all or a portion of its portfolio investments
against fluctuations in interest rates through the use of certain financial
futures contracts ("financial futures contracts") and options thereon. While
each Fund's use of hedging strategies is intended to reduce the volatility of
the net asset value of its Common Stock, the net asset value of its Common
Stock fluctuates. There can be no assurance that a Fund's hedging
transactions will be effective. For so long as a Fund's AMPS are rated by
Moody's and S&P, the Fund's use of financial futures contracts and options
thereon will be subject to certain limitations mandated by the rating
agencies. A Fund only will engage in hedging activities from time to time
and may not necessarily be engaging in hedging activities when movements in
interest rates occur.

25
<PAGE>

Certain Federal income tax requirements may limit a Fund's ability to
engage in hedging transactions. Gains from transactions in financial futures
contracts or options thereon distributed to stockholders are taxable as
ordinary income or, in certain circumstances, as long-term capital gains to
stockholders. In addition, in order to maintain ratings of a Fund's AMPS
from Moody's and S&P, the Fund may be required to limit its use of hedging
techniques in accordance with the specified guidelines of such rating
agencies.

The following is a description of the transactions involving financial
futures contracts or options thereon in which each Fund may engage,
limitations on the use of such transactions and risks associated therewith.
The investment policies with respect to the hedging transactions of a Fund
are not fundamental policies and may be modified by the Board of Directors of
the Fund without the approval of the Fund's stockholders.

Writing Covered Call Options. Each Fund is authorized to write (i.e.,
sell) covered call options with respect to Municipal Bonds it owns, thereby
giving the holder of the option the right to buy the underlying security
covered by the option from the Fund at the stated exercise price until the
option expires. Each Fund writes only covered call options, which means that
so long as the Fund is obligated as the writer of a call option, it will own
the underlying securities subject to the option. The Fund may not write
covered call options on underlying securities in an amount exceeding 15% of
the market value of its total assets.

Each Fund receives a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, a Fund limits
its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as a writer continues. Covered call options serve as a
partial hedge against a decline in the price of the underlying security.
Each Fund may engage in closing transactions in order to terminate
outstanding options that it has written.

Purchase of Options. Each Fund is authorized to purchase put options in
connection with its hedging activities. By buying a put the Fund has a right
to sell the underlying security at the exercise price, thus limiting the
Fund's risk of loss through a decline in the market value of the security
until the put expires. The amount of any appreciation in the value of the
underlying security will be partially offset by the amount of the premium
paid for the put option and any related transaction costs. Prior to its
expiration, a put option may be sold in a closing sale transaction; profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the put option plus the related transaction costs.
A closing sale transaction cancels out the Fund's position as the purchaser
of an option by means of an offsetting sale of an identical option prior to
the expiration of the option it has purchased. In certain circumstances, the
Fund may purchase call options on securities held in its portfolio on which
it has written call options or on securities which it intends to purchase. A
Fund will not purchase options on securities if, as a result of such
purchase, the aggregate cost of all outstanding options on securities held by
the Fund would exceed 5% of the market value of the Fund's total assets.

Financial Futures Contracts and Options Thereon. Each Fund is
authorized to purchase and sell certain financial futures contracts and
options thereon solely for the purposes of hedging its investments in
Municipal Bonds against declines in value and hedging against increases in
the cost of securities it intends to purchase. A financial futures contract
obligates the seller of a contract to deliver and the purchaser of a contract
to take delivery of the type of financial instrument covered by the contract
or, in the case of index-based financial futures contracts, to make and
accept a cash settlement, at a specific future time for a specified price.
The purchase or sale of an option on a financial futures contract is
analogous to the purchase or sale of an option on an individual security. A
sale of financial futures contracts or options thereon may provide a hedge
against a decline in the value of portfolio securities because such
depreciation may be offset, in whole or in part, by an increase in the value
of the position in the financial futures contracts or options. A purchase of
financial futures

26
<PAGE>

contracts or options thereon may provide a hedge against an increase in the
cost of securities intended to be purchased, because such appreciation may be
offset, in whole or in part, by an increase in the value of the position in
the financial futures contracts or options.

The purchase or sale of a financial futures contract or option thereon
differs from the purchase or sale of a security in that no price or premium
is paid or received. Instead, an amount of cash or securities acceptable to
the broker equal to approximately 5% of the contract amount must be deposited
with the broker. This amount is known as initial margin. Subsequent
payments to and from the broker, called variation margin, are made on a daily
basis as the price of the financial futures contract or option thereon
fluctuates making the long and short positions in the financial futures
contract or option thereon more or less valuable.

Each Fund may purchase and sell financial futures contracts based on The
Bond Buyer Municipal Bond Index, a price-weighted measure of the market value
of 40 large tax-exempt issues, and purchase and sell put and call options on
such financial futures contracts for the purpose of hedging Municipal Bonds
which the Fund holds or anticipates purchasing against adverse changes in
interest rates. Each Fund also may purchase and sell financial futures
contracts on U.S. Government securities and purchase and sell put and call
options on such financial futures contracts for such hedging purposes. With
respect to U.S. Government securities, currently there are financial futures
contracts based on long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA
Certificates and three-month U.S. Treasury bills.

Subject to policies adopted by its Board of Directors, each Fund also
may engage in transactions in other financial futures contracts or options
thereon, such as financial futures contracts or options on other municipal
bond indices which may become available, if FAM should determine that there
normally is sufficient correlation between the prices of such financial
futures contracts or options thereon and the Municipal Bonds in which the
Fund invests to make such hedging appropriate.

Over-The-Counter-Options. Each Fund is authorized to engage in
transactions involving financial futures contracts or options thereon on
exchanges and in the over-the-counter markets ("OTC options"). In general,
exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation)
with standardized strike prices and expiration dates. OTC options
transactions are two-party contracts with price and terms negotiated by the
buyer and seller.

Restrictions on OTC Options. Each Fund is authorized to engage in
transactions in OTC options only with member banks of the Federal Reserve
System and primary dealers in U.S. Government securities or with affiliates
of such banks or dealers which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50
million. OTC options and assets used to cover OTC options written by the
Funds are considered by the staff of the Securities and Exchange Commission
to be illiquid. The illiquidity of such options or assets may prevent a
successful sale of such options or assets, result in a delay of sale, or
reduce the amount of proceeds that otherwise might be realized.

Risk Factors in Financial Futures Contracts and Options Thereon.
Utilization of financial futures contracts and options thereon involves the
risk of imperfect correlation in movements in the price of financial futures
contracts and options thereon and movements in the price of the security
which is the subject of the hedge. If the price of the financial futures
contract or option thereon moves more or less than the price of the security
that is the subject of the hedge, a Fund will experience a gain or loss which
will not be completely offset by movements in the price of such security.
There is a risk of imperfect correlation where the securities underlying
financial futures contracts or options thereon have different maturities,
ratings, geographic compositions or other characteristics than the security
being hedged. In addition, the correlation may be affected by additions to
or deletions from the index which serves as a basis for a financial futures
contract or

27
<PAGE>

option thereon. Finally, in the case of financial futures contracts on U.S.
Government securities and options on such financial futures contracts, the
anticipated correlation of price movements between the U.S. Government
securities underlying the financial futures contracts or options and
Municipal Bonds may be adversely affected by economic, political, legislative
or other developments which have a disparate impact on the respective markets
for such securities.
Under regulations of the Commodity Futures Trading Commission, the
futures trading activities described herein will not result in a Fund's being
deemed a "commodity pool," as defined under such regulations, provided that
the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell futures contracts and options thereon (i) for bona fide
hedging purposes, and (ii) for non-hedging purposes, if the aggregate initial
margin and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any
such contracts and options. Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.

When a Fund purchases a financial futures contract, or writes a put
option or purchases a call option thereon, it will maintain an amount of
cash, cash equivalents (e.g., commercial paper and daily tender adjustable
notes) or short-term, high-grade, fixed-income securities in a segregated
account with the Fund's custodian, so that the amount so segregated plus the
amount of initial and variation margin held in the account of its broker
equals the market value of the financial futures contract, thereby ensuring
that the use of such financial futures contract is unleveraged.

Although certain risks are involved in financial futures contracts and
options thereon, FAM believes that, because each Fund will engage in
transactions involving financial futures contracts and options thereon only
for hedging purposes, the options and futures portfolio strategies of a Fund
will not subject the Fund to certain risks frequently associated with
speculation in financial futures contracts and options thereon. A Fund may
be restricted in engaging in transactions involving financial futures
contracts and options thereon due to the requirement that less than 30% of
its gross income in each taxable year be derived from the sale or other
disposition of securities held for less than three months.

The volume of trading in the exchange markets with respect to Municipal
Bond options may be limited, and it is impossible to predict the amount of
trading interest that may exist in such options. In addition, there can no
assurance that viable exchange markets will continue.

Each Fund intends to enter into financial futures contracts and options
thereon, on an exchange or in the over-the-counter market, only if there
appears to be a liquid secondary market for such financial futures contracts
or options. There can be no assurance, however, that a liquid secondary
market will exist at any specific time. Thus, it may not be possible to
close a financial futures contract position or the related option. The
inability to close financial futures contract positions or the related
options also could have an adverse impact on a Fund's ability to hedge
effectively its portfolio. There is also the risk of loss by a Fund of
margin deposits or collateral in the event of bankruptcy of a broker with
which the Fund has an open position in a financial futures contract or the
related option.

The liquidity of a secondary market in a financial futures contract or
option thereon may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
financial futures contract or option price during a single trading day. Once
the daily limit has been reached in the financial futures contract or option,
no trades may be entered into at a price beyond the limit, thus preventing
the liquidation of open financial futures contract positions or the related
options. Prices in the past have reached or exceeded the daily limit on a
number of consecutive trading days.

28
<PAGE>

If it is not possible to close a financial futures contract position or
the related option entered into by a Fund, the Fund would continue to be
required to make daily cash payments of variation margin in the event of
adverse price movements. In such a situation, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so.

The successful use of these transactions also depends on the ability of
FAM to forecast correctly the direction and extent of interest rate movements
within a given time frame. To the extent interest rates remain stable during
the period in which a financial futures contract or option thereon is held by
a Fund or moves in a direction opposite to that anticipated, the Fund may
realize a loss on the hedging transaction which is not fully or partially
offset by an increase in the value of portfolio securities. As a result, the
Fund's total return for such period may be less than if it had not engaged in
the hedging transaction.

INVESTMENT RESTRICTIONS

Other than as noted above under "Investment Objectives and Policies",
Arizona I and Arizona II have identical investment restrictions. The
following are fundamental investment restrictions of each Fund and may not be
changed without the approval of the holders of a majority of the outstanding
shares of Common Stock and the outstanding shares of AMPS and any other
preferred stock, voting as a single class, and a majority of the outstanding
shares of AMPS and any other preferred stock, voting separately as a class
(which for this purpose and under the 1940 Act means for each such class the
lesser of (i) 67% of the shares of each class of capital stock represented at
a meeting at which more than 50% of the outstanding shares of each class of
capital stock are represented or (ii) more than 50% of the outstanding shares
of each class of capital stock). Each Fund may not:

1. Make investments for the purpose of exercising control or
management.

2. Purchase securities of other investment companies, except
in connection with a merger, consolidation, acquisition or
reorganization, or by purchase in the open market of securities of
closed-end investment companies and only if immediately thereafter
not more than 10% of the Fund's total assets would be invested in
such securities.

3. Purchase or sell real estate, real estate limited
partnerships, commodities or commodity contracts; provided,
however, that the Fund may invest in securities secured by real
estate or interests therein or issued by companies that invest in
real estate or interests therein, and the Fund may purchase and
sell financial futures contracts and options thereon.

4. Issue senior securities other than preferred stock or
borrow amounts in excess of 5% of its total assets taken at market
value; provided, however, that the Fund is authorized to borrow
moneys in excess of 5% of the value of its total assets for the
purpose of repurchasing shares of Common Stock or redeeming shares
of preferred stock.

5. Underwrite securities of other issuers except insofar as
the Fund may be deemed an underwriter under the Securities Act of
1933 in selling portfolio securities.

6. Make loans to other persons, except that the Fund may
purchase Municipal Bonds and other debt securities in accordance
with its investment objective, policies and limitations.

29
<PAGE>

7. Invest more than 25% of its total assets (taken at market
value at the time of each investment) in securities of issuers in a
single industry; provided, however, that for purposes of this
restriction, states, municipalities and their political
subdivisions are not considered to be part of any industry.

Additional investment restrictions adopted by each Fund, which may be
changed by the Board of Directors, provide that the Fund may not:

1. Mortgage, pledge, hypothecate or in any manner transfer,
as security for indebtedness, any securities owned or held by the
Fund except as may be necessary in connection with borrowings
mentioned in investment restriction (4) above or except as may be
necessary in connection with transactions in financial futures
contracts and options thereon.

2. Purchase any securities on margin, except that (subject to
investment restriction (4) above) the Fund may obtain such
short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities (the deposit or payment
by the Fund of initial or variation margin in connection with
financial futures contracts and options thereon is not considered
the purchase of a security on margin).

3. Make short sales of securities or maintain a short
position or invest in put, call, straddle or spread options, except
that the Fund may write, purchase and sell options and futures on
Municipal Bonds, U.S. Government obligations and related indices or
otherwise in connection with bona fide hedging activities and may
purchase and sell Call Rights to require mandatory tender for the
purchase of related Municipal Bonds.

For so long as shares of a Fund's AMPS are rated by Moody's, the Fund
will not change these additional investment restrictions unless it receives
written confirmation from Moody's that engaging in such transactions would
not impair the rating then assigned to the shares of AMPS by Moody's.

If a percentage restriction on investment policies or the investment or
use of assets set forth above is adhered to at the time a transaction is
effected, later changes in percentage resulting from changing values will not
be considered a violation.

RATING AGENCY GUIDELINES

Each Fund intends that, so long as shares of its AMPS are outstanding,
the composition of its portfolio will reflect guidelines established by
Moody's and S&P in connection with the Fund's receipt of a rating for such
shares on their date of original issue of at least Aa1 from Moody's and AAA
from S&P. Moody's and S&P, nationally recognized statistical rating
organizations, issue ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines for rating AMPS have
been developed by Moody's and S&P in connection with issuances of
asset-backed and similar securities, including debt obligations and variable
rate preferred stocks, generally on a case-by-case basis through discussions
with the issuers of these securities. The guidelines are designed to ensure
that assets underlying outstanding debt or preferred stock will be varied
sufficiently and will be of sufficient quality and amount to justify
investment-grade ratings. The guidelines do not have the force of law but
have been adopted by each Fund in order to satisfy current requirements
necessary for Moody's and S&P to issue the above-described ratings for shares
of AMPS, which ratings generally are relied upon by institutional investors
in purchasing such securities. The guidelines provide

<PAGE>

a set of tests for portfolio composition and asset coverage that supplement
(and in some cases are more restrictive than) the applicable requirements
under the Investment Company Act.

Each Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of the ratings altogether. In addition, any
rating agency providing a rating for the shares of AMPS, at any time, may
change or withdraw any such rating. As set forth in the Articles
Supplementary of each Fund, the Board of Directors, without stockholder
approval, may modify certain definitions or restrictions which have been
adopted by the Fund pursuant to the rating agency guidelines, provided the
Board of Directors has obtained written confirmation from Moody's and S&P
that any such change would not impair the ratings then assigned by Moody's
and S&P to the AMPS. See "Risk Factors and Special Considerations--Ratings
Considerations".

For so long as any shares of a Fund's AMPS are rated by Moody's or S&P,
as the case may be, the Fund will not buy or sell financial futures
contracts, write, purchase or sell call options on financial futures
contracts or purchase put options on financial futures contracts or write
call options (except covered call options) on portfolio securities unless it
receives written confirmation from Moody's that engaging in such transactions
would not impair the ratings then assigned to the shares of AMPS by Moody's
or S&P, as the case may be, except that the Fund may engage in certain
hedging transactions subject to the limitations determined by Moody's or S&P.

PORTFOLIO COMPOSITION

Although the investment portfolios of both Funds must satisfy the same
standards of credit quality, the actual securities owned by each Fund are
different, as a result of which there are certain differences in the
composition of the two investment portfolios. Of the Municipal Bonds owned
by Arizona I as of June 30, 1994, 45% are rated in the highest grade by
Moody's or S&P, 53.7% are rated in the highest two grades, 79.2% are rated in
the highest three grades, 88.2% are rated in the highest four grades, and 0%
are unrated. The comparable percentages for Arizona II are 30% in the
highest grade, 54.3% in the highest two grades, 74.2% in the highest three
grades, 83.8% in the highest four grades and 0% unrated.

There are small differences in concentration among the categories of
issuers of the Municipal Bonds held in the portfolios of the Funds. For
Arizona I, as of June 30, 1994, the highest concentration of Municipal Bonds
was in the general obligation, IDB/PCR and hospital categories, accounting
for 26.3%, 18.6%, and 16.1% of the Fund's portfolio, respectively, whereas
for Arizona II, the highest concentration was in the general obligation,
pollution control and other revenue categories, accounting for 32.8%, 20.1%
and 12.4% of the Fund's portfolio.

Arizona I
- ---------

As of June 30, 1994, approximately 93.9% of the market value of Arizona
I's portfolio was invested in long-term municipal obligations and
approximately 6.1% of the market value of Arizona I's portfolio was invested
in short-term municipal obligations. The following table sets forth certain
information with respect to the composition of Arizona I's long-term
municipal obligation investment portfolio as of June 30, 1994.

31
<PAGE>

<TABLE>
<CAPTION>
Number of Value
S&P* Moody's* Issues (in thousands) Percent
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>

AAA Aaa 16 $21,819 45%
AA Aa 4 4,220 8.7
A A 8 12,366 25.5
BBB Baa 1 4,395 9.0
BB Ba 2 3,214 6.6
B B __ __ __
CCC Caa __ __ __
CC Ca __ __ --
C C -- ------- -----
Total 31 $46,014 94.8%
== ======= =====

___________
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations. S&P's rating categories may be modified further
by a plus (+) or minus (-) in AA, A, BBB, BB, B and C ratings. Moody's
rating categories may be modified further by a 1, 2 or 3 in Aa, A, Baa,
Ba and B ratings. See Exhibit III--"Ratings of Fixed Income
Securities."

</TABLE>

Arizona II
- ----------

As of June 30, 1994, approximately 89.1 of the market value of Arizona
II's portfolio was invested in long-term municipal obligations and
approximately 10.9% of the market value of Arizona II's portfolio was
invested in short-term municipal obligations. The following table sets forth
certain information with respect to the composition of Arizona II's long-term
municipal obligation investment portfolio as of June 30, 1994.

<TABLE>
<CAPTION>
Number of Value
S&P* Moody's* Issues (in thousands) Percent
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>

AAA Aaa 10 $10,714 30%
AA Aa 8 8,652 24.3
A A 5 7,094 19.9
BBB Baa 1 3,428 9.6
BB Ba 2 1,882 5.3
B B __ __ __
CCC Caa __ __ __
CC Ca __ __ --
C C -- ------- -----
Total 26 $31,770 89.1%
== ======= =====
___________
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations. S&P's rating categories may be modified further
by a plus (+) or minus (-) in AA, A, BBB, BB, B and C ratings. Moody's
rating categories may be modified further by a 1, 2 or 3 in Aa, A, Baa,
Ba and B ratings. See Exhibit III--"Ratings of Fixed Income
Securities."

</TABLE>

32
<PAGE>

PORTFOLIO TRANSACTIONS

The procedures for engaging in portfolio transactions are the same for
both Arizona I and Arizona II. Subject to policies established by the Board
of Directors of each Fund, FAM is primarily responsible for the execution of
each Fund's portfolio transactions. In executing such transactions, FAM
seeks to obtain the best results for each Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While FAM generally seeks reasonably competitive commission rates, Arizona I
and Arizona II do not necessarily pay the lowest commission or spread
available.

Neither Fund has any obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, securities firms which provide supplemental
investment research to FAM, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), may receive orders for transactions by a
Fund. Information so received will be in addition to, and not in lieu of,
the services required to be performed by FAM under its investment advisory
agreements with the Funds, and the expenses of FAM will not necessarily be
reduced as a result of the receipt of such supplemental information.

The securities in which each Fund primarily invests are traded in the
over-the-counter markets, and each Fund normally deals directly with the
dealers who make markets in the securities involved, except in those
circumstances where better prices and execution are available elsewhere.
Under the Investment Company Act, except as permitted by exemptive order,
persons affiliated with a Fund are prohibited from dealing with the Fund as
principals in the purchase and sale of securities. Since transactions in the
over-the-counter markets usually involve transactions with dealers acting as
principals for their own account, a Fund will not deal with affiliated
persons, including Merrill Lynch and its affiliates, in connection with such
transactions, except that pursuant to an exemptive order obtained by FAM, a
Fund may engage in principal transactions with Merrill Lynch in high quality,
short-term, tax-exempt securities. An affiliated person of a Fund may serve
as its broker in over-the-counter transactions conducted on an agency basis.

Arizona I and Arizona II also may make loans to tax-exempt borrowers in
individually negotiated transactions with the borrower. Because an active
trading market may not exist for such securities, the prices that the Funds
may pay for these securities or receive on their resale may be lower than
that for similar securities with a more liquid market.

The Boards of Directors of Arizona I and Arizona II have considered the
possibility of recapturing for the benefit of the Funds brokerage
commissions, dealer spreads and other expenses of possible portfolio
transactions, such as underwriting commissions, by conducting portfolio
transactions through affiliated entities, including Merrill Lynch. For
example, brokerage commissions received by Merrill Lynch could be offset
against the investment advisory fees paid by the Funds to FAM. After
considering all factors deemed relevant, the Directors made a determination
not to seek such recapture. The Directors will reconsider this matter from
time to time.

Periodic auctions are conducted for the Arizona I AMPS and the Arizona
II AMPS by the Auction Agent for the Funds. The auctions require the
participation of one or more broker-dealers, each of whom enters into an
agreement with the Auction Agent. After each auction, the Auction Agent pays
a service charge, from funds provided by the issuing Fund, to each broker-
dealer at the annual rate of 1/4 of 1%, calculated on the basis of the
purchase price of shares of the relevant AMPS placed by such broker-dealer at
such auction.

33
<PAGE>

PORTFOLIO TURNOVER

Generally, neither Arizona I nor Arizona II purchases securities for
short-term trading profits. However, either Fund may dispose of securities
without regard to the time that they have been held when such action, for
defensive or other reasons, appears advisable to FAM. While it is not
possible to predict turnover rates with any certainty, at present it is
anticipated that each Fund's annual portfolio turnover rate, under normal
circumstances, will be less than 100%. (The portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of portfolio
securities for the particular fiscal year by the monthly average of the value
of the portfolio securities owned by a Fund during the particular fiscal
year. For purposes of determining this rate, all securities whose maturities
at the time of acquisition are one year or less are excluded.)

CAPITAL STOCK

Arizona I and Arizona II each has outstanding both Common Stock and
AMPS. Arizona I Common Stock and Arizona II Common Stock both are traded on
the AMEX. The shares of Arizona I Common Stock commenced trading on the AMEX
on August 16, 1993. As of June 30, 1994, the net asset value per share of
the Arizona I Common Stock was $12.41 and the market price per share was
$12.625. The shares of Arizona II Common Stock commenced trading on the AMEX
on November 15, 1993. As of June 30, 1994, the net asset value per share of
the Arizona II Common Stock was $12.16 and the market price per share was
$13.125.

Each Fund is authorized to issue 200,000,000 shares of capital stock,
all of which shares initially were classified as Common Stock. The Board of
Directors of each Fund is authorized to classify or reclassify any unissued
shares of capital stock by setting or changing the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption. In connection with
each Fund's offering of shares of AMPS, Arizona I reclassified 694 shares of
unissued Common Stock as AMPS, and Arizona II reclassified 518 shares of
unissued Common Stock as AMPS.

Common Stock
- ------------
Holders of a Fund's Common Stock are entitled to share equally in
dividends declared by the Fund's Board of Directors payable to holders of the
Common Stock and in the net assets of the Fund available for distribution to
holders of the Common Stock after payment of the preferential amounts payable
to holders of any outstanding preferred stock. Holders of a Fund's Common
Stock do not have preemptive or conversion rights and shares of a Fund's
Common Stock are not redeemable. The outstanding shares of Common Stock of
each Fund are fully paid and nonassessable.

So long as any shares of a Fund's AMPS or any other preferred stock are
outstanding, holders of the Fund's Common Stock will not be entitled to
receive any dividends of or other distributions from the Fund unless all
accumulated dividends on outstanding shares of the Fund's AMPS and any other
preferred stock have been paid, and unless asset coverage (as defined in the
Investment Company Act) with respect to such AMPS and any other preferred
stock would be at least 200% after giving effect to such distributions.

Preferred Stock
- ---------------

Arizona I AMPS are structured identically to Arizona II AMPS. The AMPS
of each Fund are shares of preferred stock of the Fund that entitle their
holders to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor, at a rate per annum that
may vary for the successive dividend periods. Arizona I AMPS and Arizona II
AMPS both have liquidation preferences of $25,000 per share; neither Fund's
AMPS are traded on any stock exchange or over-the counter. Each Fund's AMPS
can be

34
<PAGE>

purchased at an auction or through broker-dealers who maintain a secondary
market in the AMPS. The interest rate for the initial dividend period for
the Arizona I AMPS was set at 2.75% per annum in the initial public offering
of the AMPS on August 25, 1993. The first auction for the Arizona I AMPS is
scheduled to be held on Monday, August 29, 1994, after which it is expected
that auctions will be held every seven days, unless Arizona I elects, subject
to certain limitations, to have a special dividend period. The interest rate
for the initial dividend period for the Arizona II AMPS was set at 2.75% per
annum in the initial public offering of the AMPS on November 29, 1993. The
first auction for the Arizona II AMPS was held on Wednesday, February 16,
1994, and thereafter auctions have been held and will be held every seven
days, unless Arizona II elects, subject to certain limitations, to have a
special dividend period. As of August 24, 1994, the dividend rate for the
Arizona II AMPS was 2.90%.

Under the Investment Company Act, each Fund is permitted to have
outstanding more than one series of preferred stock as long as no single
series has priority over another series as to the distribution of assets of
the Fund or the payment of dividends. Holders of a Fund's preferred stock do
not have preemptive rights to purchase any shares of AMPS or any other
preferred stock that might be issued. The net asset value per share of a
Fund's AMPS equals its original purchase price per share plus accumulated
dividends per share.

Certain Provisions of the Charter
- ---------------------------------

Each Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Directors and could have
the effect of depriving stockholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A Director may be removed from office
with or without cause by a vote of the holders of at least 66 2/3% of the
votes entitled to be voted on the matter. A Director elected by the holders
of Common Stock, AMPS and any other preferred stock may be removed only by
action of such holders, and a Director elected by the holders of AMPS and any
other preferred stock may be removed only by action of the holders of AMPS
and any other preferred stock.

In addition, the Charter of each Fund requires the affirmative vote of
the holders of at least 66 2/3% of all of the Fund's shares of capital stock,
then entitled to be voted, voting as a single class, to approve, adopt or
authorize the following:

(i) a merger or consolidation or statutory share exchange of the
Fund with any other corporation,

(ii) a sale of all or substantially all of the Fund's assets
(other than in the regular course of the Fund's investment activities),
or

(iii) a liquidation or dissolution of the Fund,

unless such action has been approved, adopted or authorized by the
affirmative vote of at least two-thirds of the total number of Directors
fixed in accordance with the Fund's by-laws, in which case the affirmative
vote of a majority of all of the votes entitled to be cast by stockholders of
the Fund, voting as a single class, is required. Such approval, adoption or
authorization of the foregoing also would require the favorable vote of the
holders of a majority of shares of preferred stock entitled to be voted
thereon, including the AMPS, voting as a separate class.

35
<PAGE>

In addition, conversion of a Fund to an open-end investment company
would require an amendment to the Fund's Articles of Incorporation. The
amendment would have to be declared advisable by the Board of Directors prior
to its submission to stockholders. Such an amendment would require the
affirmative vote of the holders of at least 66 2/3% of the Fund's outstanding
shares of capital stock (including the AMPS and any other preferred stock)
entitled to be voted on the matter, voting as a single class (or a majority
of such shares if the amendment was previously approved, adopted or
authorized by at least two-thirds of the total number of Directors fixed in
accordance with the Fund's by-laws), and, the affirmative vote of a majority
of votes entitled to be cast by holders of shares of preferred stock
(including the AMPS), voting separately as a class. Such a vote also would
satisfy a separate requirement in the Investment Company Act that the change
be approved by the stockholders. Stockholders of an open-end investment
company may require the company to redeem their shares of common stock at any
time (except in certain circumstances as authorized by or under the
Investment Company Act) at their net asset value, less such redemption
charge, if any, as might be in effect at the time of a redemption. All
redemptions will be made in cash. If the Fund is converted to an open-end
investment company, it could be required to liquidate portfolio securities to
meet requests for redemption and the Common Stock no longer would be listed
on a stock exchange. Conversion to an open-end investment company also would
require redemption of all outstanding shares of preferred stock (including
the AMPS) and would require changes in certain of the Fund's investment
policies and restrictions, such as those relating to the issuance of senior
securities, the borrowing of money and the purchase of illiquid securities.

The Board of Directors of each Fund has determined that the 66 2/3%
voting requirements described above, which are greater than the minimum
requirements under Maryland law or the Investment Company Act, are in the
best interests of stockholders generally. Reference should be made to the
Charter of each Fund on file with the Securities and Exchange Commission for
the full text of these provisions.

MANAGEMENT OF THE FUNDS

Directors and Officers. The Boards of Directors of Arizona I and
Arizona II currently consist of the same six persons, five of whom are not
"interested persons", as defined in the Investment Company Act, of either
Fund. The Directors are responsible for the overall supervision of the
operations of Arizona I and Arizona II and perform the various duties imposed
on the directors of investment companies by the Investment Company Act and
under applicable Maryland law. Arizona I and Arizona II also have the same
officers. For further information regarding the Directors and officers of
each Fund, see "Election of Directors".

Management and Advisory Arrangements. FAM serves as the investment
adviser for both Arizona I and Arizona II pursuant to separate investment
advisory agreements that, except for their termination dates, are identical.
FAM is an affiliate of MLAM, which is an indirect, wholly-owned subsidiary of
ML & Co. FAM provides each Fund with the same investment advisory and
management services. FAM or MLAM acts as the investment adviser for over 100
registered investment companies. FAM also offers portfolio management and
portfolio analysis services to individuals and institutions. As of June 30,
1994, FAM and MLAM had a total of approximately $161.4 billion in investment
company and other portfolio assets under management (approximately $30.0
billion of which were invested in municipal securities), including accounts
of certain affiliates of FAM. The principal business address of FAM is 800
Scudders Mill Road, Plainsboro, New Jersey 08536. The audited balance sheet
of FAM for the fiscal year ended December 31, 1993 is attached hereto on page
F-__.

Each Fund's investment advisory agreement with FAM provides that,
subject to the direction of the Board of Directors of the Fund, FAM is
responsible for the actual management of the Fund's portfolio. The
responsibility for making decisions to buy, sell or hold a particular
security for each Fund rests with FAM, subject to review by the Board of
Directors of the Fund.

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FAM provides the portfolio management for Arizona I and Arizona II.
Such portfolio management considers analyses from various sources (including
brokerage firms with which each Fund does business), makes the necessary
investment decisions, and places orders for transactions accordingly. FAM
also is responsible for the performance of certain administrative and
management services for each Fund.

For the services provided by FAM under each Fund's investment advisory
agreement, the Fund pays a monthly fee at an annual rate of .50 of 1% of the
Fund's average weekly net assets (i.e., the average weekly value of the total
assets of the Fund, minus the sum of accrued liabilities of the Fund and
accumulated dividends on its shares of AMPS). For purposes of this
calculation, average weekly net assets are determined at the end of each
month on the basis of the average net assets of the Fund for each week during
the month. The assets for each weekly period are determined by averaging the
net assets at the last business day of a week with the net assets at the last
business day of the prior week.

Each Fund's investment advisory agreement obligates FAM to provide
investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with investment
and economic research, trading and investment management of the Fund, as well
as the compensation of all Directors of the Fund who are affiliated persons
of FAM or any of its affiliates. Each Fund pays all other expenses incurred
in the operation of the Fund, including, among other things, expenses for
legal and auditing services, taxes, costs of printing proxies, listing fees,
stock certificates and stockholder reports, charges of the custodian and the
transfer agent, dividend disbursing agent and registrar, fees and expenses
with respect to the issuance of AMPS, Securities and Exchange Commission
fees, fees and expenses of unaffiliated Directors, accounting and pricing
costs, insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, mailing and other expenses properly
payable by the Fund. FAM provides accounting services to each Fund, and each
Fund reimburses FAM for its respective costs in connection with such
services.

Unless earlier terminated as described below, the investment advisory
agreement between Arizona I and FAM initially will remain in effect until May
31, 1995, and then will continue from year to year thereafter if approved
annually (a) by the Board of Directors of Arizona I or by a majority of the
outstanding shares of Arizona I Common Stock and Arizona I AMPS, voting
together as a single class, and (b) by a majority of the Directors of Arizona
I who are not parties to such contract or "interested persons", as defined in
the Investment Company Act, of any such party. The contract is not
assignable and it may be terminated without penalty on 60 days' written
notice at the option of either party thereto or by the vote of the
stockholders of Arizona I.

Similarly, unless earlier terminated as described below, the investment
advisory agreement between Arizona II and FAM initially will remain in effect
until September 30, 1995, and then will continue from year to year thereafter
if approved annually (a) by the Board of Directors of Arizona II or by a
majority of the outstanding shares of Arizona II Common Stock and Arizona II
AMPS, voting together as a single class, and (b) by a majority of the
Directors of Arizona II who are not parties to such contract or "interested
persons", as defined in the Investment Company Act, of any such party. The
contract is not assignable and it may be terminated without penalty on 60
days' written notice at the option of either party thereto or by the vote of
the stockholders of Arizona II.

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VOTING RIGHTS

Voting rights are identical for the holders of shares of Arizona I
Common Stock and the holders of shares of Arizona II Common Stock. Holders
of each Fund's Common Stock are entitled to one vote for each share held and
will vote with the holders of any outstanding shares of the Fund's AMPS or
other preferred stock on each matter submitted to a vote of holders of Common
Stock, except as set forth below.

Stockholders of each Fund are entitled to one vote for each share held.
The shares of each Fund's Common Stock, AMPS and any other preferred stock do
not have cumulative voting rights, which means that the holders of more than
50% of the shares of a Fund's Common Stock, AMPS and any other preferred
stock voting for the election of Directors can elect all of the Directors
standing for election by such holders, and, in such event, the holders of the
remaining shares of a Fund's Common Stock, AMPS and any other preferred stock
will not be able to elect any of such Directors.

Voting rights of the holders of Arizona I AMPS are identical to voting
rights of the holders of Arizona II AMPS. Except as otherwise indicated
below, and except as otherwise required by applicable law, holders of shares
of a Fund's AMPS will be entitled to one vote per share on each matter
submitted to a vote of the Fund's stockholders and will vote together with
the holders of shares of the Fund's Common Stock as a single class.

In connection with the election of a Fund's Directors, holders of shares
of a Fund's AMPS and any other preferred stock, voting separately as a class,
shall be entitled at all times to elect two of the Fund's Directors, and the
remaining Directors will be elected by holders of shares of the Fund's Common
Stock and shares of the Fund's AMPS and any other preferred stock, voting
together as a single class. In addition, if at any time dividends on
outstanding shares of a Fund's AMPS shall be unpaid in an amount equal to at
least two full years' dividends thereon or if at any time holders of any
shares of a Fund's preferred stock are entitled, together with the holders of
shares of the Fund's AMPS, to elect a majority of the Directors of the Fund
under the Investment Company Act, then the number of Directors constituting
the Board of Directors automatically shall be increased by the smallest
number that, when added to the two Directors elected exclusively by the
holders of shares of AMPS and any other preferred stock as described above,
would constitute a majority of the Board of Directors as so increased by such
smallest number, and at a special meeting of stockholders which will be
called and held as soon as practicable, and at all subsequent meetings at
which Directors are to be elected, the holders of shares of the Fund's AMPS
and any other preferred stock, voting separately as a class, will be entitled
to elect the smallest number of additional Directors that, together with the
two Directors which such holders in any event will be entitled to elect,
constitutes a majority of the total number of Directors of the Fund as so
increased. The terms of office of the persons who are Directors at the time
of that election will continue. If the Fund thereafter shall pay, or declare
and set apart for payment in full, all dividends payable on all outstanding
shares of AMPS and any other preferred stock for all past dividend periods,
the additional voting rights of the holders of shares of AMPS and any other
preferred stock as described above shall cease, and the terms of office of
all of the additional Directors elected by the holders of shares of AMPS and
any other preferred stock (but not of the Directors with respect to whose
election the holders of shares of Common Stock were entitled to vote or the
two Directors the holders of shares of AMPS and any other preferred stock
have the right to elect in any event) will terminate automatically.

STOCKHOLDER INQUIRIES

Stockholder inquiries with respect to Arizona I and Arizona II may be
addressed to either Fund by telephone at (609) 282-2000 or at the address set
forth on the cover page of this Proxy Statement and Prospectus.

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DIVIDENDS AND DISTRIBUTIONS

Arizona I's current policy with respect to dividends and distributions
relating to shares of the Arizona I Common Stock is identical to Arizona II's
policy with respect to shares of the Arizona II Common Stock. Each Fund
intends to distribute substantially all of its net investment income.
Dividends from such net investment income are declared and paid monthly to
holders of a Fund's Common Stock. Monthly distributions to holders of a
Fund's Common Stock normally consist of substantially all of the net
investment income remaining after the payment of dividends on the Fund's
AMPS. All net realized long-term or short-term capital gains, if any, are
distributed at least annually, pro rata to holders of shares of a Fund's
Common Stock and AMPS. While any shares of a Fund's AMPS are outstanding,
the Fund may not declare any cash dividend or other distribution on the
Fund's Common Stock, unless at the time of such declaration, (1) all
accumulated dividends on the Fund's AMPS have been paid, and (2) the net
asset value of the Fund's portfolio (determined after deducting the amount of
such dividend or other distribution) is at least 200% of the liquidation
value of the Fund's outstanding shares of AMPS. This limitation on a Fund's
ability to make distributions on its Common Stock under certain circumstances
could impair the ability of the Fund to maintain its qualification for
taxation as a regulated investment company. See "The Reorganization--Tax
Consequences of the Reorganization".

Similarly, Arizona I's current policy with respect to dividends and
distributions relating to shares of the Arizona I AMPS is identical to
Arizona II's current policy with respect to shares of the Arizona II AMPS.
The holders of shares of a Fund's AMPS are entitled to receive, when, as and
if declared by the Board of Directors of the Fund, out of funds legally
available therefor, cumulative cash dividends on their shares. Dividends on
a Fund's shares of AMPS so declared and payable shall be paid (i) in
preference to and in priority over any dividends so declared and payable on
the Fund's Common Stock, and (ii) to the extent permitted under the Code and
to the extent available, out of net tax-exempt income earned on the Fund's
investments. Dividends for the Arizona I AMPS and the Arizona II AMPS are
paid through The Depository Trust Company ("DTC") (or a successor securities
depository) on each dividend payment date. DTC's normal procedures provide
for it to distribute dividends in next-day funds settled through the New York
Clearing House to agent members, who in turn are expected to distribute such
dividends to the person for whom they are acting as agent in accordance with
the instructions of such person. The current broker-dealers for the AMPS of
each Fund have indicated to the Funds that they, or their affiliates, will
make such dividend payments available in same-day funds to customers that use
such broker-dealers or affiliates as agent members. Prior to each dividend
payment date, the relevant Fund is required to deposit with the Auction Agent
sufficient funds for the payment of such declared dividends. Neither Fund
intends to establish any reserves for the payment of dividends, and no
interest will be payable in respect of any dividend payment or payment on the
shares of a Fund's AMPS which may be in arrears.

Dividends paid by each Fund, to the extent paid from tax-exempt income
earned on Arizona Municipal Bonds, are exempt from Federal and Arizona income
taxes, subject to the possible application of the alternative minimum tax.
However, each Fund is required to allocate net capital gains and other income
subject to regular Federal income taxes, if any, proportionately between
shares of its Common Stock and shares of its AMPS in accordance with the
current position of the IRS described herein. Each Fund notifies the Auction
Agent of the amount of any net capital gains or other taxable income to be
included in any dividend on shares of AMPS prior to the auction establishing
the applicable rate for such dividend. The Auction Agent in turn notifies
each broker-dealer whenever it receives any such notice from a Fund, and each
broker-dealer then notifies its customers who are holders of the Fund's AMPS.

In limited circumstances, each Fund also may include such income in a
dividend on shares of its AMPS without giving advance notice thereof if it
increases the dividend by an additional amount to offset the tax effect
thereof. The amount of taxable income allocable to shares of a Fund's AMPS
will depend upon the amount of such income realized by the Fund and other
factors, but generally is not expected to be significant.

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<PAGE>

For information concerning the manner in which dividends and
distributions to holders of each Fund's Common Stock may be reinvested
automatically in shares of the Fund's Common Stock, see "Automatic Dividend
Reinvestment Plan". Dividends and distributions may be taxable to
stockholders under certain circumstances as discussed below, whether they are
reinvested in shares of a Fund or received in cash.

If Arizona I or Arizona II, as the case may be, retroactively allocates
any net capital gains or other income subject to regular Federal income taxes
to shares of its AMPS without having given advance notice thereof as
described above, which only may happen when such allocation is made as a
result of the redemption of all or a portion of the outstanding shares of its
AMPS or the liquidation of the Fund, the Fund will make certain payments to
holders of shares of its AMPS to which such allocation was made to offset
substantially the tax effect thereof. In no other instances will the Fund be
required to make payments to holders of shares of its AMPS to offset the tax
effect of any reallocation of net capital gains or other taxable income.

AUTOMATIC DIVIDEND REINVESTMENT PLAN

Pursuant to each Fund's Automatic Dividend Reinvestment Plan (each, the
"Plan"), unless a holder of a Fund's Common Stock elects otherwise, all
dividend and capital gains distributions are reinvested automatically by The
Bank of New York, as agent for stockholders in administering the Plan (the
"Plan Agent"), in additional shares of the Fund's Common Stock. Holders of a
Fund's Common Stock who elect not to participate in the Plan receive all
distributions in cash paid by check mailed directly to the stockholder of
record (or, if the shares are held in street or other nominee name, then to
such nominee) by The Bank of New York, as dividend paying agent. Such
stockholders may elect not to participate in the Plan and to receive all
distributions of dividends and capital gains in cash by sending written
instructions to The Bank of New York, as dividend paying agent, at the
address set forth below. Participation in the Plan is completely voluntary
and may be terminated or resumed at any time without penalty by written
notice if received by the Plan Agent not less than ten days prior to any
dividend record date; otherwise, such termination will be effective with
respect to any subsequently declared dividend or capital gains distribution.

Whenever a Fund declares an ordinary income dividend or a capital gain
dividend (collectively referred to as "dividends") payable either in shares
or in cash, non-participants in the Plan receive cash, and participants in
the Plan receive the equivalent in shares of the Fund's Common Stock. The
shares are acquired by the Plan Agent for the participant's account,
depending upon the circumstances described below, either (i) through receipt
of additional unissued but authorized shares of the Fund's Common Stock from
the Fund ("newly issued shares") or (ii) by purchase of outstanding shares of
the Fund's Common Stock on the open market ("open-market purchases"), on the
AMEX or elsewhere. If on the payment date for the dividend, the net asset
value per share of the Fund's Common Stock is equal to or less than the
market price per share of the Fund's Common Stock plus estimated brokerage
commissions (such condition being referred to herein as "market premium"),
the Plan Agent invests the dividend amount in newly-issued shares on behalf
of the participant. The number of newly-issued shares of the Fund's Common
Stock to be credited to the participant's account is determined by dividing
the dollar amount of the dividend by the net asset value per share on the
date the shares are issued, provided that the maximum discount from the then
current market price per share on the date of issuance may not exceed 5%. If
on the dividend payment date, the net asset value per share is greater than
the market value (such condition being referred to herein as "market
discount"), the Plan Agent invests the dividend amount in shares acquired on
behalf of the participant in open-market purchases.

In the event of a market discount on the dividend payment date, the Plan
Agent has until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares

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<PAGE>

acquired in open-market purchases. Each Fund intends to pay monthly income
dividends. Therefore, the period during which open-market purchases can be
made exists only from the payment date on the dividend through the date
before the next "ex-dividend" date, which typically is approximately ten
days. If, before the Plan Agent has completed its open-market purchases, the
market price of a share of a Fund's Common Stock exceeds the net asset value
per share, the average per share purchase price paid by the Plan Agent may
exceed the net asset value of the Fund's shares, resulting in the acquisition
of fewer shares than if the dividend had been paid in newly-issued shares on
the dividend payment date. Because of the foregoing difficulty with respect
to open-market purchases, the Plan provides that if the Plan Agent is unable
to invest the full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market premium during
the purchase period, the Plan Agent ceases making open-market purchases and
invests the uninvested portion of the dividend amount in newly-issued shares
at the close of business on the last purchase date.

The Plan Agent maintains all stockholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by stockholders for tax records. Shares in the account of
each Plan participant are held by the Plan Agent in non-certificated form in
the name of the participant, and each stockholder's proxy includes those
shares purchased or received pursuant to the Plan. The Plan Agent will
forward all proxy solicitation materials to participants and vote proxies for
shares held pursuant to the Plan in accordance with the instructions of the
participants.

In the case of stockholders such as banks, brokers or nominees which
hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the record stockholders as representing the total amount
registered in the record stockholder's name and held for the account of
beneficial owners who are to participate in the Plan.

There are no brokerage charges with respect to shares issued directly by
Arizona I or Arizona II as a result of dividends or capital gains
distributions payable either in shares or in cash. However, each participant
pays a pro rata share of brokerage commissions incurred with respect to the
Plan Agent's open-market purchases in connection with the reinvestment of
dividends.

The automatic reinvestment of dividends and distributions does not
relieve participants of any Federal, state or local income tax that may be
payable (or required to be withheld) on such dividends. See "The
Reorganization--Tax Consequences of the Reorganization".

Stockholders participating in the Plan may receive benefits not
available to stockholders not participating in the Plan. If the market price
plus commissions of a Fund's shares of Common Stock is above the net asset
value, participants in the Plan receive shares of the Fund's Common Stock at
less than they otherwise could purchase them and have shares with a cash
value greater than the value of any cash distribution they would have
received on their shares. If the market price plus commissions is below the
net asset value, participants receive distributions in shares with a net
asset value greater than the value of any cash distribution they would have
received on their shares. However, there may be insufficient shares
available in the market to make distributions in shares at prices below the
net asset value. Also, since neither Fund normally redeems its shares, the
price on resale may be more or less than the net asset value.

Each Fund reserves the right to amend or terminate its Plan. There is
no direct service charge to participants in the Plan; however, each Fund
reserves the right to amend its Plan to include a service charge payable by
the participants.

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LIQUIDATION RIGHTS OF HOLDERS OF AMPS

Upon any liquidation, dissolution or winding up of Arizona I or Arizona
II, as the case may be, whether voluntary or involuntary, the holders of
shares of the Fund's AMPS will be entitled to receive, out of the assets of
the Fund available for distribution to stockholders, before any distribution
or payment is made upon any shares of the Fund's Common Stock or any other
capital stock of the Fund ranking junior in right of payment upon liquidation
to AMPS, $25,000 per share together with the amount of any dividends
accumulated but unpaid (whether or not earned or declared) thereon to the
date of distribution, and after such payment the holders of AMPS will be
entitled to no other payments except for any additional dividends. If such
assets of the Fund shall be insufficient to make the full liquidation payment
on the AMPS and liquidation payments on any other outstanding class or series
of preferred stock of the Fund ranking on a parity with the AMPS as to
payment upon liquidation, then such assets will be distributed among the
holders of shares of AMPS and the holders of shares of such other class or
series ratably in proportion to the respective preferential amounts to which
they are entitled. After payment of the full amount of liquidation
distribution to which they are entitled, the holders of shares of a Fund's
AMPS will not be entitled to any further participation in any distribution of
assets by the Fund except for any additional dividends. A consolidation,
merger or share exchange of a Fund with or into any other entity or entities
or a sale, whether for cash, shares of stock, securities or properties, of
all or substantially all or any part of the assets of the Fund shall not be
deemed or construed to be a liquidation, dissolution or winding up of the
Fund.

TAX RULES APPLICABLE TO ARIZONA I, ARIZONA II AND THEIR STOCKHOLDERS

The tax consequences associated with investment in shares of Arizona I
Common Stock are identical to the tax consequences associated with investment
in shares of Arizona II Common Stock. Similarly, the tax consequences
associated with investment in shares of Arizona I AMPS are identical to the
tax consequences associated with investment in shares of Arizona II AMPS.
Arizona I and Arizona II have qualified for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As a
result, in any taxable year in which they distribute an amount equal to at
least 90% of taxable net income and 90% of tax-exempt net income (see below),
the Funds (but not their stockholders) are not subject to Federal income tax
to the extent that they distribute their net investment income and net
realized capital gains. Similar rules apply to the Funds if their income is
subject to Arizona tax, except that the Funds may be subject to the Arizona
minimum corporate income tax of $50. Neither Fund has been subject to
Arizona tax (except for application of the Arizona minimum corporate income
tax) and each Fund has distributed substantially all of its income.

If, at any time when shares of a Fund's AMPS are outstanding the Fund
does not meet the asset coverage requirements of the Investment Company Act,
the Fund is required to suspend distributions to holders of shares of its
Common Stock until the asset coverage is restored. This can prevent the Fund
from distributing at least 90% of its net income and therefore can jeopardize
the Fund's qualification for taxation as a regulated investment company.
Upon any failure to meet the asset coverage requirements, the Funds may, and
under certain circumstances are required to, redeem shares of AMPS in order
to maintain or restore the requisite asset coverage and avoid the adverse
consequences of failing to qualify as a RIC.

Each Fund is qualified to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section, if, at the close of each
quarter of its taxable year, at least 50% of the value of a Fund's total
assets consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund is qualified to
pay exempt-interest dividends to its stockholders. Exempt-interest dividends
are dividends or any part thereof paid by a Fund which are attributable to
interest on tax-exempt obligations and designated by the Fund as
exempt-interest dividends in a written notice mailed to stockholders within
60 days after the close of its taxable year. To the extent that the
dividends distributed to a Fund's stockholders are derived from interest
income
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<PAGE>

exempt from Federal income tax under Code Section 103(a) and are properly
designated as exempt-interest dividends, they are excludable from a
stockholder's gross income for Federal income tax purposes. Exempt-interest
dividends are included, however, in determining the portion, if any, of a
person's social security and railroad retirement benefits subject to Federal
income taxes. Interest on indebtedness incurred or continued to purchase or
carry a Fund's shares is not deductible for Federal income tax purposes to
the extent attributable to exempt-interest dividends. A tax adviser should
be consulted with respect to whether exempt-interest dividends retain the
exclusion under Code Section 103(a) if a stockholder would be treated as a
"substantial user" or "related person" under Code Section 147(a) with respect
to property financed with the proceeds of an issue of "industrial development
bonds" or "private activity bonds," if any, held by a Fund.

The portion of exempt-interest dividends paid from interest received by
each Fund from Arizona Municipal Bonds also is exempt from Arizona personal
and corporate income tax. Stockholders subject to income taxation by states
other than Arizona may realize a lower after-tax rate of return than Arizona
stockholders since the dividends distributed by a Fund generally are not
exempt, to any significant degree, from income taxation by such other states.

Each Fund informs its stockholders annually as to the portion of the Fund's
distributions which constitutes exempt-interest dividends and the portion
which is exempt from Arizona personal and corporate income taxes. Interest
on indebtedness incurred or continued to purchase or carry a Fund's shares is
not deductible for Arizona personal or corporate income tax purposes.

The IRS, in a revenue ruling, held that certain AMPS would be treated as
stock for Federal income tax purposes. The terms of the Arizona I AMPS and
the Arizona II AMPS are substantially similar, but not identical, to the AMPS
discussed in the revenue ruling, and in the opinion of Brown & Wood, counsel
to both Funds, the shares of each Fund's AMPS constitute stock and
distributions with respect to shares of such AMPS (other than distributions
in redemption of shares of AMPS subject to Section 302(b) of the Code)
constitute dividends to the extent of current and accumulated earnings and
profits as calculated for Federal income tax purposes. Nevertheless, the IRS
could take a contrary position, asserting, for example, that the shares of
AMPS constitute debt. If this position is upheld, the discussion of the
treatment of distributions below will not apply to holders of shares of AMPS.

Instead, distributions by each Fund to holders of shares of its AMPS will
constitute interest, whether or not they exceed the earnings and profits of
the Fund, will be included in full in the income of the recipient and taxed
as ordinary income. Counsel believes that such a position, if asserted by
the IRS, is unlikely to prevail.

To the extent that a Fund's distributions are derived from interest on
its taxable investments or from an excess of net short-term capital gains
over net long-term capital losses ("ordinary income dividends"), such
distributions are considered taxable ordinary income for Federal and Arizona
income tax purposes. Such distributions are not eligible for the dividends
received deduction for corporations. Distributions, if any, of net long-term
capital gains from the sale of securities or from certain transactions in
futures or options ("capital gain dividends") are taxable as long-term
capital gains for Federal income tax purposes, regardless of the length of
time the stockholder has owned Fund shares, and are taxable as ordinary
income for Arizona tax purposes. Under the Revenue Reconciliation Act of
1993, all or a portion of a Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount
of ordinary income dividends received by stockholders. Any loss upon the
sale or exchange of Fund shares held for six months or less is treated as
long-term capital loss to the extent of capital gain dividends received by
the stockholder. In addition, such loss is disallowed to the extent of any
exempt-interest dividends received by the stockholder. Distributions in
excess of a Fund's earnings and profits first will reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming the shares are
held as a capital asset). If a Fund pays a dividend in January which was
declared in the previous October, November or December to stockholders of
record on a specified date in one of such months, then such dividend is
treated for tax purposes as paid by the Fund and
received by its stockholders on December 31 of the year in which such
dividend was declared.

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The IRS has taken the position in a revenue ruling that if a RIC has two
classes of shares it may designate distributions made to each class in any
year as consisting of no more than such class' proportionate share of
particular types of income, including exempt-interest dividends and capital
gain dividends. Thus, each Fund is required to allocate a portion of its net
capital gains and other taxable income to the shares of its AMPS. Each Fund
generally notifies the Auction Agent of the amount of any net capital gains
and other taxable income to be included in any dividend on shares of its AMPS
prior to the auction establishing the applicable rate for such dividend.
Except for the portion of any dividend that a Fund informs the Auction Agent
will be treated as capital gains or other taxable income, the dividends paid
on the shares of AMPS constitute exempt-interest dividends. The amount of
net capital gains and ordinary income allocable to shares of a Fund's AMPS
(the "taxable distribution") depends upon the amount of such gains and income
realized by the Fund and the total dividends paid by the Fund on shares of
its Common Stock and shares of its AMPS during a taxable year, but the
taxable distribution generally is not significant.

In the opinion of Brown & Wood, counsel to both Funds, under current law
the manner in which each Fund allocates items of tax-exempt income, net
capital gains, and other taxable income, if any, between shares of its Common
Stock and shares of its AMPS will be respected for Federal income tax
purposes. However, the tax treatment of additional dividends may affect a
Fund's calculation of each class' allocable share of capital gains and other
taxable income. In addition, there is currently no direct guidance from the
IRS or other sources specifically addressing whether a Fund's method for
allocating tax-exempt income, net capital gains, and other taxable income
between shares of its Common Stock and shares of its AMPS will be respected
for Federal income tax purposes, and it is possible that the IRS could
disagree with counsel's opinion and attempt to reallocate a Fund's net
capital gains or other taxable income. In the event of a reallocation, some
of the dividends identified by a Fund as exempt-interest dividends to holders
of shares of its AMPS could be recharacterized as additional capital gains or
other taxable income. In the event of such recharacterization, a Fund is not
required to make payments to such stockholders to offset the tax effect of
such reallocation. In addition, a reallocation could cause a Fund to be
liable for income tax and excise tax on any reallocated taxable income.
Brown & Wood has advised each Fund that, in its opinion, if the IRS were to
challenge in court the Fund's allocations of income and gain, the IRS would
be unlikely to prevail. The opinion of Brown & Wood, however, represents
only its best legal judgment and is not binding on the IRS or the courts.

The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent it does not distribute 98% of its ordinary income, determined on a
calendar year basis, and 98% of its capital gains, determined in general, on
an October 31 year end, plus certain undistributed amounts from previous
years. The required distributions, however, are based only on the taxable
income of a regulated investment company. The excise tax, therefore,
generally does not apply to the tax-exempt income of RICs, such as the Funds,
that pay exempt-interest dividends.

The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax
applies to interest received on "private activity bonds" issued after August
7, 1986. "Private activity bonds" are bonds which, although tax-exempt, are
used for purposes other than those generally performed by governmental units
and which benefit non-governmental entities (e.g., bonds used for industrial
development or housing purposes). Income received on such bonds is
classified as an item of "tax preference" which could subject investors in
such bonds, including stockholders of the Funds, to an increased alternative
minimum tax. Each Fund purchases such "private activity bonds" and reports
to stockholders within 60 days after its fiscal year-end the portion of its
dividends declared during the year which constitutes an item of tax
preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to an alternative minimum tax based, in part,
on certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings" which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by a Fund is

44
<PAGE>

included in adjusted current earnings, a corporate stockholder may be
required to pay an alternative minimum tax on exempt-interest dividends paid
by such Fund.

The Revenue Reconciliation Act of 1993 has added new marginal tax
brackets of 36% and 39.6% for individuals and has created a graduated
structure of 26% and 28% for the alternative minimum tax applicable to
individual taxpayers. These rate increases affect the after-tax return from
an investment in the Funds as compared with a return from taxable
investments.

Under certain provisions of the Code, some stockholders may be subject
to a 31% withholding tax on certain ordinary income dividends and on capital
gain dividends and redemption payments ("backup withholding"). Generally,
stockholders subject to backup withholding will be those for whom no taxpayer
identification number is on file with the Funds or who, to the Funds'
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that such stockholder is not otherwise subject to backup withholding.

Ordinary income dividends paid by a Fund to stockholders who are
nonresident aliens or foreign entities are subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law.

A loss realized on a sale or exchange of shares of a Fund disallowed if
other Fund shares are acquired (whether under the Automatic Dividend
Reinvestment Plan or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.

The Code provides that every stockholder required to file a tax return
must include for information purposes on such return the amount of
exempt-interest dividends received from all sources (including the Funds)
during the taxable year.

THE REORGANIZATION

GENERAL

Under the Agreement and Plan of Reorganization (attached hereto as
Exhibit I), Arizona II will acquire substantially all of the assets, and will
assume substantially all of the liabilities, of Arizona I, in exchange solely
for an equal aggregate value of Arizona II Common Stock and Arizona II Series
B AMPS to be issued by Arizona II. Upon receipt by Arizona I of such shares,
Arizona I will distribute the shares of Arizona II Common Stock to the
holders of Arizona I Common Stock and the shares of Arizona II Series B AMPS
to the holders of Arizona I AMPS in exchange for their proportionate
interests in the assets and liabilities of Arizona I. Articles Supplementary
to the Articles of Incorporation of Arizona II establishing the powers,
rights and preferences of the Arizona II Series B AMPS will have been filed
with the Department of Assessments and Taxation of the State of Maryland
prior to the closing of the Reorganization. As soon as practicable after the
closing of the Reorganization, Articles of Amendment to the Articles of
Incorporation of Arizona II will be filed with the Department of Assessments
and Taxation of the State of Maryland, reflecting a change in the name of the
surviving fund to "MuniYield Arizona Fund, Inc."

45
<PAGE>

As soon as practicable after the Exchange Date (as defined below),
Arizona I would dissolve and distribute the shares of Arizona II Common Stock
and Arizona II Series B AMPS, respectively, received by it pro rata to its
holders of record of Arizona I Common Stock and Arizona I AMPS, respectively,
in exchange for such stockholders' proportional interests in Arizona I. Such
dissolution and distribution would be accomplished by opening new accounts on
the books of Arizona II in the names of the common and preferred stockholders
of Arizona I and transferring to those stockholder accounts the Arizona II
Common Stock and Arizona II Series B AMPS previously credited on those books
to the account of Arizona I. Each newly-opened account on the books of
Arizona II for the previous holders of Arizona I Common Stock would represent
the respective pro rata number of shares of Arizona II Common Stock (rounded
down, in the case of fractional shares, to the next largest number of whole
shares) due such holder of Arizona I Common Stock. No fractional shares of
Arizona I Common Stock or Arizona II Common Stock will be issued. In lieu
thereof, Arizona I's transfer agent, The Bank of New York, will aggregate all
fractional shares of Arizona I Common Stock and sell the resulting whole
shares on the AMEX for the account of all holders of fractional interests,
and each such holder will be entitled to his or her pro rata share of the
proceeds of such sale upon surrender of his or her Arizona I Common Stock
certificates. Similarly, each newly-opened account on the books of Arizona
II for the previous holders of Arizona I AMPS would represent the respective
pro rata number of shares of Arizona I AMPS due such holder of Arizona I
AMPS. See "Surrender and Exchange of Arizona I Stock Certificates" for a
description of the procedures to be followed by Arizona I stockholders to
obtain their Arizona II Common Stock (and cash in lieu of fractional shares,
if any) or Arizona II Series B AMPS, as the case may be.

Accordingly, as a result of the Reorganization, every holder of Arizona
I Common Stock would own shares of Arizona II Common Stock that (except for
cash payments received in lieu of fractional shares) would have an aggregate
net asset value immediately after the Exchange Date equal to the aggregate
net asset value of that stockholder's Arizona I Common Stock immediately
prior to the Exchange Date. Since the Arizona II Common Stock would be
issued at net asset value in exchange for the net assets of Arizona I having
a value equal to the aggregate net asset value of those shares of Arizona I
Common Stock, the net asset value per share of Arizona II Common Stock should
remain virtually unchanged by the Reorganization. Similarly, since the
Arizona II Series B AMPS would be issued at a liquidation preference per
share equal to the liquidation preference of the Arizona I AMPS, the
liquidation preference per share of the Arizona II AMPS should remain
virtually unchanged by the Reorganization. Thus, the Reorganization should
result in virtually no dilution of net asset value of the Arizona II Common
Stock, other than to reflect the costs of the Reorganization, and should
result in no dilution of liquidation preference of the Arizona II AMPS.
However, as a result of the Reorganization, a stockholder of either Fund
likely would hold a reduced percentage of ownership in the larger combined
entity than he or she did in either of the constituent Funds.

PROCEDURE

On June 17, 1994, the Boards of Directors of Arizona I and Arizona II,
including all of the Directors who are not "interested persons", as defined
by the Investment Company Act, of Arizona I and Arizona II deemed advisable
the Agreement and Plan of Reorganization.

On the same date, the Board of Directors of Arizona II approved (i) a
change in the name of the surviving fund to "MuniYield Arizona Fund, Inc.",
to be effected by the filing of Articles of Amendment to Arizona II's
Articles of Incorporation; and (ii) the filing of Articles Supplementary to
Arizona II's Articles of Incorporation establishing the powers, rights and
preferences of the Arizona II Series B AMPS in order that they may be given
to holders of Arizona I AMPS as part of the Reorganization.

46
<PAGE>

As a result of such Board approvals, Arizona I and Arizona II jointly
will file a proxy statement with the Securities and Exchange Commission
soliciting a vote of the stockholders of Arizona I and Arizona II to approve
the Reorganization. The costs of such solicitation are to be paid by Arizona
II after the Reorganization so as to be borne equally and exclusively by the
holders of Arizona I Common Stock and Arizona II Common Stock. It is
anticipated that special meetings of stockholders of Arizona I and Arizona II
will be held on or about December 22, 1994. If the stockholders of both
Arizona I and Arizona II approve the Reorganization, the Reorganization will
take place on or about December 29, 1994.

TERMS OF THE AGREEMENT AND PLAN OF REORGANIZATION

The following is a summary of the significant terms of the Agreement and
Plan of Reorganization. This summary is qualified in its entirety by
reference to the Agreement and Plan of Reorganization, attached hereto as
Exhibit I.

Valuation of Assets and Liabilities. The respective assets of Arizona I
and Arizona II will be valued on the business day prior to the date on which
the Reorganization will take place (the "Exchange Date"). The valuation
procedures are the same for both Funds: Net asset value per share of the
Arizona I Common Stock and the Arizona II Common Stock will be determined at
4:15 P.M., New York time, on the Exchange Date. For the purpose of
determining the net asset value of a share of the Arizona I Common Stock or
the Arizona II Common Stock, the value of the securities held by the issuing
Fund plus any cash or other assets (including interest accrued but not yet
received) minus all liabilities (including accrued expenses) and the
aggregate liquidation value of the outstanding shares of AMPS of the issuing
Fund is divided by the total number of shares of Common Stock of the issuing
Fund outstanding at such time. Daily expenses, including the fees payable to
FAM, will accrue on the Exchange Date.

The Arizona Municipal Bonds in which each Fund invests are traded
primarily in the over-the-counter markets. In determining net asset value on
the Exchange Date, each Fund will utilize the valuations of portfolio
securities furnished by a pricing service approved by the Boards of Directors
of the Funds. The pricing service typically values portfolio securities at
the bid price or the yield equivalent when quotations are readily available.
Municipal Bonds for which quotations are not readily available will be valued
at fair market value on a consistent basis as determined by the pricing
service using a matrix system to determine valuations. The Boards of
Directors of Arizona I and Arizona II have determined in good faith that the
use of a pricing service is a fair method of determining the valuation of
portfolio securities. Positions in financial futures contracts will be
valued on the Exchange Date at closing prices for such contracts established
by the exchange on which they are traded, or if market quotations are not
readily available, will be valued at fair value on a consistent basis using
methods determined in good faith by the Board of Directors.

Distribution of Arizona II Common Stock and Arizona II Series B AMPS.
On the Exchange Date, Arizona II will issue to Arizona I a number of shares
of Arizona II Common Stock the aggregate net asset value of which will equal
the aggregate net asset value of shares of Arizona I Common Stock on the
Exchange Date. Each holder of Arizona I Common Stock will receive the number
of shares of Arizona II Common Stock corresponding to his or her
proportionate interest in the aggregate net asset value of the Arizona I
Common Stock.

On the Exchange Date, Arizona II also will issue to Arizona I a number
of shares of Arizona II Series B AMPS the aggregate liquidation preference of
which will equal the aggregate liquidation preference of Arizona I AMPS on
the Exchange Date. Each holder of Arizona I AMPS will receive the number of
shares of Arizona II Series B AMPS corresponding to his or her proportionate
interest in the aggregate liquidation

47
<PAGE>

preference of the Arizona I AMPS. No sales charge or fee of any kind will be
charged to Arizona I stockholders in connection with their receipt of Arizona
II Common Stock and Arizona II Series B AMPS in the Reorganization. The
Arizona II Series B AMPS will follow the same auction schedule and procedures
as those presently followed by the Arizona I AMPS.

Expenses. Arizona II shall pay, subsequent to the Exchange Date, all
expenses incurred in connection with the Reorganization, including, but not
limited to, all costs related to the preparation and distribution of
materials distributed to each Fund's Board of Directors, expenses incurred in
connection with the preparation of the Agreement and Plan of Reorganization
and a registration statement on Form N-14, Securities and Exchange Commission
and state securities commission filing fees and legal and audit fees in
connection with the Reorganization, printing and distributing this Proxy
Statement and Prospectus, legal fees incurred preparing each Fund's board
materials, attending each Fund's board meetings and preparing the minutes and
accounting fees associated with each Fund's financial statements, stock
exchange fees, rating agency fees, portfolio transfer taxes (if any), and any
similar expenses incurred in connection with the Reorganization. In this
regard, expenses of the Reorganization will be deducted from the assets of
the combined fund so as to be borne equally and exclusively by the holders of
the Arizona I Common Stock and the Arizona II Common Stock. Neither Arizona
I nor Arizona II shall pay any expenses of its respective stockholders
arising out of or in connection with the Reorganization.

Required Approvals. Under Arizona I's Articles of Incorporation (as
amended to date and including Articles Supplementary establishing the powers,
rights and preferences of the Arizona I AMPS), relevant Maryland law and the
rules of the AMEX, stockholder approval of the Agreement and Plan of
Reorganization requires the affirmative vote of stockholders representing
more than 50% of the outstanding shares of Arizona I Common Stock and Arizona
I AMPS, voting together as a single class, and of the Arizona I AMPS, voting
separately as a class. Similarly, under Arizona II's Articles of
Incorporation (as amended to date and including Articles Supplementary
establishing the powers, rights and preferences of the Arizona II AMPS),
relevant Maryland law and the rules of the AMEX, stockholder approval of the
Agreement and Plan of Reorganization requires the affirmative vote of
stockholders representing more than 50% of the outstanding shares of Arizona
II Common Stock and Arizona II AMPS, voting together as a single class, and
of the Arizona II AMPS, voting separately as a class.

Deregistration and Dissolution. Following the transfer of the assets
and liabilities of Arizona I to Arizona II and the distribution of shares of
Arizona II Common Stock and Arizona II Series B AMPS to Arizona I
stockholders, Arizona I will terminate its registration under the Investment
Company Act and its incorporation under Maryland law.

Amendments and Conditions. The Agreement and Plan of Reorganization may
be amended at any time prior to the Exchange Date with respect to any of the
terms therein. The obligations of Arizona I and Arizona II pursuant to the
Agreement and Plan of Reorganization are subject to various conditions,
including a registration statement on Form N-14 being declared effective by
the Securities and Exchange Commission, approval of the Reorganization by the
requisite number of shares of stockholders of Arizona I and Arizona II being
given, an IRS ruling as to tax matters being received, an opinion of counsel
as to securities matters being received and the continuing accuracy of
various representations and warranties of Arizona I and Arizona II being
confirmed by the respective parties.

48
<PAGE>

BENEFITS TO ARIZONA I COMMON STOCKHOLDERS AND ARIZONA II COMMON STOCKHOLDERS
AS A RESULT OF THE REORGANIZATION

In approving the Reorganization, the Board of Directors of each Fund
identified certain benefits that are likely to result from combining the
Funds, including lower expenses per share of Common Stock, greater efficiency
and flexibility in portfolio management and a more liquid trading market for
the shares of Common Stock of the combined fund. The Boards also considered
the possible risks and costs of combining the Funds, and examined the
relative credit strength, maturity characteristics, mix of type and purpose,
and yield of the Funds' portfolios of Municipal Bonds and the costs involved
in a transaction such as the Reorganization. The Boards noted the many
similarities between the Funds, including their virtually identical
investment objectives and investment policies, their common management and
their similar portfolios of Municipal Bonds. Based on these factors, the
Boards concluded that the Reorganization (i) presents no significant risks
that would outweigh the benefits discussed above and (ii) involves minimal
costs (including relatively minor legal, accounting and administrative costs,
most of which already have been incurred in evaluating and analyzing the
Reorganization).

The surviving fund that would result from the Reorganization would have
a much larger asset base than either Fund has currently. Based on data
presented by FAM, the Board of each Fund believes that administrative
expenses for a larger combined fund would be less than the aggregate expenses
for the individual Funds, resulting in a lower expense ratio for common
stockholders of the combined fund and higher earnings per common share. In
particular, certain fixed costs, such as costs of printing stockholder
reports and proxy statements, legal expenses, audit fees, registration fees,
mailing costs and other expenses will be spread across a larger asset base,
thereby lowering the expense ratio for the combined fund. To illustrate the
potential economies of scale, on April 30, 1994, the total operating expense
ratio for Arizona I was 0.94% (0.65% after voluntary reimbursement by FAM)
(based on net assets of $52.4 million), and the total operating expense ratio
for Arizona II was 1.04% (0.35% after voluntary reimbursement by FAM) (based
on net assets of $35.5 million). If the Reorganization had taken place on
that date, the total operating expense ratio for the combined fund would have
been 0.88% (based on net assets of $84.5 million).

Management projections estimate that Arizona II will have net assets in
excess of $(85) million upon completion of the Reorganization. A larger
asset base should provide benefits in portfolio management. After the
Reorganization, Arizona II should be able to purchase large amounts of
Municipal Bonds at more favorable prices than either of the Funds separately
and, with this greater purchasing power, request improvements in the terms of
the Municipal Bonds (e.g., added indenture provisions covering call
protection, sinking funds and audits for the benefit of large holders) prior
to purchase.

In approving the Reorganization, the Board of Directors of each Fund
determined that the interests of existing stockholders of the Fund would not
be diluted as a result of the Reorganization. Although the Reorganization is
expected to result in a reduction in net asset value per share of the Arizona
II Common Stock of approximately $0.05 as a result of the estimated
costs of the Reorganization, management of each Fund advised its Board that
it expects that such costs would be recovered within 18 months after the
Exchange Date.

It is not anticipated that the Reorganization directly would benefit the
holders of shares of Arizona I AMPS or Arizona II AMPS; however, the
Reorganization will not adversely affect the holders of shares of AMPS of
either Fund and the expenses of the Reorganization will not be borne by the
holders of shares of AMPS of either Fund.

49
<PAGE>

SURRENDER AND EXCHANGE OF ARIZONA I STOCK CERTIFICATES

After the Exchange Date, each holder of an outstanding certificate or
certificates formerly representing shares of Arizona I Common Stock or
Arizona I AMPS, as the case may be, will be entitled to receive, upon
surrender of his or her certificate or certificates, a certificate or
certificates representing the number of shares of Arizona II Common Stock or
Arizona II Series B AMPS distributable with respect to such holder's shares
of Arizona I Common Stock or Arizona I AMPS, together with cash in lieu of
any fractional shares. Promptly after the Exchange Date, the transfer agent
for the Arizona II Common Stock or the Arizona II Series B AMPS, as the case
may be, will mail to each holder of certificates formerly representing shares
of Arizona I Common Stock or Arizona I AMPS, as the case may be, a letter of
transmittal for use in surrendering his or her certificates for certificates
representing shares of Arizona II Common Stock or Arizona II Series B AMPS,
as the case may be, and cash in lieu of any fractional shares.

PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. UPON
CONSUMMATION OF THE REORGANIZATION, ARIZONA I COMMON AND PREFERRED
STOCKHOLDERS WILL BE FURNISHED WITH INSTRUCTIONS FOR EXCHANGING THEIR ARIZONA
I STOCK CERTIFICATES FOR ARIZONA II STOCK CERTIFICATES AND, IF APPLICABLE,
CASH IN LIEU OF FRACTIONAL SHARES.

From and after the Exchange Date, certificates formerly representing
shares of Arizona I Common Stock or Arizona II AMPS, as the case may be, will
be deemed for all purposes to evidence ownership of the number of full shares
of Arizona II Common Stock or Arizona II Series B AMPS distributable with
respect to such shares of Arizona I in the Reorganization, provided, that
until such Arizona I stock certificates have been so surrendered, no
dividends payable to the holders of record of Arizona II Common Stock or
Arizona II Series B AMPS, as the case may be, as of any date subsequent to
the Exchange Date will be paid to the holders of such outstanding Arizona I
stock certificates. Dividends payable to holders of record of shares of
Arizona II Common Stock or Arizona II Series B AMPS, as the case may be, as
of any date after the Exchange Date and prior to the exchange of certificates
by any Arizona I stockholder will be paid to such stockholder, without
interest, at the time such stockholder surrenders his or her Arizona I stock
certificates for exchange.

From and after the Exchange Date, there will be no transfers on the
stock transfer books of Arizona I. If, after the Exchange Date, certificates
representing shares of Arizona I Common Stock or Arizona II AMPS are
presented to Arizona II, they will be cancelled and exchanged for
certificates representing Arizona II Common Stock or Arizona II Series B
AMPS, as the case may be, and the cash in lieu of fractional shares, if any,
distributable with respect to such Arizona I Common Stock or Arizona I AMPS
in the Reorganization.

TAX CONSEQUENCES OF THE REORGANIZATION

General. The Reorganization has been structured with the intention that
it qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(D) of the Code. Arizona I and Arizona II each has elected
to qualify as a regulated investment company under the Code, and Arizona II
intends to continue to so qualify after the Reorganization. Arizona I and
Arizona II have each received a private letter ruling from the IRS to the
effect that for Federal income tax purposes: (i) the Reorganization, as
described, will constitute a reorganization within the meaning of Section
368(a)(1)(D) of the Code; (ii) in accordance with Section 354(a)(1) of the
Code, no gain or loss will be recognized by the stockholders of Arizona I
upon the receipt of Arizona II Common Stock and Arizona II Series B AMPS in
the Reorganization; (iii) in accordance with Section 358 of the Code,
immediately after the Reorganization, the tax basis of the Arizona II Common
Stock and Arizona II Series B AMPS received by the stockholders of Arizona I
in the Reorganization will be equal, in the aggregate, to the tax basis of
the shares of Arizona I surrendered in exchange; (iv) in accordance with
Section 1223 of the Code, the holding period of the Arizona II Common Stock
and the Arizona II Series B

50
<PAGE>

AMPS received by stockholders of Arizona I in the Reorganization for purposes
of calculating long-term capital gains will include the holding period of the
shares of Arizona I immediately prior to the liquidation of Arizona I
(provided that at the time of the Reorganization the shares of Arizona I were
held as capital assets); (v) in accordance with Section 361(a) of the Code,
no gain or loss will be recognized by Arizona I in the Reorganization; (vi)
under Section 1032 of the Code, no gain or loss will be recognized by Arizona
II on the exchange of its Common Stock and Series B AMPS for Arizona I
assets; (vii) in accordance with Section 362(b) of the Code, the tax basis of
the assets of Arizona I in the hands of Arizona II will be the same as the
tax basis of such assets in the hands of Arizona I immediately prior to the
Reorganization; (viii) in accordance with Section 1223 of the Code, the
holding period of the assets of Arizona I transferred to Arizona II for
purposes of the Code will include the holding period of such assets in the
hands of Arizona I; and (ix) the taxable year of Arizona I will end on the
effective date of the Reorganization and pursuant to Section 381(a) of the
Code and regulations thereunder, Arizona II will succeed to and take into
account certain tax attributes of Arizona I, such as earnings and profits,
capital loss carryovers and method of accounting.

As noted in the discussion under "Tax Rules Applicable to Arizona I,
Arizona II and Their Stockholders", a Fund must distribute annually at least
90% of its net taxable and tax-exempt income. A distribution only will be
counted for this purpose if it qualifies for the dividends paid deduction
under the Code. In the opinion of Brown & Wood, the issuance of Series B
AMPS pursuant to the Reorganization in addition to the already existing
Series A AMPS will not cause distributions on either series of AMPS to be
treated as preferential dividends ineligible for the dividends paid
deduction. It is possible that the IRS may assert that, because there are
two series of AMPS, distributions on such shares are preferential under the
Code and therefore not eligible for the dividends paid deduction. If the IRS
successfully disallowed the dividends paid deduction for dividends on the
AMPS, Arizona II could lose the special tax treatment afforded RICs. In this
case, dividends on the shares of AMPS would not be exempt from Federal income
tax. Additionally, Arizona II would be subject to the alternative minimum
tax.

Stockholders should consult their tax advisers regarding the effect of
the Reorganization in light of their individual circumstances. As the
foregoing relates only to Federal income tax consequences, stockholders also
should consult their tax advisers as to the foreign, state and local tax
consequences of the Reorganization.

Status as a Regulated Investment Company. Both Arizona I and Arizona II
have elected to be taxed as regulated investment companies under Section 851-
855 of the Code, and after the Reorganization Arizona II intends to continue
to operate so as to qualify as a regulated investment company.

CAPITALIZATION

The following table sets forth as of April 30, 1994 (i) the
capitalization of Arizona I, (ii) the capitalization of Arizona II and (iii)
the pro forma capitalization of Arizona II as adjusted to give effect to the
Reorganization.

51
<PAGE>

PRO FORMA CAPITALIZATION OF ARIZONA II AS OF APRIL 30, 1994
-----------------------------------------------------------

Arizona II
Arizona I Arizona II As Adjusted*
--------- ---------- ------------

<S> <C> <C> <C>
Total Net Assets: $48,833,809 $35,643,100 $84,476,909

Shares Outstanding:
Common Stock 2,499,161 1,856,551 4,355,712
AMPS
Series A 347** 518 865
Series B 0

Net Asset Value
Per Common Share: $12.60 $12.22 $12.44

_____________________
* Total Net Assets includes the aggregate value of the Arizona I Common
Stock and the Arizona I AMPS which would have been transferred to
Arizona II had the Reorganization been consummated on April 30, 1994.
Net Asset Value Per Common Share includes the per share value of the
Arizona I Common Stock which would have been transferred to Arizona II
had the Reorganization been consummated on April 30, 1994. Data does
not take into account expenses incurred in connection with the
Reorganization or the actual number of shares that would have been
issued. No assurance can be given as to how many shares of
Arizona II Common Stock and Arizona II Series B AMPS Arizona I
stockholders will receive on the date the Reorganization takes place,
and the foregoing should not be relied upon to reflect the number of
shares of Arizona II Common Stock and Arizona II Series B AMPS that
actually will be received on or after such date.

** It is anticipated that a stock split of the Arizona I AMPS will occur
prior to the Reorganization, thereby increasing to 694 the number of
shares of AMPS outstanding.

</TABLE>

ELECTION OF DIRECTORS

At the Meetings, the same Board of Directors for both Arizona I and
Arizona II will be elected to serve until the next Annual Meeting of
Stockholders and until their successors are elected and qualified. If the
stockholders of both Arizona I and Arizona II approve the Reorganization,
then the Board of Directors elected at the Meetings will serve as the Board
of Arizona II until its next Annual Meeting of Stockholders. If the
stockholders of either Arizona I or Arizona II vote against the
Reorganization, then the Board of Directors of each Fund elected at the
Meetings will continue to serve until the next Annual Meeting of Stockholders
of each Fund. It is intended that all properly executed proxies will be
voted (unless such authority has been withheld in the proxy) as follows:

With respect to the proxies of Arizona I stockholders:

(1) All such proxies of the holders of shares of Arizona I AMPS,
voting separately as a class, in favor of the two persons
designated as Directors to be elected by the holders of shares of
Arizona I AMPS; and

(2) All such proxies of the holders of shares of Arizona I Common
Stock and Arizona I AMPS, voting together as a single class, in
favor of the four persons designated as Directors to be elected by
the holders of Arizona I Common Stock and Arizona I AMPS.

52
<PAGE>

With respect to the proxies of Arizona II stockholders:

(1) All such proxies of the holders of shares of Arizona II AMPS,
voting separately as a class, in favor of the two persons
designated as Directors to be elected by the holders of shares of
Arizona II AMPS; and

(2) All such proxies of the holders of shares of Arizona II Common
Stock and Arizona II AMPS, voting together as a single class, in
favor of the four persons designated as Directors to be elected by
the holders of shares of Arizona II Common Stock and Arizona II
AMPS.

The Boards of Directors of Arizona I and Arizona II know of no reason
why any of these nominees will be unable to serve, but in the event of any
such unavailability, the proxies received will be voted for such substitute
nominee or nominees as the Boards of Directors may recommend.

Certain information concerning the nominees, including their designated
classes, is set forth below.

53
<PAGE>

TO BE ELECTED BY HOLDERS OF AMPS, VOTING SEPARATELY AS A CLASS:

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED AT
SEPTEMBER 2, 1994
PRINCIPAL OCCUPATIONS DURING -----------------
THE PAST FIVE YEARS AND DIRECTOR COMMON
NAME AND ADDRESS OF NOMINEE AGE PUBLIC DIRECTORSHIPS(1) SINCE STOCK AMPS
--------------------------- --- ----------------------------- -------- ----- ----

<S> <C> <C> <C> <C> <C>
Kenneth S. Axelson (1)(2) . . . . . 72 Executive Vice President and 1993 0 0
75 Jameson Point Road Director, J.C. Penney
Rockland, Maine 04841 Company, Inc. until 1982;
Director, UNUM Corporation,
Protection Mutual Insurance
Company, and, until 1994,
Grumman Corporation and Zurn
Industries, Inc., and, until
1992, Central Maine Power
Company and Key Trust
Company of Maine; Trustee,
The Chicago Dock and Canal
Trust.

Joseph L. May (1)(2) . . . . . . . 42 Attorney in private practice 1993 0 0
424 Church Street, Suite 2000 since 1984; President, May
Nashville, Tennessee 37219 and Athens Hosiery Mills
Division, Wayne-Gossard
Corporation from 1954 to
1983; Vice President, Wayne-
Gossard Corporation from
1972 to 1983; Chairman, The
May Corporation (personal
holding company) from 1972
to 1983; Director, Signal
Apparel Co. from 1972 to
1989.

</TABLE>

54
<PAGE>

TO BE ELECTED BY HOLDERS OF AMPS AND COMMON STOCK, VOTING TOGETHER AS A
SINGLE CLASS

<S> <C> <C> <C> <C> <C>
Herbert I. London (1)(2) . . . . 55 Dean, Gallatin Division of 1993 0 0
113-115 University Place New York University from
New York, New York 10003 1978 to 1993 and Director
from 1975 to 1976; John M.
Olin Professor of
Humanities, New York
University since 1993;
Professor, New York
University since 1973;
Distinguished Fellow, Herman
Kahn Chair, Hudson Institute
from 1984 to 1985; Trustee,
Hudson Institute since 1980;
Overseer, Center for Naval
Analyses from 1983 to 1993;
Director, Damon Corporation
since 1991.

Robert R. Martin (1)(2) . . . . . 67 Chairman and Chief Executive 1993 0 0
513 Grand Hill Officer, Kinnard
St. Paul, Minnesota 55102 Investments, Inc. from 1990
to 1993; Executive Vice
President, Dain Bosworth
from 1974 to 1989; Director,
Carnegie Capital Management
from 1977 to 1985 and
Chairman thereof in 1979;
Director, Securities
Industry Association from
1981 to 1982 and Public
Securities Association from
1979 to 1980; Chairman of
the Board, WTC Industries,
Inc. since 1994; Trustee,
Northland College since
1992.

Andre F. Perold (1)(2) . . . . . 42 Professor, Harvard Business 1993 0 0
Morgan Hall, Soldiers Field School since 1989 and
Boston, Massachusetts 02163 Associate Professor from
1983 to 1989; Trustee, The
Common Fund, since 1989;
Director, Quantec Investment
Technology (a private United
Kingdom company).

<PAGE>

Arthur Zeikel (1)(3) . . . . . . . 62 President and Chief Investment 1993 0 0
800 Scudders Mill Road Officer of FAM and its predecessor
Plainsboro, New Jersey since 1977; President of MLAM and
08536 its predecessor since 1977 and
Chief Investment Officer thereof
since 1976; President and Director
of Princeton Services, Inc.
("Princeton Services") since 1993;
Executive Vice President of ML &
Co. since 1990; Executive Vice
President of Merrill Lynch since
1990 and Senior Vice President
thereof from 1986 to 1990;
Director of Merrill Lynch Funds
Distributor, Inc. ("MLFD").

_______________________
(1) Each of the nominees is a director, trustee or member of an advisory
board of certain other investment companies for which FAM or MLAM acts
as investment adviser. See "Merrill Lynch Investment Company Board
Directorships" below.
(2) Member of the Audit Committee of the Board of Directors.
(3) Interested person, as defined in the Investment Company Act, of the
Funds.

</TABLE>

COMMITTEE AND BOARD MEETINGS

The Board of Directors of each Fund has a standing Audit Committee,
which consists of the Directors who are not "interested persons", as defined
in the Investment Company Act, of the Fund. The principal purpose of the
Audit Committee is to review the scope of the annual audit conducted by each
Fund's independent auditors and the evaluation by such auditors of the
accounting procedures followed by the Fund. The non-interested Directors
have retained independent legal counsel to assist them in connection with
these duties. Neither Board of Directors has a nominating committee. During
the fiscal year ended October 31, 1993, the Board of Directors and the Audit
Committee of Arizona I each held one organizational meeting and one quarterly
meeting, while the Board of Directors and the Audit and Nominating Committee
of Arizona II each held one organizational meeting.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), requires each Fund's officers, Directors and
persons who own more than ten percent of a registered class of the Fund's
equity securities, to file reports of ownership and changes in ownership on
Forms 3, 4 and 5 with the Securities and Exchange Commission and the AMEX.
Officers, Directors and greater than ten percent stockholders are required by
Securities and Exchange Commission regulations to furnish the Fund with
copies of all Forms 3, 4 and 5 that they file.

Based solely on each Fund's review of the copies of such forms, and
amendments thereto, furnished to it during or with respect to its most recent
fiscal year, and written representations from certain reporting persons that
they were not required to file Forms 5 with respect to the most recent fiscal
year, each Fund believes that all of its officers, Directors, greater than
ten percent beneficial owners and other persons subject to Section 16 of the
Securities Exchange Act because of the requirements of Section 30 of the
Investment Company Act (i.e.,

56
<PAGE>

any advisory board member, investment adviser or affiliated person of the
Fund's investment adviser), have complied with all filing requirements
applicable to them with respect to transactions during the Fund's most recent
fiscal year.

INTERESTED PERSONS

Each Fund considers Mr. Zeikel to be an "interested person" of the Fund
within the meaning of Section 2(a)(19) of the Investment Company Act as a
result of the position he holds with FAM and its affiliates. Mr. Zeikel is
the President of each Fund, the President of FAM and the President of MLAM.

COMPENSATION OF DIRECTORS

FAM, the investment adviser for both Funds, pays all compensation of all
officers of each Fund and all Directors of each Fund who are affiliated with
ML & Co. or its subsidiaries. Each Fund pays each Director who is not
affiliated with FAM a fee of $2,500 per year plus $250 per meeting attended,
together with such Director's actual out-of-pocket expenses relating to
attendance at meetings. Each Fund also pays each member of its Audit
Committee, which consists of all of the non-affiliated Directors, a fee of
$500 per year plus $125 per meeting attended, together with such Director's
out-of-pocket expenses relating to attendance at meetings. These fees and
expenses for the period ended October 31, 1993 aggregated $6,500 for
Arizona I and $0 for Arizona II.

MERRILL LYNCH INVESTMENT COMPANY BOARD DIRECTORSHIPS

FAM or MLAM acts as the investment adviser for more than 100 registered
companies. Mr. Zeikel is a director or trustee of each of these companies
except for Merrill Lynch Series Fund, Inc., Merrill Lynch Institutional
Intermediate Fund and Merrill Lynch Funds for Institutions Series. In
addition to being a Director of Arizona I and Arizona II, each of the
nominees is a director or trustee of the following other funds: Convertible
Holdings, Inc., Merrill Lynch Balanced Fund for Investment and Retirement,
Merrill Lynch California Municipal Series Trust, Merrill Lynch Consults
International Portfolio, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Growth Fund for Investment and Retirement, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch World Income Fund, Inc., MuniEnhanced Fund, Inc.,
MuniVest Pennsylvania Insured Fund, MuniYield Fund, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Michigan
Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured
Fund II, Inc., MuniYield New Jersey Fund, Inc., MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc.

Mr. Zeikel is also a director of certain funds which are neither
registered under the Investment Company Act nor offered in the United States.

OFFICERS OF THE FUNDS

The Boards of Directors of Arizona I and Arizona II have elected the
same seven officers of each Fund. The principal business address of each
officer is 800 Scudders Mill Road, Plainsboro, New Jersey 08536. The
following sets forth information concerning each of these officers:

57
<PAGE>

<TABLE>
<CAPTION>
Name and Principal Occupation OFFICE AGE OFFICER
----------------------------- ------ --- SINCE
-------
<S> <C> <C> <C>
Arthur Zeikel ................................ President 62 1993
President and Chief Investment Officer of FAM (which
term, as used herein, includes its corporate predecessor)
since 1977; President of MLAM (which term, as used herein,
includes its corporate predecessor) since 1977 and Chief
Investment Officer thereof since 1976; President and Director
of Princeton Services since 1993; Executive Vice President of
ML & Co. and of Merrill Lynch since 1990 and Senior Vice
President thereof from 1985 to 1990; Director of MLFD.
Terry K. Glenn ................................ Executive 53 1993
Executive Vice President of FAM and of MLAM since Vice President
since 1983; Executive Vice President and Director
of Princeton Services since 1993; President of MLFD
since 1986 and Director thereof since 1991; President
of Princeton Administrators.
Vincent R. Giordano ............................ Senior Vice 50 1993
Senior Vice President of FAM and of MLAM since 1984 President
and Vice President of MLAM from 1980 to 1984; Portfolio
Manager of MLAM since 1977; Senior Vice President of
Princeton Services since 1993.
Kenneth A. Jacob ............................ Vice President 44 1993
Vice President of FAM and of MLAM since 1984; employed
by MLAM since 1978.
Donald C. Burke ............................. Vice President 34 1993
Vice President and Director of Taxation of MLAM since
1990; Employee at Deloitte & Touche LLP from 1982 to 1990.
Gerald M. Richard ............................. Treasurer 45 1993
Senior Vice President and Treasurer of FAM and of MLAM
since 1984; Senior Vice President and Treasurer of Princeton
Services since 1993; Treasurer of MLFD since 1984 and Vice
President thereof since 1981.
Mark B. Goldfus ............................... Secretary 47 1993
Vice President of FAM and of MLAM since 1985; attorney
in private practice from 1981 to 1985.

</TABLE>

58
<PAGE>

SELECTION OF INDEPENDENT AUDITORS

The Boards of Directors of Arizona I and Arizona II, including a
majority of the Directors who are not "interested persons", as defined in the
Investment Company Act, of the Funds, have selected the firm of Deloitte &
Touche LLP as independent auditors, to examine the financial statements of
each Fund for the current fiscal year. The Funds know of no direct or
indirect financial interest of such firm in the Funds. Such appointment is
subject to ratification or rejection by the stockholders of the Funds. If
the stockholders of both Arizona I and Arizona II approve the Reorganization,
then the independent auditors selected at the Meetings will serve as the
independent auditors of Arizona II until its next Annual Meeting of
Stockholders. If the stockholders of either Arizona I or Arizona II vote
against the Reorganization, then the independent auditors of each Fund
selected at the Meetings will continue to serve until the next Annual Meeting
of Stockholders of each Fund. Unless a contrary specification is made, the
accompanying proxy will be voted in favor of ratification of the selection of
such auditors.

Deloitte & Touche LLP also acts as independent auditors for ML & Co. and
all of its subsidiaries and for most other investment companies for which FAM
or MLAM acts as investment adviser. The fees received by Deloitte & Touche
LLP from these other entities are substantially greater, in the aggregate,
than the total fees received by it from the Funds. The Boards of Directors
of Arizona I and Arizona II considered the fact that Deloitte & Touche LLP has
been retained as the independent auditors of ML & Co. and the other entities
described above in its evaluation of the independence of Deloitte & Touche LLP
with respect to the Funds.

Representatives of Deloitte & Touche LLP are expected to be present at
the Meetings and will have the opportunity to make a statement if they so
desire and to respond to questions from stockholders.

INFORMATION CONCERNING THE SPECIAL MEETINGS

DATE, TIME AND PLACE OF MEETINGS

The Meetings will be held on December 22, 1994 at the offices of MLAM,
800 Scudders Mill Road, Plainsboro, New Jersey at (9:00) A.M., New York time
(for Arizona I) and (9:30) A.M., New York time (for Arizona II).

SOLICITATION, REVOCATION AND USE OF PROXIES

A stockholder executing and returning a proxy has the power to revoke it
at any time prior to its exercise by executing a superseding proxy or by
submitting a notice of revocation to the Secretary of Arizona I or Arizona
II, as the case may be. Although mere attendance at the Meetings will not
revoke a proxy, a stockholder present at the Meetings may withdraw his proxy
and vote in person.

All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Meetings in accordance
with the directions on the proxies; if no direction is indicated, the shares
will be voted "FOR" (i) the approval of the Agreement and Plan of
Reorganization, (ii) the election of Directors and (iii) the ratification of
the selection of Deloitte & Touche LLP as independent accountants.

It is not anticipated that any matters other than (i) the adoption of
the Agreement and Plan of Reorganization, (ii) the election of Directors and
(iii) the ratification of the selection of Deloitte & Touche LLP will be
brought before the Meetings. If, however, any other business properly is
brought before the Meetings, proxies will be voted in accordance with the
judgment of the persons designated on such proxies.

59
<PAGE>

RECORD DATE AND OUTSTANDING SHARES

Only holders of record of shares of Arizona I Common Stock, shares of
Arizona I AMPS, shares of Arizona II Common Stock and shares of Arizona II
AMPS at the close of business on October 21, 1994 (the "Record Date") are
entitled to vote at the Meetings or any adjournment thereof. At the close of
business on the Record Date, there were _________ shares of Arizona I Common
Stock, 347 shares of Arizona I AMPS, __________ shares of Arizona II Common
Stock and 518 shares of Arizona II AMPS issued and outstanding and entitled
to vote.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF ARIZONA I
AND ARIZONA II

To the knowledge of Arizona I and Arizona II, at the date hereof, no
person or entity owns beneficially 5% or more of the shares of either the
Arizona I Common Stock, the Arizona I AMPS, the Arizona II Common Stock or
the Arizona II AMPS.

At October 21, 1994, the Directors and officers of Arizona I as a group
(12 persons) owned an aggregate of less than 1/4 of 1% of the outstanding
shares of Arizona I Common Stock and Arizona I AMPS.

At October 21, 1994, the Directors and officers of Arizona II as a
group (12 persons) owned an aggregate of less than 1/4 of 1% of the
outstanding shares of Arizona II Common Stock and Arizona II AMPS.

At October 21, 1994, the Directors and officers of each Fund owned an
aggregate of less than 1/4 of 1% of the outstanding shares of Common Stock of
ML & Co.

VOTING RIGHTS AND REQUIRED VOTE

For purposes of this Proxy Statement and Prospectus, each share of
Arizona I Common Stock, Arizona I AMPS, Arizona II Common Stock and Arizona
II AMPS is entitled to one vote. Approval of the Agreement and Plan of
Reorganization requires the affirmative vote of stockholders representing
more than 50% of the outstanding shares of Arizona I Common Stock and Arizona
I AMPS, voting together as a single class, and the Arizona I AMPS, voting
separately as a class, as well as the affirmative vote of stockholders
representing more than 50% of the outstanding shares of Arizona II Common
Stock and Arizona II AMPS, voting together as a single class, and the Arizona
II AMPS, voting separately as a class.

Under Maryland law, stockholders of a registered investment company
whose shares are traded publicly on a national securities exchange, such as
Arizona I and Arizona II, are not entitled to demand the fair value of their
shares upon a merger; therefore, the Arizona I and Arizona II common
stockholders will be bound by the terms of the Reorganization. However, any
common stockholder of Arizona I or Arizona II may sell his or her shares of
Common Stock at any time on the AMEX. Conversely, since neither the Arizona
I AMPS nor the Arizona II AMPS are traded publicly on a national securities
exchange, shareholders of either of such AMPS will be entitled to appraisal
rights upon the consummation of the Reorganization.

60
<PAGE>

ADDITIONAL INFORMATION

The expenses of preparation, printing and mailing of the enclosed form
of proxy, the accompanying Notice and this Proxy Statement and Prospectus
will be borne by Arizona II, the surviving fund after the Reorganization, so
as to be borne equally and exclusively by the holders of Arizona I Common
Stock and Arizona II Common Stock.

Arizona II likewise will reimburse banks, brokers and others for their
reasonable expenses in forwarding proxy solicitation materials to the
beneficial owners of shares of Arizona I and Arizona II and certain persons
that Arizona I or Arizona II may employ for their reasonable expenses in
assisting in the solicitation of proxies from such beneficial owners of
shares of capital stock of Arizona I or Arizona II.

In order to obtain the necessary quorum at the Meetings (i.e., a
majority of the shares of each class of each Fund's securities entitled to
vote at the Meetings, present in person or by proxy), supplementary
solicitation may be made by mail, telephone, telegraph or personal interview
by officers of the Fund. The Funds also may hire proxy solicitors at the
expense of Arizona II. It is anticipated that the cost of such supplementary
solicitation, if any, will be nominal.

Broker-dealer firms, including Merrill Lynch, holding Fund shares in
"street name" for the benefit of their customers and clients will request the
instructions of such customers and clients on how to vote their shares on
each proposal before the Meetings. The Funds understand that, under the
rules of the AMEX, such broker-dealer firms may, without instructions from
their customers and clients, grant authority to the proxies designated to
vote on the election of a Board of Directors of each Fund to serve for the
ensuing year (proposal 2) and the ratification of the selection of Deloitte &
Touche LLP as independent auditors for each Fund for the current fiscal year
(proposal 3) if no instructions have been received prior to the date
specified in the broker-dealer firm's request for voting instructions.
Broker-dealer firms, including Merrill Lynch, will not be permitted to grant
voting authority without instructions with respect to the approval of the
Agreement and Plan of Reorganization (proposal 1). The Funds will include
shares held of record by broker-dealers as to which such authority has been
granted in its tabulation of the total number of shares present for purposes
of determining whether the necessary quorum of shareholders of each Fund
exists. Proxies which are returned but which are marked "abstain" or on
which a broker-dealer has declined to vote on any proposal ("broker non-
votes") will be counted as present for the purposes of determining a quorum.
Merrill Lynch has advised the Funds that it intends to exercise discretion
over shares held in its name for which no instructions have been received by
voting such shares on proposals 2 and 3 in the same proportion as it has
voted such shares for which it has received instructions. However,
abstentions and broker non-votes will not be counted as votes cast.
Abstentions and broker non-votes will not have an effect on the vote on
proposals 2 and 3; however, abstentions and broker non-votes will have the
same effect as a vote against proposal 1.

This Proxy Statement and Prospectus does not contain all of the
information set forth in the registration statements and the exhibits
relating thereto which Arizona I and Arizona II, respectively, have filed
with the Securities and Exchange Commission, under the Securities Act and the
Investment Company Act, to which reference is hereby made.

Arizona I and Arizona II both are subject to the informational
requirements of the Securities Exchange Act, and in accordance therewith they
file reports and other information with the Securities and Exchange
Commission. Reports, proxy statements, registration statements and other
information filed by Arizona I and Arizona II can be inspected and copied at
the public reference facilities of the Securities and Exchange Commission in
Washington, D.C. and at the New York Regional Office of the Securities and
Exchange

<PAGE>

Commission at Seven World Trade Center, New York, New York 10048.
Copies of such materials also can be obtained by mail from the Public Reference
Branch, Office of Consumer Affairs and Information Services, Securities and
Exchange Commission, Washington, D.C. 20549, at prescribed rates.

CUSTODIAN

The Bank of New York acts as the custodian for cash and securities of
Arizona I and Arizona II. The principal business address of The Bank of New
York in such capacity is 90 Washington Street, 12th Floor, New York, New York
10286.

TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR

The Bank of New York serves as the transfer agent, dividend disbursing
agent and registrar with respect to the Arizona I Common Stock and the
Arizona II Common Stock, at the same rate for each Fund, pursuant to separate
registrar, transfer agency and service agreements with each of the Funds.
The principal business addresses of The Bank of New York in such capacity is
101 Barclay Street, 12W, New York, New York 10286.

IBJ Schroder Bank and Trust Company serves as the transfer agent,
registrar and auction agent to Arizona I and Arizona II, in connection with
their respective AMPS, at the same rate for each Fund, pursuant to separate
registrar, transfer agency and service agreements with each of the Funds.
The principal business address of IBJ Schroder Bank and Trust Company is One
State Street, New York, New York 10004.

LEGAL PROCEEDINGS

There are no material legal proceedings to which Arizona I or Arizona II
is a party.

LEGAL OPINIONS

Certain legal matters in connection with the Reorganization will be
passed upon for Arizona I, Arizona II and Merrill Lynch by Brown & Wood, New
York, New York. Brown & Wood will rely as to matters of Maryland law on the
opinion of Galland, Kharasch, Morse & Garfinkle, P.C., Washington, D.C.

EXPERTS

The financial statements as of October 31, 1993 of Arizona I and
Arizona II, as well as the balance sheet as of December 31, 1993 for FAM,
included in this Proxy Statement and Prospectus have been so included
in reliance on the reports of Deloitte & Touche LLP, independent auditors,
given on their authority as experts in auditing and accounting. The
principal business address of Deloitte & Touche LLP is 117 Campus Drive,
Princeton, New Jersey 08540.

62
<PAGE>

STOCKHOLDER PROPOSALS

If a stockholder of either Fund intends to present a proposal at the
1995 Annual Meeting of Stockholders of either Fund, which is anticipated to
be held in __________, 1995, and desires to have the proposal included in the
Fund's proxy statement and form of proxy for that meeting, the stockholder
must deliver the proposal to the offices of the Fund by _______, 1995.

By Order of the Boards of Directors

MARK B. GOLDFUS
Secretary

63
<PAGE>

INDEX TO FINANCIAL STATEMENTS

Unaudited Financial Statements for Arizona I for the Six-Month Period Ended
April 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-

Audited Financial Statements for Arizona I for the Period from July 30, 1993
(Commencement of Operations) to October 31, 1993 . . . . . . . . . . . . F-

Unaudited Financial Statements for Arizona II for the Six-Month Period Ended
April 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-

Audited Financial Statements for Arizona II for the Period from October 29,
1993
(Commencement of Operations) to October 31, 1993 . . . . . . . . . . . . F-

Unaudited Financial Statements for the Combined Fund on a Pro Forma Basis
as of April 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . F-

Unaudited Schedule of Investments for the Combined Fund on a Pro Forma Basis
as of April 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . F-

Audited Financial Statements for FAM for the Fiscal Year Ended December 31,
1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-

64
<PAGE>

FINANCIAL INFORMATION FOR MUNIYIELD ARIZONA FUND, INC.
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1994 (unaudited)
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>

SCHEDULE OF INVESTMENTS (in thousands)

S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Arizona--79.5%

Arizona Educational Loan Marketing Corporation, Educational Loan
NR Aa $ 500 Senior Series B, VRDN, 3.30% due 12/01/2002 (a) $500
NR A 700 Series B, AMT, 7% due 3/01/2002 743
NR A 1,000 Subordinate Series, AMT, 5.70% due 12/01/2008 967
Arizona Health Facilities Authority, Hospital System Revenue Refunding
NR Ba 1,000 (Saint Luke's Health System), 7.25% due 11/01/2014 996
AAA Aaa 1,000 (Samaritan Health System), 5.625% due 12/01/2015 (b) 923
Arizona State, COP, Refunding Bonds (Capital Guaranty), Series B:
AAA Aaa 500 5% due 11/01/2009 451
AAA Aaa 965 5% due 5/01/2011 849
AA A1 1,000 Arizona State University, Revenue Refunding Bonds, Series A, 5.75% due
7/01/2012 952
AAA Aaa 1,550 Chandler, Arizona, Street and Highway User Revenue Refunding Bonds,
5.50% due 7/01/2010 (c) 1,475
A A3 2,500 Greenlee County, Arizona, IDA, PCR, Refunding (Phelps Dodge
Corporation Project),
5.45% due 6/01/2009 2,329
AAA Aaa 1,000 Maricopa County, Arizona, Chandler Unified School District Number 80
Refunding Bonds, 6.25% due 7/01/2011 (c) 1,016
AAA Aaa 5,500 Maricopa County, Arizona, IDA, Health Facilities Revenue Insured Bonds
(Catholic Health Care West), Series A, 5.625% due 7/01/2023 (b) 4,986
A1+ VMIG1 2,000 Maricopa County, Arizona, IDA, Hospital Facility Revenue Bonds
(Samaritan Health Service Hospital), Series B2, VRDN, 2.95% due
12/01/2008 (a)(b) 2,000
BB Ba2 2,500 Maricopa County, Arizona, Pollution Control Corporation, PCR,
Refunding (Public Service Company--Palo Verde), Series A, 6.375% due
8/15/2023 2,230
AA- Aa 1,000 Maricopa County, Arizona, Scottsdale Unified School District Number 48
Revenue Bonds, UT, 6% due 7/01/2002 (f)(g) 1,047
BBB Baa2 5,000 Navajo County, Arizona, Pollution Control Corporation, Revenue
Refunding Bonds (Arizona Public Service Company), Series A, 5.875% due
8/15/2028 4,503
A A1 5,750 Phoenix, Arizona, Civic Improvement Corporation, Wastewater System
Lease Revenue Refunding Bonds, 4.75% due 7/01/2023 4,435
A1+ P1 1,600 Pinal County, Arizona, IDA, PCR (Magma-Copper/Newmont Mining
Corporation), DATES, 2.65% due 12/01/2009 (a) 1,600
AAA Aaa 1,000 Santa Cruz County, Arizona, Unified School District Number 1 Revenue
Bonds (Nogales), Series A, 5,80% due 7/01/2013 (d) 948
AAA Aaa 1,000 Scottsdale, Arizona, IDA, Hospital Revenue Bonds (Scottsdale Memorial
Hospital),
5.25% due 9/01/2018 (e) 869
A NR 500 Scottsdale, Arizona, Mountain Community Facilities District Revenue
Bonds, Series A, UT, 6.20% due 7/01/2017 493
A NR 1,500 Tatum Ranch, Arizona, Community Facilities District Revenue
Bonds, Series A, UT, 6.875% due 7/01/2016 1,564

F-1

<PAGE>

SCHEDULE OF INVESTMENTS (in thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)

Arizona (concluded)

AAA Aaa $ 300 Tucson, Arizona, GO, Refunding, 6.10% due 7/01/2012 (c) $ 298
A+ A1 1,400 Tucson, Arizona, Water Revenue Refunding Bonds, Series A, 5.75% due
7/01/2018 1,307
AA A1 1,345 University of Arizona, University Revenue Refunding Bonds, 6.25% due
6/01/2011 1,350
Puerto Rico--17.5%
AAA Aaa 2,000 Puerto Rico Commonwealth, GO, RIB, YCN, 8.882% due 7/01/2020 (d)(f)(g) 1,858
Puerto Rico Electric Power Authority, Power Revenue Bonds
AAA Aaa 2,000 LEVRRS, 9.238% due 7/01/2023 (d)(f)(g) 1,905
A- Baa1 3,000 Series R, 6.25% due 7/01/2017 2,946
A Baa1 1,000 Puerto Rico Public Building Authority, Public Educational and Health
Facilities Refunding Bonds, Guaranteed, Series M, 5.75% due 7/01/2015 915
A Baa1 1,000 Puerto Rico Public Building Authority, Revenue Refunding Bonds,
Guaranteed, Series L, 5.75% due 7/01/2016 911
Total Investments (Cost--$51,236)--97.0% 47,366
Other Assets Less Liabilities--3.0% 1,468
Net Assets--100.0% $48,834

</TABLE>

(a) The interest rate is subject (c) FGIC Insured.
to change periodically based (d) FSA Insured.
upon the prevailing market (e) AMBAC Insured.
rate. The interest rates (f) Prerefunded.
shown are the rates in effect (g) The interest rate is subject
at April 30, 1994. to change periodically and
(b) MBIA Insured. inversely based upon the
prevailing market rate. The
interest rates shown are the
See Notes to Financial Statements. rates in effect at April 30,
1994.

PORTFOLIO ABBREVIATIONS

To simplify the listings of GO General Obligation Bonds
MuniYield Arizona Fund, Inc.'s IDA Industrial Development Authority
portfolio holdings in the Schedule LEVRRS Leveraged Reverse Rate
of Investments, we have Securities
abbreviated the names of many of PCR Pollution Control Revenue Bonds
the securities according to the RIB Residual Interest Bonds
list below and at right. UT Unlimited Tax
VRDN Variable Rate Demand Notes
AMT Alternative Minimum Tax YCN Yield Curve Notes
(subject to)
COP Certificates of Participation
DATES Daily Adjustable Tax-Exempt
Securities

F-2
<PAGE>

STATEMENT OF ASSETS, LIABILITIES AND CAPITAL AS OF APRIL 30, 1994 (unaudited)

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS: Investments, at value (identified cost -- $51,236,028)(Note 1a).............. $47,366,437
Cash 39,038
Receivables:
Interest.................................................................... $853,323
Securities sold............................................................. 642,794
Investment adviser (Note 2)................................................. 11,495 1,507,612
-------
Deferred organization expenses (Note 1e)......................................... 26,523
Prepaid expenses and other assets................................................ 47,164
-----------
Total assets..................................................................... 48,986,774
===========
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES: Dividends payable to shareholders (Note 1g) 39,759
Accrued expenses and other liabilities....................................... 113,206
-----------
Total liabilities........................................................... 152,965
-----------

- ----------------------------------------------------------------------------------------------------------------
NET ASSETS: Net assets............................................................... $48,833,809
===========
- ----------------------------------------------------------------------------------------------------------------
CAPITAL: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (347 shares of AMPS* issued
and outstanding at $50,000 per share liquidation preference).............. $17,350,000
Common Stock, par value $.10 per share (2,499,161 shares
issued and outstanding)................................................... $249,916
Paid-in capital in excess of par.......................................... 34,621,019
Undistributed investment income -- net...................................... 191,138
Undistributed realized capital gains -- net................................. 291,327
Unrealized depreciation on investments -- net............................... (3,869,591)
-----------
Total -- Equivalent to $12.60 net asset value per
share of Common Stock (market price -- $13.25).............................. $31,483,809
-----------

Total capital............................................................... $48,833,809
===========
- ----------------------------------------------------------------------------------------------------------------
*Auction Market Preferred Stock.
See Notes to Financial Statements.

</TABLE>

F-3
<PAGE>

<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS (unaudited) FOR THE SIX MONTHS
ENDED APRIL 30, 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT
INCOME Interest and amortization of premium and
(NOTE 1D) discount earned............................................................. $1,497,394
- ---------------------------------------------------------------------------------------------------------------
EXPENSES: Investment advisory fees (Note 2)........................................... $130,215
Professional fees................................................................ 34,207
Accounting services (Note 2)..................................................... 16,934
Transfer agent fees.............................................................. 13,920
Printing and shareholder reports................................................. 12,523
Directors' fees and expenses..................................................... 11,720
Commission fees (Note 4)......................................................... 5,063
Listing fees..................................................................... 3,468
Amortization of organization expenses (Note 1e).................................. 2,828
Custodian fees................................................................... 2,607
Pricing fees..................................................................... 2,467
Other............................................................................ 10,650
---------
Total expenses before reimbursement.............................................. 246,602
Reimbursement of expenses (Note 2)............................................... (76,162)
---------

Total expenses after reimbursement............................................... 170,440
-----------

Investment income -- net......................................................... 1,326,954
-----------

===============================================================================================================
REALIZED & Realized gain on investments -- net............................... 291,390
UNREALIZED GAIN Change in unrealized appreciation/depreciation on investments -- net (5,673,597)
(LOSS) ON ----------

INVESTMENTS -- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS.................... $(4,055,253)
NET
(NOTES 1D & 3):
- ---------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements
</TABLE>

F-4
<PAGE>

<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS (unaudited)
FOR THE SIX FOR THE PERIOD
MONTHS ENDED JULY 30, 1993+
INCREASE (DECREASE) IN NET ASSETS: APRIL 30, 1994 TO OCT.31,1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS: Investment income -- net.................................................... $1,326,954 $663,406
Realized gain on investments -- net................................................... 291,390 107,520
Change in unrealized appreciation/depreciation on investments -- net.................. (5,673,597) 1,804,006
----------- ---------
Net increase (decrease) in net assets resulting from operations....................... (4,055,253) 2,574,932
---------- ---------
- ----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS & Investment income -- net:
DISTRIBUTIONS Common Stock.............................................................. (1,120,576) (365,402)
TO SHAREHOLDERS Preferred Stock......................................................... (231,074) (82,170)
(NOTE 1G): Realized gain on investments -- net:......................................
Common Stock........................................................... (94,265) --
Preferred Stock........................................................ (13,318) --
-------- --------
Net decrease in net assets resulting from
dividends and distributions to shareholders.............................. (1,459,233) (447,572)
----------- ---------
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL STOCK Net proceeds from the issuance of Common Stock........................... --- 34,593,338
TRANSACTIONS Proceeds from the issuance of Preferred Stock............................ --- 17,350,000
(NOTE 4): Offering and underwriting costs resulting
from the issuance of Preferred Stock..................................... --- (426,956)
Value of shares issued to Common Stock shareholders in reinvestment of
dividends................................................................ 396,285 208,263
------- ----------
Net increase in net assets derived from capital stock transactions....... 396,285 51,724,645
------- ----------
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS: Total increase (decrease) in net assets.................................. (5,118,201) 53,852,005
Beginning of period...................................................... 53,952,010 100,005
----------- -----------
End of period*........................................................... $48,833,809 $53,952,010
- -------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income -- net.................................. $191,138 $215,834
- ----------------------------------------------------------------------------------------------------------------------------
+Commencement of Operations.
See Notes to Financial Statements.
</TABLE>

F-5

<PAGE>

FINANCIAL HIGHLIGHTS (unaudited)

The following per share data and ratios have been derived
from information provided in the financial statements.

<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED JULY 30, 1993+
INCREASE (DECREASE) IN NET ASSET VALUE: APRIL 30, 1994 TO OCT. 31, 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>

PER SHARE Net asset value, beginning of period.................... $ 14.82 $ 14.18
---------- ----------
OPERATING Investment income--net.................................. .53 .27
PERFORMANCE: Realized and unrealized gain (loss) on
investments--net...................................... (2.16) .77
---------- ----------
Total from investment operations........................ (1.63) 1.04
---------- ----------
Less dividends and distributions to
Common Stock shareholders:
Investment income--net............................... (.45) (.15)
Realized gain on investments--net.................... (.04) --
---------- ----------
Total dividends and distributions to
Common Stock shareholders............................. (.49) (.15)
---------- ----------
Capital charge resulting from issuance of
Common Stock......................................... --- (.05)
---------- ----------
Effect of Preferred Stock activity:++
Dividends and distributions to Preferred Stock shareholders:
Investment income--net.............................. (.09) (.03)
Realized gain on investments--net................... (.01) ---
Capital charge resulting from issuance of
Preferred Stock.................................... --- (.17)
---------- ----------
Total effect of Preferred Stock activity................ (.10) (.20)
---------- ----------
Net asset value, end of period.......................... $ 12.60 $ 14.82
========== ==========
Market price per share, end of period.................. $ 13.25 $ 14.875
========== ==========
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENT Based on market price per share..................... (7.76)%++ 0.16%++
========== ==========
RETURN:** Based on net asset value per share...................... (11.96)%++ 5.56%++
========== ==========
- ----------------------------------------------------------------------------------------------------
RATIOS TO Expenses, net of reimbursement.......................... 65%* 0%*
========== ==========
AVERAGE Expenses................................................ 94%* 1.09%*
========== ==========
NET ASSETS:***Investment income--net.................................. 5.08%* 5.73%*
========== ==========
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL Net assets, net of Preferred Stock, end of period
(in thousands)........................................ $ 31,484 $ 36,602
========== ==========
DATA: Preferred Stock outstanding, end of period
(in thousands)........................................ $ 17,350 $ 17,350
========== ==========
Portfolio turnover...................................... 18.65% 16.91%
========== ==========
- ----------------------------------------------------------------------------------------------------
DIVIDENDS PER Investment income--net.................................. $ 666 $ 237
SHARE ON
PREFERRED STOCK
OUTSTANDING:
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, result in
substantially different returns. Total investment returns exclude
the effects of sales loads.
*** Do not reflect the effect of dividends to Preferred Stock
shareholders.
+ Commencement of Operations.
++ The Fund's Preferred Stock was issued on August 30, 1993.
++ Aggregate total investment return.

See Notes to Financial Statements.

F-6
<PAGE>

NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES:
MuniYield Arizona Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a non-diversified, closed-end management investment
company. The Fund determines and makes available for publication the net
asset value of its Common Stock on a weekly basis. The Fund's Common Stock
is listed on the American Stock Exchange under the symbol MZA. The following
is a summary of significant accounting policies followed by the Fund.

(a) Valuation of investments--Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts, which are traded on
exchanges, are valued at their closing prices as of the close of such
exchanges. Options, which are traded on exchanges, are valued at their last
sale price as of the close of such exchanges or, lacking any sales, at the
last available bid price. Securities with remaining maturities of sixty days
or less are valued at amortized cost. Securities for which market quotations
are not readily available are valued at their fair value as determined in
good faith by or under the direction of the Board of Directors of the Fund.

(b) Financial futures contracts--The Fund may purchase or sell interest rate
futures contracts and options on such futures contracts for the purpose of
hedging the market risk on existing securities or the intended purchase of
securities. Futures contracts are contracts for delayed delivery of
securities at a specific future date and at a specific price or yield. Upon
entering into a contract, the Fund deposits and maintains as collateral such
initial margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from or pay
to the broker an amount of cash equal to the daily fluctuation in value of
the contract. Such receipts or payments are known as variation margin and
are recorded by the Fund as unrealized gains or losses. When the contract is
closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at
the time it was closed.

(c) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.

(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.

(e) Deferred organization expenses and offering expenses--Deferred
organization expenses are amortized on a straight-line basis over a five-year
period. Direct expenses relating to the public offering of the Common and
Preferred Stock were charged to capital at the time of issuance.

(f) Non-income producing investments--Written and purchased options are non-
income producing investments.

(g) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.

2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). Effective January 1, 1994, the investment advisory
business of FAM was reorganized from a corporation to a limited partnership.
Both prior to and after the reorganization, ultimate control of FAM was
vested with Merrill Lynch & Co., Inc. ("ML & Co."). The general partner of
FAM is Princeton Services, Inc., an indirect, wholly-owned subsidiary of ML &
Co. The limited partners of FAM are ML & Co. and Fund Asset Management, Inc.
("FAMI"), which is also an indirect, wholly-owned subsidiary of ML & Co.

F-7
<PAGE>

FAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of .50% of the Fund's average weekly net
assets. For the six months ended April 30, 1994, FAM earned fees of
$130,215, of which $76,162 was voluntarily waived.

Accounting services are provided to the Fund by FAM at cost.

Certain officers and/or directors of the Fund are officers and/or directors
of FAM, FAMI, Merrill Lynch, Pierce, Fenner & Smith Incorporated and/or ML &
Co.

3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the
six months ended April 30, 1994 were $9,185,393 and $13,334,565,
respectively.

Net realized and unrealized gains(losses) as of April 30, 1994 were as
follows:

<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
Realized UNREALIZED
Gains LOSSES
- ------------------------------------------------------------------------------
<S> <C> <C>
Long-term investments . . . . . . $291,390 $(3,869,591)
Total . . . . . . . . . . . . . . $291,390 $(3,869,591)
- ------------------------------------------------------------------------------

</TABLE>

As of April 30, 1994, net unrealized appreciation for Federal income tax
purposes aggregated $3,869,591, of which $10,163 related to appreciated
securities and $3,879,754 related to depreciated securities. The aggregate
cost of investments at April 30, 1994 for Federal income tax purposes was
$51,236,028.

4. CAPITAL STOCK TRANSACTIONS:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which were
initially classified as Common Stock. The Board of Directors is authorized,
however, to reclassify any unissued shares of capital stock without approval
of the holders of Common Stock.

Common Stock
For the six months ended April 30, 1994, shares issued and outstanding
increased by 29,035 to 2,499,161 as a result of dividend reinvestment. At
April 30, 1994, total paid-in capital amounted to $34,870,935.

Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the
Fund that entitle their holders to receive cash dividends at an annual rate
that may vary for the successive dividend periods. The yield in effect at
April 30, 1994 was 2.75%.

In connection with the offering of AMPS, the Board of Directors reclassified
347 shares of unissued capital stock as AMPS. For the six months ended April
30, 1994, there were 347 AMPS shares authorized, issued and outstanding with
a liquidation preference of $50,000 per share, plus accumulated and unpaid
dividends of $7,481.

The Fund pays commissions to certain broker-dealers at the end of each
auction at the annual rate of one-quarter of 1% calculated on the proceeds of
each auction.

F-8
<PAGE>

5. SUBSEQUENT EVENT:
On May 6, 1994, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of 0.071169 per share,
payable on May 27, 1994 to shareholders of record as of May 15, 1994.

F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
MUNIYIELD ARIZONA FUND, INC.:

We have audited the accompanying statement of assets, liabilities and
capital, including the schedule of investments, of MuniYield Arizona Fund,
Inc. as of October 31, 1993, the related statements of operations and changes
in net assets and the financial highlights for the period from July 30, 1993
(commencement of operations) to October 31, 1993. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned at October 31, 1993 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniYield Arizona
Fund, Inc. as of October 31, 1993, the results of its operations, the changes
in its net assets, and the financial highlights for the period from July 30,
1993 to October 31, 1993 in conformity with generally accepted accounting
principles.

DELOITTE & TOUCHE LLP
Princeton, New Jersey
December 6, 1993

F-10
<PAGE>

FINANCIAL INFORMATION FOR MUNIYIELD ARIZONA FUND, INC.
FOR THE PERIOD FROM JULY 30, 1993 (COMMENCEMENT OF OPERATIONS)
TO OCTOBER 31, 1993
---------------------------------------------------------------

SCHEDULE OF INVESTMENTS
(in thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Arizona--78.0%

Arizona Educational Loan Marketing Corporation, Educational Loan
NR A $ 700 Series B, 7% due 3/01/2002 $ 788
NR A 1,000 Subordinate Series, 5.70% due 12/01/2008 1,012
Arizona Health Facilities Authority, Hospital System Revenue Refunding
NR Ba 1,000 (Saint Luke's Health System), 7.25% due 11/01/2014 1,057
AAA Aaa 1,000 (Samaritan Health System), 5.625% due 12/01/2015 (b) 1,026
AA A1 1,000 Arizona State University, Revenue Refunding Bonds, Series A,
5.75% due 7/01/2012 1,039
AAA Aaa 1,550 Chandler, Arizona, Street and Highway User, Revenue Refunding Bonds,
5.50% due 7/01/2010 (c) 1,590
AAA Aaa 8,000 Maricopa County, Arizona, IDA, Health Facilities Revenue Insured Bonds
(Catholic Health Care West), Series A, 5.625% due 7/01/2023 (b) 8,171
A1+ VMG1 1,000 Maricopa County, Arizona, IDA, Hospital Facility Revenue Bonds
(Samaritan Health Service Hospital), Series B2, VRDN, 2.45% due
12/01/2008 (a)(b) 1,000
BB+ Ba2 2,500 Maricopa County, Arizona, Pollution Control Corporation, PCR,
Refunding (Public Service Company--Palo Verde), Series A, 6.375% due
8/15/2023 2,538
AA- Aa 1,000 Maricopa County, Arizona, Scottsdale Unified School District Number 48
Revenue Bonds, UT, 6% due 7/01/2011 1,068
BBB Baa2 5,000 Navajo County, Arizona, Pollution Control Corporation, Revenue
Refunding Bonds (Arizona Public Service Company), Series A, 5.875% due
8/15/2028 5,040
Phoenix, Arizona, Civic Improvement Corporation, Wastewater System
A A1 5,500 6.125% due 7/01/2023 6,224
A A1 1,000 Refunding, 4.75% due 7/01/2023 910
A1+ VMG-1 100 Phoenix, Arizona, GO, Series 1, UT, AMT, VRDN, 2.55% due 6/01/2016 (a) 100
AA P1 100 Pinal County, Arizona, IDA, PCR (Magma-Copper/Newmont Mining
Corporation), VRDN, 2.45% due 12/01/2009 (a) 100
AA Aa 2,250 Salt River Project, Arizona, Agricultural Improvement and Power
District Electric System Revenue Bonds, Series A, 6% due 1/01/2031 2,331
AAA Aaa 1,000 Santa Cruz County, Arizona, Unified School District Number 1 Revenue
Bonds (Nogales), Series A, 5.80% due 7/01/2013 (d) 1,035
AAA Aaa 1,000 Scottsdale, Arizona, IDA, Hospital Revenue Bonds (Scottsdale Memorial
Hospital), 5.25% due 9/01/2018 (e) 978
A NR 500 Scottsdale, Arizona, Mountain Community Facilities District Revenue
Bonds, Series A, UT, 6.20% due 7/01/2017 528
A NR 1,500 Tatum Ranch, Arizona, Community Facilities District Revenue Bonds,
Series, A, UT,
6.875% due 7/01/2016 1,689
Tucson, Arizona, GO, Refunding (c):
AAA Aaa 300 6.10% due 7/01/2012 324
AAA Aaa 1,900 5.58%* due 7/01/2013 643
A+ A1 1,400 Tucson, Arizona, Water Revenue Refunding Bonds, Series A, 5.75% due
7/01/2018 1,451
AA A1 1,345 University of Arizona, University Revenue Refunding Bonds, 6.25% due
6/01/2011 1,458
F-11
<PAGE>

SCHEDULE OF INVESTMENTS
(in thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Puerto Rico--22.1%

AAA Aaa $ 2,000 Puerto Rico Commonwealth, GO, YCN, 8.632% due 7/01/2020 (d)(f) $ 2,252
A Baa1 2,000 Puerto Rico Commonwealth, Highway and Transportation Authority,
Highway Revenue Refunding Bonds, Series V, 5.75% due 7/01/2018 2,037
Puerto Rico Electric Power Authority, Power Revenue Bonds:
AAA Aaa 2,000 LEVRRS, 8.788% due 7/01/2023 (d)(f) 2,292
A- Baa1 3,000 Series R, 6.25% due 7/01/2017 3,277
A Baa1 1,000 Puerto Rico Public Building Authority, Public Educational and Health
Facilities Refunding Bonds, Guaranteed, Series M, 5.75% due 7/01/2015 1,026
A Baa1 1,000 Puerto Rico Public Building Authority, Revenue Refunding Bonds,
Guaranteed, Series L, 5.75% due 7/01/2016 1,025
Total Investments (Cost--$52,205)--100.1% 54,009
Liabilities in Excess of Other Assets--(0.1%) (57)
--------
Net Assets--100.0% $ 53,952
========
- ------------------------------------------------------------------------------------------------------
(a) The interest rate is subject to change periodically based upon the
prevailing market rate. The interest rates shown are the rates in
effect at October 31, 1993.
(b) MBIA Insured.
(c) FGIC Insured.
(d) FSA Insured.
(e) AMBAC Insured.
(f) The interest rate is subject to change periodically and inversely based
upon the prevailing market rate. The interest rates shown are the rates
in effect at October 31, 1993.
* Represents the yield to maturity on this zero coupon issue.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.

See Notes to Financial Statements.

</TABLE>

PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniYield Arizona Fund, Inc.'s portfolio holdings
in the Schedule of Investments, we have abbreviated the names of many of the
securities according to the list below.

AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
IDA Industrial Development Authority
LEVRRS Leveraged Reverse Rate Securities
PCR Pollution Control Revenue Bonds
UT Unlimited Tax
VRDN Variable Rate Demand Notes
YCN Yield Curve Notes

F-12

<PAGE>

<TABLE>
<CAPTION>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL AS OF OCTOBER 31, 1993

<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
ASSETS: Investments, at value (identified cost -- $52,204,853)(Note 1a).......... $54,008,859
Cash..................................................................... 159,570
Receivables:
Interest............................................................... $928,014
Investment adviser (Note 2)............................................ 65,548 993,562
-------
Deferred organization expenses (Note 1e)................................. 26,523
Prepaid expenses and other assets........................................ 1,221
----------
Total assets 55,189,735
----------
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES: Payables:
Securities purchased.............................................. 918,324
Dividends to shareholders (Note 1g)............................... 39,760 958,084
-------
Accrued expenses and other liabilities............................ 279,641
-----------

Total liabilities................................................... 1,237,725
-----------
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS: Net assets.......................................................... $53,952,010
===========
- ----------------------------------------------------------------------------------------------------------------
CAPITAL: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (347 shares of AMPS* issued
and outstanding at $50,000 per share liquidation preference)...... $17,350,000
Common Stock, par value $.10 per share (2,470,126 shares
issued and outstanding)........................................... $247,013
Paid-in capital in excess of par.................................. 34,227,637
Undistributed investment income -- net.............................. 215,834
Undistributed realized capital gains -- net......................... 107,520
Unrealized appreciation on investments -- net....................... 1,804,006
---------

Total -- Equivalent to $14.82 net asset value per
share of Common Stock (market price -- $14.875)..................... 36,602,010
----------

Total capital....................................................... $53,952,010
===========
- ----------------------------------------------------------------------------------------------------------------
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>

F-13
<PAGE>

<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE PERIOD
JULY 30, 1993+ TO
OCTOBER 31, 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT
INCOME Interest and amortization of premium and
(NOTE 1D): discount earned.................................................... $663,406
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES: Investment advisory fees (Note 2).................................. $60,079
Transfer Agent fees.............................................. 13,659
Professional fees................................................ 11,587
Accounting services (Note 2)..................................... 11,000
Directors' fees and expenses..................................... 6,500
Printing and shareholder reports................................. 5,000
Listing fees..................................................... 2,763
Custodian fees................................................... 2,155
Amortization of organization expenses (Note 1e).................. 1,440
Pricing fees..................................................... 884
Other............................................................ 10,560
----------
Total expenses before reimbursement................................ 125,627
Reimbursement of expenses (Note 2)................................. (125,627)
---------
Total expenses after reimbursement................................. 0
----------
Investment income -- net........................................... 663,406
----------
- -----------------------------------------------------------------------------------------------------------------------------
REALIZED & Realized gain on investments -- net............................. 107,520
UNREALIZED GAIN Unrealized appreciation on investments -- net................... 1,804,006

---------
ON INVESTMENTS -- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $2,574,932
NET (NOTES 1D & 3): ==========

</TABLE>

F-14
<PAGE>

<TABLE>
STATEMENT OF CHANGES IN NET ASSETS

<CAPTION>
FOR THE PERIOD
JULY 30, 1993+ TO
OCTOBER 31, 1993
Increase (Decrease) in Net Assets:
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
OPERATIONS: Investment income -- net...................................................... $663,406
Realized gain on investments -- net........................................... 107,520
Unrealized appreciation on investments -- net................................. 1,804,006
----------
Net increase in net assets resulting from operations.......................... 2,574,932
----------
- -----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS TO Investment income -- net:
SHAREHOLDERS Common Stock................................................................ (365,402)
(NOTE 1G): Preferred Stock............................................................. (82,170)
----------

Net decrease in net assets resulting from dividends to shareholders.......... (447,572)
----------
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL STOCk Net proceeds from the issuance of Common Stock.............................. 34,593,338
TRANSACTIONS Proceeds from the issuance of Preferred Stock............................... 17,350,000
(NOTES 1E & 4): Offering and underwriting costs resulting from the issuance
of Preferred Stock.......................................................... (426,956)
Value of shares issued to Common Stock shareholders
in reinvestment of dividends................................................ 208,263
-----------
Net increase in net assets derived from capital stock
transactions................................................................ 51,724,645
-----------
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS: Total increase in net assets................................................ 53,852,005
Beginning of period......................................................... 100,005
-----------
End of period* ............................................................. $53,952,010
-----------
- -----------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income -- net..................................... $215,834
===========
- -----------------------------------------------------------------------------------------------------------------------------
+Commencement of Operations.
See Notes to Financial Statements.

</TABLE>

F-15
<PAGE>

FINANCIAL HIGHLIGHTS

The following per share data and ratios have been derived
from information provided in the financial statements.

<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 30, 1993+
INCREASE (DECREASE) IN NET ASSET VALUE: TO OCT. 31, 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>

PER SHARE Net asset value, beginning of period............................... $ 14.18
------------
OPERATING Investment income--net............................................. .27
PERFORMANCE: Realized and unrealized gain on investments--net................... .77
------------
Total from investment operations................................... 1.04
------------
Less dividends to Common Stock shareholders:
Investment income--net........................................... (.15)
------------
Capital charge resulting from issuance of Common Stock............. (.05)
------------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income--net.......................................... (.03)
Capital charge resulting from issuance of Preferred Stock....... (.17)
------------
Total effect of Preferred Stock activity........................... (.20)
------------
Net asset value, end of period..................................... $ 14.82
============
Market price per share, end of period.............................. $ 14.875
============
- ---------------------------------------------------------------------------------------------------
TOTAL INVESTMENT Based on market price per share................................... $ 0.16%+
===========
RETURN:** Based on net asset value per share................................. 5.56%++
===========
- ---------------------------------------------------------------------------------------------------
RATIOS TO Expenses, net of reimbursement..................................... 0%*
===========
AVERAGE Expenses........................................................... 1.09%*
===========
NET ASSETS:*** Investment income--net............................................. 5.73%*
===========
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTAL Net assets, net of Preferred Stock, end of period (in thousands)... $ 36,602
===========
DATA: Preferred Stock outstanding, end of period (in thousands).......... $ 17,350
===========
Portfolio turnover................................................. 16.91%
===========
- ---------------------------------------------------------------------------------------------------
DIVIDENDS PER Investment income--net............................................. $ 237
SHARE ON
PREFERRED STOCK
OUTSTANDING:
- ---------------------------------------------------------------------------------------------------
* Annualized.
** Total investment returns based on market value, which can be significantly greater or
lesser than the net asset value, result in substantially different returns. Total
investment returns exclude the effects of sales loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of Operations.
++ The Fund's Preferred Stock was issued on August 30, 1993.
++ Aggregate total investment return.

See Notes to Financial Statements.

</TABLE>

F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES:
MuniYield Arizona Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a non-diversified, closed-end management investment
company. Prior to commencement of operations on July 30, 1993, the Fund had
no operations other than those relating to organizational matters and the
sale of 7,055 shares of Common Stock on July 19, 1993 to Fund Asset
Management, Inc. ("FAMI") for $100,005. The Fund determines and makes
available for publication the net asset value of its Common Stock on a weekly
basis. The Fund's Common Stock is listed on the American Stock Exchange
under the symbol MZA. The following is a summary of significant accounting
policies followed by the Fund.

(f) Non-income producing investments--Written and purchased options are non-
income producing investments.
(g) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.

2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with FAMI, a
wholly-owned subsidiary of Merrill Lynch Investment Management, Inc.
("MLIM"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc.

FAMI is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund.

F-17
<PAGE>

For such services, the Fund pays a monthly fee at an annual rate of 0.50% of
the Fund's average weekly net assets. For the period from July 30, 1993 to
October 31, 1993, FAMI earned fees of $60,079, all of which was voluntarily
waived. In addition, FAMI reimbursed the Fund $65,548 for additional
expenses.

Accounting services are provided to the Fund by FAMI at cost.

Certain officers and/or directors of the Fund are officers and/or directors
of FAMI, MLIM, Merrill Lynch, Pierce, Fenner & Smith Incorporated and/or
Merrill Lynch & Co., Inc.

3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the
period from July 30, 1993 to October 31, 1993 were $56,512,316 and
$5,606,640, respectively.

Net realized and unrealized gains as of October 31, 1993 were as follows:

<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
REALIZED UNREALIZED
GAINS GAINS
- -------------------------------------------------------------------------------
<S> <C> <C>
Long-term investments . . . . . . $ 107,520 $ 1,804,006
Total . . . . . . . . . . . . . . $ 107,520 $ 1,804,006

- -------------------------------------------------------------------------------
As of October 31, 1993, net unrealized appreciation for Federal income tax
purposes aggregated $1,804,006, of which $1,830,865 related to appreciated
securities and $26,859 related to depreciated securities. The aggregate cost
of investments at October 31, 1993 for Federal income tax purposes was
$52,204,853.
</TABLE>

Common Stock
For the period from July 30, 1993 to October 31, 1993, the Fund sold
2,449,000 shares and issued 14,071 shares as a result of dividend
reinvestment. At October 31, 1993, total paid-in capital amounted to
$34,474,650.

In connection with the offering of AMPS, the Board of Directors reclassified
347 shares of unissued capital stock as AMPS. For the period from August 30,
1993 to October 31, 1993, there were 347 AMPS shares authorized, issued and
outstanding with a liquidation preference of $50,000 per share.

The Fund pays commissions to certain broker-dealers at the end of each
auction at the annual rate of one-quarter of 1% calculated on the proceeds of
each auction.

5. SUBSEQUENT EVENT:
On November 8, 1993, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of .087378 per
share, payable on November 29, 1993 to shareholders of record as of November
18, 1993.

F-18
<PAGE>

<TABLE>
FINANCIAL INFORMATION FOR MUNIYIELD ARIZONA FUND II, INC.
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1994 (UNAUDITED)
---------------------------------------------------------------------
<CAPTION>
SCHEDULE OF INVESTMENTS
(in thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Arizona--90.4%

A1+ VMIG2 $ 200 Apache County, Arizona, IDA, PCR (Tucson Electric Power Company
Project), VRDN, 3.30% due 10/01/2021 (b) $ 200
NR Ba 1,000 Arizona Health Facilities Authority, Hospital System Revenue Refunding
Bonds (Saint Luke's Health System), 7.25% due 11/01/2014 996
AAA Aaa 1,250 Arizona State, COP, Refunding Bonds (Capital Guaranty), Series B, 5%
due 11/01/2011 1,097
AAA Aaa 1,180 Arizona State Power Authority, Power Resource Revenue Refunding Bonds
(Hoover Uprating Project), 5.375% due 10/01/2013 (a) 1,077
AAA Aaa 850 Arizona State University, COP, Refunding Bonds (West Campus Project),
5.375% due 7/15/2009 (a) 786
AA A1 2,500 Arizona State University, Revenue Refunding Bonds, Series A, 5.50% due
7/01/2019 2,249
A A3 3,250 Greenlee County, Arizona, IDA, PCR, Refunding (Phelps Dodge
Corporation Project),
5.45% due 6/01/2009 3,028
AAA Aaa 1,000 Maricopa County, Arizona, Gilbert Unified School District Number 41
Revenue Bonds, Series A, UT, 5.40% due 7/01/2013 (c) 913
Maricopa County, Arizona, IDA, Health Facilities Revenue Insured Bonds
(Catholic Health Care West):
AAA Aaa 2,000 Series A, 5.625% due 7/01/2023 (a) 1,813
A1+ VMIG1 300 Series B2, VRDN, 2.95% due 12/01/2008 (b) 300
AAA Aaa 1,400 Maricopa County, Arizona, IDA, Hospital Facility Revenue Refunding
Bonds (Samaritan Health Services Hospital), Series A, 7% due
12/01/2016 (a) 1,542
BB Ba2 1,000 Maricopa County, Arizona, Pollution Control Corporation, PCR,
Refunding (Public Service Company--Palo Verde), Series A, 6.375% due
8/15/2023 892
BBB Baa2 3,900 Navajo County, Arizona, Pollution Control Corporation, Revenue
Refunding Bonds (Arizona Public Service Company), Series A, 5.875% due
8/15/2028 3,513
AAA Aaa 1,320 Navapache, Arizona, Hospital District Refunding Bonds (Navapache
Regional Medical Center), 5.40% due 6/01/2012 (c) 1,210
AAA Aaa 570 Peoria, Arizona, Municipal Facilities Revenue Refunding Bonds
(Municipal Development Authority Incorporated), 5.20% due 7/01/2013 (a) 507
Phoenix, Arizona, Civic Improvement Corporation, Excise Tax Revenue
(Senior Lien--New City Hall Project):
A A1 500 5% due 7/01/2018 414
AA+ Aa 1,300 5.10% due 7/01/2018 1,119
AA+ Aa 500 5.10% due 7/01/2028 413
A A1 1,000 Phoenix, Arizona, Civic Improvement Corporation, Wastewater System
Lease Revenue Refunding Bonds, 4.75% due 7/01/2023 771
AA A1 500 Phoenix, Arizona, Civic Improvement Corporation, Water System Revenue
Bonds (Junior Lien), 5.40% due 7/01/2014 449
AA+ Aa 1,750 Phoenix, Arizona, Refunding Bonds, UT, Series B, 5.50% due 7/01/2016 1,607
AAA Aaa 300 Pima County, Arizona, IDA, Revenue Refunding Insured Bonds (Tucson
Medical Center), Series A, 5% due 4/15/2015 (a) 254

F-19
<PAGE>
SCHEDULE OF INVESTMENTS
(in thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)

Arizona (concluded)

AA P1 500 Pinal County, Arizona, IDA, PCR (Magma-Copper/Newmont Mining
Corporation), VRDN, 2.95% due 12/01/2009 (b) 500
AA Aa 2,000 Salt River Project, Arizona, Agricultural Improvement and Power
District Revenue Bonds (Electrical System), STRIPES, 7.125% due
1/01/2012 (d) 1,510
AA Aa1 1,000 Scottsdale, Arizona, Refunding Bonds, Series A, 4.90% due 7/01/2011 874
A NR 1,425 Tatum Ranch, Arizona, Community Facilities District, Series A, UT,
6.875% due 7/01/2016 1,486
A+ A1 1,300 Tucson, Arizona, Water Revenue Refunding Bonds, Series A, 5.75% due
7/01/2018 1,213

AAA Aaa 1,000 University of Arizona, COP (Residence Life Project), Series A, 5.80%
due 9/01/2013 957
AA A1 610 University of Arizona, University Revenue Refunding Bonds, 5% due
6/01/2017 515
Puerto Rico--7.8%
A Baa1 1,000 Puerto Rico, Commonwealth, Highway and Transportation Authority,
Highway Revenue Refunding Bonds, Series X, 5.50% due 7/01/2019 885
A- Baa1 1,000 Puerto Rico Electric Power Authority, Power Revenue Bonds, Series R,
6.25% due 7/01/2017 982
A Baa1 1,000 Puerto Rico, Public Buildings Authority, Guaranteed Public Education
and Health Facilities, Refunding Bonds, Series M, 5.75% due 7/01/2015 916
Total Investments (Cost--$38,328)--98.2% 34,988
Other Assets Less Liabilities--1.8% 655
-------
Net Assets--100.0% $35,643
=======
- ------------------------------------------------------------------------------------------------------

(a) MBIA Insured.
(b) The interest rate is subject to change periodically based on prevailing
market rates. The interest rates shown are those in effect at Aptil 30,
1994.
(c) FGIC Insured.
(d) The interest rate is subject to change periodically and inversely based
upon the prevailing market rate. The interest rates shown are those in
effect at April 30, 1994.

See Notes to Financial Statements.

</TABLE>

PORTFOLIO ABBREVIATIONS

To simplify the listings of MuniYield Arizona Fund II, Inc.'s portfolio
holdings in the Schedule of Investments, we have abbreviated the names of
some of the securities according to the list below.

COP Certificates of Participation
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
STRIPES Short-Term Rate Inverse Payment Exempt Securities
UT Unlimited Tax
VRDN Variable Rate Demand Notes

F-20
<PAGE>

<TABLE>
<CAPTION>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL AS OF APRIL 30, 1994 (unaudited)

<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS: Investments, at value (identified cost -- $38,327,919)(Note 1a)................... $34,987,607
Cash.............................................................................. 9,691
Receivables:
Interest........................................................................ $737,825
Investment adviser (Note 2)..................................................... 33,596 771,421
--------
Deferred organization expenses (Note 1e).......................................... 28,716
-----------
Total assets...................................................................... 35,797,435
-----------

- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES: Accrued expenses and other liabilities............................................ 154,335
-----------
Total liabilities................................................................. 154,335
-----------

- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS: Net assets........................................................................ $35,643,100
===========
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (518 shares of AMPS* issued
and outstanding at $25,000 per share liquidation preference).................... $12,950,000
Common Stock, par value $.10 per share (1,856,551 shares
issued and outstanding)......................................................... $185,655
Paid-in capital in excess of par................................................ 25,664,792
Undistributed investment income -- net............................................ 142,371
Undistributed realized capital gains -- net....................................... 40,594
Unrealized depreciation on investments -- net..................................... (3,340,312)
-----------

Total -- Equivalent to $12.22 net asset value per
share of Common Stock (market price -- $12.75).................................... $22,693,100
-----------

Total capital..................................................................... $35,643,100
===========
- ------------------------------------------------------------------------------------------------------------------------------
*Auction Market Preferred Stock.
See Notes to Financial Statements.

</TABLE>

F-21
<PAGE>

<TABLE>
STATEMENT OF OPERATIONS (unaudited)
<CAPTION>
FOR THE SIX MONTHS
ENDED APRIL 30, 1994

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

<S> <C> <C>
INVESTMENT
INCOME Interest and amortization of premium and
(NOTE 1D) discount earned......................................... $967,785

- ---------------------------------------------------------------------------------------------------------------
EXPENSES: Investment advisory fees (Note 2)........................ $89,533
Professional fees........................................ 20,061
Accounting services (Note 2)............................. 12,726
Transfer agent fees...................................... 12,289
Commission fees (Note 4)................................. 11,271
Directors' fees and expenses............................. 10,954
Printing and shareholder reports......................... 9,528
Amortization of organization expenses (Note 1e).......... 2,904
Custodian fees........................................... 2,546
Pricing fees............................................. 1,813
Listing fees............................................. 1,206
Other.................................................... 9,545
--------
Total expenses before reimbursement...................... 184,376
Reimbursement of expenses (Note 2)....................... (123,081)
---------

Total expenses after reimbursement ...................... 61,295
---------

Investment income -- net ................................. 906,490
---------

- --------------------------------------------------------------------------------------------------------------
REALIZED & Realized gain on investments -- net...................... 40,594
UNREALIZED GAIN Change in unrealized appreciation/depreciation
on investments -- net.................................. (3,347,302)
-----------
(LOSS) ON
INVESTMENTS -- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,400,218)
============
NET
(NOTES 1D & 3):

See Notes to Financial Statements.

</TABLE>

F-22
<PAGE>

<TABLE>
STATEMENT OF CHANGES IN NET ASSETS (unaudited)

<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED OCT. 29, 1993+
INCREASE (DECREASE) IN NET ASSETS: APRIL 30, 1994 TO OCT.31,1993
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATIONS: Investment income -- net............................................ $906,490 $ 4,896
Realized gain on investments -- net................................. 40,594 ---
Change in unrealized appreciation/depreciation on
investments -- net................................................ (3,347,302) 6,990
----------
Net increase (decrease) in net assets resulting from operations..... (2,400,218) 11,886
----------- ----------
- -----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS TO Investment income -- net:
SHAREHOLDERS Common Stock...................................................... (637,215) ----
(NOTE 1G): Preferred Stock................................................... (131,800) ----
Net decrease in net assets resulting from dividends
and distributions to shareholders................................... (769,015) ----
--------- --------
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL STOCK Net proceeds from the issuance of Common Stock....................... ---- 25,515,000
TRANSACTIONS Proceeds from the issuance of Preferred Stock........................ 12,950,000 ----
(NOTES 1E & 4): Offering and underwriting costs resulting from the issuance
of Common Stock.................................................. ---- (121,238)

Offering and underwriting costs resulting from the issuance of
Preferred Stock.................................................. (324,250) ----
Value of shares issued to Common Stock shareholders in
reinvestment of dividends........................................ 680,930 ----
------- --------
Net increase in net assets derived from capital stock
transactions..................................................... 13,306,680 25,393,762
---------- ----------
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS: Total increase in net assets......................................... 10,137,447 25,405,648
Beginning of period.................................................. 25,505,653 100,005
---------- ----------
End of period*....................................................... $35,643,100 $25,505,653
----------- -----------
- -------------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income -- net............................... $142,371 $4,896
======== ======
- -------------------------------------------------------------------------------------------------------------------------------
+Commencement of Operations.
See Notes to Financial Statements.

</TABLE>

F-23
<PAGE>
<TABLE>

FINANCIAL HIGHLIGHTS (unaudited)

The following per share data and ratios have been derived
from information provided in the financial statements

<CAPTION>
For the Six For the Period
Months Ended Oct. 29, 1993+
Increase (Decrease) in Net Asset Value: April 30, 1994 to Oct. 31, 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per Share Net asset value, beginning of period.................... $ 14.11 $ 14.18
------------ -------------
Operating Investment income-net................................... .49 ---
Performance: Realized and unrealized (loss) on investments-net...... (1.79) ---
------------ -------------
Total from investment operations....................... (1.30) ---
------------ -------------
Less dividends to Common Stock shareholders:
Investment income-net................................ (.35) ---
------------ -------------
Capital charge resulting from issuance of Common Stock.. --- (.07)
------------ -------------
Effect of Preferred Stock activity++:
Dividends to Preferred Stock shareholders:
Investment income-net................................ (.07) ---
Capital charge resulting from issuance
of Preferred Stock................................... (.17) ---
------------ -------------
Total effect of Preferred Stock activity............... (.24) ---
------------ -------------
Net asset value, end of period......................... $ 12.22 $ 14.11
============ =============
Market price per share, end of period.................. $ 12.75 $ 15.00
============ =============
- -----------------------------------------------------------------------------------------------------
Total Investment Based on market price per share..................... (12.77%)+ 0.00%+
============ =============
Return:** Based on net asset value per share.................... (11.13%) (0.49%)+
============ =============
- ------------------------------------------------------------------------------------------------------
Ratios to Expenses, net of reimbursement.......................... .35%* --%
============ =============
Average Expenses................................................ 1.04% ---
============ =============
Net Assets:*** Investment income-net................................ 5.12%* .02%*
============ =============
Supplemental Net assets, net of Preferred Stock, end of
period (in thousands)................................. $ 22,693 $ 25,506
============ =============
Data: Preferred Stock outstanding, end of
period (in thousands)................................. $ 12,950 $ ---
============ =============
Portfolio turnover....................................... 169.70% 0%
============ =============
- ------------------------------------------------------------------------------------------------------
Dividends Per Investment income-net................................. $ 254 $ ---
Share on
Preferred Stock
Outstanding:
- ------------------------------------------------------------------------------------------------------
+ Commencement of Operations.
++ The Fund's Preferred Stock was issued on December 2, 1993.
+ Aggregate total investment return.
+ Annualized.
** Total investment returns based on market value, which can be significantly greater
or lesser than the net asset value, result in substantially different returns.
Total investment returns exclude the effects of sales loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.

See Notes to Financial Statements.
</TABLE>

F-24
<PAGE>
NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES:
MuniYield Arizona Fund II, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. The Fund determines and makes available for publication
the net asset value of its Common Stock on a weekly basis. The Fund's Common
Stock is listed on the American Stock Exchange under the symbol MZT. The
following is a summary of significant accounting policies followed by the
Fund.

(f) Non-income producing investments--Written and purchased options are non-
income producing investments.

(g) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.

F-25
<PAGE>
FAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of .50% of the Fund's average weekly net
assets. For the six months ended April 30, 1994, FAM earned fees of $89,533
of which $84,871 was voluntarily waived. FAM also voluntarily reimbursed the
Fund $38,210 for additional expenses.

Accounting services are provided to the Fund by FAM at cost.

Certain officers and/or directors of the Fund are officers and/or directors
of FAM, FAMI, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"),
and/or ML & Co.

3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the
six months ended April 30, 1994 were $41,452,733 and $8,239,668 respectively.

Net realized and unrealized gains(losses) as of April 30, 1994 were as
follows:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
REALIZED UNREALIZED
GAINS LOSSES
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Long-term investments....................... $ 40,409 $(3,340,312)
Short-term investments...................... 185 ---
_________ _____________
Total....................................... $ 40,594 $(3,340,312)
_________ _____________
- ----------------------------------------------------------------------------------------------
As of April 30, 1994, net unrealized appreciation for Federal income tax
purposes aggregated $3,340,312, all of which related to depreciated
securities. The aggregate cost of investments at April 30, 1994 for Federal
income tax purposes was $38,327,919.
</TABLE>

Common Stock
For the six months ended April 30, 1994, shares issued and outstanding
increased by 49,496 to 1,856,551 as a result of dividend reinvestment. At
April 30, 1994, total paid-in capital amounted to $25,850,447.

In connection with the offering of AMPS, the Board of Directors reclassified
shares of unissued capital stock as AMPS. For the six months ended April 30,
1994, there were 518 AMPS shares authorized, issued and outstanding with a
liquidation preference of $25,000 per share, plus accumulated and unpaid
dividends of $3,691.

The Fund pays commissions to certain broker-dealers at the end of each
auction at the annual rate of one-quarter of 1% calculated on the proceeds of
each auction. For the six months ended April 30, 1994, MLPF&S, an affiliate
of MLAM, earned $6,927 as commissions.

F-26
<PAGE>

5. SUBSEQUENT EVENT:
On May 6, 1994, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of 0.072314 per share,
payable on May 27, 1994 to shareholders of record as of May 17, 1994.

F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
MUNIYIELD ARIZONA FUND II, INC.:

We have audited the accompanying statement of assets, liabilities and
capital, including the schedule of investments, of MuniYield Arizona Fund II,
Inc. as of October 31, 1993, the related statements of operations and changes
in net assets and the financial highlights for the period from October 29,
1993 (commencement of operations) to October 31, 1993. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audit.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniYield Arizona
Fund II, Inc. as of October 31, 1993, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated period in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
Princeton, New Jersey
December 6, 1993
F-28
<PAGE>

<TABLE>
FINANCIAL INFORMATION FOR MUNIYIELD ARIZONA FUND II, INC.
FOR THE PERIOD FROM OCTOBER 29, 1993 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1993
- -------------------------------------------------------------------------------------

SCHEDULE OF INVESTMENTS

(in thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Arizona--83.9%
<C> <C> <C> <C> <C>

A1+ VMG2 $ 1,200 Apache County, Arizona, IDA, PCR (Tucson Electric Power Company
Project), VRDN, 2.65% due 10/01/2021 (b) $ 1,200
NR Aa 1,200 Arizona Educational Loan Marketing Corporation, Educational Loan
Revenue Bonds, Series B, VRDN, 2.70% due 12/01/2002 (b) 1,200
AAA Aa 1,200 Arizona State Transportation Board Highway, Revenue Refunding Bonds,
VRDN, 2.60% due 7/01/1994 (b) 1,197
A1+ VMG1 700 Maricopa County, Arizona, IDA, Hospital Facility Revenue Bonds
(Samaritan Health Services Hospital), VRDN, 2.45% due 12/01/2008
(a)(b) 700
A1+ P1 6,300 Maricopa County, Arizona, PCR (Arizona Public Service Company), VRDN,
2.25% due 12/01/2009 (b) 6,300
SP1+ MIG2 1,200 Maricopa County, Arizona, TAN, 3.10% due 7/29/1994 1,204
BBB Baa2 1,000 Navajo County, Arizona, Pollution Control Corporation, Revenue
Refunding Bonds (Arizona Public Service Company), Series A, 5.875% due
8/15/2028 1,008
A1+ VMG1 1,200 Phoenix, Arizona, Series 1991-1, AMT, VRDN, 2.55% due 6/01/2016 (b) 1,200
A1+ NR 1,200 Pinal County, Arizona, IDA, IDR (Calsonic Incorporated Project), VRDN,
2.60% due 12/01/2005 (b) 1,200
Pinal County, Arizona, IDA, PCR, VRDN (b):
A1+ P1 700 (Dates-Newmont Project), 2.45% due 12/01/2009 700
AA P1 4,300 (Magma-Copper/Newmont Mining Corporation), 2.45% due 12/01/2009 4,300
A1+ NR 1,200 Tucson, Arizona, IDA, M/F Revenue Refunding Bonds (Lincoln Garden
Project), VRDN, 2.55% due 2/01/2006 (b) 1,200

Puerto Rico--15.7%

A1+ VMG1 1,200 Puerto Rico, Commonwealth, Government Development Bank, Revenue
Refunding Bonds, VRDN, 2.30% due 12/1/2015 (b) 1,200
SP1 MIG1+ 1,200 Puerto Rico, Commonwealth, TRAN, Series A, 3% due 7/29/1994 1,203
A1+ P1 1,600 Puerto Rico, Maritime Shipping Authority, TECP, 2.25% due 11/09/1993 1,600
Total Investments (Cost--$25,405)--99.6% 25,412
Other Assets Less Liabilities--0.4% 94
Net Assets--100.0% -------
$25,506
=======
- --------------------------------------------------------------------------------------------------------
(a) MBIA Insured. + Highest short-term rating by Moody's Investors
(b) The interest rate is subject to change Service, Inc.
periodically based on prevailing market
rates. The interest rates shown are Ratings of issues shown have not been audited by Deloitte
those in effect at October 31, 1994. & Touche LLP.
See Notes to Financial Statements.

</TABLE>

PORTFOLIO ABBREVIATIONS

To simplify the listings of MuniYield IDR Industrial Development
Arizona Fund II, Inc.'s portfolio holdings Revenue Bonds
in the Schedule of Investments, we have M/F Multi-Family
abbreviated the names of many of Bond PCR Pollution Control Revenue
the securities according to the list TAN Tax Anticipation Notes
below and at right. TECP Tax-Exempt Commercial Paper
below and at right. TRAN Tax-Revenue Anticipation
Notes
VRDN Variable Rate Demand Notes
AMT Alternative Minimum Tax (subject to)
IDA Industrial Development Authority

F-29
<PAGE>

<TABLE>

STATEMENT OF ASSETS, LIABILITIES AND CAPITAL AS OF OCTOBER 31, 1993

<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS: Investments, at value (identified cost -- $25,405,418)(Note 1a)...... $25,412,408
Cash................................................................. 3,562,409
Receivables:
Interest............................................................. $83,159
Investment adviser (Note 2).......................................... 48 83,207
---------
Deferred organization expenses (Note 1e)............................. 28,716
----------
Total assets......................................................... 29,086,740
----------
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES: Payable for securities purchased..................................... 3,431,086
Accrued expenses and other liabilities............................... 150,001
----------
Total liabilities.................................................... 3,581,087
----------
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS: Net assets........................................................... $25,505,653
===========
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL: Capital Stock (200,000,000 shares authorized) (Note 4):
Common Stock, par value $.10 per share 1,807,055 shares
issued and outstanding............................................. $180,705
Paid-in capital in excess of par................................... 25,313,062

Undistributed investment income -- net............................... 4,896
Unrealized appreciation on investments -- net........................ 6,990
----------
Total capital -- Equivalent to $14.11 net asset value per
share of Common Stock (market price -- $15.00) $25,505,653
===========
- --------------------------------------------------------------------------------------------------------------------------------

See Notes to Financial Statements.
</TABLE>

F-30
<PAGE>
<TABLE>

STATEMENT OF OPERATIONS
<CAPTION>
FOR THE PERIOD
OCTOBER 29, 1993+ TO
OCTOBER 31, 1993

- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT Interest and amortization of premium and
INCOME discount earned.......................................... $4,896
(NOTE 1D)

- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES: Investment advisory fees (Note 2)........................ $1,048
Amortization of organization expenses (Note 1e).......... 48
-------
Total expenses before reimbursement...................... 1,096
Reimbursement of expenses (Note 2)....................... (1,096)
-------
Total expenses after reimbursement....................... 0
-----------
Investment income -- net................................. 4,896
-----------
- --------------------------------------------------------------------------------------------------------------------------------
+Commencement of Operations.
See Notes to Financial Statements.
</TABLE>

F-31
<PAGE>

<TABLE>
STATEMENT OF CHANGES IN NET ASSETS

<CAPTION>
FOR THE PERIOD
OCTOBER 29, 1993+ TO
Increase (Decrease) in Net Assets: OCTOBER 31,1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
OPERATIONS: Investment income -- net............................................................ $4,896
Unrealized appreciation on investments -- net..................................... 6,990
-----------

Net increase in net assets resulting from operations.............................. 11,886
-----------
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK Offering and underwriting costs resulting from
TRANSACTIONS issuance of Common Stock............................................................ (121,238)
(NOTES 1E & 4): Proceeds from the issuance of Common Stock.......................................... 25,515,000
-----------

Net increase in net assets derived from the issuance
of Common Stock..................................................................... 25,393,762
-----------
NET ASSETS: Total increase in net assets........................................................ 25,405,648
Beginning of period................................................................. 100,005
-----------
End of period*...................................................................... $25,505,653
===========
- -------------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income -- net $4,896
------
- -------------------------------------------------------------------------------------------------------------------------------
+Commencement of Operations.
See Notes to Financial Statements.
</TABLE>

F-32
<PAGE>
<TABLE>

FINANCIAL HIGHLIGHTS

The following per share data and ratios have been derived
from information provided in the financial statements.

<CAPTION>
FOR THE PERIOD
OCT. 29, 1993+
INCREASE (DECREASE) IN NET ASSET VALUE: TO OCT. 31, 1993
- ----------------------------------------------------------------------------------------------------
<S> <C>

PER SHARE Net asset value, beginning of period........................... $ 14.18
OPERATING -------------
PERFORMANCE: Capital charge resulting from issuance of Common Stock......... (.07)
-------------
Net asset value, end of period................................. $ 14.11
-------------
Market price per share, end of period.......................... $ 15.00
=============
- ---------------------------------------------------------------------------------------------------
TOTAL Based on net asset value per share......................... (0.49%)++
INVESTMENT =============
RETURN:** Based on market price per share................................ 0.00%
=============
- ---------------------------------------------------------------------------------------------------
RATIOS TO Investment income--net......................................... .02%*
AVERAGE =============
NET ASSETS:
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTAL Net assets, end of period (in thousands)....................... $ 25,506
DATA: =============
Portfolio turnover............................................. 0%
=============
- ---------------------------------------------------------------------------------------------------
+ Commencement of Operations.
++ Aggregate total investment return.
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, result in substantially different returns.
Total investment returns exclude the effects of sales loads.

See Notes to Financial Statements.
</TABLE>

F-33
<PAGE>
NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES:
MuniYield Arizona Fund II, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. Prior to commencement of operations on October 29, 1993,
the Fund had no operations other than those relating to organizational
matters and the sale of 7,055 shares of Common Stock on October 15, 1993 to
Fund Asset Management, Inc. ("FAMI") for $100,005. The Fund determines and
makes available for publication the net asset value of its Common Stock on a
weekly basis. The Fund's Common Stock is listed on the American Stock
Exchange under the symbol MZT. The following is a summary of significant
accounting policies followed by the Fund.

(a) Valuation of investments --Municipal bonds are traded primarily in the
over-the-counter market and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts, which are traded on
exchanges, are valued at their closing prices as of the close of such
exchanges. Options, which are traded on exchanges, are valued at their last
sale price as of the close of such exchanges or, lacking any sales, at the
last available bid price. Securities with remaining maturities of sixty days
or less are valued at amortized cost. Securities for which market quotations
are not readily available are valued at their fair value as determined in
good faith by or under the direction of the Board of Directors of the Fund.

(b) Financial futures contracts --The Fund may purchase or sell interest rate
futures contracts and options on such futures contracts for the purpose of
hedging the market risk on existing securities or the intended purchase of
securities. Futures contracts are contracts for delayed delivery of
securities at a specific future date and at a specific price or yield. Upon
entering into a contract, the Fund deposits and maintains as collateral such
initial margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from or pay
to the broker an amount of cash equal to the daily fluctuation in value of
the contract. Such receipts or payments are known as variation margin and
are recorded by the Fund as unrealized gains or losses. When the contract is
closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at
the time it was closed.

(c) Income taxes --It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.

(e) Deferred organization and offering expenses--Deferred organization
expenses are amortized on a straight-line basis over a five-year period
beginning with the commencement of operations of the Fund. Direct expenses
relating to the public offering of the Common Stock were charged to capital
at the time of issuance.

(f) Non-income producing investments--Written and purchased options are non-
income producing investments.

(g) Dividends and distributions --Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.

F-34

<PAGE>

2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:

The Fund has entered into an Investment Advisory Agreement with FAMI, a
wholly-owned subsidiary of Merrill Lynch Investment Management, Inc.
("MLIM"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc.

FAMI is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund.

For such services, the Fund pays a monthly fee at an annual rate of 0.50% of
the Fund's average weekly net assets. For the period from October 30, 1993
to October 31, 1993, FAMI earned fees of $1,048, all of which were waived.
In addition, FAMI reimbursed the Fund $48 for additional expenses.

Accounting services are provided to the Fund by FAMI at cost.

Certain officers and/or directors of the Fund are officers and/or directors
of FAMI, MLIM, Merrill Lynch, Pierce, Fenner & Smith Incorporated and/or
Merrill Lynch & Co., Inc.

3. INVESTMENTS:
Purchases of investments, excluding short-term securities, for the period
ended October 31, 1993 were $2,198,000.

Net unrealized gains (losses) as of October 31, 1993 were as follows:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
UNREALIZED
GAINS
(LOSSES)
- ------------------------------------------------------------------------------
<S> <C>
Long-term investments............................................... $ 7,132
Short-term investments.............................................. (142)
--------
Total............................................................... $ 6,990
========

</TABLE>

As of October 31, 1993, net unrealized appreciation for Federal income tax
purposes aggregated $6,990, of which $9,940 related to appreciated securities
and $2,950 related to depreciated securities. The aggregate cost of
investments at October 31, 1993 for Federal income tax purposes was
$25,405,418.

4. CAPITAL STOCK TRANSACTIONS:
For the period ending October 31, 1993, 1,800,000 shares of Common Stock were
sold. At October 31, 1993, a total paid-in capital amounted to $25,493,767.

5. SUBSEQUENT EVENT:
On November 10, 1993, the Fund issued an additional 28,000 shares of Common
Stock, with proceeds of $396,000. On December 2, 1993, the Fund issued 518
shares of Auction Market Preferred Stock, each with a liquidation preference
of $25,000, with total proceeds of $12,950,000.

F-35
<PAGE>

<TABLE>

FINANCIAL STATEMENTS OF MUNIYIELD ARIZONA FUND, INC., MUNIYIELD ARIZONA FUND II, INC.
AND THE COMBINED FUND ON A PRO FORMA BASIS (unaudited)

COMBINED STATEMENT OF ASSETS, LIABILITIES AND CAPITAL AS OF APRIL 30, 1994

<CAPTION>
MUNIYIELD ARIZONA MUNIYIELD ARIZONA PRO FORMA FOR
FUND, INC. FUND II, INC. COMBINED FUND
ASSETS: ("Arizona I") ("Arizona II")
- ------ ----------------- -------------------- --------------------
<S> <C> <C> <C>
Investments, at value (Note 1a) $47,366,437 $34,987,607 $82,354,044
Cash 39,038 9,691 48,729
Receivables:
Interest $853,323 $737,825 $1,591,148
Securities sold 642,794 --- 642,794
Investment adviser (Note 2) 11,495 1,507,612 33,596 771,421 45,091 2,279,033
------ --------- ------ ------- ------ ---------
Deferred organization expenses (Note 1e) 26,523 28,716 55,239
Prepaid expenses and other assets 47,164 --- 47,164
Total assets 48,986,774 35,797,435 84,784,209
========== ========== ==========

LIABILITIES:
- -----------
Dividends payable to shareholders (Note 1g) 39,759 --- 705,189(1)
Accrued expenses and other liabilities 113,206 154,335 467,541(2)
Total liabilities 152,965 154,335 1,172,730
---------- ---------- ---------

NET ASSETS:
- ----------
Net assets $48,833,809 $35,643,100 $83,611,479
=========== =========== ===========
CAPITAL:
- -------
Capital Stock (200,000,000 shares of each Fund authorized;
400,000,000 shares as adjusted); Preferred Stock, par
value $.10 per share (347 shares of Arizona I AMPS*
issued and outstanding at $50,000 per share liquidation
preference; 518 shares of Arizona II Series A AMPS* issued
and outstanding at $25,000 per share liquidation preference;
1,212 Shares of AMPS* for the combined Fund at $25,000 per
share liquidation preference) $17,350,000 $12,950,000 $30,300,000
Common Stock, par value $.10 per share (2,499,161 shares of
Arizona I Common Stock and 1,856,551 shares of Arizona II
Common Stock issued and outstanding; 4,388,034 shares for
the combined Fund as adjusted) $249,916 $185,655 $438,803
Paid-in capital in excess of par 34,621,019 25,664,792 60,082,579(2)
Undistributed investment income--net 191,138 142,371 --- (1)
Undistributed realized capital gains--net 291,327 40,594 --- (1)
Unrealized depreciation on investments--net (3,869,591) (3,340,312) (7,209,903)
---------- ---------- -----------
Total--equivalent to $12.60 net asset value per share of
Arizona I Common Stock and $12.22 net asset value per
share of Arizona II Common Stock 31,483,809 22,693,100 53,311,479
---------- ---------- ----------
Total capital $48,833,809 $35,643,100 83,611,479
=========== =========== ==========
* Auction Market Preferred Stock
(1) Assumes the distribution of undistributed investment and undistributed realized capital gains.
(2) Reflects the charge for estimated reorganization expenses of $200,000.
See Notes to Financial Statements

</TABLE>

F-36
<PAGE>
<TABLE>

COMBINED SCHEDULE OF INVESTMENTS AS OF APRIL 30, 1994

<CAPTION>
VALUE
S&P'S MOODY'S FACE (IN THOUSANDS)
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------------------------
Arizona -- 85.0%
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

A1+ VMIG2 $200 Apache County, Arizona, IDA, PCR (Tucson Electric Power
(Company Project), VRDN, 3.30% due 10/01/2021 (a) $200
Arizona Educational Loan Marketing Corporation,
Educational Loan Revenue Bonds:
NR Aa 500 Senior Series B, VRDN, 3.30% due 12/01/2002(a) 500
NR A 700 Series B, AMT, 7.00% due 3/01/2002 743
NR A 1,000 Subordinate Series, AMT, 5.70% due 12/01/2008 967
Arizona Health Facilities Authority, Hospital System
Revenue Refunding Bonds:
NR Ba 2,000 (Saint Luke's Health System), 7.25% due 11/01/2014 1,992
AAA Aaa 1,000 (Samaritan Health System), 5.625% due 12/01/2015 (b) 923
Arizona State, COP, Refunding Bonds (Capital Guaranty),
Series B:
AAA Aaa 500 5.00% due 11/01/2009 451
AAA Aaa 965 5.00% due 5/01/2011 849
AAA Aaa 1,250 5.00% due 11/01/2011 1,097
AAA Aaa 1,180 Arizona State Power Authority, Power Resource Revenue
Refunding Bonds (Hoover Uprating Project), 5.375% due
10/01/2013 (b) 1,077
AAA Aaa 850 Arizona State University, COP, Refunding Bonds (West
Campus Project), 5.375% due 7/15/2009 (b) 786
Arizona State University, Revenue Refunding Bonds,
Series A:
AA A1 1,000 5.75% due 7/01/2012 952

AA A1 2,500 5.50% due 7/01/2019 2,249
AAA Aaa 1,550 Chandler, Arizona, Street and Highway User Revenue
Refunding Bonds, 5.50% due 7/01/2010 (c) 1,475
A A3 5,750 Greenlee County, Arizona, IDA, PCR, Refunding
(Phelps Dodge Corporation Project), 5.45% due
6/01/2009 5,357
AAA Aaa 1,000 Maricopa County, Arizona, Chandler Unified School
District Number 80 Refunding Bonds, 6.25% due
7/01/2011 (c) 1,016
AAA Aaa 1,000 Maricopa County, Arizona, Gilbert Unified School
District Number 41 Revenue Bonds. Series A, UT, 5.40%
due 7/01/2013 (c) 913

F-37
<PAGE>
S&P'S MOODY'S FACE (IN THOUSANDS)
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------------------------
Maricopa County, Arizona, IDA, Health Facilities
Revenue Insured Bonds (Catholic Health Care West):
AAA Aaa 7,500 Series A, 5.625% due 7/01/2023 (b) 6,799
A1+ VMIG1 300 Series B2, VRDN, 2.95% due 12/01/2008 (a) 300
Maricopa County, Arizona, IDA, Hospital Facilities
Revenue Bonds (Samaritan Health Services Hospital) (b):
AAA Aaa 1,400 Refunding, Series A, 7% due 12/01/2016 1,542
A1+ VMIG1 2,000 Series B2, VRDN, 2.95% due 12/01/2008(a) 2,000
BB Ba2 3,500 Maricopa County, Arizona, Pollution Control
Corporation, PCR, Refunding (Public Service
Company-Palo Verde), Series A, 6.375% due 8/15/2023 3,122
AA- Aa 1,000 Maricopa County, Arizona, Scottsdale Unified School
District Number 48 Revenue Bonds, UT, 6.00% due
7/01/2002 (f) (g) 1,047
BBB Baa2 8,900 Navajo County, Arizona, Pollution Control Corporation,
Revenue Refunding Bonds (Arizona Public Service
Company), Series A, 5.875% due 8/15/2028 8,016
AAA Aaa 1,320 Navapache, Arizona, Hospital District Refunding Bonds
(Navapache Regional Medical Center), 5.40% due
6/01/2012 (c) 1,210
AAA Aaa 570 Peoria, Arizona, Municipal Facilities Revenue Refunding
Bonds (Municipal Development Authority Incorporated),
5.20% due 7/01/2013 (b) 507
Phoenix, Arizona, Civic Improvement Corporation, Excise
Tax Revenue Bonds (Senior Lien-New City Hall Project):
A A1 500 5% due 7/01/2018 414
AA+ Aa 1,300 5.10% due 7/01/2018 1,119
AA+ Aa 500 5.10% due 7/01/2028 413
A A1 6,750 Phoenix, Arizona, Civic Improvement Corporation,
Wastewater System Lease Revenue Refunding Bonds,
4.75% due 7/01/2023 5,206
AA A1 500 Phoenix, Arizona, Civic Improvement Corporation, Water
System Revenue Bonds (Junior Lien), 5.40% due
7/01/2014 449
AA+ Aa 1,750 Phoenix, Arizona, Refunding Bonds, UT, Series B, 5.50%
due 7/01/2016 1,607
AAA Aaa 300 Pima County, Arizona, IDA, Revenue Refunding Insured
Bonds (Tucson Medical Center), Series A, 5% due
4/15/2015 (b) 254
Pinal County, Arizona, IDA, PCR (Magma-Copper/Newmont
Mining Corporation)(a):

F-38
<PAGE>
S&P'S MOODY'S FACE (IN THOUSANDS)
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------------------------
A1+ P1 1,600 DATES, 2.65% due 12/01/2009 1,600
AA P1 500 VRDN, 2.95% due 12/01/2009 500
AA Aa 2,000 Salt River Project, Arizona, Agricultural Improvement
and Power District Revenue Bonds (Electrical System),
STRIPES, 7.125% due 1/01/2012 (g) 1,510
AAA Aaa 1,000 Santa Cruz County, Arizona, Unified School District
Number 1 Revenue Bonds (Nogales), Series A, 5.80% due
7/01/2013 (d) 948
AAA Aaa 1,000 Scottsdale, Arizona, IDA, Hospital Revenue Bonds
(Scottsdale Memorial Hospital), 5.25% due 9/01/2018 (e) 869
A NR 500 Scottsdale, Arizona, Mountain Community Facilities
District Revenue Bonds, Series A, UT, 6.20% due
7/01/2017 493
AA Aa1 1,000 Scottsdale, Arizona, Refunding Bonds, Series A, 4.90%
due 7/01/2011 874
A NR 2,925 Tatum Ranch, Arizona, Community Facilities District
Revenue Bonds, Series A, UT, 6.875% due 7/01/2016 3,050
AAA Aaa 300 Tucson, Arizona, GO, Refunding, 6.10% due 7/01/2012 (c) 298
A+ A1 2,700 Tucson, Arizona, Water Revenue Refunding Bonds, Series
A, 5.75% due 7/01/2018 2,520
AAA Aaa 1,000 University of Arizona, COP (Residence Life Project),
Series A, 5.80% due 9/0l/2013 957
University of Arizona, University Revenue Refunding
Bonds:
AA A1 1,345 6.25% due 6/01/2011 1,350
AA A1 610 5% due 6/01/2017 515

================================================================================================================================

- --------------------------------------------------------------------------------------------------------------------------------
Puerto Rico -- 13.5%
- --------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Puerto Rico Commonwealth, GO, RIB, YCN, 8.882% due
7/01/2020 (d)(f)(g) 1,858
A Baa1 1,000 Puerto Rico, Commonwealth, Highway and Transportation
Authority, Highway Revenue Refunding Bonds, Series X,
5.50% due 7/01/2019 885
Puerto Rico Electric Power Authority, Power Revenue
Bonds:
AAA Aaa 2,000 LEVRRS, 9.238% due 7/01/2023(d)(f)(g) 1,905

F-39
<PAGE>
S&P'S MOODY'S FACE (IN THOUSANDS)
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------------------------
A- Baa1 4,000 Series R, 6.25% due 7/01/2017 3,928
A Baa1 2,000 Puerto Rico Public Building Authority, Public
Educational and Health Facilities Refunding Bonds,
Guaranteed, Series M, 5.75% due 7/01/2015 1,831
A Baa1 1,000 Puerto Rico Public Building Authority, Revenue
Refunding Bonds, Guaranteed, Series L, 5.75% due
7/01/2016 911
- --------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost -- $89,564) -- 98.5% $ 82,354

Other Assets Less Liabilities -- 1.5% 1,257
--------

Net Assets -- 100.0% $ 83,611
========

(a) The interest rate is subject to change periodically based upon the prevailing market rate. The interest rates shown are the
rates in effect at April 30, 1994.
(b) MBIA Insured.
(c) FGIC Insured.
(d) FSA Insured.
(e) AMBAC Insured.
(f) Prerefunded.
(g) The interest rate is subject to change periodically and inversely based upon the prevailing market rate. The interest rates
shown are the rates in effect at April 30, 1994.

See Notes to Financial Statements.

To simplify the listings of portfolio holdings in the Schedule of Investments, we have abbreviated the names of the many of the
securities according to the list below.

AMT Alternative Minimum Tax (subject to) UT Unlimited Tax
COP Certificates of Participation VRDN Variable Rate Demand Notes
DATES Daily Adjustable Tax-Exempt Securities YCN Yield Curve Notes
GO General Obligation Bonds
IDA Industrial Development Authority
LEVRRS Leveraged Reverse Rate Securities
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
STRIPES Short-Term Rate Inverse Payment Exempt Securities

</TABLE>

F-40
<PAGE>
NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES:
MuniYield Arizona Fund, Inc. ("Arizona I") and MuniYield Arizona Fund II,
Inc. ("Arizona II") (collectively, the "Funds") are registered under the
Investment Company Act of 1940 as non-diversified, closed-end management
investment companies. The Funds determine and make available for publication
the net asset value of their Common Stock on a weekly basis. The Common
Stock of Arizona I and Arizona II are listed on the American Stock Exchange
under the symbols MZA and MZT, respectively. The following is a summary of
significant accounting policies followed by the Funds.

(a) Valuation of investments--Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Funds' pricing service from dealers that make
markets in such securities. Financial futures contracts, which are traded on
exchanges, are valued at their closing prices as of the close of such
exchanges. Options, which are traded on exchanges, are valued at their last
sale price as of the close of such exchanges or, lacking any sales, at the
last available bid price. Securities with remaining maturities of sixty days
or less are valued at amortized cost. Securities for which market quotations
are not readily available are valued at their fair value as determined in
good faith by or under the direction of the Boards of Directors of the Funds.

(b) Financial futures contracts--The Funds may purchase or sell interest rate
futures contracts and options on such futures contracts for the purpose of
hedging the market risk on existing securities or the intended purchase of
securities. Futures contracts are contracts for delayed delivery of
securities at a specific future date and at a specific price or yield. Upon
entering into a contract, a Fund deposits and maintains as collateral such
initial margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from or pay
to the broker an amount of cash equal to the daily fluctuation in value of
the contract. Such receipts or payments are known as variation margin and
are recorded by the Fund as unrealized gains or losses. When the contract is
closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at
the time it was closed.

(c) Income taxes--It is the policy of the Funds to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of their taxable income to
their shareholders. Therefore, no Federal income tax provision is required.

(e) Deferred organization expenses and offering expenses--Deferred
organization expenses of each Fund are amortized on a straight-line basis
over a five-year period. Direct expenses relating to the public offering of
the Common and Preferred Stock of each Fund were charged to capital at the
time of issuance.

(f) Non-income producing investments--Written and purchased options are non-
income producing investments.

(g) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.

F-41
<PAGE>
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
Each Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services,
Inc., an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."). The limited partners of FAM are ML & Co. and Fund Asset Management,
Inc. ("FAMI"), which is also an indirect, wholly-owned subsidiary of ML & Co.

FAM is responsible for the management of each Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Funds. For such services, each Fund pays
a monthly fee at an annual rate of .50% of the Fund's average weekly net
assets. For the six months ended April 30, 1994, FAM earned fees of (i)
$130,215 of which $76,162 was voluntarily waived from Arizona I and (ii)
$89,533 of which $84,871 was voluntarily waived from Arizona II. In
addition, FAM voluntarily reimbursed Arizona II $38,210 for additional
expenses.

Accounting services are provided to the Funds by FAM at cost.

Certain officers and/or directors of the Funds are officers and/or directors
of FAM, FAMI, Merrill Lynch, Pierce, Fenner & Smith Incorporated and/or ML &
Co.

F-42
<PAGE>
INDEPENDENT AUDITORS' REPORT

FUND ASSET MANAGEMENT, INC.:

We have audited the accompanying consolidated balance sheet of Fund Asset
Management, Inc. and subsidiary (the "Company") as of December 31, 1993.
This balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on the balance sheet based on our
audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, such consolidated balance sheet presents fairly, in all
material respects, the financial position of the Company at December 31, 1993
in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 28, 1994

F-43
<PAGE>

FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET DECEMBER 31, 1993
- ------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $996,680

Receivable from affiliated companies:
Lease transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,501,523
Sale of leased investment . . . . . . . . . . . . . . . . . . . . . . . 48,312,532
Fund management fees receivable . . . . . . . . . . . . . . . . . . . . . . . 28,927,938
Investments in leases:
Leveraged leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,431,668
Sales-type lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,362,521
Investments in affiliated investment companies (market: $19,731,088) . . .
18,181,262
Investment in affiliated limited partnership . . . . . . . . . . . . . . . . 31,109,264

TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $212,823,388

LIABILITIES AND STOCKHOLDER'S EQUITY

LIABILITIES:

Payable to Merrill Lynch & Co., Inc.
and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,554,955
Deferred income taxes:
Arising from leveraged leases . . . . . . . . . . . . . . . . . . . . . 52,938,886
Arising from sales-type lease . . . . . . . . . . . . . . . . . . . . . 1,351,622
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,838,124
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,501
----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $91,692,088
----------
STOCKHOLDER'S EQUITY:

Common stock, par value $1.00 per share - authorized 25,000 shares;
outstanding 1,000 shares . . . . . . . . . . . . . . . . . . . . . . . . . .
1,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 686,215,876
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,029,472

Proceeds receivable from Merrill Lynch & Co., Inc. from sale of subsidiary . (684,115,048)
Total stockholder's equity . . . . . . . . . . . . . . . . . . . . . . . . . 121,131,300
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY . . . . . . . . . . . . . . . . . $212,823,388
</TABLE>

See notes to consolidated balance sheet.

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

F-44
<PAGE>
FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY
- ------------------------------------------

NOTES TO CONSOLIDATED BALANCE SHEET December 31, 1993
- --------------------------------------------------------------------------

ORGANIZATION

Fund Asset Management, Inc. and subsidiary (the "Company"), a wholly-owned
subsidiary of Merrill Lynch Investment Management, Inc. (the "Parent"), or
"MLIM", which is an indirect, wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ("ML & Co."), serves as an investment adviser to various registered
open-end investment companies. The Company is also a lessor participant in
certain leveraged and sales-type lease agreements.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Income Taxes - The results of the operations of the Company are included in
the consolidated Federal and combined state and local income tax returns
filed by ML & Co. It is the policy of ML & Co. to allocate the tax
associated with such operating results to each respective subsidiary in a
manner which approximates the separate company method. In 1992, ML & Co.
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"), which requires an asset and liability method in
recording income taxes on all transactions that have been recognized in the
financial statements. SFAS 109 provides that deferred taxes be adjusted to
reflect tax rates at which future tax liabilities or assets are expected to
be settled or realized.

TRANSACTIONS WITH AFFILIATES

The Company serves as an investment adviser for certain affiliated investment
companies. The Company maintains investments in certain of these investment
companies. Such investments are carried at the lower of cost or market
value. Market value is determined based upon quoted market prices.

The Company has an arrangement with Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), an affiliate, which provides that the Company, which
receives revenue as investment adviser to certain investment companies (the
"Funds"), reimburse MLPF&S for certain costs incurred in processing
transactions involving shares of the Funds.

ML & Co. is the holder of the Company's excess cash, which is available on
demand to meet current liabilities. ML & Co. credits the Company for
interest, at a floating rate approximating ML & Co.'s average borrowing rate,
based on the Company's average daily balances due to/from ML & Co.

The "Receivable from affiliated companies" arising from lease transactions is
summarized as follows:

Monies advanced to fund lease transactions............. $(103,476,954)
Tax benefits allocated to the Company by ML & Co....... 88,699,254
Other.................................................. 39,279,223
-------------
Total.......................................... $ 24,501,523
=============

F-45
<PAGE>

The Company has a 49 percent limited partnership interest in ML Plainsboro
Limited Partnership ("MLP"), whose general partner is an affiliate. Profits
and losses are allocated to the Company based on its percentage interest.

During 1992, the Company sold its investment in Merrill Lynch Interfunding,
Inc., and Merlease Leasing Corp. to an affiliate at book value, resulting in
a receivable from ML & Co. This receivable is reflected as a reduction to
stockholder's equity.

INVESTMENTS IN LEASES

The Company is a lessor participant in leveraged leases.

Pertinent information relating to the Company's investments in leveraged
leases is summarized as follows:

<TABLE>
<CAPTION>
ESTIMATED RESIDUAL
LENGTH OF VALUE OF LEASED
TYPE OF PROPERTY LEASE (YEARS) EQUITY INVESTMENT PROPERTY
---------------- ------------- ----------------- --------
<S> <C> <C> <C>
Generating plant . . . . 24-25 34.06% 15.0%

</TABLE>

Financing beyond the Company's equity interest in the purchase price of the
properties was furnished by outside parties in the form of long-term debt
that provides for no recourse against the Company and is secured by a first
lien on the properties and related rentals. At the end of the respective
lease terms, ownership of the properties remains with the Company.

The Company's net investment in leveraged leases is summarized as follows:

Rentals receivable (net of principal and
interest on nonrecourse debt)............... $ 66,075,030
Estimated residual values of leased assets.... 18,964,143
Less:
Unearned and deferred income............. (26,617,505)
Allowance for uncollectibles............. (990,000)
--------------

Investment in leveraged leases................ 57,431,668
Less deferred taxes arising from
leveraged leases............................ (52,938,886)
--------------
Net investment in leveraged leases............ $ 4,492,782
=============
During 1993, the Company sold its equity interest in the chemical tanker
previously accounted for as a leveraged lease. The sale resulted in an
after-tax gain of $112,000.

The Company's investment in the sales-type leases consisted of the following
elements at December 31, 1993:

Minimum lease payments receivable............ $3,672,000

F-46
<PAGE>

Less:
Unearned income.......................... (59,479)
Allowance for uncollectibles............. (250,000)
---------
Investment in sales-type leases.............. $3,362,521
=========

At December 31, 1993 minimum lease payments receivable are
$3,672,000 for 1994.

For Federal income tax purposes, the Company receives the investment tax
credit and has the benefit of tax deductions for (i) depreciation on the
entire amount of leased assets and (ii) interest on the outstanding
long-term debt. For state and local tax purposes, the Company also
receives the benefits of tax deductions from (i) and (ii) above. Since,
during the early years of the leases, those deductions exceed the Company's
lease rental income, substantial excess deductions are available to be
applied against the Company's other income and the consolidated income of
ML & Co. In the later years of these leases, rental income will exceed the
related deductions and taxes will be payable (to the extent that net
deductions arising from additional leveraged lease transactions do not
offset such net lease income). Deferred taxes have been provided to
reflect these temporary differences.

INCOME TAXES

As part of the consolidated group, the Company transfers its current
Federal and state tax liabilities to MLIM. No such amounts were due to
MLIM at December 31, 1993.

PENSION PLAN

The Company participates in the ML & Co. Comprehensive Retirement Program
(the "Program"), consisting of the Retirement Accumulation Plan (the "RAP")
and the Employee Stock Ownership Plan (the "ESOP"). Under the Program,
cash contributions made by the Company and the ML & Co. stock held by the
ESOP will be allocated quarterly to participants' accounts. Allocations
will be based on years of service, age and eligible compensation.
Actuarial data regarding the Company's Plan participants is not separately
available.

NAME CHANGE

Effective December 28, 1991, the Company's parent, through an amendment of
its certificate of incorporation, changed its name to Merrill Lynch
Investment Management, Inc. ("MLIM"). MLIM does business under the name
"Merrill Lynch Asset Management".

SUBSEQUENT EVENT

Effective January 1, 1994, Fund Asset Management, Inc. contributed certain
net investment advisory assets to Fund Asset Management, L.P., a newly
formed Delaware limited partnership, in exchange for a 99% limited
partnership interest. The general partner, Princeton Services, Inc. (a
wholly-owned subsidiary of ML & Co.), contributed 1% of the value of the
net investment advisory assets in exchange for its 1% general partnership
interest. The partnership's profits and losses are to be allocated in
proportion to the capital contributions of the partners.

F-47
<PAGE>
EXHIBIT I

AGREEMENT AND PLAN OF REORGANIZATION

THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as
of the ___ day of October, 1994, by and between MuniYield Arizona Fund,
Inc., a Maryland corporation ("Arizona I"), and MuniYield Arizona Fund II,
Inc., a Maryland corporation ("Arizona II").

PLAN OF REORGANIZATION
----------------------

The reorganization will comprise (a) the acquisition by Arizona II of
substantially all of the assets, and the assumption of substantially all of
the liabilities, of Arizona I in exchange solely for an equal aggregate value
of Arizona II's shares of (i) common stock, with a par value of $.10 per
share ("Arizona II Common Stock"), and (ii) auction market preferred stock,
with a liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared)
("Arizona II Series B AMPS"), and the subsequent distribution to Arizona I
stockholders in liquidation of Arizona I of (x) all of the Arizona II Common
Stock received in exchange for their corresponding shares of common stock of
Arizona I, with a par value of $.10 per share ("Arizona I Common Stock") and
(y) all of the Arizona II Series B AMPS received in exchange for their
corresponding shares of auction market preferred stock, with a liquidation
preference of $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) ("Arizona I
AMPS"); and (b) a change in the name of the surviving fund to "MuniYield
Arizona Fund, Inc.", all upon and subject to the terms hereinafter set forth
(the "Reorganization").

In the course of the Reorganization, Arizona II Common Stock and Arizona
II Series B AMPS will be distributed to Arizona I stockholders as follows:
(i) each holder of Arizona I Common Stock will be entitled to receive the
number of shares of Arizona II Common Stock to be received by Arizona I equal
to the aggregate net asset value of the Arizona I Common Stock owned by such
stockholder on the Exchange Date (as defined in Section 7 of this Agreement);
and (ii) each holder of Arizona I AMPS will be entitled to receive the number
of shares of Arizona II Series B AMPS to be received by Arizona I equal to
the aggregate liquidation preference of the Arizona I AMPS owned by such
stockholder on the Exchange Date. In consideration therefor, on the Exchange
Date Arizona II shall assume all of Arizona I's obligations and liabilities
then existing, whether absolute, accrued, contingent or otherwise. It is
intended that the Reorganization described in this Plan shall be a
reorganization within the meaning of Section 368(a)(1)(D) of the Internal
Revenue Code of 1986, as amended (the "Code"), and any successor provision.

Articles Supplementary to Arizona II's Articles of Incorporation
establishing the powers, rights and preferences of the Arizona II Series B
AMPS will have been filed with the Department of Assessments and Taxation of
the State of Maryland prior to the closing of the Reorganization. As soon as
practicable after the closing of the Reorganization and upon the liquidation
and dissolution of Arizona I, Articles of Amendment to Arizona II's Articles
of Incorporation will be filed with the Department of Assessments and
Taxation of the State of Maryland to reflect the change in the name of
Arizona II to "MuniYield Arizona Fund, Inc." As promptly as practicable
after the liquidation of Arizona I pursuant to the Reorganization, Arizona I
shall be dissolved in accordance with the laws of the State of Maryland and
will terminate its registration under the Investment Company Act of 1940, as
amended (the "1940 Act").

I-1
<PAGE>

AGREEMENT
---------

In order to consummate the Reorganization and in consideration of the
premises and the covenants and agreements hereinafter set forth, and
intending to be legally bound, Arizona I and Arizona II hereby agree as
follows:

1. Representations and Warranties of Arizona I.
-------------------------------------------

Arizona I represents and warrants to, and agrees with, Arizona II that:

(a) Arizona I is a corporation duly organized, validly existing
and in good standing in conformity with the laws of the State of Maryland,
and has the power to own all of its assets and to carry out this Agreement.
Arizona I has all necessary Federal, state and local authorizations to carry
on its business as it is now being conducted and to carry out this Agreement.

(b) Arizona I is duly registered under the 1940 Act as a non-
diversified, closed-end management investment company (File No. 811-7806),
and such registration has not been revoked or rescinded and is in full force
and effect. Arizona I has elected and qualified for the special tax
treatment afforded regulated investment companies ("RICs") under Sections
851-855 of the Code at all times since its inception and intends to continue
to so qualify for its taxable year ending upon the liquidation of Arizona I.

(c) As used in this Agreement, the term "Investments" shall mean
(i) the investments of Arizona I shown on the schedule of its investments as
of the Valuation Time (as defined in Section 3(c) of this Agreement)
furnished to Arizona II, with such additions thereto and deletions therefrom
as may have arisen in the course of Arizona I's business up to the Valuation
Time; and (ii) all other assets owned by Arizona I or liabilities incurred as
of the Valuation Time. Any unexpended portion of the foregoing funds
retained by Arizona I shall be disbursed by Arizona I pro rata to its
stockholders upon dissolution of the fund as a final liquidating dividend.

(d) Arizona I has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board of Directors, and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.

(e) Arizona II has been furnished with a statement of assets,
liabilities and capital and a schedule of investments of Arizona I, each as
of October 31, 1993, said financial statements having been examined by
Deloitte & Touche LLP, independent public accountants. An unaudited
statement of assets, liabilities and capital of Arizona I and an unaudited
schedule of investments of Arizona I, each as of the Valuation Time, will be
furnished to Arizona II at or prior to the Exchange Date for the purpose of
determining the number of shares of Arizona II Common Stock and shares of
Arizona II Series B AMPS to be issued pursuant to Section 4 of this
Agreement; and each will fairly present the financial position of Arizona I
as of the Valuation Time in conformity with generally accepted accounting
principles applied on a consistent basis.

I-2
<PAGE>

(f) Arizona II has been furnished with Arizona I's Semi-Annual
Report to Stockholders for the six months ended April 30, 1994, and the
unaudited financial statements appearing therein fairly present the financial
position of Arizona I as of the respective dates indicated, in conformity
with generally accepted accounting principles applied on a consistent basis.

(g) Arizona II has been furnished with (i) the prospectus of
Arizona I, dated July 23, 1993, relating to the Arizona I Common Stock (the
"Arizona I Common Stock Prospectus") and (ii) the prospectus of Arizona I,
dated August 25, 1993, relating to the Arizona I AMPS (the "Arizona I AMPS
Prospectus"); and said prospectuses do not contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.

(h) There are no material legal, administrative or other
proceedings pending or, to the knowledge of Arizona I, threatened against
Arizona I which assert liability on the part of Arizona I or which materially
affect its financial condition or its ability to consummate the
Reorganization. Arizona I is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or regulation
or administrative ruling relating to any aspect of its business.

(i) There are no material contracts outstanding to which Arizona I
is a party that have not been disclosed in the
N-14 Registration Statement (as defined in subsection (p) below) or will not
otherwise be disclosed to Arizona II prior to the Valuation Time.

(j) Arizona I is not a party to or obligated under any provision
of its Articles of Incorporation, as amended, or its
by-laws, as amended, or any contract or other commitment or obligation, and
is not subject to any order or decree which would be violated by its
execution of or performance under this Agreement.

(k) Arizona I has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of assets,
liabilities and capital referred to above, those incurred in the ordinary
course of its business as an investment company since October 31, 1993, and
those incurred in connection with the Reorganization. As of the Valuation
Time, Arizona I will advise Arizona II in writing of all known liabilities,
contingent or otherwise, whether or not incurred in the ordinary course of
business, existing or accrued as of such time.

(l) Arizona I has filed, or has obtained extensions to file, all
Federal, state and local tax returns which are required to be filed by it,
and has paid or has obtained extensions to pay, all Federal, state and local
taxes shown on said returns to be due and owing and all assessments received
by it, up to and including the taxable year in which the Exchange Date
occurs. All tax liabilities of Arizona I have adequately been provided for
on its books, and no tax deficiency or liability of Arizona I has been
asserted and no question with respect thereto has been raised by the Internal
Revenue Service or by any state or local tax authority for taxes in excess of
those already paid, up to and including the taxable year in which the
Exchange Date occurs.

(m) At both the Valuation Time and the Exchange Date, Arizona I
will have full right, power and authority to sell, assign, transfer and
deliver the Investments. At the Exchange Date, subject only to the delivery
of the Investments as contemplated by this Agreement, Arizona I will have
good and marketable title to all of the Investments, and Arizona II will
acquire all of the Investments free and clear of any encumbrances, liens or
security interests and without any restrictions upon the transfer thereof
(except those imposed by the

I-3
<PAGE>

Federal or state securities laws and those imperfections of title or
encumbrances as do not materially detract from the value or use of the
Investments or materially affect title thereto).

(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Arizona I of the
Reorganization, except such as may be required under the Securities Act of
1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934,
as amended (the "1934 Act"), and the 1940 Act or state securities laws (which
term as used herein shall include the laws of the District of Columbia and
Puerto Rico).

(o) The registration statement filed by Arizona II on Form N-14
relating to the Arizona II Common Stock and the Arizona II Series B AMPS to
be issued pursuant to this Agreement, and any supplement or amendment thereto
or to the documents therein (as amended, the "N-14 Registration Statement"),
on the effective date of the N-14 Registration Statement, at the time of the
stockholders' meetings referred to in Section 6(a) of this Agreement and on
the Exchange Date, insofar as it relates to Arizona I (i) complied or will
comply in all material respects with the provisions of the 1933 Act, the 1934
Act and the 1940 Act and the rules and regulations thereunder, and (ii) did
not or will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading; and the prospectus included therein
did not or will not contain any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this subsection
shall apply only to statements in or omissions from the N-14 Registration
Statement made in reliance upon and in conformity with information furnished
by Arizona I for use in the N-14 Registration Statement as provided in
Section 7 of this Agreement.

(p) Arizona I is authorized to issue 200,000,000 shares of capital
stock, par value $.05 per share, each outstanding share of which is fully
paid, nonassessable and has full voting rights.

(q) All of the issued and outstanding shares of Arizona I Common
Stock and Arizona I AMPS were offered for sale and sold in conformity with
all applicable Federal and state securities laws.

(r) The books and records of Arizona I made available to Arizona
II and/or its counsel are substantially true and correct and contain no
material misstatements or omissions with respect to the operations of Arizona
I.

(s) Arizona I will not sell or otherwise dispose of any of the
shares of Arizona II to be received in the Reorganization, except in
distribution to the stockholders of Arizona I.

2. Representations and Warranties of Arizona II.
--------------------------------------------

Arizona II represents and warrants to, and agrees with, Arizona I that:

(a) Arizona II is a corporation duly organized, validly existing
and in good standing in conformity with the laws of the State of Maryland,
and has the power to own all of its assets and to carry out this Agreement.
Arizona I has all necessary Federal, state and local authorizations to carry
on its business as it is now being conducted and to carry out this Agreement.

I-4
<PAGE>

(b) Arizona II is duly registered under the 1940 Act as a non-
diversified, closed-end management investment company (File No. 811-7083),
and such registration has not been revoked or rescinded and is in full force
and effect. Arizona I has elected and qualified for the special tax
treatment afforded RICs under Sections 851-855 of the Code at all times since
its inception, and intends to continue to so qualify both until consummation
of the Reorganization and thereafter.

(c) Arizona I has been furnished with a statement of assets,
liabilities and capital and a schedule of investments of Arizona II, each as
of October 31, 1993, said financial statements having been examined by
Deloitte & Touche LLP, independent public accountants. An unaudited
statement of assets, liabilities and capital of Arizona II and an unaudited
schedule of investments of Arizona II, each as of the Valuation Time, will
be furnished to Arizona I at or prior to the Exchange Date for the purpose
of determining the number of shares of Arizona II Common Stock and shares of
Arizona II Series B AMPS to be issued pursuant to Section 4 of this
Agreement; each will fairly present the financial position of Arizona II as
of the Valuation Time in conformity with generally accepted accounting
principles applied on a consistent basis.

(d) Arizona I has been furnished with (i) the prospectus of
Arizona II, dated October 22, 1993, relating to the Arizona II Common Stock
(the "Arizona II Common Stock Prospectus") and (ii) the prospectus of Arizona
II, dated November 29, 1993, relating to the shares of Auction Market
Preferred Stock, Series A of Arizona II ("Arizona II AMPS") (the "Arizona II
AMPS Prospectus"); and said prospectuses do not contain any untrue statement
of a material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.

(e) Arizona II has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board of Directors and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.

(f) There are no material legal, administrative or other
proceedings pending or, to the knowledge of Arizona II, threatened against
Arizona II which assert liability on the part of Arizona II or which
materially affect its financial condition or its ability to consummate the
Reorganization. Arizona II is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or regulation
or administrative ruling relating to any aspect of its business.

(g) Arizona II is not a party to or obligated under any provision
of its Articles of Incorporation, as amended, or its by-laws, as amended, or
any contract or other commitment or obligation, and is not subject to any
order or decree which would be violated by its execution of or performance
under this Agreement.

(h) There are no material contracts outstanding to which Arizona
II is a party that have not been disclosed in the N-14 Registration Statement
or will not otherwise be disclosed to Arizona I prior to the Valuation Time.

(i) Arizona II has no known liabilities of a material amount,
contingent or otherwise, other than those shown on Arizona II's statements of
assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since October 29,
1993 and those incurred in connection with the Reorganization. As of the
Valuation Time, Arizona II will advise Arizona I in writing of

I-5
<PAGE>

all known liabilities, contingent or otherwise, whether or not incurred in
the ordinary course of business, existing or accrued as of such time.

(j) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Arizona II of the
Reorganization, except such as may be required under the 1933 Act, the 1934
Act, the 1940 Act or state securities laws.

(k) The N-14 Registration Statement, on its effective date, at the
time of the stockholders' meetings referred to in Section 6(a) of this
Agreement and at the Exchange Date, insofar as it relates to Arizona II (i)
complied or will comply in all material respects with the provisions of the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder and (ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and the
prospectus included therein did not or will not contain any untrue statement
of a material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the representations and
warranties in this subsection only shall apply to statements in or omissions
from the N-14 Registration Statement made in reliance upon and in conformity
with information furnished by Arizona II for use in the N-14 Registration
Statement as provided in Section 7 of this Agreement.

(l) Arizona II is authorized to issue 200,000,000 shares of
capital stock, par value $.10 per share, each outstanding share of which is
fully paid, nonassessable and has full voting rights.

(m) The Arizona II Common Stock and Arizona II Series B AMPS to be
issued to Arizona I pursuant to this Agreement will have been duly authorized
and, when issued and delivered pursuant to this Agreement, will be legally
and validly issued and will be fully paid and nonassessable and will have
full voting rights, and no stockholder of Arizona II will have any preemptive
right of subscription or purchase in respect thereof.

(n) At or prior to the Exchange Date, the Arizona II Common Stock
and Arizona II Series B AMPS to be transferred to Arizona I on the Exchange
Date will be duly qualified for offering to the public in all states of the
United States in which the sale of shares of Arizona II presently are
qualified, and there are a sufficient number of such shares registered under
the 1933 Act and with each pertinent state securities commission to permit
the transfers contemplated by this Agreement to be consummated.

(o) At or prior to the Exchange Date, Arizona II will have
obtained any and all regulatory, Director and stockholder approvals necessary
to issue the Arizona II Common Stock and Arizona II Series B AMPS to Arizona
I.

3. The Reorganization.
------------------

(a) Subject to the requisite approvals of the stockholders of each
of Arizona I and Arizona II being given, and to the other terms and
conditions contained herein, Arizona I agrees to convey, transfer and deliver
to Arizona II for the benefit of Arizona II, and Arizona II agrees to acquire
from Arizona I for the benefit of Arizona II, on the Exchange Date all of the
Investments (including interest accrued as of the Valuation Time on debt
instruments) of Arizona I, and assume substantially all of the liabilities of
Arizona I, in exchange solely for that number of shares of Arizona II Common
Stock and Arizona II Series B AMPS provided in Section 4 of this Agreement.
Pursuant to this Agreement, as soon as practicable Arizona I will distribute
all Arizona II Common Stock and Arizona II Series B AMPS received by it to
its stockholders in

I-6
<PAGE>

exchange for their corresponding Arizona I Common Stock and Arizona I AMPS.
Such distribution shall be accomplished by the opening of stockholder
accounts on the stock ledger records of Arizona II in the amounts due the
stockholders of Arizona I based on their respective holdings in Arizona I as
of the Valuation Time.

(b) Arizona I will pay or cause to be paid any interest it
receives on or after the Exchange Date with respect to the Investments
transferred to Arizona II hereunder.

(c) The Valuation Time shall be 4:00 P.M., New York time, on
___________, 1994, or such earlier or later day and time as mutually may be
agreed upon in writing (the "Valuation Time").

(d) Arizona II will acquire substantially all of the assets of,
and assume all of the known liabilities of, Arizona I, except that recourse
for such liabilities will be limited to Arizona II. The known liabilities of
Arizona I as of the Valuation Time shall be confirmed in writing to Arizona
II by Arizona I pursuant to Section 1(g) of this Agreement.

(e) Arizona II will file Articles Supplementary to its Articles of
Incorporation establishing the powers, rights and preferences of the Arizona
II Series B AMPS with the Department of Assessments and Taxation of the State
of Maryland prior to the closing of the Reorganization.

(f) Arizona II will file Articles of Amendment to its Articles of
Incorporation with the Department of Assessments and Taxation of the State of
Maryland, reflecting a change in the name of the fund to "MuniYield Arizona
Fund, Inc.", as soon as practicable after the closing of the Reorganization.

4. Issuance and Valuation of Arizona II Common Stock and Arizona II
----------------------------------------------------------------
Series B AMPS in the Reorganization.
- -----------------------------------

Full Arizona II Common Stock and Arizona II Series B AMPS of an
aggregate net asset value or liquidation preference, as the case may be,
equal (to the nearest one ten thousandth of one cent) to the value of the
assets of Arizona I acquired determined as hereinafter provided, reduced by
the amount of liabilities assumed by Arizona II, shall be issued by Arizona
II in exchange for such assets of Arizona I. The assets of Arizona I and
Arizona II shall be determined in accordance with the procedures described in
the Arizona II Common Stock Prospectus and the Arizona II AMPS Prospectus as
of the Valuation Time, and no formula will be used to adjust the net asset
value so determined of either Arizona I or Arizona II to take into account
differences in realized and unrealized gains and losses. Values in all cases
shall be determined as of the Valuation Time. The value of the Investments
of Arizona I to be transferred to Arizona II shall be determined by Arizona
II pursuant to the procedures utilized by Arizona II in valuing its own
assets and determining its own liabilities for purposes of the
Reorganization. Such valuation and determination shall be made by Arizona II
in cooperation with Arizona I and shall be confirmed in writing to Arizona II
by Arizona I. The net asset value per share of the Arizona II Common Stock
and the liquidation preference per share of the Arizona II Series B AMPS
shall be determined in accordance with such procedures and Arizona II shall
certify the computations involved. Arizona II shall issue to Arizona I
separate certificates or share deposit receipts for the Arizona II Common
Stock and the Arizona II Series B AMPS, each registered in the name of
Arizona I. Arizona I then shall distribute the Arizona II Common Stock and
the Arizona II Series B AMPS to its corresponding stockholders of Arizona I
Common Stock and Arizona I AMPS by redelivering the certificates or share
deposit receipts evidencing ownership of (i) the Arizona II Common Stock to
The Bank of New York, as the transfer agent and registrar for the Arizona II
Common Stock and (ii) the Arizona II Series B AMPS to IBJ Schroder Bank and
Trust Company, as the transfer agent and registrar for the Arizona II Series
B AMPS. With respect to any Arizona I stockholder holding certificates
evidencing ownership of either the Arizona I Common Stock or the Arizona II
Series B AMPS as of the Exchange Date, and subject to Arizona II being
informed

I-7
<PAGE>

thereof in writing by Arizona I, Arizona II will not permit such stockholder
to receive new certificates evidencing ownership of the Arizona II Common
Stock or Arizona II Series B AMPS, exchange Arizona II Common Stock or
Arizona II Series B AMPS credited to such stockholder's account for shares of
other investment companies managed by Merrill Lynch Asset Management, L.P. or
any of its affiliates, or pledge or redeem such Arizona II Common Stock or
Arizona II Series B AMPS, in any case, until notified by Arizona I or its
agent that such stockholder has surrendered his or her outstanding
certificates evidencing ownership of the Arizona I Common Stock or the
Arizona I AMPS or, in the event of lost certificates, posted adequate bond.
Arizona I, at its own expense, will request its stockholders to surrender
their outstanding certificates evidencing ownership of the Arizona I Common
Stock or the Arizona I AMPS, as the case may be, or post adequate bond
therefor.

5. Payment of Expenses.
-------------------

(a) Arizona II shall pay, subsequent to the Exchange Date, all
expenses incurred in connection with the Reorganization, including, but not
limited to, all costs related to the preparation and distribution of the N-14
Registration Statement and the fees of special counsel to the Reorganization.
Such fees and expenses shall include legal, accounting and state securities
or blue sky fees, printing costs, filing fees, stock exchange fees, rating
agency fees, portfolio transfer taxes (if any), and any similar expenses
incurred in connection with the Reorganization. Neither Arizona I nor
Arizona II shall pay any expenses of its respective stockholders arising out
of or in connection with the Reorganization.

(b) If for any reason the Reorganization is not consummated, no
party shall be liable to any other party for any damages resulting therefrom,
including, without limitation, consequential damages.

6. Covenants of Arizona I and Arizona II.
-------------------------------------

(a) Arizona I and Arizona II each agrees to call a special meeting
of its respective stockholders as soon as is practicable after the effective
date of the N-14 Registration Statement for the purpose of considering the
Reorganization as described in this Agreement. As a condition to the
obligations of each of the parties hereto, the holders of (i) more than fifty
percent of the shares of Arizona I Common Stock and Arizona I AMPS, voting
together as a single class, (ii) more than fifty percent of the shares of
Arizona I AMPS, voting separately as a class, (iii) more than fifty percent
of the shares of Arizona II Common Stock and Arizona II AMPS, voting together
as a single class and (iv) more than fifty percent of the shares of Arizona
II AMPS, voting separately as a class, in each case issued and outstanding
and entitled to vote thereon, shall have approved this Agreement at such a
meeting at or prior to the Valuation Time.

(b) Arizona I and Arizona II each covenants to operate its
respective business as presently conducted between the date hereof and the
Exchange Date.

(c) Arizona I agrees that following the consummation of the
Reorganization, it will liquidate and dissolve in accordance with the laws of
the State of Maryland and any other applicable law, it will not make any
distributions of any Arizona II Common Stock and Arizona II Series B AMPS
other than to the stockholders of Arizona I and without first paying or
adequately providing for the payment of all of Arizona I's liabilities not
assumed by Arizona II, if any, and on and after the Exchange Date it shall
not conduct any business except in connection with its liquidation and
dissolution.

I-8
<PAGE>

(d) Arizona I undertakes that if the Reorganization is
consummated, it will file an application pursuant to Section 8(f) of the 1940
Act for an order declaring that Arizona I has ceased to be a registered
investment company.

(e) Arizona I and Arizona II jointly will file the N-14
Registration Statement with the Securities and Exchange Commission (the
"Commission") and will use their best efforts to provide that the N-14
Registration Statement becomes effective as promptly as practicable. Arizona
I and Arizona II agree to cooperate fully with each other, and each will
furnish to the other the information relating to itself to be set forth in
the N-14 Registration Statement as required by the 1933 Act, the 1934 Act,
the 1940 Act, and the rules and regulations thereunder and the state
securities or blue sky laws.

(f) Arizona II agrees to advise Arizona I promptly in writing if
at any time prior to the Exchange Date the assets of Arizona I include any
assets which Arizona II is not permitted, or reasonably believes to be
unsuitable for it, to acquire, including without limitation any security
which, prior to its acquisition by Arizona I, Arizona II has informed Arizona
I is unsuitable for Arizona II to acquire. Moreover, Arizona II has no plan
or intention to sell or otherwise dispose of the assets of Arizona I to be
acquired in the Reorganization, except for dispositions made in the ordinary
course of business.

(g) Arizona I and Arizona II each agrees that by the Exchange Date
all of its Federal and other tax returns and reports required to be filed on
or before such date shall have been filed and all taxes shown as due on said
returns either have been paid or adequate liability reserves have been
provided for the payment of such taxes. In connection with this covenant,
the funds agree to cooperate with each other in filing any tax return,
amended return or claim for refund, determining a liability for taxes or a
right to a refund of taxes or participating in or conducting any audit or
other proceeding in respect of taxes. Arizona II agrees to retain for a
period of ten (10) years following the Exchange Date all returns, schedules
and work papers and all material records or other documents relating to tax
matters of Arizona I for its taxable period first ending after the Exchange
Date and for all prior taxable periods. Any information obtained under this
subsection shall be kept confidential except as otherwise may be necessary in
connection with the filing of returns or claims for refund or in conducting
an audit or other proceeding. After the Exchange Date, Arizona I shall
prepare, or cause its agents to prepare, any Federal, state or local tax
returns, including any Forms 1099, required to be filed by Arizona I with
respect to Arizona I's final taxable year ending with its complete
liquidation and for any prior periods or taxable years and further shall
cause such tax returns and Forms 1099 to be duly filed with the appropriate
taxing authorities. Notwithstanding the aforementioned provisions of this
subsection, any expenses incurred by Arizona I (other than for payment of
taxes) in connection with the preparation and filing of said tax returns and
Forms 1099 after the Exchange Date shall be borne by Arizona I to the extent
such expenses have been accrued by Arizona I in the ordinary course without
regard to the Reorganization; any excess expenses shall be borne by Fund
Asset Management, L.P. ("FAM") at the time such tax returns and Forms 1099
are prepared.

(h) Arizona I and Arizona II each agrees to mail to each of its
respective stockholders of record entitled to vote at the special meeting of
stockholders at which action is to be considered regarding this Agreement, in
sufficient time to comply with requirements as to notice thereof, a combined
Proxy Statement and Prospectus which complies in all material respects with
the applicable provisions of Section 14(a) of the 1934 Act and Section 20(a)
of the 1940 Act, and the rules and regulations, respectively, thereunder.

(i) Following the consummation of the Reorganization, Arizona II
expects to stay in existence and continue its business as a closed-end
management investment company registered under the 1940 Act.

I-9
<PAGE>

7. Exchange Date.
-------------

(a) Delivery of the assets of Arizona I to be transferred,
together with any other Investments, and the Arizona II Common Stock and
Arizona II Series B AMPS to be issued, shall be made at the offices of Brown
& Wood, One World Trade Center, New York, New York 10048, at 10:00 A.M. on
the next full business day following the Valuation Time, or at such other
place, time and date agreed to by Arizona I and Arizona II, the date and time
upon which such delivery is to take place being referred to herein as the
"Exchange Date". To the extent that any Investments, for any reason, are not
transferable on the Exchange Date, Arizona I shall cause such Investments to
be transferred to Arizona II's account with The Bank of New York at the
earliest practicable date thereafter.
(b) Arizona I will deliver to Arizona II on the Exchange Date
confirmations or other adequate evidence as to the tax basis of each of the
Investments delivered to Arizona II hereunder, certified by Deloitte &
Touche LLP.

(c) Arizona II shall have made prior arrangements for the delivery
on the Exchange Date of the Investments to The Bank of New York as the
custodian for Arizona II.

(d) As soon as practicable after the close of business on the
Exchange Date, Arizona I shall deliver to Arizona II a list of the names and
addresses of all of the stockholders of record of Arizona I on the Exchange
Date and the number of shares of Arizona I Common Stock and/or Arizona I AMPS
owned by each such stockholder, certified by its transfer agent for the
Arizona I Common Stock or the Arizona I AMPS, as applicable or by its
President to the best of their knowledge and belief.

8. Arizona I Conditions.
--------------------

The obligations of Arizona I hereunder shall be subject to the following
conditions:

(b) That Arizona II shall have furnished to Arizona I a statement
of Arizona II's assets, liabilities and capital, with values determined as
provided in Section 4 of this Agreement, together with a schedule of its
investments, all as of the Valuation Time, certified on Arizona I's behalf by
its President (or any Vice President) and its Treasurer, and a certificate
signed by Arizona II's President (or any Vice President) and its Treasurer,
dated as of the Exchange Date, certifying that as of the Valuation Time and
as of the Exchange Date there has been no material adverse change in the
financial position of Arizona II since ________________, 1994, other than
changes in its portfolio securities since that date or changes in the market
value of its portfolio securities.

(c) That Arizona II shall have furnished to Arizona I a
certificate signed by Arizona II's President (or any Vice President) and its
Treasurer, dated as of the Exchange Date, certifying that all representations
and warranties of Arizona II made in this Agreement are true and correct in
all material respects with the same effect as if made at and as of the
Exchange Date, and that Arizona II has complied with all of the agreements
and satisfied all of the conditions on its part to be performed or satisfied
at or prior to such date.

I-10
<PAGE>

(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.

(e) That Arizona I shall have received an opinion of Galland,
Kharasch, Morse & Garfinkle, P.C., Maryland counsel to Arizona I, in form
satisfactory to Arizona I and dated the Exchange Date, to the effect that (i)
Arizona II is a corporation duly organized, validly existing and in good
standing in conformity with the laws of the State of Maryland; (ii) the
Arizona II Common Stock and Arizona II Series B AMPS to be delivered to
Arizona I stockholders as provided for by this Agreement are duly authorized
and, upon delivery, will be validly issued and outstanding and fully paid and
nonassessable by Arizona II, and no stockholder of Arizona II has any
preemptive right to subscription or purchase in respect thereof (pursuant to
the Articles of Incorporation, as amended, or the by-laws of Arizona II or,
to the best of such counsel's knowledge, otherwise); (iii) this Agreement has
been duly authorized, executed and delivered by Arizona II, and represents a
valid and binding contract, enforceable in accordance with its terms, subject
to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance
and similar laws relating to or affecting creditors' rights generally and
court decisions with respect thereto; provided, that such counsel shall
express no opinion with respect to the application of equitable principles in
any proceeding, whether at law or in equity; (iv) the execution and delivery
of this Agreement did not, and the consummation of the Reorganization will
not, violate the Articles of Incorporation, as amended, or the by-laws of
Arizona II; (v) no consent, approval, authorization or order of any Maryland
court or governmental authority is required for the consummation by Arizona I
of the Reorganization, except such as have been obtained under Maryland law;
and (vi) such opinion is solely for the benefit of Arizona I and its
Directors and officers. In giving the opinion set forth above, Galland,
Kharasch, Morse & Garfinkle, P.C. may state that it is relying on
certificates of officers of Arizona I and Arizona II with regard to matters
of fact and certain certificates and written statements of government
officials with respect to the good standing of Arizona I and Arizona II.

I-11
<PAGE>

corporate actions required to be taken by Arizona I and Arizona II to
authorize this Agreement and to effect the Reorganization have been duly
authorized by all necessary corporate actions on the part of Arizona I and
Arizona II. Such opinion also shall state that (x) while such counsel cannot
make any representation as to the accuracy or completeness of statements of
fact in the N-14 Registration Statement or any amendment or supplement
thereto, nothing has come to their attention that would lead them to believe
that, on the respective effective dates of the N-14 Registration Statement
and any amendment or supplement thereto, (1) the N-14 Registration Statement
or any amendment or supplement thereto contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and (2)
the prospectus included in the N-14 Registration Statement contained any
untrue statement of a material fact or omitted to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (y) such counsel do not
express any opinion or belief as to the financial statements, other financial
data, statistical data or information relating to Arizona I or Arizona II
contained or incorporated by reference in the N-14 Registration Statement.
In giving the opinion set forth above, Brown & Wood may state that it is
relying on certificates of officers of Arizona I and Arizona II with regard
to matters of fact and certain certificates and written statements of
governmental officials with respect to the good standing of Arizona I and
Arizona II and on the opinion of Galland, Kharasch, Morse & Garfinkle, P.C.
as to matters of Maryland law.

(g) That Arizona I shall have received a private letter ruling
from the Internal Revenue Service, to the effect that for Federal income tax
purposes (i) the transfer of substantially all of the Investments of Arizona
I to Arizona II in exchange solely for Arizona II Common Stock and Arizona II
Series B AMPS as provided in this Agreement will constitute a reorganization
within the meaning of Section 368(a)(1)(D) of the Code; (ii) in accordance
with Section 361(a) of the Code, no gain or loss will be recognized to
Arizona I as a result of the Reorganization; (iii) under Section 1032 of the
Code, no gain or loss will be recognized to Arizona II as a result of the
Reorganization; (iv) in accordance with Section 354(a)(1) of the Code, no
gain or loss will be recognized to the stockholders of Arizona I on the
receipt of Arizona II Common Stock and Arizona II Series B AMPS in exchange
for their corresponding Arizona I Common Stock and Arizona I AMPS; (v) in
accordance with Section 362(b) of the Code, the tax basis of the Arizona I
assets in the hands of Arizona II will be the same as the tax basis of such
assets in the hands of Arizona I immediately prior to the consummation of the
Reorganization; (vi) in accordance with Section 358 of the Code, immediately
after the Reorganization, the tax basis of the Arizona II Common Stock and
Arizona II Series B AMPS received by the stockholders of Arizona I in the
Reorganization will be equal, in the aggregate, to the tax basis of the
shares of Arizona I surrendered in exchange; (vii) in accordance with Section
1223 of the Code, a stockholder's holding period for the Arizona II Common
Stock and Arizona II Series B AMPS will be determined by including the period
for which he or she held the Arizona I Common Stock and Arizona I AMPS
exchanged therefor, provided, that such Arizona I shares were held as a
capital asset; (viii) in accordance with Section 1223 of the Code, Arizona
II's holding period with respect to the Arizona I assets transferred will
include the period for which such assets were held by Arizona I; and (ix) the
taxable year of Arizona I will end on the effective date of the
Reorganization and pursuant to Section 381(a) of the Code and regulations
thereunder, Arizona II will succeed to and take into account certain tax
attributes of Arizona I, such as earnings and profits, capital loss
carryovers and method of accounting.

(h) That all proceedings taken by Arizona II and its counsel in
connection with the Reorganization and all documents incidental thereto shall
be satisfactory in form and substance to Arizona I.

(i) That the N-14 Registration Statement shall have become
effective under the 1933 Act, and no stop order suspending such effectiveness
shall have been instituted or, to the knowledge of Arizona II, contemplated
by the Commission.

I-12
<PAGE>

(j) That Arizona I shall have received from Deloitte & Touche LLP a
letter dated as of the effective date of the N-14 Registration Statement and
a similar letter dated within five days prior to the Exchange Date, in form
and substance satisfactory to Arizona I, to the effect that (i) they are
independent public accountants with respect to Arizona II within the meaning
of the 1933 Act and the applicable published rules and regulations
thereunder; (a) in their opinion, the financial statements and supplementary
information of Arizona II included or incorporated by reference in the N-14
Registration Statement and reported on by them comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act
and the published rules and regulations thereunder; (b) on the basis of
limited procedures agreed upon by Arizona I and Arizona II and described in
such letter (but not an examination in accordance with generally accepted
auditing standards) consisting of a reading of any unaudited interim
financial statements and unaudited supplementary information of Arizona II
included in the N-14 Registration Statement, and inquiries of certain
officials of Arizona II responsible for financial and accounting matters,
nothing came to their attention that caused them to believe that (a) such
unaudited financial statements and related unaudited supplementary
information do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules
and regulations thereunder, (b) such unaudited financial statements are not
fairly presented in conformity with generally accepted accounting principles,
applied on a basis substantially consistent with that of the audited
financial statements, or (c) such unaudited supplementary information is not
fairly stated in all material respects in relation to the unaudited financial
statements taken as a whole; and (c) on the basis of limited procedures
agreed upon by Arizona I and Arizona II and described in such letter (but not
an examination in accordance with generally accepted auditing standards), the
information relating to Arizona I appearing in the N-14 Registration
Statement, which information is expressed in dollars (or percentages derived
from such dollars) concerning Arizona II (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting records
of Arizona II or from schedules prepared by officials of Arizona II having
responsibility for financial and reporting matters and such information is in
agreement with such records, schedules or computations made therefrom.

(k) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of Arizona II or would
prohibit the Reorganization.

(l) That Arizona I shall have received from the Commission such
orders or interpretations as Brown & Wood, as counsel to Arizona I, deems
reasonably necessary or desirable under the 1933 Act and the 1940 Act in
connection with the Reorganization, provided, that such counsel shall have
requested such orders as promptly as practicable, and all such orders shall
be in full force and effect.

9. Arizona II Conditions.
---------------------

The obligations of Arizona II hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of the
holders of (i) more than fifty percent of the Arizona II Common Stock and
Arizona II AMPS, voting together as a single class, and (ii) more than fifty
percent of the Arizona II AMPS, voting separately as a class, in each case
issued and outstanding and entitled to vote thereon; and that Arizona I shall
have delivered to Arizona II a copy of the resolution approving this
Agreement adopted by Arizona I's Board of Directors, certified by the
Secretary of Arizona I.

I-13
<PAGE>

(b) That Arizona I shall have furnished to Arizona II a statement
of Arizona I's assets, liabilities and capital, with values determined as
provided in Section 4 of this Agreement, together with a schedule of
investments with their respective dates of acquisition and tax costs, all as
of the Valuation Time, certified on Arizona I's behalf by its President (or
any Vice President) and its Treasurer, and a certificate of both such
officers, dated the Exchange Date, certifying that there has been no material
adverse change in the financial position of Arizona I since _______________,
1994, other than changes in the Investments since that date or changes in the
market value of the Investments.

(c) That Arizona I shall have furnished to Arizona II a
certificate signed by Arizona I's President (or any Vice President) and its
Treasurer, dated the Exchange Date, certifying that as of the Valuation Time
and as of the Exchange Date all representations and warranties of Arizona I
made in this Agreement are true and correct in all material respects as if
made at and as of such date and Arizona I has complied with all of the
agreements and satisfied all of the conditions on its part to be performed or
satisfied at or prior to such dates.

(d) That Arizona I shall have delivered to Arizona II a letter
from Deloitte & Touche LLP, dated the Exchange Date, stating that such firm has
performed a limited review of the Federal, state and local income tax returns
of Arizona I for the period ended ______________, 1994 (which returns
originally were prepared and filed by Arizona I), and that based on such
limited review, nothing came to their attention which caused them to believe
that such returns did not properly reflect, in all material respects, the
Federal, state and local income taxes of Arizona I for the period covered
thereby; and that for the period from _____________, 1994 to and including
the Exchange Date and for any taxable year of Arizona I ending upon the
liquidation of Arizona I, such firm has performed a limited review to
ascertain the amount of applicable Federal, state and local taxes, and has
determined that either such amount has been paid or reserves established for
payment of such taxes, this review to be based on unaudited financial data;
and that based on such limited review, nothing has come to their attention
which caused them to believe that the taxes paid or reserves set aside for
payment of such taxes were not adequate in all material respects for the
satisfaction of Federal, state and local taxes for the period from
_____________, 1994 to and including the Exchange Date and for any taxable
year of Arizona I ending upon the liquidation of Arizona I or that Arizona I
would not continue to qualify as a regulated investment company for Federal
income tax purposes.

(e) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.

(f) That Arizona II shall have received an opinion of Galland,
Kharasch, Morse & Garfinkle, P.C., Maryland counsel to Arizona II, in form
satisfactory to Arizona II and dated the Exchange Date, to the effect that
(i) Arizona I is a corporation duly organized, validly existing and in good
standing in conformity with the laws of the State of Maryland; (ii) this
Agreement has been duly authorized, executed and delivered by Arizona I, and
represents a valid and binding contract, enforceable in accordance with its
terms, subject to the effects of bankruptcy, insolvency, moratorium,
fraudulent conveyance and similar laws relating to or affecting creditors'
rights generally and court decisions with respect thereto, provided, that
such counsel shall express no opinion with respect to the application of
equitable principles in any proceeding, whether at law or in equity; (iii)
Arizona I has the power to sell, assign, transfer and deliver the assets
transferred by it hereunder and, upon consummation of the Reorganization in
accordance with the terms of this Agreement, Arizona I will have duly
transferred such assets and liabilities in accordance with this Agreement;
(iv) the execution and delivery of this Agreement does not, and the
consummation of the Reorganization will not, violate the Articles of
Incorporation, as amended, or the by-laws of Arizona I; (v) no consent,
approval, authorization or order of any Maryland court or governmental
authority is required for the consummation by Arizona I of the
Reorganization, except such as have been obtained under Maryland law; and
(vi) such opinion is solely for the benefit of Arizona II
I-14
<PAGE>

and its Directors and officers. In giving the opinion set forth above,
Galland, Kharasch, Morse & Garfinkle, P.C. may state that it is relying on
certificates of officers of Arizona I and Arizona II with regard to matters
of fact and certain certificates and written statements of government
officials with respect to the good standing of Arizona I and Arizona II.

(g) That Arizona II shall have received an opinion of Brown &
Wood, as counsel to Arizona II, in form satisfactory to Arizona II and dated
the Exchange Date, with respect to the matters specified in Section 8(f) of
this Agreement and such other matters as Arizona II reasonably may deem
necessary or desirable.

(h) That Arizona II shall have received a private letter ruling
from the Internal Revenue Service with respect to the matters specified in
Section 8(g) of this Agreement.

(i) That Arizona II shall have received from Deloitte & Touche LLP
a letter dated as of the effective date of the N-14 Registration Statement
and a similar letter dated within five days prior to the Exchange Date, in
form and substance satisfactory to Arizona II, to the effect that (d) they
are independent public accountants with respect to Arizona I within the
meaning of the 1933 Act and the applicable published rules and regulations
thereunder; (e) in their opinion, the financial statements and supplementary
information of Arizona I included or incorporated by reference in the N-14
Registration Statement and reported on by them comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act
and the published rules and regulations thereunder; (f) on the basis of
limited procedures agreed upon by Arizona I and Arizona II and described in
such letter (but not an examination in accordance with generally accepted
auditing standards) consisting of a reading of any unaudited interim
financial statements and unaudited supplementary information of Arizona I
included in the N-14 Registration Statement, and inquiries of certain
officials of Arizona I responsible for financial and accounting matters,
nothing came to their attention that caused them to believe that (a) such
unaudited financial statements and related unaudited supplementary
information do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules
and regulations thereunder, (b) such unaudited financial statements are not
fairly presented in conformity with generally accepted accounting principles,
applied on a basis substantially consistent with that of the audited
financial statements, or (c) such unaudited supplementary information is not
fairly stated in all material respects in relation to the unaudited financial
statements taken as a whole; and (g) on the basis of limited procedures
agreed upon by Arizona I and Arizona II and described in such letter (but not
an examination in accordance with generally accepted auditing standards), the
information relating to Arizona I appearing in the N-14 Registration
Statement, which information is expressed in dollars (or percentages derived
from such dollars) concerning Arizona I (with the exception of performance
comparisons, if any), has been obtained from the accounting records of
Arizona I or from schedules prepared by officials of Arizona I having
responsibility for financial and reporting matters and such information is in
agreement with such records, schedules or computations made therefrom.

(j) That the Investments to be transferred to Arizona II shall not
include any assets or liabilities which Arizona II, by reason of charter
limitations or otherwise, may not properly acquire or assume.

(k) That the N-14 Registration Statement shall have become
effective under the 1933 Act and no stop order suspending such effectiveness
shall have been instituted or, to the knowledge of Arizona I, contemplated by
the Commission.

(l) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, no other legal,
administrative or other proceeding shall

I-15
<PAGE>

be instituted or threatened which would materially affect the financial
condition of Arizona I or would prohibit the Reorganization.

(m) That Arizona II shall have received from the Commission such
orders or interpretations as Brown & Wood, as counsel to Arizona II, deems
reasonably necessary or desirable under the 1933 Act and the 1940 Act in
connection with the Reorganization, provided, that such counsel shall have
requested such orders as promptly as practicable, and all such orders shall
be in full force and effect.

(n) That all proceedings taken by Arizona I and its counsel in
connection with the Reorganization and all documents incidental thereto shall
be satisfactory in form and substance to Arizona II.

(o) That prior to the Exchange Date, Arizona I shall have declared
a dividend or dividends which, together with all such previous dividends,
shall have the effect of distributing to its stockholders all of its net
investment company taxable income for the period from November 1, 1993 to and
including the Exchange Date, if any (computed without regard to any deduction
or dividends paid), and all of its net capital gain, if any, realized for the
period from November 1, 1993 to and including the Exchange Date.

10. Termination, Postponement and Waivers.
-------------------------------------

(a) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement may be terminated and the Reorganization abandoned
at any time (whether before or after adoption thereof by the stockholders of
each of Arizona I and Arizona II) prior to the Exchange Date, or the Exchange
Date may be postponed, (i) by mutual consent of the Boards of Directors of
Arizona I and Arizona II; (ii) by the Board of Directors of Arizona I if any
condition of Arizona I's obligations set forth in Section 8 of this Agreement
has not been fulfilled or waived by such Board; or (iii) by the Board of
Directors of Arizona II if any condition of Arizona II's obligations set
forth in Section 9 of this Agreement has not been fulfilled or waived by such
Board.

(b) If the transactions contemplated by this Agreement have not
been consummated by _____________, 1994, this Agreement automatically shall
terminate on that date, unless a later date is mutually agreed to by the
Boards of Directors of Arizona I and Arizona II.

(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect, and
there shall not be any liability on the part of either Arizona I or Arizona
II or persons who are their directors, trustees, officers, agents or
stockholders in respect of this Agreement.

(d) At any time prior to the Exchange Date, any of the terms or
conditions of this Agreement may be waived by the Board of Directors of
either Arizona I or Arizona II, respectively (whichever is entitled to the
benefit thereof), if, in the judgment of such Board after consultation with
its counsel, such action or waiver will not have a material adverse effect on
the benefits intended under this Agreement to the stockholders of their
respective fund, on behalf of which such action is taken. (In addition, the
Boards of Directors of Arizona I and Arizona II have delegated to FAM the
ability to make non-material changes to the transaction if it deems it to be
in the best interests of Arizona I and Arizona II to do so.)

I-16
<PAGE>

protect any officer, director or trustee, agent or stockholder of Arizona I
or Arizona II against any liability to the entity for which that officer,
director or trustee, agent or stockholder so acts or to its stockholders to
which that officer, director or trustee, agent or stockholder otherwise would
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties in the conduct of such office.

(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Exchange Date and shall impose any
terms or conditions which are determined by action of the Boards of Directors
of Arizona I and Arizona II to be acceptable, such terms and conditions shall
be binding as if a part of this Agreement without further vote or approval of
the stockholders of Arizona I and Arizona II, unless such terms and
conditions shall result in a change in the method of computing the number of
shares of Arizona II Common Stock and Arizona II Series B AMPS to be issued
to Arizona I in which event, unless such terms and conditions shall have been
included in the proxy solicitation materials furnished to the stockholders of
Arizona I and Arizona II prior to the meetings at which the Reorganization
shall have been approved, this Agreement shall not be consummated and shall
terminate unless Arizona I and Arizona II promptly shall call special
meetings of stockholders at which such conditions so imposed shall be
submitted for approval.

11. Indemnification.
---------------

(a) Arizona I hereby agrees to indemnify and hold Arizona II
harmless from all loss, liability and expense (including reasonable counsel
fees and expenses in connection with the contest of any claim) which Arizona
II may incur or sustain by reason of the fact that (i) Arizona II shall be
required to pay any corporate obligation of Arizona I, whether consisting of
tax deficiencies or otherwise, based upon a claim or claims against Arizona I
which were omitted or not fairly reflected in the financial statements to be
delivered to Arizona II in connection with the Reorganization; (ii) any
representations or warranties made by Arizona I in this Agreement should
prove to be false or erroneous in any material respect; (iii) any covenant
has been breached in any material respect; or (iv) any claim is made alleging
that (a) the N-14 Registration Statement included any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or (b) the
Proxy Statement and Prospectus delivered to the stockholders of Arizona I and
forming a part of the N-14 Registration Statement included any untrue
statement of a material fact or omitted to state any material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except insofar as such claim is based on
written information furnished to Arizona I by Arizona II.

(b) Arizona II hereby agrees to indemnify and hold Arizona I
harmless from all loss, liability and expenses (including reasonable counsel
fees and expenses in connection with the contest of any claim) which Arizona
I may incur or sustain by reason of the fact that (i) any representations or
warranties made in this Agreement should prove false or erroneous in any
material respect, (ii) any covenant has been breached in any material
respect, or (iii) any claim is made alleging that (a) the N-14 Registration
Statement included any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make
the statements therein, not misleading or (b) the Proxy Statement and
Prospectus delivered to the stockholders of Arizona II and forming a part of
the N-14 Registration Statement included any untrue statement of a material
fact or omitted to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except insofar as such claim is based on written information
furnished to Arizona II by Arizona I.

I-17
<PAGE>
reasonable promptness and before payment of such claim, shall give written
notice of such claim to the other party (the "Indemnifying Party"). If no
objection as to the validity of the claim is made in writing to the
Indemnified Party by the Indemnifying Party within thirty (30) days after the
giving of notice hereunder, then the Indemnified Party may pay such claim and
shall be entitled to reimbursement therefor, pursuant to this Agreement. If,
prior to the termination of such thirty-day period, objection in writing as
to the validity of such claim is made to the Indemnified Party, the
Indemnified Party shall withhold payment thereof until the validity of such
claim is established (i) to the satisfaction of the Indemnifying Party, or
(ii) by a final determination of a court of competent jurisdiction, whereupon
the Indemnified Party may pay such claim and shall be entitled to
reimbursement thereof, pursuant to this Agreement, or (iii) with respect to
any tax claims, within seven (7) calendar days following the earlier of (A)
an agreement between Arizona I and Arizona II that an indemnity amount is
payable, (B) an assessment of a tax by a taxing authority, or (C) a
"determination" as defined in Section 1313(a) of the Code. For purposes of
this Section 13, the term "assessment" shall have the same meaning as used in
Chapter 63 of the Code and Treasury Regulations thereunder, or any comparable
provision under the laws of the appropriate taxing authority. In the event
of any objection by the Indemnifying Party, the Indemnifying Party promptly
shall investigate the claim, and if it is not satisfied with the validity
thereof, the Indemnifying Party shall conduct the defense against such claim.

All costs and expenses incurred by the Indemnifying Party in connection with
such investigation and defense of such claim shall be borne by it. These
indemnification provisions are in addition to, and not in limitation of, any
other rights the parties may have under applicable law.

12. Other Matters.
-------------

(a) Pursuant to Rule 145 under the 1933 Act, and in connection
with the issuance of any shares to any person who at the time of the
Reorganization is, to its knowledge, an affiliate of a party to the
Reorganization pursuant to Rule 145(c), Arizona II will cause to be affixed
upon the certificate(s) issued to such person (if any) a legend as follows:

THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE SECURITIES ACT
OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO MUNIYIELD
ARIZONA FUND II, INC. (OR ITS STATUTORY SUCCESSOR) OR ITS PRINCIPAL
UNDERWRITER UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II) IN THE OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT REQUIRED.

and, further, that stop transfer instructions will be issued to Arizona II's
transfer agent with respect to such shares. Arizona I will provide Arizona
II on the Exchange Date with the name of any Arizona I stockholder who is to
the knowledge of Arizona I an affiliate of it on such date.

(b) All covenants, agreements, representations and warranties made
under this Agreement and any certificates delivered pursuant to this
Agreement shall be deemed to have been material and relied upon by each of
the parties, notwithstanding any investigation made by them or on their
behalf.

(c) Any notice, report or demand required or permitted by any
provision of this Agreement shall be in writing and shall be deemed to have
been given if delivered or mailed, first class postage prepaid, addressed to
Arizona I or Arizona II, in either case at 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, Attn: Arthur Zeikel, President.

I-18
<PAGE>

(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization, constitutes
the only understanding with respect to the Reorganization, may not be changed
except by a letter of agreement signed by each party and shall be governed by
and construed in accordance with the laws of the State of New York applicable
to agreements made and to be performed in said state.

(e) Copies of the Articles of Incorporation, as amended, of
Arizona I and Arizona II are on file with the Department of Assessments and
Taxation of the State of Maryland and notice is hereby given that this
instrument is executed on behalf of the Directors of each fund.

This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.

MUNIYIELD ARIZONA FUND, INC.

By:___________________________

Witness:

_____________________

MUNIYIELD ARIZONA FUND II, INC.

By:___________________________

Witness:

_____________________

I-19
<PAGE>
EXHIBIT II

ECONOMIC AND FINANCIAL CONDITIONS IN ARIZONA

Arizona's total population of approximately 3,958,875 ranks it as the
twenty-fourth largest state by population. From 1980 to 1993, the State's
population increased by 45.64%. The U.S. Census Bureau has ranked Arizona
(sometimes referred to as the "State") third among states in percentage
growth of population between 1980 and 1990. The State's overall growth rate
is expected to continue to exceed the national average through the turn of
the century.

Over the last several decades, the State's economy has grown faster than
that of most other regions of the country, as measured by nearly every major
indicator of economic growth, including aggregate personal income growth,
employment growth, gross state product and job creation. From 1988 to 1993,
the State's aggregate personal income grew nearly 35.5% to approximately
$71.591 billion. Over the same period, the State's total secondary assessed
valuation of property, the measure used to assess property taxes to service
general obligation indebtedness, increased by 4.5%.

Although the rate of growth has slowed considerably in recent years,
diversification of the State's economy has helped enable the State to
maintain a moderate rate of growth. Jobs in industries such as mining and
agriculture have diminished in relative importance to the State's economy
over the past two decades, while substantial growth has occurred in the areas
of aerospace, high technology, light manufacturing, finance and insurance.
Jobs in the construction and real estate sectors have also experienced
substantial growth over the past 20 years, although substantial declines were
experienced during the late 1980s through 1991. The unemployment rate for
the State in 1993 was 6.4%, the same as the national rate.

Maricopa County is the State's most populous county. Within Maricopa
County's boundaries lies the Phoenix Metropolitan Statistical Area, which
includes the City of Phoenix, the State's largest city and the eighth largest
city in the United States, and the Cities of Scottsdale, Tempe, Mesa,
Glendale, Chandler and Peoria, as well as the Towns of Paradise Valley and
Gilbert. Maricopa County accounts for 58% of the State's population, 65% of
the State's non-agricultural employment, and 64% of its aggregate personal
income. The population of Maricopa County grew from 1,509,262 in 1980 to
approximately 2,291,200 in 1993, a growth of approximately 51.8%. Rapid
population growth has been accompanied by moderate employment growth. From
1989 to 1993, non-agricultural employment in Maricopa County grew by 6.4%,
bringing the average number of persons employed in wage and salary jobs in
Maricopa County during 1993 to 1,023,800. Unemployment in Maricopa County
averaged 5.1% in 1993, as compared to 6.4% nationally, continuing the trend
that since 1977 Maricopa County's average annual unemployment rate has been
below the national average.
Good transportation facilities, a substantial pool of available labor, a
variety of support industries and a warm climate have made the Phoenix
Metropolitan Area a major business center in the southwestern United States.
Once dependent primarily upon an agriculturally based economy, Maricopa
County has substantially diversified its economic base. The service
producing sector, including transportation, communications, public utilities,
hospitality and entertainment, trade, finance, insurance, real estate,
services and government, is the leading source of employment in Maricopa
County, employing an average of 833,900 persons in 1993, representing over
81.4% of Maricopa County's non-agricultural employment in that year. The
size of this sector reflects in part the substantial contribution of tourism
to the State's economy; during 1993, an estimated
II-1
<PAGE>

$8.1 billion of tourist expenditures were made in the State, of which
approximately $2.75 billion were made in Maricopa County.

Despite the modestly improving economic picture, Maricopa County
experienced a fiscal year 1993-94 deficit of approximately $64.2 million as
compared to a total county budget of approximately $1.2 billion. The County
has proposed a three-year plan which officials say would eliminate the
deficit in two years through the adoption of budget cuts, and a tax increase
would be avoided.

Pima County is the State's second most populous county, and encompasses
the City of Tucson. The population of Pima County has grown nearly 34.1%
since 1980 to its current population of approximately 722,700, representing
nearly 18.1% of Arizona's population. Pima County's economy is based
primarily upon manufacturing, mining, government, agriculture, tourism,
education and finance. The service producing sector is the largest
employment source, employing an average of 229,200 persons in 1993,
representing nearly 84.5% of Pima County's non-agricultural employment in
that year. The Pima County manufacturing sector employed an average of
24,100 persons in 1993. The declines in the real estate, construction and
related finance industries have adversely affected the Pima County economy in
recent years, and employment growth has remained relatively flat over the
past two years.

Much of the attention on the State's economic condition in recent years
has focused on the sharp declines in the real estate and construction
industries, which are now in modest recovery. The aggregate value of
building permits in the State decreased each year between 1985 and 1991, with
a moderate increase experienced in 1992, and again in 1993. While Arizona's
real estate markets have begun to stabilize prior to overbuilding, the
relative unavailability of real estate financing, the still substantial
inventory of real estate held or controlled by the Federal government, and
various other factors make it likely that the pace of recovery in real estate
and related industries will continue to be modest for the next several years.

The State government's fiscal situation has improved in recent years.
After experiencing several years of budget shortfalls requiring mid-year
adjustments, the State had a budget surplus of $86 million for fiscal year
1992-93, as compared to a total State budget of $3.7 billion. For fiscal
year 1993-94, the Legislature is projecting a surplus of $107.1 million. For
fiscal year 1994-95, a surplus between $4.9 million and $47 million is
projected. In part owing to the improved fiscal picture, the 1994
Legislature enacted a personal income tax reduction of approximately $107
million and various business tax cuts that raised concerns that the State may
be undercutting its tax base. In addition, voter approval in November 1992
of Proposition 108, which requires a two-thirds majority in both houses of
the Legislature to pass a tax or fee increase, has substantially constrained
the State's ability to raise revenue.

II-2
<PAGE>

EXHIBIT III

RATINGS OF FIXED INCOME SECURITIES

DESCRIPTION OF MUNICIPAL BOND RATINGS OF MOODY'S INVESTORS SERVICE, INC.
("MOODY'S"):

Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and generally are 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 which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as with 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 with Aaa securities.

A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.

Baa Bonds which are rated Baa are considered 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 which 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 which are rated B generally lack characteristics of a 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.

Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.

Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

C Bonds which 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.

III-1
<PAGE>
Note: Moody's applies numerical modifiers, 1, 2 and 3, in each generic
rating classification from Aa through B in its municipal bond rating system.
The modifier 1 indicates that the bond 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 rating
category.

DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS

Because of the fundamental differences between preferred stocks and
bonds, a variation of the bond rating symbols is used in the quality ranking
of preferred stocks. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It always should be borne in
mind that preferred stocks occupy a junior position to bonds within a
particular capital structure and that these securities are rated within the
universe of preferred stocks.

Preferred stock rating symbols and their definitions are as follows:

aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.

aa An issue which is rated "aa" is considered a high-grade preferred stock.

This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the
foreseeable future.

a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and assets protection,
nevertheless, are expected to be maintained at adequate levels.

baa An issue which is rated "baa" is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but may be questionable
over any great length of time.

ba An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.

b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.

caa An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.

ca An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.

c This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

III-2
<PAGE>
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.

DESCRIPTION OF MUNICIPAL BOND RATINGS OF STANDARD & POOR'S CORPORATION
("STANDARD & POOR'S"):

AAA Bonds rated AAA have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher-rated issues only in small degree.

A Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in
higher-rated categories.

BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in
higher-rated categories.

BB Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest payments and
principal repayments. The BB rating also is used for bonds subordinated
to senior debt that is assigned an actual or implied BBB- rating.

B Bonds rated B have a greater vulnerability to default but currently have
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions likely will impair
capacity or willingness to pay interest or repay principal. The B
rating category also is used for bonds subordinated to senior debt that
is assigned an actual or implied BB or BB- rating.

CCC Bonds rated CCC have a currently identifiable vulnerability to default,
and are dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic
conditions, they are not likely to have the capacity to pay interest and
repay principal. The CCC rating also is used for bonds subordinated to
senior debt that is assigned an actual or implied B or B- rating.

CC The rating CC typically is applied to bonds subordinated to senior debt
that is assigned an actual or implied CCC rating.

C The rating C typically is applied to bonds subordinated to senior debt
that is assigned an actual or implied CCC- rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.

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

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<PAGE>
D Bonds rated D are in payment default. The D rating is used when
interest payments or principal repayments are not made on the date due
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.

NR Not rated.

Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS

A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and
any applicable sinking fund obligations. A preferred stock rating differs
from a bond rating inasmuch as it is assigned to an equity issue, which issue
is intrinsically different from, and subordinated to, a debt issue.
Therefore, to reflect this difference, the preferred stock rating symbol
normally will not be higher than the bond rating symbol assigned to, or that
would be assigned to, the senior debt of the same issuer.

The preferred stock ratings are based on the following considerations:

I. Likelihood of payment -- capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the
obligation;

II. Nature of, and provisions of, the issue; and

III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements under the laws of bankruptcy and
other laws affecting creditors' rights.

AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.

AA A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated "AAA."

A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.

BBB An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in "A"
Category.

BB,B,
CCC Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such
issues likely will have some

III-4
<PAGE>
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.

CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.

C A preferred stock rated "C" is a non-paying issue.

D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.

NR indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.

Plus (+) or minus (-): To provide more detailed indications of
preferred stock quality, the ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.

A preferred stock rating is not a recommendation to purchase, sell or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to Standard & Poor's by the issuer or obtained by
Standard & Poor's from other sources it considers reliable. Standard &
Poor's does not perform an audit in connection with any rating and, on
occasion, may rely on unaudited financial information. The ratings may be
changed, suspended,or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.

DESCRIPTION OF MUNICIPAL BOND RATINGS OF FITCH INVESTORS SERVICE, INC.
("FITCH"):

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

AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated 'AAA'.

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

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

BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can
be identified which could assist the obligor in satisfying its debt
service requirements.

III-5
<PAGE>
B Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely repayment of principal and payment of interest
reflect the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of
the issue.

CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.

CC Bonds are minimally protected. Default in payment of interest
and/or repayment of principal seems probable over time.

C Bonds are in imminent default in payment of interest or repayment
of principal.

DDD, DD
AND D Bonds are in default on interest payments and/or principal
repayments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation
or reorganization of the obligor. 'DDD' represents the highest
potential for recovery on these bonds, and 'D' represents the
lowest potential for recovery.

NR Indicates that Fitch does not rate the specific issue.

PLUS(+) OR MINUS(-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the 'AAA', 'DDD', 'DD' or
'D' categories.

CONDITIONAL: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.

SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.

WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish
proper and timely information.

FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for potential downgrade, or "Evolving", where
ratings may be raised or lowered. FitchAlert is relatively short-term, and
should be resolved within 12 months.

CREDITTREND: Credit trend indicators show whether credit fundamentals are
improving, stable, declining or uncertain, as follows:
Improving Stable Declining Uncertain

DESCRIPTION OF FITCH'S PREFERRED STOCK RATINGS

Preferred stock ratings should be viewed in the universe of equity
(preferred and preference) and not in relationship to bonds. Although
certain preferred stock issues may carry the same rating as an issuer's
bond obligations, preferred stocks by definition are junior to debt
obligations. The rating of a preferred stock issue

III-6
<PAGE>
is an indication of the company's ability to pay the preferred dividends and
any sinking fund obligations on a timely basis. Preferred dividends are
payable only when declared; they are not contractually guaranteed.

AAA Preferred stocks assigned this rating are the highest quality.
Strong asset protection, conservative balance sheet ratios and
positive indications of continued protection of preferred dividend
requirements are prerequisites for an 'AAA' rating.

AA Preferred or preference issues assigned this rating are very high
quality. Maintenance of asset protection and dividend paying
ability appears assured but not quite to the extent of the 'AAA'
rating.

A Preferred or preference issues assigned this rating are good
quality. Asset protection and coverage of preferred dividends are
considered adequate and are expected to be maintained.

BBB Preferred or preference issues assigned this rating are reasonably
safe but lack the protections of the 'A' to 'AAA' categories.
Current results should be watched for possible signs of
deterioration.

BB Preferred or preference issues assigned this rating are considered
speculative. The margin of protection is slim or subject to wide
fluctuations. The longer term financial capabilities of the
enterprises cannot be predicted with assurance.

B Issues assigned this rating are considered highly speculative.
While earnings should normally cover dividends, directors may
reduce or omit payment due to unfavorable developments, inability
to finance or wide fluctuations in earnings.

CCC Issues assigned this rating are extremely speculative and should be
assessed on their prospects in a possible reorganization. Dividend
payments may be in arrears with the status of the current dividend
uncertain.

CC Dividends are not currently being paid and may be in arrears. The
outlook for future payments cannot be assured.

C Dividends are not currently being paid and may be in arrears.
Prospects for future payments are remote.

D Issuer is in default on its debt obligations and has filed for
reorganization or liquidation under the bankruptcy law.

III-7
<PAGE>
PART C

OTHER INFORMATION

ITEM 15. INDEMNIFICATION.

Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, Article VI of the
Registrant's By-Laws and the Registrant's Investment Advisory Agreement with
Fund Asset Management, Inc. (now known as Fund Asset Management, L.P.; the
"Investment Adviser") provide for indemnification.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be provided to directors,
officers and controlling persons of each Fund, pursuant to the foregoing
provisions or otherwise, each Fund has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and, therefore, is
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by a Fund of expenses incurred or paid by
a director, officer or controlling person of the Registrant in connection
with any successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant, unless in the opinion of its
counsel the matter has been settled by controlling precedent, will submit to
a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.

Reference is made to (i) Section Six of the Purchase Agreement relating
to the Registrant's Common Stock, a form of which previously was filed as an
exhibit to the Common Stock Registration Statement (as defined below), and
(ii) Section Seven of the Purchase Agreement relating to the Registrant's
AMPS, a form of which previously was filed as an exhibit to the AMPS
Registration Statement (as defined below), for provisions relating to the
indemnification of the underwriter.

ITEM 16. EXHIBITS.

(1)(a) -- Articles of Incorporation of the Registrant*
(b) -- Articles Supplementary creating the Series A AMPS**
(c) -- Form of Articles Supplementary creating the Series B
AMPS
(2) -- By-Laws of the Registrant*
(3) -- Not applicable
(4) -- Form of Agreement and Plan of Reorganization between
the Registrant and MuniYield Arizona Fund, Inc.
(5)(a) -- Form of Certificate for Common Stock****
(b) -- Form of Certificate for AMPS**
(c) -- Portions of the Articles of Incorporation and the
By-Laws of the Registrant defining the rights of
holders of shares of the Registrant***
(6) -- Form of Investment Advisory Agreement between the
Registrant and the Investment Adviser*
(7)(a) -- Form of Purchase Agreement between the Registrant
and the Investment Adviser and Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch")
relating to the Registrant's Common Stock*

III-8
<PAGE>

(b) -- Form of Purchase Agreement between the Registrant and
the Investment Adviser and Merrill Lynch relating to
the Registrant's AMPS**
(c) -- Merrill Lynch Standard Dealer Agreement*
(8) -- Not applicable
(9) -- Custody Agreement between the Registrant and The Bank
of New York****
(10) -- Not applicable
(11) -- Opinion and Consent of Brown & Wood, counsel to the
Registrant*****
(12) -- Private Letter Ruling from the Internal Revenue
Service
(13)(a) -- Registrar, Transfer Agency and Service Agreement
between the Registrant and the Bank of New York****
(b) -- Form of Auction Agent Agreement**
(c) -- Form of Broker-Dealer Agreement**
(d) -- Form of Letter of Representations**
(14) -- Consent of Deloitte & Touche LLP, independent
auditors for the Registrant*****
(15) -- Not applicable
(16) -- Included on the signature page of this Registration
Statement
- -----------------

* Incorporated by reference to the Registrant's registration statement on
Form N-2 relating to the Registrant's Common Stock (File Nos. 33-50171
and 811-7083), filed with the Securities and Exchange Commission (the
"Commission") on September 3, 1993 (the "Common Stock Registration
Statement").

** Incorporated by reference to the Registrant's registration statement on
Form N-2 relating to the Registrant's Series A AMPS (File Nos. 33-50975
and 811-7083) filed with the Commission on November 9, 1993 (the "AMPS
Registration Statement").

*** Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article IX, Article X, Article XI, Article
XII and Article XIII of the Registrant's Articles of Incorporation,
filed herewith as Exhibit (a) to the Registration Statement; and to
Article II, Article III (sections 1, 3, 5 and 17), Article VI, Article
VII, Article XII, Article XIII and Article XIV of the Registrant's By-
Laws, filed herewith as Exhibit (b) to the Registration Statement.

**** Incorporated by reference to Pre-Effective Amendment No. 2 to the Common
Stock Registration Statement filed with the Commission on October 22,
1993.

***** To be filed by amendment.

ITEM 17. UNDERTAKINGS.

(a) The Registrant undertakes to suspend offering of the shares of
Common Stock covered hereby until it amends its Prospectus contained herein
if (1) subsequent to the effective date of this Registration Statement, its
net asset value per share of Common Stock declines more than 10 percent from
its net asset value per share of Common Stock as of the effective date of
this Registration Statement, or (2) its net asset value per share of Common
Stock increases to an amount greater than its net proceeds as stated in the
Prospectus contained herein.

III-9
<PAGE>

(b) The Registrant undertakes that:

(1) For the purpose of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of a registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to
Rule 497(h) under the Securities Act shall be deemed to be a part of the
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.

III-10
<PAGE>

SIGNATURES

As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the Township of Plainsboro
and State of New Jersey, on the 5th day of October, 1994.

MUNIYIELD ARIZONA FUND II, INC.
(Registrant)

/s/ ARTHUR ZEIKEL
-------------------
(Arthur Zeikel, President)

Each person whose signature appears below hereby authorizes Arthur
Zeikel, Terry K. Glenn and Gerald M. Richard, or any of them, as attorney-in-
fact, to sign on his behalf, individually and in each capacity stated below,
any amendments to this Registration Statement (including post-effective
amendments) and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.

As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ ARTHUR ZEIKEL President (Principal October 5, 1994
(Arthur Zeikel) Executive Officer) and
Director

/s/ GERALD M. RICHARD Treasurer (Principal October 5, 1994
(Gerald M. Richard) Financial and Accounting
Officer)

/s/ KENNETH S. AXELSON Director October 5, 1994
(Kenneth S. Axelson)

/s/ HERBERT I. LONDON Director October 5, 1994
(Herbert I. London)

/s/ ROBERT R. MARTIN Director October 5, 1994
(Robert R. Martin)

/s/ JOSEPH L. MAY Director October 5, 1994
(Joseph L. May)

/s/ ANDRE F. PEROLD Director October 5, 1994
(Andre F. Perold)

</TABLE>

<PAGE>
EXHIBIT INDEX
-------------

Item No. Description
- -------- -----------

(1)(C) Form of Articles Supplementary creating the
Series B AMPS

(4) Form of Agreement and Plan of Reorganization between
the Registrant and MuniYield Arizona Fund, Inc.

(12) Private Letter Ruling from the Internal Revenue
Service

(14) Consents of Deloitte & Touche LLP, independent
auditors for the Registrant

<PAGE>
EXHIBIT (1)(C)

DRAFT OF OCTOBER 5, 1994
---------------------------

MUNIYIELD ARIZONA FUND II, INC.

Articles Supplementary creating a series of

Auction Market Preferred Stock(R)

MUNIYIELD ARIZONA FUND II, INC., a Maryland corporation having its
principal Maryland office in the City of Baltimore (the "Corporation"),
certifies to the State Department of Assessments and Taxation of Maryland
that:

FIRST: Pursuant to authority expressly vested in the Board of Directors
of the Corporation by article fifth of its Charter, the Board of Directors
has reclassified 694 authorized and unissued shares of common stock of the
Corporation as preferred stock of the Corporation and has authorized the
issuance of a series of preferred stock, par value $.10 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated
but unpaid dividends (whether or not earned or declared) thereon, to be
designated Auction Market Preferred Stock, Series B.

SECOND: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the
shares of such series of preferred stock are as follows:

DESIGNATION
A series of 694 shares of preferred stock, par value $.10 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated
but unpaid dividends (whether or not earned or declared) thereon, is hereby
designated "Auction Market Preferred Stock, Series B". Each share of Auction
Market Preferred Stock, Series B (sometimes referred to herein as "AMPS")
shall be issued on a date to be determined by the Board of Directors of the
Corporation or pursuant to their delegated authority; have an Initial
Dividend Rate and an Initial Dividend Payment Date as shall be determined in
advance of the issuance thereof by the Board of Directors of the Corporation
or pursuant to their delegated authority; and have such other preferences,
voting powers,
- ----------------------------
(R) Registered trademark of Merrill Lynch & Co., Inc.

1
<PAGE>
limitations as to dividends, qualifications and terms and
conditions of redemption as are set forth in these Articles Supplementary.
The Auction Market Preferred Stock, Series B shall constitute a separate
series of preferred stock of the Corporation, and each share of Auction
Market Preferred Stock, Series B shall be identical.

1. Definitions. (a) Unless the context or use indicates another
-----------
or different meaning or intent, in these Articles Supplementary the following
terms have the following meanings, whether used in the singular or plural:

"'AA' Composite Commercial Paper Rate," on any date of
determination, means (i) the Interest Equivalent of the rate on commercial
paper placed on behalf of issuers whose corporate bonds are rated "AA" by S&P
or "Aa" by Moody's or the equivalent of such rating by another nationally
recognized rating agency, as such rate is made available on a discount basis
or otherwise by the Federal Reserve Bank of New York for the Business Day
immediately preceding such date, or (ii) in the event that the Federal
Reserve Bank of New York does not make available such a rate, then the
arithmetic average of the Interest Equivalent of the rate on commercial paper
placed on behalf of such issuers, as quoted on a discount basis or otherwise
by Merrill Lynch, Pierce, Fenner & Smith Incorporated or its successors that
are Commercial Paper Dealers, to the Auction Agent for the close of business
on the Business Day immediately preceding such date. If one of the
Commercial Paper Dealers does not quote a rate required to determine the "AA"
Composite Commercial Paper Rate, the "AA" Composite
2
<PAGE>
Commercial Paper Rate will be determined on the basis of the quotation or
quotations furnished by any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Corporation to provide such rate or
rates not being supplied by the Commercial Paper Dealer. If the number of
Dividend Period Days shall be (i) 7 or more but fewer than 49 days, such rate
shall be the Interest Equivalent of the 30-day rate on such commercial paper;
(ii) 49 or more but fewer than 70 days, such rate shall be the Interest
Equivalent of the 60-day rate on such commercial paper; (iii) 70 or more days
but fewer than 85 days, such rate shall be the arithmetic average of the
Interest Equivalent on the 60-day and 90-day rates on such commercial paper;
(iv) 85 or more days but fewer than 99 days, such rate shall be the Interest
Equivalent of the 90-day rate on such commercial paper; (v) 99 or more days
but fewer than 120 days, such rate shall be the arithmetic average of the
Interest Equivalent of the 90-day and 120-day rates on such commercial paper;
(vi) 120 or more days but fewer than 141 days, such rate shall be the
Interest Equivalent of the 120-day rate on such commercial paper; (vii) 141
or more days but fewer than 162 days, such rate shall be the arithmetic
average of the Interest Equivalent of the 120-day and 180-day rates on such
commercial paper; and (viii) 162 or more days but fewer than 183 days, such
rate shall be the Interest Equivalent of the 180-day rate on such commercial
paper.

"Accountant's Confirmation" has the meaning set forth in paragraph 7(c)
of these Articles Supplementary.

"Additional Dividend" has the meaning set forth in paragraph 2(e) of
these Articles Supplementary.

"Adviser" means the Corporation's investment adviser which currently is
Fund Asset Management, L.P.

"Affiliate" means any Person, other than Merrill Lynch, Pierce, Fenner &
Smith Incorporated or its successors, known to the Auction Agent to be
controlled by, in control of, or under common control with, the Corporation.

"Agent Member" means a member of the Securities Depository that will act
on behalf of a Beneficial Owner of one or more shares of AMPS or a Potential
Beneficial Owner.

"AMPS" means the Auction Market Preferred Stock, Series B.

"AMPS Basic Maintenance Amount," as of any Valuation Date, means the
dollar amount equal to (i) the sum of (A) the product of the number of shares
of AMPS and Other AMPS Outstanding on such Valuation Date multiplied by the
sum of (a) $25,000 and (b) any applicable redemption premium attributable to
the designation of a Premium Call Period; (B) the aggregate amount of cash
dividends (whether or not earned or declared) that will have accumulated for
each share of AMPS and Other AMPS Outstanding, in each case, to (but not
including) the end of the current Dividend Period that follows such Valuation
Date in the event the then current Dividend Period will end within 49
calendar days of such Valuation Date or through the 49th day after such
Valuation Date in the event the then current Dividend Period will not end
within 49 calendar days of such Valuation Date; (C) in the event the then
current Dividend Period will end within 49 calendar days of such

3
<PAGE>

Valuation Date, the aggregate amount of cash dividends that would accumulate
at the Maximum Applicable Rate applicable to a Dividend Period of 28 or
fewer days on any shares of AMPS and Other AMPS Outstanding from the end of
such Dividend Period through the 49th day after such Valuation Date,
multiplied by the larger of the Moody's Volatility Factor and the S&P
Volatility Factor, determined from time to time by Moody's and S&P,
respectively (except that if such during a on-Payment Period, the cash
dividend for purposes of calculation would accumulate at the then current
Non-Payment Period Rate); (D) the amount of anticipated expenses of the
Corporation for the 90 days subsequent to such Valuation Date; (E) the
amount of the Corporation's Maximum Potential Additional Dividend Liability
as of such Valuation Date; and (F) any current liabilities as of such
Valuation Date to the extent not reflected in any of (i)(A) through (i)(E)
(including, without limitation, and immediately upon determination, any
amounts due and payable by the Corporation pursuant to repurchase
agreements and any payables for Arizona Municipal Bonds or
Municipal Bonds purchased as of such Valuation Date) less (ii) either (A) the
Discounted Value of any of the Corporation's assets, or (B) the face value of
any of the Corporation's assets if such assets mature prior to or on the date
of redemption of AMPS or payment of a liability and are either securities
issued or guaranteed by the United States Government or have a rating
assigned by Moody's of at least Aaa, P-1, VMIG-1 or MIG-1 and, with
respect to S&P, at least AAA, SP-1+ or A-1+, in both cases irrevocably
deposited by the Corporation for the payment of the amount needed to
redeem shares of AMPS subject to redemption or any of (i)(B) through (i)(F).

"AMPS Basic Maintenance Cure Date," with respect to the failure by the
Corporation to satisfy the AMPS Basic Maintenance Amount (as required by
paragraph 7(a) of these Articles Supplementary) as of a given Valuation Date,
means the sixth Business Day following such Valuation Date.

"AMPS Basic Maintenance Report" means a report signed by any of the
President, Treasurer, any Senior Vice President or any Vice President of the
Corporation which sets forth, as of the related Valuation Date, the assets of
the Corporation, the Market Value and the Discounted Value thereof (seriatim
and in aggregate), and the AMPS Basic Maintenance Amount.

"Anticipation Notes" means the following Arizona Municipal Bonds:
revenue anticipation notes, tax anticipation notes, tax and revenue
anticipation notes, grant anticipation notes and bond anticipation notes.

4
<PAGE>
"Applicable Percentage" has the meaning set forth in paragraph
11(a)(vii) of these Articles Supplementary.

"Applicable Rate" means the rate per annum at which cash dividends are
payable on the AMPS or Other AMPS, as the case may be, for any Dividend
Period.

"Arizona Municipal Bonds" means municipal obligations issued by or on
behalf of the State of Arizona, its political subdivisions, agencies and
instrumentalities and by other qualifying issuers that pay interest which, in
the opinion of bond counsel to the issuer, is exempt from Federal and Arizona
income taxes.

"Auction" means a periodic operation of the Auction Procedures.

"Auction Agent" means IBJ Schroder Bank & Trust Company unless and until
another commercial bank, trust company or other financial institution
appointed by a resolution of the Board of Directors of the Corporation or a
duly authorized committee thereof enters into an agreement with the
Corporation to follow the Auction Procedures for the purpose of determining
the Applicable Rate and to act as transfer agent, registrar, dividend
disbursing agent and redemption agent for the AMPS and Other AMPS.

"Auction Procedures" means the procedures for conducting Auctions set
forth in paragraph 11 of these Articles Supplementary.

"Beneficial Owner" means a customer of a Broker-Dealer who is listed on
the records of that Broker-Dealer (or, if applicable, the Auction Agent) as a
holder of shares of AMPS or a Broker-Dealer that holds AMPS for its own
account.

"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in paragraph 11 of these
Articles Supplementary, that has been selected by the Corporation and has
entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective.

"Broker-Dealer Agreement" means an agreement between the Auction Agent
and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in paragraph 11 of these Articles Supplementary.

5
<PAGE>
"Business Day" means a day on which the New York Stock Exchange, Inc. is
open for trading and which is not a Saturday, Sunday or other day on which
banks in The City of New York are authorized or obligated by law to close.

"Charter" means the Articles of Incorporation, as amended and
supplemented (including these Articles Supplementary), of the Corporation on
file in the State Department of Assessments and Taxation of Maryland.

"Code" means the Internal Revenue Code of 1986, as amended.

"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the
Corporation may from time to time appoint, or, in lieu of any thereof, their
respective affiliates or successors.

"Common Stock" means the common stock, par value $.10 per share, of the
Corporation.

"Corporation" means MuniYield Arizona Fund II, Inc., a Maryland
corporation.

"Date of Original Issue" means, with respect to any share of AMPS or
Other AMPS, the date on which the Corporation originally issues such share.

"Deposit Securities" means cash and Arizona Municipal Bonds and
Municipal Bonds rated at least Aaa, P-1, VMIG-1 or MIG-1 by Moody's or AAA,
A-1+ or SP-1+ by S&P.

"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the Market Value thereof divided by the applicable S&P Discount
Factor and (ii) with respect to a Moody's Eligible Asset, the lower of par
and the quotient of the Market Value thereof divided by the applicable
Moody's Discount Factor.

"Dividend Coverage Amount," as of any Valuation Date, means (A)(i) the
aggregate amount of cash dividends that will accumulate on all shares of
Outstanding AMPS and Other AMPS, in each case to (but not including) the next
Dividend Payment Date therefor for the AMPS that follows such Valuation Date
plus (ii) the aggregate amount of all liabilities existing on such Valuation
Date which are payable on or prior to such next Dividend Payment Date less
(B) the sum of (i) the combined Market Value of Deposit Securities
irrevocably deposited with the Auction Agent for the payment of cash
dividends on all shares of AMPS and Other AMPS, (ii) the book value of
receivables for Arizona Municipal Bonds and Municipal Bonds sold as of or
prior to such Valuation Date, if such receivables are due within five
Business Days of such Valuation Date and
6
<PAGE>

in any event on or prior to such next Dividend Payment Date, and
(iii) interest on Arizona Municipal Bonds and Municipal Bonds which is
scheduled to be paid on or prior to the next Dividend Payment Date.

"Dividend Coverage Assets," as of any Valuation Date, means, in the case
of shares of AMPS and Other AMPS, Deposit Securities with maturity or tender
payment dates not later in each case than the Dividend Payment Date therefor
that follows such Valuation Date.

"Dividend Payment Date," with respect to AMPS, has the meaning set forth
in paragraph 2(b)(i) of these Articles Supplementary and, with respect to
Other AMPS, has the equivalent meaning.

"Dividend Period" means the Initial Dividend Period, any 7-Day Dividend
Period and any Special Dividend Period.

"Existing Holder" means a Broker-Dealer or any such other Person as may
be permitted by the Corporation that is listed as the holder of record of
shares of AMPS in the Stock Books.

"Forward Commitment" has the meaning set forth in paragraph 9(c) of
these Articles Supplementary.

"Holder" means a Person identified as a holder of record of shares of
AMPS in the Stock Register.

"Independent Accountant" means a nationally recognized accountant, or
firm of accountants, that is, with respect to the Corporation, an independent
public accountant or firm of independent public accountants under the
Securities Act of 1933, as amended.

"Initial Dividend Payment Date" means the Initial Dividend Payment Date
as determined by the Board of Directors of the Corporation with respect to
the AMPS or Other AMPS, as the case may be.

"Initial Dividend Period," with respect to the AMPS, has the meaning set
forth in paragraph 2(c)(i) of these Articles Supplementary and, with respect
to Other AMPS, has the equivalent meaning.

"Initial Dividend Rate," with respect to the AMPS, means the rate per
annum applicable to the Initial Dividend Period for the AMPS and, with
respect to Other AMPS, has the equivalent meaning.

"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures
contract.

"Interest Equivalent" means a yield on a 360-day basis of a discount
basis security which is equal to the yield on an equivalent interest-bearing
security.

7
<PAGE>
"Long-Term Dividend Period" means a Special Dividend Period consisting
of a specified period of one whole year or more but not greater than five
years.

"Mandatory Redemption Price" means $25,000 per share of AMPS plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared) to the date fixed for redemption and excluding Additional
Dividends.

"Marginal Tax Rate" means the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax rate, whichever is greater.

"Market Value" of any asset of the Corporation means the market value
thereof determined by the Pricing Service. Market Value of any asset shall
include any interest accrued thereon. The Pricing Service shall value
portfolio securities at the quoted bid prices or the mean between the quoted
bid and asked price or the yield equivalent when quotations are not readily
available. Securities for which quotations are not readily available shall
be valued at fair value as determined by the Pricing Service using methods
which include consideration of: yields or prices of municipal bonds of
comparable quality, type of issue, coupon, maturity and rating; indications
as to value from dealers; and general market conditions. The Pricing
Service may employ electronic data processing techniques and/or a matrix
system to determine valuations. In the event the Pricing Service is unable
to value a security, the security shall be valued at the lower of two dealer
bids obtained by the Corporation from dealers who are members of the
National Association of Securities Dealers, Inc. and who make a market in
the security, at least one of which shall be in writing. Futures contracts
and options are valued at closing prices for such instruments established by
the exchange or board of trade on which they are traded, or if market
quotations are not readily available, are valued at fair value on a
consistent basis using methods determined in good faith by the
Board of Directors.

"Maximum Applicable Rate," with respect to AMPS, has the meaning set
forth in paragraph 11(a)(vii) of these Articles Supplementary and, with
respect to Other AMPS, has the equivalent meaning.

"Maximum Potential Additional Dividend Liability," as of any Valuation
Date, means the aggregate amount of Additional Dividends that would be due if
the Corporation were to make Retroactive Taxable Allocations,
8
<PAGE>
with respect to any fiscal year, estimated based upon dividends paid and the
amount of undistributed realized net capital gains and other taxable income
earned by the Corporation, as of the end of the calendar month immediately
preceding such Valuation Date and assuming such Additional Dividends are
fully taxable.

"Minimum Liquidity Level" means, as of any Valuation Date, an aggregate
Market Value of the Corporation's Dividend Coverage Assets not less than the
Dividend Coverage Amount.

"Moody's" means Moody's Investors Service, Inc. or its successors.

"Moody's Discount Factor" means, for purposes of determining the
Discounted Value of any Arizona Municipal Bond or Municipal Bond which
constitutes a Moody's Eligible Asset, the percentage determined by reference
to (a) the rating by Moody's or S&P on such Bond and (b) the Moody's Exposure
Period, in accordance with the table set forth below:

<TABLE>
<CAPTION>
Rating Category
Moody's Exposure Period Aaa* Aa* A* Baa* VNIG-1** SP-1**

<S> <C> <C> <C> <C>
7 weeks or less . . . . . . . . . . 166% 175% 185% 222% 150% 163%
8 weeks or less but
greater than 7 weeks . . . . . . . 169 180 190 226 151 164
9 weeks or less but
greater than 8 weeks . . . . . . . 174 186 197 230 152 165

* Moody's rating.
** Arizona Municipal Bonds and Municipal Bonds rated MIG-1, VMIG-1 or P-1
or, if not rated by Moody's, rated SP-1+ or A-1+ by S&P which do not
mature or have a demand feature at par exercisable within the Moody's
Exposure Period and which do not have a long-term rating. For the
purposes of the definition of Moody's Eligible Assets, these securities
will have an assumed rating of "A" by Moody's.
</TABLE>

Notwithstanding the foregoing, (i) no Moody's Discount Factor will be
applied to short-term Arizona Municipal Bonds and short-term Municipal Bonds,
so long as such Arizona Municipal Bonds and Municipal Bonds are rated at
least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand feature at
par exercisable within the Moody's Exposure Period, and the Moody's Discount
Factor for such Bonds will be 125% if such Bonds are not rated by Moody's but
are rated A-1+ or SP-1+ or AA by S&P and mature or have a demand feature at
par exercisable within the Moody's Exposure Period, and (ii) no Moody's
Discount Factor will be applied to cash or to Receivables for Arizona
Municipal Bonds or Municipal Bonds Sold.
9
<PAGE>
"Receivables for Arizona Municipal Bonds or Municipal Bonds Sold," for
purposes of calculating Moody's Eligible Assets as of any Valuation Date,
means no more than the aggregate of the following: (i) the book value of
receivables for Arizona Municipal Bonds or Municipal Bonds sold as of or
prior to such Valuation Date if such receivables are due within five
Business Days of such Valuation Date, and if the trades which generated
such receivables are (x) settled through clearing house firms with respect
to which the Corporation has received prior written authorization from
Moody's or (y) with counterparties having a Moody's long-term debt rating
of at least Baa3; and (ii) the Moody's Discounted Value of Arizona Municipal
Bonds or Municipal Bonds sold as of or prior to such Valuation Date which
generated receivables, if such receivables are due within five Business Days
of such Valuation Date but do not comply with either of conditions (x) or
(y) of the preceding clause (i).

"Moody's Eligible Asset" means cash, Receivables for Arizona Municipal
Bonds or Municipal Bonds Sold, an Arizona Municipal Bond or a Municipal Bond
that (i) pays interest in cash, (ii) is publicly rated Baa or higher by
Moody's or, if not rated by Moody's but rated by S&P, is rated at least BBB-
by S&P (provided that, for purposes of determining the Moody's Discount
Factor applicable to any such S&P-rated Arizona Municipal Bond or
S&P-rated Municipal Bond, such Arizona Municipal Bond or Municipal Bond
(excluding any short-term Arizona Municipal Bond or Municipal Bond) will be
deemed to have a Moody's rating which is one full rating category lower than
its S&P rating), (iii) does not have its Moody's rating suspended by
Moody's; and (iv) is part of an issue of Arizona Municipal Bonds or
Municipal Bonds of at least $10,000,000. In addition, Arizona Municipal
Bonds and Municipal Bonds in the Corporation's portfolio must be within
the following diversification requirements in order to be included within
Moody's Eligible Assets:

10
<PAGE>

<TABLE>
<CAPTION> Minimum Maximum Maximum Maximum Maximum
Issue Size Underlying Issue Type County State or
($ Millions) Obligor (%)(1) Concentration Concentration Territory
(%)(1)(2) (%)(1)(3) Concentration
Rating (1)(4)
<S> <C> <C> <C> <C> <C>
Aaa . . . . . . 10 100 100 100 100
Aa . . . . . . 10 10 30 10 60
A . . . . . . . 10 5 20 5 40
Baa . . . . . . 10 3 10 3 20

____________________
(1) The referenced percentages represent maximum cumulative totals for the related rating category and each lower rating
category.
(2) Does not apply to general obligation bonds.
(3) Applicable to general obligation bonds only.
(4) Does not apply to Arizona Municipal Bonds. Territorial bonds (other than those issued by Puerto Rico and counted
collectively) are each limited to 10% of Moody's Eligible Assets. For diversification purposes, Puerto Rico will be
treated as a state.
</TABLE>

For purposes of the maximum underlying obligor requirement described above,
any such Municipal Bond backed by the guaranty, letter of credit or insurance
issued by a third party will be deemed to be issued by such third party if
the issuance of such third party credit is the sole determinant of the rating
on such Municipal Bond. For purposes of the issue type concentration
requirement described above, Arizona Municipal Bonds and Municipal Bonds will
be classified within one of the following categories: health care issues
(teaching and non-teaching hospitals, public and private), housing issues
(single-and multi-family), educational facilities issues (public and private
schools), student loan issues, resource recovery issues, transportation
issues (mass transit, airport and highway bonds), industrial
revenue/pollution control bond issues, utility issues (including water, sewer
and electricity), general obligation issues, lease obligations/certificates
of participation, escrowed bonds and other issues ("Other Issues") not
falling within one of the aforementioned categories (includes special
obligations to crossover, excise and sales tax revenue, recreation revenue,
special assessment and telephone revenue bonds). In no event shall (a) more
than 10% of Moody's Eligible Assets consist of student loan issues, (b) more
than 10% of Moody's Eligible Assets consist of resource recovery issues or
(c) more than 10% of Moody's Eligible Assets consist of Other Issues.

When the Corporation sells an Arizona Municipal Bond or Municipal Bond
and agrees to repurchase it at a future date, the Discounted Value of such
Bond will constitute a Moody's Eligible Asset and the amount the Corporation
is required to pay upon repurchase of such Bond will count as a liability for
purposes of calculating
11
<PAGE>
the AMPS Basic Maintenance Amount. When the Corporation purchases an Arizona
Municipal Bond or Municipal Bond and agrees to sell it at a future date to
another party, cash receivable by the Corporation thereby will constitute a
Moody's Eligible Asset if the long-term debt of such other party is rated at
least A2 by Moody's and such agreement has a term of 30 days or less;
otherwise the Discounted Value of such Bond will constitute a Moody's
Eligible Asset.

Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of
any kind, (iii) held for the purchase of a security pursuant to a Forward
Commitment or (iv) irrevocably deposited by the Corporation for the payment
of dividends or redemption.

"Moody's Exposure Period" means a period that is the same length or
longer than the number of days used in calculating the cash dividend
component of the AMPS Basic Maintenance Amount and shall initially be the
period commencing on and including a given Valuation Date and ending 48 days
thereafter.

"Moody's Hedging Transactions" has the meaning set forth in paragraph
9(b) of these Articles Supplementary.

"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted
but not yet implemented, the Moody's Volatility Factor shall be as follows:

<TABLE>
<CAPTION>
% Change in
Marginal Tax Moody's Volatility
Rate Factor
------------ ------------------

<S> <C>

5% 292%
>5% but 10% 313%
>10% but 15% 338%
>15% but 20% 364%
>20% but 25% 396%
>25% but 30% 432%
>30% but 35% 472%
>35% but 40% 520%

</TABLE>

Notwithstanding the foregoing, the Moody's Volatility Factor may mean such
other potential dividend rate increase factor as Moody's advises the
Corporation in writing is applicable.

12
<PAGE>
"Municipal Bonds" means "Municipal Bonds" as defined in the
Corporation's Registration Statement on Form N-2 (File No. 33-50975) on file
with the Securities and Exchange Commission, as such Registration Statement
may be amended from time to time, as well as short-term municipal
obligations.

"Municipal Index" has the meaning set forth in paragraph 9(a) of these
Articles Supplementary.

"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.

"1940 Act AMPS Asset Coverage" means asset coverage, as defined in
section 18(h) of the 1940 Act, of at least 200% with respect to all
outstanding senior securities of the Corporation which are stock, including
all outstanding shares of AMPS and Other AMPS (or such other asset coverage
as may in the future be specified in or under the 1940 Act as the minimum
asset coverage for senior securities which are stock of a closed-end
investment company as a condition of paying dividends on its common stock).

"1940 Act Cure Date," with respect to the failure by the Corporation to
maintain the 1940 Act AMPS Asset Coverage (as required by paragraph 6 of
these Articles Supplementary) as of the last Business Day of each month,
means the last Business Day of the following month.

"Non-Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".

"Non-Payment Period" means, with respect to the AMPS, any period
commencing on and including the day on which the Corporation shall fail to
(i) declare, prior to the close of business on the second Business Day
preceding any Dividend Payment Date, for payment on or (to the extent
permitted by paragraph 2(c)(i) of these Articles Supplementary) within three
Business Days after such Dividend Payment Date to the Holders as of 12:00
noon, New York City time, on the Business Day preceding such Dividend Payment
Date, the full amount of any dividend on shares of AMPS payable on such
Dividend Payment Date or (ii) deposit, irrevocably in trust, in same-day
funds, with the Auction Agent by 12:00 noon, New York City time, (A) on
such Dividend Payment Date the full amount of any cash dividend on such
shares payable (if declared) on such Dividend Payment Date or (B) on any
redemption date for any shares of AMPS called for redemption, the Mandatory
Redemption Price per share of such AMPS or, in the case of an optional
redemption, the Optional Redemption Price per share, and ending on and
including the Business Day on which, by 12:00 noon, New York City time,
all unpaid cash dividends and unpaid redemption prices shall have been so
deposited or shall have otherwise
13
<PAGE>
been made available to Holders in same-day
funds; provided that, a Non-Payment Period shall not end unless the
Corporation shall have given at least five days' but no more than 30 days'
written notice of such deposit or availability to the Auction Agent, all
Existing Holders (at their addresses appearing in the Stock Books) and the
Securities Depository. Notwithstanding the foregoing, the failure by the
Corporation to deposit funds as provided for by clauses (ii)(A) or (ii)(B)
above within three Business Days after any Dividend Payment Date or
redemption date, as the case may be, in each case to the extent contemplated
by paragraph 2(c)(i) of these Articles Supplementary, shall not constitute a
"Non-Payment Period."

"Non-Payment Period Rate" means, initially, 200% of the applicable
Reference Rate (or 275% of such rate if the Corporation has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend pursuant to paragraph 2(f) hereof that net
capital gains or other taxable income will be included in such dividend on
shares of AMPS), provided that the Board of Directors of the Corporation
shall have the authority to adjust, modify, alter or change from time to time
the initial Non-Payment Period Rate if the Board of Directors of the
Corporation determines and Moody's and S&P (and any Substitute Rating Agency
in lieu of Moody's or S&P in the event either of such parties shall not rate
the AMPS) advise the Corporation in writing that such adjustment,
modification, alteration or change will not adversely affect their
then-current ratings on the AMPS.

"Normal Dividend Payment Date" has the meaning set forth in paragraph
2(b)(i) of these Articles Supplementary.

"Notice of Redemption" means any notice with respect to the redemption
of shares of AMPS pursuant to paragraph 4 of these Articles Supplementary.

"Notice of Revocation" has the meaning set forth in paragraph 2(c)(iii)
of these Articles Supplementary.

"Notice of Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of these Articles Supplementary.

"Optional Redemption Price" means $25,000 per share plus an amount equal
to accumulated but unpaid dividends (whether or not earned or declared) to
the date fixed for redemption and excluding Additional Dividends plus any
applicable redemption premium attributable to the designation of a Premium
Call Period.

14
<PAGE>
"Other AMPS" means the auction rate preferred stock of the Corporation,
other than the AMPS.

"Outstanding" means, as of any date (i) with respect to AMPS, shares of
AMPS theretofore issued by the Corporation except, without duplication, (A)
any shares of AMPS theretofore cancelled or delivered to the Auction Agent
for cancellation, or redeemed by the Corporation, or as to which a Notice of
Redemption shall have been given and moneys shall have been deposited in
trust by the Corporation pursuant to paragraph 4(c) and (B) any shares of
AMPS as to which the Corporation or any Affiliate thereof shall be an
Existing Holder, provided that shares of AMPS held by an Affiliate shall be
deemed outstanding for purposes of calculating the AMPS Basic Maintenance
Amount and (ii) with respect to shares of other Preferred Stock, has the
equivalent meaning.

"Parity Stock" means the AMPS and each other outstanding series of
Preferred Stock the holders of which, together with the holders of the AMPS,
shall be entitled to the receipt of dividends or of amounts distributable
upon liquidation, dissolution or winding up, as the case may be, in
proportion to the full respective preferential amounts to which they are
entitled, without preference or priority one over the other.

"Person" means and includes an individual, a partnership, a corporation,
a trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.

"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of AMPS but that
wishes to purchase such shares, or that is a Beneficial Owner that wishes to
purchase additional shares of AMPS.

"Potential Holder" means any Broker-Dealer or any such other Person as
may be permitted by the Corporation, including any Existing Holder, who may
be interested in acquiring shares of AMPS (or, in the case of an Existing
Holder, additional shares of AMPS).

"Preferred Stock" means the preferred stock, par value $.10 per share,
of the Corporation, and includes AMPS and Other AMPS.

"Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".

15
<PAGE>

"Pricing Service" means J.J. Kenny or any pricing service designated by
the Board of Directors of the Corporation provided the Corporation obtains
written assurance from S&P and Moody's that such designation will not impair
the rating then assigned by S&P and Moody's to the AMPS.

"Quarterly Valuation Date" means the twenty-fifth day of the last month
of each fiscal quarter of the Corporation (or, if such day is not a Business
Day, the next succeeding Business Day) in each fiscal year of the
Corporation, commencing __________, 1994.

"Receivables for Arizona Municipal Bonds Sold" has the meaning set forth
under the definition of S&P Discount Factor.

"Receivables for Arizona Municipal Bonds or Municipal Bonds Sold" has
the meaning set forth under the definition of Moody's Discount Factor.

"Reference Rate" means: (i) with respect to a Dividend Period or a
Short-Term Dividend Period having 28 or fewer days, the higher of the
applicable "AA" Composite Commercial Paper Rate and the Taxable Equivalent of
the Short-Term Municipal Bond Rate, (ii) with respect to any Short-Term
Dividend Period having more than 28 but fewer than 183 days, the applicable
"AA" Composite Commercial Paper Rate, (iii) with respect to any Short-Term
Dividend Period having 183 or more but fewer than 364 days, the applicable
U.S. Treasury Bill Rate and (iv) with respect to any Long-Term Dividend
Period, the applicable U.S. Treasury Note Rate.

"Request for Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of these Articles Supplementary.

"Response" has the meaning set forth in paragraph 2(c)(iii) of these
Articles Supplementary.

"Retroactive Taxable Allocation" has the meaning set forth in paragraph
2(e) of these Articles Supplementary.

"Right," with respect to the AMPS, has the meaning set forth in
paragraph 2(e) of these Articles Supplementary and, with respect to Other
AMPS, has the equivalent meaning.

"S&P" means Standard & Poor's Corporation or its successors.
16
<PAGE>

"S&P
Discount Factor" means, for purposes of determining the Discounted Value of
any Arizona Municipal Bond which constitutes an S&P Eligible Asset, the
percentage determined by reference to (a) the rating by S&P or Moody's on
such Bond and (b) the S&P Exposure Period, in accordance with the tables set
forth below:

<TABLE>
<CAPTION>
For Arizona Municipal Bonds: Rating Category
S&P Exposure Period AAA* AA* A* BBB*

<S> <C> <C> <C> <C>
40 Business Days . . . . . . . . . 210% 215% 230% 270%
22 Business Days . . . . . . . . . 190 195 210 250
10 Business Days . . . . . . . . . 175 180 195 235
7 Business Days . . . . . . . . . . 170 175 190 230
3 Business Days . . . . . . . . . . 150 155 170 210

______________________
* S&P rating.
</TABLE>

Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term Arizona Municipal Bonds will be 115%, so long as such Arizona
Municipal Bonds are rated A-1+ or SP-1+ by S&P and mature or have a demand
feature exercisable in 30 days or less, or 125% if such Arizona Municipal
Bonds are not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's;
provided, however, such short-term Arizona Municipal Bonds rated by Moody's
but not rated by S&P having a demand feature exercisable in 30 days or less
must be backed by a letter of credit, liquidity facility or guarantee from a
bank or other financial institution having a short-term rating of at least
A-1+ from S&P; and further provided that such short-term Arizona Municipal
Bonds rated by Moody's but not rated by S&P may comprise no more than 50% of
short-term Arizona Municipal Bonds that qualify as S&P Eligible Assets and
(ii) no S&P Discount Factor will be applied to cash or to Receivables for
Arizona Municipal Bonds Sold. "Receivables for Arizona Municipal Bonds
Sold," for purposes of calculating S&P Eligible Assets as of any Valuation
Date, means the book value of receivables for Arizona Municipal Bonds sold as
of or prior to such Valuation Date if such receivables are due within five
Business Days of such Valuation Date. The Corporation may adopt S&P Discount
Factors for Municipal Bonds other than Arizona Municipal Bonds provided that
S&P advises the Corporation in writing that such action will not adversely
affect its then current rating on the AMPS. For purposes of the foregoing,
Anticipation Notes
17
<PAGE>
rated SP-1+ or, if not rated by S&P, rated VMIG-1 by Moody's, which do not
mature or have a demand feature exercisable in 30 days and which do not have
a long-term rating, shall be considered to be short-term Arizona Municipal
Bonds.

"S&P Eligible Asset" means cash, Receivables for Arizona Municipal Bonds
Sold or an Arizona Municipal Bond that (i) is interest bearing and pays
interest at least semi-annually;

(ii) is payable with respect to principal and interest in United States
Dollars; (iii) is publicly rated BBB or higher by S&P or, except in the case
of Anticipation Notes that are grant anticipation notes or bond anticipation
notes which must be rated by S&P to be included in S&P Eligible Assets, if
not rated by S&P but rated by Moody's, is rated at least A by Moody's
(provided that such Moody's-rated Arizona Municipal Bonds will be included in
S&P Eligible Assets only to the extent the Market Value of such Arizona
Municipal Bonds does not exceed 50% of the aggregate Market Value of the S&P
Eligible Assets; and further provided that, for purposes of determining the
S&P Discount Factor applicable to any such Moody's-rated Arizona Municipal
Bond, such Arizona Municipal Bond will be deemed to have an S&P rating which
is one full rating category lower than its Moody's rating);

(iv) is not subject to a covered call or covered put option written by the
Corporation; (v) is not part of a private placement of Arizona Municipal
Bonds; and (vi) is part of an issue of Arizona Municipal Bonds with an
original issue size of at least $10 million or, if of an issue with an
original issue size below $10 million (but in no event below $5 million), is
issued by an issuer with a total of at least $50 million of securities
outstanding. Notwithstanding the foregoing:

(1) Arizona Municipal Bonds of any one issuer or guarantor
(excluding bond insurers) will be considered S&P Eligible Assets only to
the extent the Market Value of such Arizona Municipal Bonds does not
exceed 10% of the aggregate Market Value of the S&P Eligible Assets,
provided that 2% is added to the applicable S&P Discount Factor for
every 1% by which the Market Value of such Arizona Municipal Bonds
exceeds 5% of the aggregate Market Value of the S&P Eligible Assets;

(2) Arizona Municipal Bonds guaranteed or insured by any one bond
insurer will be considered S&P Eligible Assets only to the extent the
Market Value of such Arizona Municipal Bonds does not exceed 25% of the
aggregate Market Value of the S&P Eligible Assets; and

18
<PAGE>
(3) Arizona Municipal Bonds of any one issue type category (as
described below) will be considered S&P Eligible Assets only to the
extent the Market Value of such Bonds does not exceed 20% of the
aggregate Market Value of S&P Eligible Assets, except that Arizona
Municipal Bonds falling within the utility issue type category will be
broken down into three sub-categories (as described below) and such
Arizona Municipal Bonds will be considered S&P Eligible Assets to the
extent the Market Value of such Bonds in each such sub-category does not
exceed 20% of the aggregate Market Value of S&P Eligible Assets. For
purposes of the issue type category requirement described above, Arizona
Municipal Bonds will be classified within one of the following
categories: health care issues, housing issues, educational facilities
issues, student loan issues, transportation issues, industrial
development bond issues, utility issues, general obligation issues,
lease obligations, escrowed bonds and other issues not falling within
one of the aforementioned categories. For purposes of the issue type
category requirement described above, Arizona Municipal Bonds in the
utility issue type category will be classified within one of the three
following sub-categories: (i) electric, gas and combination issues (if
the combination issue includes an electric issue),
(ii) water and sewer utilities and combination issues (if the
combination issue does not include an electric issue), and (iii)
irrigation, resource recovery, solid waste and other utilities, provided
that Arizona Municipal Bonds included in this sub-category (iii) must be
rated by S&P in order to be included in S&P Eligible Assets.

The Corporation may include Municipal Bonds other than Arizona Municipal
Bonds as S&P Eligible Assets pursuant to guidelines and restrictions to be
established by S&P provided that S&P advises the Corporation in writing that
such action will not adversely affect its then current rating on the AMPS.

"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the AMPS Basic Maintenance
Cure Date, that the Corporation has under these Articles Supplementary to
cure any failure to maintain, as of such Valuation Date, the
Discounted Value for its portfolio at least equal to the AMPS Basic
Maintenance Amount (as described in paragraph 7(a) of these Articles
Supplementary).

19
<PAGE>

"S&P Hedging Transactions" has the meaning set forth in paragraph 9(a)
of these Articles Supplementary.

"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Corporation in writing is applicable.

"Securities Depository" means The Depository Trust Company or any
successor company or other entities elected by the Corporation as securities
depository for the shares of AMPS that agrees to follow the procedures
required to be followed by such securities depository in connection with the
shares of AMPS.

"Service" means the United States Internal Revenue Service.

"7-Day Dividend Period" means a Dividend Period consisting of seven
days.

"Short-Term Dividend Period" means a Special Dividend Period consisting
of a specified number of days (other than seven), evenly divisible by seven
and not fewer than seven nor more than 364.

"Special Dividend Period" means a Dividend Period consisting of (i) a
specified number of days (other than seven), evenly divisible by seven and
not fewer than seven nor more than 364 or (ii) a specified period of one
whole year or more but not greater than five years (in each case subject to
adjustment as provided in paragraph 2(b)(i)).

"Specific Redemption Provisions" means, with respect to a Special
Dividend Period either, or any combination of, (i) a period (a "Non-Call
Period") determined by the Board of Directors of the Corporation, after
consultation with the Auction Agent and the Broker-Dealers, during which the
shares of AMPS subject to such Dividend Period shall not be subject to
redemption at the option of the Corporation and (ii) a period (a "Premium
Call Period"), consisting of a number of whole years and determined by the
Board of Directors of the Corporation, after consultation with the Auction
Agent and the Broker-Dealers, during each year of which the shares of AMPS
subject to such Dividend Period shall be redeemable at the Corporation's
option at a price per share equal to $25,000 plus accumulated but unpaid
dividends plus a premium expressed as a percentage of $25,000, as determined
by the Board of Directors of the Corporation after consultation with the
Auction Agent and the Broker-Dealers.
20
<PAGE>

"Stock Books" means the books maintained by the Auction Agent setting
forth at all times a current list, as determined by the Auction Agent, of
Existing Holders of the AMPS.

"Stock Register" means the register of Holders maintained on behalf of
the Corporation by the Auction Agent in its capacity as transfer agent and
registrar for the AMPS.

"Subsequent Dividend Period," with respect to AMPS, has the meaning set
forth in paragraph 2(c)(i) of these Articles Supplementary and, with respect
to Other AMPS, has the equivalent meaning.

"Substitute Commercial Paper Dealers" means such Substitute Commercial
Paper Dealer or Dealers as the Corporation may from time to time appoint or,
in lieu of any thereof, their respective affiliates or successors.

"Substitute Rating Agency" and "Substitute Rating Agencies" mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by
Merrill Lynch, Pierce, Fenner & Smith Incorporated or its affiliates and
successors, after consultation with the Corporation, to act as the substitute
rating agency or substitute rating agencies, as the case may be, to determine
the credit ratings of the shares of AMPS.

"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index (the "Kenny
Index") or any successor index, made available for the Business Day
immediately preceding such date but in any event not later than 8:30 A.M.,
New York City time, on such date by Kenny Information Systems Inc. or any
successor thereto, based upon 30-day yield evaluations at par of bonds the
interest on which is excludable for regular Federal income tax purposes under
the Code of "high grade" component issuers selected by Kenny Information
Systems Inc. or any such successor from time to time in its discretion, which
component issuers shall include, without limitation, issuers of general
obligation bonds but shall exclude any bonds the interest on which
constitutes an item of tax preference under Section 57(a)(5) of the Code, or
successor provisions, for purposes of the "alternative minimum tax," divided
by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal); provided,
however, that if the Kenny Index is not made so available by 8:30 A.M.,
New York City time, on such date by Kenny Information Systems Inc. or any
successor, the Taxable
21
<PAGE>

Equivalent of the Short-Term Municipal Bond Rate means the quotient of
(A) the per annum rate expressed on an interest equivalent basis equal
to the most recent Kenny Index so made available for any preceding Business
Day, divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a
decimal). The Corporation may not utilize a successor index to the Kenny
Index unless Moody's and S&P provide the Corporation with written
confirmation that the use of such successor index will not adversely affect
the then-current respective Moody's and S&P ratings of the AMPS.

"Treasury Bonds" has the meaning set forth in paragraph 9(a) of these
Articles Supplementary.

"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent
of the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Bill Rate on such date. "Alternate
Treasury Bill Rate" on any date means the Interest Equivalent of the yield as
calculated by reference to the arithmetic average of the bid price quotations
of the actively traded Treasury Bill with a maturity most nearly comparable
to the length of the related Dividend Period, as determined by bid price
quotations as of any time on the Business Day immediately preceding such
date, obtained from at least three recognized primary U.S. Government
securities dealers selected by the Auction Agent.

"U.S. Treasury Note Rate" on any date means (i) the yield as calculated
by reference to the bid price quotation of the actively traded, current
coupon Treasury Note with a maturity most nearly comparable to the length of
the related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of
New York in its Composite 3:30 P.M. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Note Rate on such date. "Alternate
Treasury Note Rate" on any date means the yield as calculated by reference to
the arithmetic average of the bid price quotations of the actively traded,
current coupon Treasury Note with a maturity most nearly comparable to the
length of the related Dividend Period, as determined by the bid price
quotations as of any time on the Business Day immediately preceding such
date,

22
<PAGE>

obtained from at least three recognized primary U.S. Government securities
dealers selected by the Auction Agent.

"Valuation Date" means, for purposes of determining whether the
Corporation is maintaining the AMPS Basic Maintenance Amount and the Minimum
Liquidity Level, each Business Day commencing with the Date of Original
Issue.

"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Corporation, the amount of cash or securities
paid to or received from a broker (subsequent to the Initial Margin payment)
from time to time as the price of such futures contract fluctuates.

(b) The foregoing definitions of Accountant's Confirmation, AMPS Basic
Maintenance Amount, AMPS Basic Maintenance Cure Date, AMPS Basic Maintenance
Report, Deposit Securities, Discounted Value, Dividend Coverage Amount,
Dividend Coverage Assets, Independent Accountant, Initial Margin, Market
Value, Maximum Potential Additional Dividend Liability, Minimum Liquidity
Level, Moody's Discount Factor, Moody's Eligible Asset, Moody's Exposure
Period, Moody's Hedging Transactions, Moody's Volatility Factor, S&P Discount
Factor, S&P Eligible Asset, S&P Exposure Period, S&P Hedging Transactions,
S&P Volatility Factor, Valuation Date and Variation Margin have been
determined by the Board of Directors of the Corporation in order to obtain an
"aa1" rating from Moody's and an AAA rating from S&P on the AMPS on their
Date of Original Issue; and the Board of Directors of the Corporation shall
have the authority, without shareholder approval, to amend, alter or repeal
from time to time the foregoing definitions and the restrictions and
guidelines set forth thereunder if Moody's and S&P or any Substitute Rating
Agency advises the Corporation in writing that such amendment, alteration or
repeal will not adversely affect their then-current ratings on the AMPS.

2. Dividends. (a) The Holders shall be entitled to receive, when,
---------
as and if declared by the Board of Directors of the Corporation, out of funds
legally available therefor, cumulative dividends each consisting of (i) cash
at the Applicable Rate, (ii) a Right to receive cash as set forth in
paragraph 2(e) below, and (iii) any additional amounts as set forth in
paragraph 2(f) below, and no more, payable on the respective dates set
\forth below. Dividends on the shares of AMPS so declared and payable
shall be paid (i) in preference

23
<PAGE>

to and in priority over any dividends declared and payable on the Common
Stock, and (ii) to the extent permitted under the Code and to the extent
available, out of net tax-exempt income earned on the Corporation's
investments. To the extent permitted under the Code, dividends on shares
of AMPS will be designated as exempt-interest dividends. For the purposes
of this section, the term "net tax-exempt income" shall exclude capital
gains of the Corporation.

(b) (i) Cash dividends on shares of AMPS shall accumulate from the
Date of Original Issue and shall be payable, when, as and if declared by the
Board of Directors, out of funds legally available therefor, commencing on
the Initial Dividend Payment Date with respect to the AMPS. Dividends on the
AMPS during the Initial Dividend Period shall be payable on the Initial
Dividend Payment Date. Following the Initial Dividend Payment Date for the
AMPS, dividends on the AMPS will be payable, at the option of the
Corporation, either (i) with respect to any 7-Day Dividend Period and any
Short-Term Dividend Period of 35 or fewer days, on the day next succeeding
the last day thereof, or (ii) with respect to any Short-Term Dividend Period
of more than 35 days and with respect to any Long-Term Dividend Period,
monthly on the first Business Day of each calendar month during such Short-
Term Dividend Period or Long-Term Dividend Period and on the day next
succeeding the last day thereof (each such date referred to in clause (i) or
(ii) being herein referred to as a "Normal Dividend Payment Date"), except
that if such Normal Dividend Payment Date is not a Business Day, then (i) the
Dividend Payment Date shall be the first Business Day next succeeding such
Normal Dividend Payment Date if such Normal Dividend Payment Date is a
Monday, Tuesday, Wednesday or Thursday, or (ii) the Dividend Payment Date
shall be the first Business Day next preceding such Normal Dividend Payment
Date if such Normal Dividend Payment Date is a Friday. If, however, in the
case of clause (ii) in the preceding sentence, the Securities Depository
shall make available to its participants and members in funds immediately
available in New York City on Dividend Payment Dates the amount due as
dividends on such Dividend Payment Dates (and the Securities Depository shall
have so advised the Corporation), and if the Normal Dividend Payment Date is
not a Business Day, then the Dividend Payment Date shall be the next
succeeding Business Day. Although any particular Dividend Payment Date may
not occur on the originally scheduled date because of the exceptions discussed
above, the next succeeding Dividend Payment Date, subject to such
exceptions, will

<PAGE>

occur on the next following originally scheduled date. If for any reason a
Dividend Payment Date cannot be fixed as described above, then the Board
of Directors shall fix the Dividend Payment Date. The Initial Dividend
Period, 7-Day Dividend Periods and Special Dividend Periods are
hereinafter sometimes referred to as "Dividend Periods." Each dividend
payment date determined as provided above is hereinafter referred to as a
"Dividend Payment Date."

(ii) Each dividend shall be paid to the Holders as they appear in
the Stock Register as of 12:00 noon, New York City time, on the Business Day
preceding the Dividend Payment Date. Dividends in arrears for any past
Dividend Period may be declared and paid at any time, without reference to
any regular Dividend Payment Date, to the Holders as they appear on the Stock
Register on a date, not exceeding 15 days prior to the payment date therefor,
as may be fixed by the Board of Directors of the Corporation.

(c) (i) During the period from and including the Date of Original
Issue to but excluding the Initial Dividend Payment Date (the "Initial
Dividend Period"), the Applicable Rate shall be the Initial Dividend Rate.
Commencing on the Initial Dividend Payment Date, the Applicable Rate for each
subsequent dividend period (hereinafter referred to as a "Subsequent Dividend
Period"), which Subsequent Dividend Period shall commence on and include a
Dividend Payment Date and shall end on and include the calendar day prior to
the next Dividend Payment Date (or last Dividend Payment Date in a Dividend
Period if there is more than one Dividend Payment Date), shall be equal to
the rate per annum that results from implementation of the Auction
Procedures.

The Applicable Rate for each Dividend Period commencing during a
Non-Payment Period shall be equal to the Non-Payment Period Rate; and each
Dividend Period, commencing after the first day of, and during, a Non-Payment
Period shall be a 7-Day Dividend Period. Except in the case of the willful
failure of the Corporation to pay a dividend on a Dividend Payment Date or to
redeem any shares of AMPS on the date set for such redemption, any amount of
any dividend due on any Dividend Payment Date (if, prior to the close of
business on the second Business Day preceding such Dividend Payment Date, the
Corporation has declared such dividend payable on such Dividend Payment Date
to the Holders of such shares of AMPS as of 12:00 noon, New York City
time, on the Business Day preceding such Dividend Payment Date) or
redemption price

25
<PAGE>

with respect to any shares of AMPS not paid to such Holders when due may be
paid to such Holders in the same form of funds by 12:00 noon, New York City
time, on any of the first three Business Days after such Dividend Payment
Date or due date, as the case may be, provided that, such amount is accompanied
by a late charge calculated for such period of non-payment at the
Non-Payment Period Rate applied to the amount of such non-payment based on
the actual number of days comprising such period divided by 365. In the
case of a willful failure of the Corporation to pay a dividend on a
Dividend Payment Date or to redeem any shares of AMPS on the date set for
such redemption, the preceding sentence shall not apply and the Applicable
Rate for the Dividend Period commencing during the Non-Payment Period
resulting from such failure shall be the Non-Payment Period Rate. For the
purposes of the foregoing, payment to a person in same-day funds on any
Business Day at any time shall be considered equivalent to payment to such
person in New York Clearing House (next-day) funds at the same time on the
preceding Business Day, and any payment made after 12:00 noon, New York
City time, on any Business Day shall be considered to have been made
instead in the same form of funds and to the same person before 12:00 noon,
New York City time, on the next Business Day.

(ii) The amount of cash dividends per share of AMPS payable (if
declared) on each Dividend Payment Date of the Initial Dividend Period, each
7-Day Dividend Period and each Short-Term Dividend Period shall be computed
by multiplying the Applicable Rate for such Dividend Period by a fraction,
the numerator of which will be the number of days in such Dividend Period or
part thereof that such share was outstanding and for which dividends are
payable on such Dividend Payment Date and the denominator of which will be
365, multiplying the amount so obtained by $25,000, and rounding the amount
so obtained to the nearest cent. During any Long-Term Dividend Period, the
amount of cash dividends per share of AMPS payable (if declared) on any
Dividend Payment Date shall be computed by multiplying the Applicable Rate
for such Dividend Period by a fraction, the numerator of which will be such
number of days in such part of such Dividend Period that such share was
outstanding and for which dividends are payable on such Dividend Payment Date
and the denominator of which will be 360, multiplying the amount so
obtained by $25,000, and rounding the amount so obtained to the nearest cent.

26
<PAGE>

(iii) With respect to each Dividend Period that is a Special Dividend
Period, the Corporation may, at its sole option and to the extent permitted
by law, by telephonic and written notice (a "Request for Special Dividend
Period") to the Auction Agent and to each Broker-Dealer, request that the
next succeeding Dividend Period for the AMPS be a number of days (other than
seven) evenly divisible by seven, and not fewer than seven nor more than 364
in the case of a Short-Term Dividend Period or one whole year or more but not
greater than five years in the case of a Long-Term Dividend Period, specified
in such notice, provided that the Corporation may not give a Request for
Special Dividend Period (and any such request shall be null and void) unless,
for any Auction occurring after the initial Auction, Sufficient Clearing Bids
were made in the last occurring Auction and unless full cumulative dividends,
any amounts due with respect to redemptions, and any Additional Dividends
payable prior to such date have been paid in full. Such Request for Special
Dividend Period, in the case of a Short-Term Dividend Period, shall be given
on or prior to the second Business Day but not more than seven Business Days
prior to an Auction Date for the AMPS and, in the case of a Long-Term
Dividend Period, shall be given on or prior to the second Business Day but
not more than 28 days prior to an Auction Date for the AMPS. Upon receiving
such Request for Special Dividend Period, the Broker-Dealer(s) shall jointly
determine whether, given the factors set forth below, it is advisable that
the Corporation issue a Notice of Special Dividend Period for the AMPS as
contemplated by such Request for Special Dividend Period and the Optional
Redemption Price of the AMPS during such Special Dividend Period and the
Specific Redemption Provisions and shall give the Corporation and the Auction
Agent written notice (a "Response") of such determination by no later than
the second Business Day prior to such Auction Date. In making such
determination the Broker-Dealer(s) will consider (1) existing short-term
and long-term market rates and indices of such short-term and long-term rates,
(2) existing market supply and demand for short-term and long-term
securities, (3) existing yield curves for short-term and long-term
securities comparable to the AMPS, (4) industry and financial conditions
which may affect the AMPS, (5) the investment objective of the Corporation,
and (6) the Dividend Periods and dividend rates at which current and
potential beneficial holders of the AMPS would remain or become beneficial
holders. If the Broker-Dealer(s) shall not give the Corporation and the
Auction Agent a Response by such second Business Day or if the Response
states that given the factors set forth above it is not

27
<PAGE>

advisable that the Corporation give a Notice of Special Dividend Period for
the AMPS, the Corporation may not give a Notice of Special Dividend Period in
respect of such Request for Special Dividend Period. In the event the
Response indicates that it is advisable that the Corporation give a Notice of
Special Dividend Period for the AMPS, the Corporation may by no later than
the second Business Day prior to such Auction Date give a notice (a "Notice
of Special Dividend Period") to the Auction Agent, the Securities Depository
and each Broker-Dealer which notice will specify (i) the duration of the
Special Dividend Period, (ii) the Optional Redemption Price as specified in
the related Response and (iii) the Specific Redemption Provisions, if any, as
specified in the related Response. The Corporation also shall provide a copy
of such Notice of Special Dividend Period to Moody's and S&P. The
Corporation shall not give a Notice of Special Dividend Period and, if the
Corporation has given a Notice of Special Dividend Period, the Corporation is
required to give telephonic and written notice of its revocation (a "Notice
of Revocation") to the Auction Agent, each Broker-Dealer, and the Securities
Depository on or prior to the Business Day prior to the relevant Auction Date
if (x) either the 1940 Act AMPS Asset Coverage is not satisfied or the
Corporation shall fail to maintain S&P Eligible Assets and Moody's Eligible
Assets each with an aggregate Discounted Value at least equal to the AMPS
Basic Maintenance Amount, in each case on each of the two Valuation Dates
immediately preceding the Business Day prior to the relevant Auction Date on
an actual basis and on a pro forma basis giving effect to the proposed
Special Dividend Period (using as a pro forma dividend rate with respect to
such Special Dividend Period the dividend rate which the Broker-Dealers shall
advise the Corporation is an approximately equal rate for securities similar
to the AMPS with an equal dividend period), provided that, in calculating the
aggregate Discounted Value of Moody's Eligible Assets for this purpose, the
Moody's Exposure Period shall be deemed to be one week longer, (y) sufficient
funds for the payment of dividends payable on the immediately succeeding
Dividend Payment Date have not been irrevocably deposited with the Auction
Agent by the close of business on the third Business Day preceding the
related Auction Date or (z) the Broker-Dealer(s) jointly advise the
Corporation that after consideration of the factors listed above they have
concluded that it is advisable to give a Notice of Revocation. The
Corporation also shall provide a copy of such Notice of Revocation to
Moody's and S&P. If the Corporation is prohibited from giving a Notice of
Special Dividend Period as a result of any of the factors

28
<PAGE>

enumerated in clause (x), (y) or (z) above or if the Corporation gives a
Notice of Revocation with respect to a Notice of Special
Dividend Period for the AMPS, the next succeeding Dividend Period will be a
7-Day Dividend Period. In addition, in the event Sufficient Clearing Bids
are not made in the applicable Auction or such Auction is not held for any
reason, such next succeeding Dividend Period will be a 7-Day Dividend Period
and the Corporation may not again give a Notice of Special Dividend Period
for the AMPS (and any such attempted notice shall be null and void) until
Sufficient Clearing Bids have been made in an Auction with respect to a 7-day
Dividend Period.

(d) (i) Holders shall not be entitled to any dividends, whether
payable in cash, property or stock, in excess of full cumulative dividends
and applicable late charge, as herein provided, on the shares of AMPS (except
for Additional Dividends as provided in paragraph 2(e) hereof and additional
payments as provided in paragraph 2(f) hereof). Except for the late charge
payable pursuant to paragraph 2(c)(i) hereof, no interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment on the
shares of AMPS that may be in arrears.

(ii) For so long as any share of AMPS is Outstanding, the Corporation
shall not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, Common Stock or
other stock, if any, ranking junior to the shares of AMPS as to dividends or
upon liquidation) in respect of the Common Stock or any other stock of the
Corporation ranking junior to or on a parity with the shares of AMPS as to
dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any shares of the Common Stock or any
other such junior stock (except by conversion into or exchange for stock of
the Corporation ranking junior to the shares of AMPS as to dividends and upon
liquidation) or any other such Parity Stock (except by conversion into or
exchange for stock of the Corporation ranking junior to or on a parity with
the shares of AMPS as to dividends and upon liquidation), unless
(A) immediately after such transaction, the Corporation shall have S&P
Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount and the
Corporation shall maintain the 1940 Act AMPS Asset Coverage, (B) full
cumulative dividends on shares

29
<PAGE>

of AMPS and shares of Other AMPS due on or prior to the date of the
transaction have been declared and paid or shall
have been declared and sufficient funds for the payment thereof deposited
with the Auction Agent, (C) any Additional Dividend required to be paid under
paragraph 2(e) below on or before the date of such declaration or payment has
been paid and (D) the Corporation has redeemed the full number of shares of
AMPS required to be redeemed by any provision for mandatory redemption
contained herein.

(e) Each dividend shall consist of (i) cash at the Applicable Rate,
(ii) an uncertificated right (a "Right") to receive an Additional Dividend
(as defined below), and (iii) any additional amounts as set forth in
paragraph 2(f) below. Each Right shall thereafter be independent of the
share or shares of AMPS on which the dividend was paid. The Corporation
shall cause to be maintained a record of each Right received by the
respective Holders. A Right may not be transferred other than by operation
of law. If the Corporation retroactively allocates any net capital gains or
other income subject to regular Federal income taxes to shares of AMPS
without having given advance notice thereof to the Auction Agent as described
in paragraph 2(f) hereof solely by reason of the fact that such allocation is
made as a result of the redemption of all or a portion of the outstanding
shares of AMPS or the liquidation of the Corporation (the amount of such
allocation referred to herein as a "Retroactive Taxable Allocation"), the
Corporation will, within 90 days (and generally within 60 days) after the end
of the Corporation's fiscal year for which a Retroactive Taxable Allocation
is made, provide notice thereof to the Auction Agent and to each holder of a
Right applicable to such shares of AMPS (initially Cede & Co. as nominee of
the Depository Trust Company) during such fiscal year at such holder's
address as the same appears or last appeared on the Stock Books of the
Corporation. The Corporation will, within 30 days after such notice is given
to the Auction Agent, pay to the Auction Agent (who will then distribute to
such holders of Rights), out of funds legally available therefor, an amount
equal to the aggregate Additional Dividend with respect to all Retroactive
Taxable Allocations made to such holders during the fiscal year in question.

An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate
amount of Retroactive Taxable Allocations made to such holder with respect to
the fiscal year in question, would cause such holder's dividends in dollars
(after Federal and Arizona income tax consequences) from the aggregate of
both the Retroactive Taxable Allocations and the
30

<PAGE>

Additional Dividend to be equal to the dollar amount of the dividends which
would have been received by such holder if the amount of the aggregate
Retroactive Taxable Allocations would have been excludable from the gross
income of such holder. Such Additional Dividend shall be calculated (i)
without consideration being given to the time value of money; (ii) assuming
that no holder of shares of AMPS is subject to the Federal alternative
minimum tax with respect to dividends received from the Corporation; and
(iii) assuming that each Retroactive Taxable Allocation would be taxable in
the hands of each holder of shares of AMPS at the greater of: (x) the
maximum combined marginal regular Federal and Arizona individual income tax
rate applicable to ordinary income or capital gains depending on the taxable
character of the distribution (including any surtax); or (y) the maximum
combined marginal regular Federal and Arizona corporate income tax rate
applicable to ordinary income or capital gains depending on the taxable
character of the distribution (taking into account in both (x) and (y) the
Federal income tax deductibility of state taxes paid or incurred but
disregarding any phase out of, or provision limiting, personal exemptions,
itemized deductions, or the benefit of lower tax brackets).

(f) Except as provided below, whenever the Corporation intends to
include any net capital gains or other income subject to regular Federal
income taxes in any dividend on shares of AMPS, the Corporation will notify
the Auction Agent of the amount to be so included at least five Business Days
prior to the Auction Date on which the Applicable Rate for such dividend is
to be established. The Corporation may also include such income in a
dividend on shares of AMPS without giving advance notice thereof if it
increases the dividend by an additional amount calculated as if such income
was a Retroactive Taxable Allocation and the additional amount was an
Additional Dividend, provided that the Corporation will notify the Auction
Agent of the additional amounts to be included in such dividend at least five
Business Days prior to the applicable Dividend Payment Date.

(g) No fractional shares of AMPS shall be issued.

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<PAGE>

3. Liquidation Rights. Upon any liquidation, dissolution or winding
------------------
up of the Corporation, whether voluntary or involuntary, the Holders shall be
entitled to receive, out of the assets of the Corporation available for
distribution to shareholders, before any distribution or payment is made upon
any Common Stock or any other capital stock ranking junior in right of
payment upon liquidation to the AMPS, the sum of $25,000 per share plus
accumulated but unpaid dividends (whether or not earned or declared) thereon
to the date of distribution, and after such payment the Holders will be
entitled to no other payments other than Additional Dividends as provided in
paragraph 2(e) hereof. If upon any liquidation, dissolution or winding up of
the Corporation, the amounts payable with respect to the AMPS and any other
Outstanding class or series of Preferred Stock of the Corporation ranking on
a parity with the AMPS as to payment upon liquidation are not paid in full,
the Holders and the holders of such other class or series will share ratably
in any such distribution of assets in proportion to the respective
preferential amounts to which they are entitled. After payment of the full
amount of the liquidating distribution to which they are entitled, the
Holders will not be entitled to any further participation in any distribution
of assets by the Corporation except for any Additional Dividends. A
consolidation, merger or statutory share exchange of the Corporation with or
into any other corporation or entity or a sale, whether for cash, shares of
stock, securities or properties, of all or substantially all or any part of
the assets of the Corporation shall not be deemed or construed to be a
liquidation, dissolution or winding up of the Corporation.

4. Redemption. (a) Shares of AMPS shall be redeemable by the
----------
Corporation as provided below:

(i) To the extent permitted under the 1940 Act and Maryland law,
upon giving a Notice of Redemption, the Corporation at its option may
redeem shares of AMPS, in whole or in part, out of funds legally
available therefor, at the Optional Redemption Price per share, on any
Dividend Payment Date; provided that no share of AMPS may be redeemed at
the option of the Corporation during (A) the Initial Dividend Period
with respect to such share or (B) a Non-Call Period to which such share
is subject. In addition, holders of AMPS which are redeemed shall be
entitled to receive Additional Dividends to the extent provided herein.
The Corporation may not give a Notice of Redemption relating to an
optional redemption as described in this paragraph 4(a)(i) unless, at
the time of giving

32
<PAGE>

such Notice of Redemption, the Corporation has available Deposit
Securities with maturity or tender dates not later than the day
preceding the applicable redemption date and having a value not less
than the amount due to Holders by reason of the redemption of their
shares of AMPS on such redemption date.

(ii) The Corporation shall redeem, out of funds legally available
therefor, at the Mandatory Redemption Price per share, shares of AMPS to
the extent permitted under the 1940 Act and Maryland law, on a date
fixed by the Board of Directors, if the Corporation fails to maintain
S&P Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount as provided in paragraph 7(a) or to satisfy the 1940 Act AMPS
Asset Coverage as provided in paragraph 6 and such failure is not cured
on or before the AMPS Basic Maintenance Cure Date or the 1940 Act Cure
Date (herein collectively referred to as a "Cure Date"), as the case may
be. In addition, holders of AMPS so redeemed shall be entitled to
receive Additional Dividends to the extent provided herein. The number
of shares of AMPS to be redeemed shall be equal to the lesser of (i) the
minimum number of shares of AMPS the redemption of which, if deemed to
have occurred immediately prior to the opening of business on the Cure
Date, together with all shares of other Preferred Stock subject to
redemption or retirement, would result in the Corporation having S&P
Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount or satisfaction of the 1940 Act AMPS Asset Coverage, as the case
may be, on such Cure Date (provided that, if there is no such minimum
number of shares of AMPS and shares of other Preferred Stock the
redemption of which would have such result, all shares of AMPS and
shares of other Preferred Stock then Outstanding shall be redeemed), and
(ii) the maximum number of shares of AMPS, together with all shares of
other Preferred Stock subject to redemption or retirement, that can be
redeemed out of funds expected to be legally available therefor on such
redemption date. In determining the number of shares of AMPS required
to be redeemed in accordance with the foregoing, the Corporation shall
allocate the number required to be redeemed which would result in the
Corporation having S&P Eligible Assets and

33
<PAGE>

Moody's Eligible Assets each with an aggregate Discounted Value equal to
or greater than the AMPS Basic Maintenance Amount or satisfaction of the
1940 Act AMPS Asset Coverage, as the case may be, pro rata among shares
of AMPS, Other AMPS and other Preferred Stock subject to redemption
pursuant to provisions similar to those contained in this paragraph
4(a)(ii); provided that, shares of AMPS which may not be redeemed at the
option of the Corporation due to the designation of a Non-Call Period
applicable to such shares (A) will be subject to mandatory redemption
only to the extent that other shares are not available to satisfy the
number of shares required to be redeemed and (B) will be selected for
redemption in an ascending order of outstanding number of days in the
Non-Call Period (with shares with the lowest number of days to be
redeemed first) and by lot in the event of shares having an equal number
of days in such Non-Call Period. The Corporation shall effect such
redemption on a Business Day which is not later than 35 days after such
Cure Date, except that if the Corporation does not have funds legally
available for the redemption of all of the required number of shares of
AMPS and shares of other Preferred Stock which are subject to mandatory
redemption or the Corporation otherwise is unable to effect such
redemption on or prior to 35 days after such Cure Date, the Corporation
shall redeem those shares of AMPS which it is unable to redeem on the
earliest practicable date on which it is able to effect such redemption
out of funds legally available therefor.

(b) Notwithstanding any other provision of this paragraph 4, no shares
of AMPS may be redeemed pursuant to paragraph 4(a)(i) of these Articles
Supplementary (i) unless all dividends in arrears on all remaining
outstanding shares of Parity Stock shall have been or are being
contemporaneously paid or declared and set apart for payment and (ii) if
redemption thereof would result in the Corporation's failure to maintain
Moody's Eligible Assets or S&P Eligible Assets with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount. In the
event that less than all of the outstanding shares of a series of AMPS are to
be redeemed and there is more than one Holder, the shares of that series of
AMPS to be redeemed shall be selected by lot or such other method as the
Corporation shall deem fair and equitable.

(c) Whenever shares of AMPS are to be redeemed, the Corporation, not
less than 20 nor more than 30 days prior to the date fixed for redemption,
shall mail a notice ("Notice of Redemption") by first-class

34
<PAGE>

mail, postage prepaid, to each Holder of shares of AMPS to be redeemed and to
the Auction Agent. The Corporation shall cause the Notice of Redemption to
also be published in the eastern and national editions of The Wall Street
---------------
Journal. The Notice of Redemption shall set forth (i) the redemption date,
- -------
(ii) the amount of the redemption price,

(iii) the aggregate number of shares of AMPS to be redeemed,

(iv) the place or places where shares of AMPS are to be surrendered for
payment of the redemption price, (v) a statement that dividends on the shares
to be redeemed shall cease to accumulate on such redemption date (except that
holders may be entitled to Additional Dividends) and (vi) the provision of
these Articles Supplementary pursuant to which such shares are being
redeemed. No defect in the Notice of Redemption or in the mailing or
publication thereof shall affect the validity of the redemption proceedings,
except as required by applicable law.

If the Notice of Redemption shall have been given as aforesaid and,
concurrently or thereafter, the Corporation shall have deposited in trust
with the Auction Agent a cash amount equal to the redemption payment for the
shares of AMPS as to which such Notice of Redemption has been given with
irrevocable instructions and authority to pay the redemption price to the
Holders of such shares, then upon the date of such deposit or, if no such
deposit is made, then upon such date fixed for redemption (unless the
Corporation shall default in making the redemption payment), all rights of
the Holders of such shares as shareholders of the Corporation by reason of
the ownership of such shares will cease and terminate (except their right to
receive the redemption price in respect thereof and any Additional Dividends,
but without interest), and such shares shall no longer be deemed outstanding.
The Corporation shall be entitled to receive, from time to time, from the
Auction Agent the interest, if any, on such moneys deposited with it and the
Holders of any shares so redeemed shall have no claim to any of such
interest. In case the Holder of any shares so called for redemption shall
not claim the redemption payment for his shares within one year after the
date of redemption, the Auction Agent shall, upon demand, pay over to the
Corporation such amount remaining on deposit and the Auction Agent shall
thereupon be relieved of all responsibility to the Holder of such shares
called for redemption and such Holder thereafter shall look only to the
Corporation for the redemption payment.

5. Voting Rights. (a) General. Except as otherwise provided in
------------- -------
the Charter or By-Laws, each Holder of shares of AMPS shall be entitled to
one vote for each share held on each matter submitted to a vote
35
<PAGE>

of shareholders of the Corporation, and the holders of outstanding shares
of Preferred Stock, including AMPS, and of shares of Common Stock shall vote
together as a single class; provided that, at any meeting of the shareholders
of the Corporation held for the election of directors, the holders of
outstanding shares of Preferred Stock, including AMPS, shall be entitled, as
a class, to the exclusion of the holders of all other securities and classes
of capital stock of the Corporation, to elect two directors of the
Corporation. Subject to paragraph 5(b) hereof, the holders of outstanding
shares of capital stock of the Corporation, including the holders of
outstanding shares of Preferred Stock, including AMPS, voting as a single
class, shall elect the balance of the directors.

(b) Right to Elect Majority of Board of Directors. During any period
---------------------------------------------
in which any one or more of the conditions described below shall exist (such
period being referred to herein as a "Voting Period"), the number of
directors constituting the Board of Directors shall be automatically
increased by the smallest number that, when added to the two directors
elected exclusively by the holders of shares of Preferred Stock, would
constitute a majority of the Board of Directors as so increased by such
smallest number; and the holders of shares of Preferred Stock shall be
entitled, voting separately as one class (to the exclusion of the holders of
all other securities and classes of capital stock of the Corporation), to
elect such smallest number of additional directors, together with the two
directors that such holders are in any event entitled to elect. A Voting
Period shall commence:

(i) if at any time accumulated dividends (whether or not earned or
declared, and whether or not funds are then legally available in an
amount sufficient therefor) on the outstanding shares of AMPS equal to
at least two full years' dividends shall be due and unpaid and
sufficient cash or specified securities shall not have been deposited
with the Auction Agent for the payment of such accumulated dividends; or

(ii) if at any time holders of any other shares of Preferred Stock
are entitled to elect a majority of the directors of the Corporation
under the 1940 Act.

36
<PAGE>

Upon the termination of a Voting Period, the voting rights described in
this paragraph 5(b) shall cease, subject always, however, to the reverting of
such voting rights in the Holders upon the further occurrence of any of the
events described in this paragraph 5(b).

(c) Right to Vote with Respect to Certain Other Matters. So long as
---------------------------------------------------
any shares of AMPS are outstanding, the Corporation shall not, without the
affirmative vote of the holders of a majority of the shares of Preferred
Stock Outstanding at the time, voting separately as one class: (i)
authorize, create or issue (other than the AMPS authorized hereby), or
increase the authorized or issued amount (other than the AMPS authorized
hereby) of, any class or series of stock ranking prior to or on a parity with
any series of Preferred Stock with respect to payment of dividends or the
distribution of assets on liquidation, or increase the authorized amount of
AMPS or any other Preferred Stock, or (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so
as to adversely affect any of the contract rights expressly set forth in the
Charter of holders of shares of AMPS or any other Preferred Stock. To the
extent permitted under the 1940 Act, in the event shares of more than one
series of AMPS are outstanding, the Corporation shall not approve any of the
actions set forth in clause (i) or (ii) which adversely affects the contract
rights expressly set forth in the Charter of a Holder of shares of a series
of AMPS differently than those of a Holder of shares of any other series of
AMPS without the affirmative vote of the holders of at least a majority of
the shares of AMPS of each series adversely affected and outstanding at such
time (each such adversely affected series voting separately as a class). The
Corporation shall notify Moody's and S&P ten Business Days prior to any such
vote described in clause (i) or (ii). Unless a higher percentage is provided
for under the Charter, the affirmative vote of the holders of a majority of
the outstanding shares of Preferred Stock, including AMPS, voting together as
a single class, will be required to approve any plan of reorganization
(including bankruptcy proceedings) adversely affecting such shares or any
action requiring a vote of security holders under Section 13(a) of the 1940
Act. The class vote of holders of shares of Preferred Stock, including AMPS,
described above will in each case be in addition to a separate vote of the
requisite percentage of shares of Common Stock and shares of Preferred Stock,
including AMPS, voting together as a single class necessary to authorize the
action in question.

37
<PAGE>

(d) Voting Procedures.
-----------------

(i) As soon as practicable after the accrual of any right of the
holders of shares of Preferred Stock to elect additional directors as
described in paragraph 5(b) above, the Corporation shall call a special
meeting of such holders and instruct the Auction Agent to mail a notice
of such special meeting to such holders, such meeting to be held not
less than 10 nor more than 20 days after the date of mailing of such
notice. If the Corporation fails to send such notice to the Auction
Agent or if the Corporation does not call such a special meeting, it may
be called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such
special meeting shall be the close of business on the fifth Business Day
preceding the day on which such notice is mailed. At any such special
meeting and at each meeting held during a Voting Period, such Holders,
voting together as a class (to the exclusion of the holders of all other
securities and classes of capital stock of the Corporation), shall be
entitled to elect the number of directors prescribed in paragraph 5(b)
above. At any such meeting or adjournment thereof in the absence of a
quorum, a majority of such holders present in person or by proxy shall
have the power to adjourn the meeting without notice, other than by an
announcement at the meeting, to a date not more than 120 days after the
original record date.

(ii) For purposes of determining any rights of the Holders to vote
on any matter or the number of shares required to constitute a quorum,
whether such right is created by these Articles Supplementary, by the
other provisions of the Charter, by statute or otherwise, a share of
AMPS which is not Outstanding shall not be counted.

(iii) The terms of office of all persons who are directors of the
Corporation at the time of a special meeting of Holders and holders of
other Preferred Stock to elect directors shall continue, notwithstanding
the election at such meeting by the Holders and such other holders of
the number of directors that they are entitled to elect, and the persons
so elected by the Holders and such other holders, together with the two
incumbent directors elected by the Holders and such other holders of

38
<PAGE>

Preferred Stock and the remaining incumbent directors elected by the
holders of the Common Stock and Preferred Stock, shall constitute the
duly elected directors of the Corporation.

(iv) Simultaneously with the expiration of a Voting Period, the
terms of office of the additional directors elected by the Holders and
holders of other Preferred Stock pursuant to paragraph 5(b) above shall
terminate, the remaining directors shall constitute the directors of the
Corporation and the voting rights of the Holders and such other holders
to elect additional directors pursuant to paragraph 5(b) above shall
cease, subject to the provisions of the last sentence of paragraph 5(b).

(e) Exclusive Remedy. Unless otherwise required by law, the Holders
----------------
of shares of AMPS shall not have any rights or preferences other than those
specifically set forth herein. The Holders of shares of AMPS shall have no
preemptive rights or rights to cumulative voting. In the event that the
Corporation fails to pay any dividends on the shares of AMPS, the exclusive
remedy of the Holders shall be the right to vote for directors pursuant to
the provisions of this paragraph 5.

(f) Notification to S&P and Moody's. In the event a vote of Holders
-------------------------------
of AMPS is required pursuant to the provisions of Section 13(a) of the 1940
Act, the Corporation shall, not later than ten Business Days prior to the
date on which such vote is to be taken, notify S&P and Moody's that such vote
is to be taken and the nature of the action with respect to which such vote
is to be taken and, not later than ten Business Days after the date on which
such vote is taken, notify S&P and Moody's of the result of such vote.

6. 1940 Act AMPS Asset Coverage. The Corporation shall maintain, as
----------------------------
of the last Business Day of each month in which any share of AMPS is
outstanding, the 1940 Act AMPS Asset Coverage.

7. AMPS Basic Maintenance Amount. (a) The Corporation shall
-----------------------------
maintain, on each Valuation Date, and shall verify to its satisfaction that
it is maintaining on such Valuation Date,

(i) S&P Eligible Assets having an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount and (ii) Moody's Eligible
Assets having an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount. Upon any failure to maintain the required
Discounted Value, the Corporation will use its best efforts to alter the
composition of its portfolio to reattain a Discounted Value at least equal to
the AMPS Basic Maintenance Amount on or prior to the AMPS Basic Maintenance
Cure Date.

39
<PAGE>

(b) On or before 5:00 p.m., New York City time, on the third Business
Day after a Valuation Date on which the Corporation fails to satisfy the AMPS
Basic Maintenance Amount, the Corporation shall complete and deliver to the
Auction Agent, and Moody's and S&P, as the case may be, a complete AMPS Basic
Maintenance Report as of the date of such failure, which will be deemed to
have been delivered to the Auction Agent if the Auction Agent receives a copy
or telecopy, telex or other electronic transcription thereof and on the same
day the Corporation mails to the Auction Agent for delivery on the next
Business Day the complete AMPS Basic Maintenance Report. The Corporation
will deliver an AMPS Basic Maintenance Report to the Auction Agent and
Moody's and S&P, as the case may be, on or before 5:00 p.m., New York City
time, on the third Business Day after a Valuation Date on which the
Corporation cures its failure to maintain Moody's Eligible Assets or S&P
Eligible Assets, as the case may be, with an aggregate Discounted Value equal
to or greater than the AMPS Basic Maintenance Amount or on which the
Corporation fails to maintain Moody's Eligible Assets or S&P Eligible Assets,
as the case may be, with an aggregate Discounted Value which exceeds the AMPS
Basic Maintenance Amount by 5% or more. The Corporation will also deliver an
AMPS Basic Maintenance Report to the Auction Agent, Moody's and S&P as of
each Quarterly Valuation Date on or before the third Business Day after such
date. Additionally, on or before 5:00 p.m., New York City time, on the third
Business Day after the first day of a Special Dividend Period, the
Corporation will deliver an AMPS Basic Maintenance Report to S&P and the
Auction Agent. Whenever the Corporation delivers an AMPS Basic Maintenance
Report to S&P pursuant to this paragraph 7(b), it shall also deliver a
Certificate of Minimum Liquidity to S&P and the Auction Agent. The
Corporation shall also provide Moody's and S&P with an AMPS Basic Maintenance
Report when specifically requested by either Moody's or S&P. A failure by
the Corporation to deliver an AMPS Basic Maintenance Report under this
paragraph 7(b) shall be deemed to be delivery of an AMPS Basic Maintenance
Report indicating the Discounted Value for S&P Eligible Assets and Moody's
Eligible Assets of the Corporation is less than the AMPS Basic Maintenance
Amount, as of the relevant Valuation Date.

(c) Within ten Business Days after the date of delivery of an AMPS
Basic Maintenance Report and a Certificate of Minimum Liquidity in
accordance with paragraph 7(b) above relating to a Quarterly Valuation Date,
the Independent Accountant will confirm in writing to the Auction Agent, S&P
and Moody's (i) the

40
<PAGE>

mathematical accuracy of the calculations reflected in such Report (and in
any other AMPS Basic Maintenance Report, randomly selected by the Independent
Accountant, that was delivered by the Corporation during the quarter ending
on such Quarterly Valuation Date) and (with respect to S&P only while S&P is
rating the AMPS) such Certificate, (ii) that, in such Report (and in such
randomly selected Report), the Corporation correctly determined the assets of
the Corporation which constitute S&P Eligible Assets or Moody's Eligible
Assets, as the case may be, at such Quarterly Valuation Date in accordance
with these Articles Supplementary, (iii) that, in such Report (and in such
randomly selected Report), the Corporation determined whether the Corporation
had, at such Quarterly Valuation Date (and at the Valuation Date addressed in
such randomly-selected Report) in accordance with these Articles
Supplementary, S&P Eligible Assets of an aggregate Discounted Value at least
equal to the AMPS Basic Maintenance Amount and Moody's Eligible Assets of an
aggregate Discounted Value at least equal to the AMPS Basic Maintenance
Amount,
(iv) that (with respect to S&P only) in such Certificate, the Corporation
determined the Minimum Liquidity Level and the Corporation's Deposit
Securities in accordance with these Articles Supplementary, including
maturity or tender date,
(v) with respect to the S&P rating on Arizona Municipal Bonds or Municipal
Bonds, the issuer name, issue size and coupon rate listed in such Report and
(with respect to S&P only) such Certificate, that the Independent Accountant
has requested that S&P verify such information and the Independent Accountant
shall provide a listing in its letter of any differences, (vi) with respect
to the Moody's ratings on Arizona Municipal Bonds or Municipal Bonds, the
issuer name, issue size and coupon rate listed in such Report and (with
respect to S&P only) such Certificate, that such information has been
verified by Moody's (in the event such information is not verified by
Moody's, the Independent Accountant will inquire of Moody's what such
information is, and provide a listing in its letter of any differences),
(vii) with respect to the bid or mean price (or such alternative permissible
factor used in calculating the Market Value) provided by the custodian of the
Corporation's assets to the Corporation for purposes of valuing securities in
the Corporation's portfolio, the Independent Accountant has traced the price
used in such Report and (with respect to S&P only) such Certificate to the
bid or mean price listed in such Report and (with respect to S&P only) such
Certificate as provided to the Corporation and verified that such
information agrees (in the event such information does not agree, the

41
<PAGE>

Independent Accountant will provide a listing in its letter of
such differences) and (viii) with respect to such confirmation to Moody's,
that the Corporation has satisfied the requirements of paragraph 9(b) of
these Articles Supplementary (such confirmation is herein called the
"Accountant's Confirmation").

(d) Within ten Business Days after the date of delivery to the Auction
Agent, S&P and Moody's of an AMPS Basic Maintenance Report in accordance with
paragraph 7(b) above relating to any Valuation Date on which the Corporation
failed to maintain S&P Eligible Assets with an aggregate Discounted Value and
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount, and relating to the AMPS
Basic Maintenance Cure Date with respect to such failure, the Independent
Accountant will provide to the Auction Agent, S&P and Moody's an Accountant's
Confirmation as to such AMPS Basic Maintenance Report.

(e) If any Accountant's Confirmation delivered pursuant to subparagraph
(c) or (d) of this paragraph 7 shows that an error was made in the AMPS Basic
Maintenance Report for a particular Valuation Date for which such
Accountant's Confirmation as required to be delivered, or shows that a lower
aggregate Discounted Value for the aggregate of all S&P Eligible Assets or
Moody's Eligible Assets, as the case may be, of the Corporation was
determined by the Independent Accountant, the calculation or determination
made by such Independent Accountant shall be final and conclusive and shall
be binding on the Corporation, and the Corporation shall accordingly amend
and deliver the AMPS Basic Maintenance Report to the Auction Agent, S&P and
Moody's promptly following receipt by the Corporation of such Accountant's
Confirmation.

(f) On or before 5:00 p.m., New York City time, on the first Business
Day after the Date of Original Issue of the shares of AMPS, the Corporation
will complete and deliver to S&P and Moody's an AMPS Basic Maintenance Report
as of the close of business on such Date of Original Issue. Within five
Business Days of such Date of Original Issue, the Independent Accountant will
confirm in writing to S&P and Moody's (i) the mathematical accuracy of the
calculations reflected in such Report and
(ii) that the aggregate Discounted Value of S&P Eligible Assets and the
aggregate Discounted Value of Moody's Eligible Assets reflected thereon
equals or exceeds the AMPS Basic Maintenance Amount reflected thereon.
Also, on or before 5:00 p.m., New York City time, on the first Business Day
after shares of Common Stock are repurchased by
42
<PAGE>

the Corporation, the Corporation will complete and deliver to S&P and
Moody's an AMPS Basic Maintenance Report as of the close of business on
such date that Common Stock is repurchased.

(g) For so long as shares of AMPS are rated by Moody's, in managing the
Corporation's portfolio, the Adviser will not alter the composition of the
Corporation's portfolio if, in the reasonable belief of the Adviser, the
effect of any such alteration would be to cause the Corporation to have
Moody's Eligible Assets with an aggregate Discounted Value, as of the
immediately preceding Valuation Date, less than the AMPS Basic Maintenance
Amount as of such Valuation Date; provided, however, that in the event that,
as of the immediately preceding Valuation Date, the aggregate Discounted
Value of Moody's Eligible Assets exceeded the AMPS Basic Maintenance Amount
by five percent or less, the Adviser will not alter the composition of the
Corporation's portfolio in a manner reasonably expected to reduce the
aggregate Discounted Value of Moody's Eligible Assets unless the Corporation
shall have confirmed that, after giving effect to such alteration, the
aggregate Discounted Value of Moody's Eligible Assets would exceed the AMPS
Basic Maintenance Amount.

8. Minimum Liquidity Level. (a) For so long as any shares of AMPS
-----------------------
are rated by S&P, the Corporation shall be required to have, as of each
Valuation Date, Dividend Coverage Assets having in the aggregate a Market
Value not less than the Dividend Coverage Amount.

(b) As of each Valuation Date, as long as any shares of AMPS are rated
by S&P, the Corporation shall determine (i) the Market Value of the Dividend
Coverage Assets owned by the Corporation as of that Valuation Date, (ii) the
Dividend Coverage Amount on that Valuation Date, and (iii) whether the
Minimum Liquidity Level is met as of that Valuation Date. The calculations
of the Dividend Coverage Assets, the Dividend Coverage Amount and whether the
Minimum Liquidity Level is met shall be set forth in a certificate (a
"Certificate of Minimum Liquidity") dated as of the Valuation Date. The AMPS
Basic Maintenance Report and the Certificate of Minimum Liquidity may be
combined in one certificate. The Corporation shall cause the Certificate of
Minimum Liquidity to be delivered to S&P not later than the close of business
on the third Business Day after the Valuation Date applicable to such
Certificate pursuant to paragraph 7(b). The Minimum Liquidity Level shall be
deemed to be met as of any date of determination if the Corporation has
timely delivered a Certificate of Minimum Liquidity relating to such
date which states that the same has been met and

43
<PAGE>

which is not manifestly inaccurate. In the event that a Certificate of
Minimum Liquidity is not delivered to S&P when required, the Minimum
Liquidity Level shall be deemed not to have been met as of the applicable
date.

(c) If the Minimum Liquidity Level is not met as of any Valuation Date,
then the Corporation shall purchase or otherwise acquire Dividend Coverage
Assets to the extent necessary so that the Minimum Liquidity Level is met as
of the fifth Business Day following such Valuation Date. The Corporation
shall, by such fifth Business Day, provide to S&P a Certificate of Minimum
Liquidity setting forth the calculations of the Dividend Coverage Assets and
the Dividend Coverage Amount and showing that the Minimum Liquidity Level is
met as of such fifth Business Day together with a report of the custodian of
the Corporation's assets confirming the amount of the Corporation's Dividend
Coverage Assets as of such fifth Business Day.

9. Certain Other Restrictions.
--------------------------
(a) For so long as any shares of AMPS are rated by S&P, the Corporation
will not purchase or sell futures contracts, write, purchase or sell options
on futures contracts or write put options (except covered put options) or
call options (except covered call options) on portfolio securities unless it
receives written confirmation from S&P that engaging in such transactions
will not impair the ratings then assigned to the shares of AMPS by S&P,
except that the Corporation may purchase or sell futures contracts based on
the Bond Buyer Municipal Bond Index (the "Municipal Index") or United States
Treasury Bonds with remaining maturities of ten years or more ("Treasury
Bonds") and write, purchase or sell put and call options on such contracts
(collectively, "S&P Hedging Transactions"), subject to the following
limitations:

(i) the Corporation will not engage in any S&P Hedging Transaction
based on the Municipal Index (other than transactions which terminate a
futures contract or option held by the Corporation by the Corporation's
taking an opposite position thereto ("Closing Transactions")), which
would cause the Corporation at the time of such transaction to own or
have sold the least of (A) more than 1,000 outstanding futures contracts
based on the Municipal Index, (B) outstanding futures contracts based on
the Municipal Index exceeding in number 25% of the quotient of the
Market Value of the Corporation's total assets divided by $100,000 or
(C) outstanding futures contracts based on the Municipal Index exceeding
in number 10% of the average number of daily traded futures contracts

44
<PAGE>

based on the Municipal Index in the 30 days
of effecting such transaction as reported by The Wall
--------
Street Journal;
--------------

(ii) the Corporation will not engage in any S&P Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would
cause the Corporation at the time of such transaction to own or have
sold the lesser of

(A) outstanding futures contracts based on Treasury Bonds and on the
Municipal Index exceeding in number 25% of the quotient of the Market
Value of the Corporation's total assets divided by $100,000 or (B)
outstanding futures contracts based on Treasury Bonds exceeding in
number 10% of the average number of daily traded futures contracts based
on Treasury Bonds in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
-----------------------

(iii) the Corporation will engage in Closing Transactions to close
out any outstanding futures contract which the Corporation owns or has
sold or any outstanding option thereon owned by the Corporation in the
event (A) the Corporation does not have S&P Eligible Assets with an
aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount on two consecutive Valuation Dates and (B) the
Corporation is required to pay Variation Margin on the second such
Valuation Date;

(iv) the Corporation will engage in a Closing Transaction to close
out any outstanding futures contract or option thereon in the month
prior to the delivery month under the terms of such futures contract or
option thereon unless the Corporation holds the securities deliverable
under such terms; and

(v) when the Corporation writes a futures contract or option
thereon, it will either maintain an amount of cash, cash equivalents or
short-term, fixed-income securities in a segregated account with the
Corporation's custodian, so that the amount so segregated plus the
amount of Initial Margin and Variation Margin held in the account of or
on behalf of the Corporation's broker with respect to such futures
contract or option equals the Market Value of the futures contract or
option, or,

45
<PAGE>

in the event the Corporation writes a futures contract or option thereon
which requires delivery of an underlying security, it shall hold such
underlying security in its portfolio.

For purposes of determining whether the Corporation has S&P Eligible
Assets with a Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of cash or securities held for the
payment of Initial Margin or Variation Margin shall be zero and the aggregate
Discounted Value of S&P Eligible Assets shall be reduced by an amount equal
to (i) 30% of the aggregate settlement value, as marked to market, of any
outstanding futures contracts based on the Municipal Index which are owned by
the Corporation plus (ii) 25% of the aggregate settlement value, as marked to
market, of any outstanding futures contracts based on Treasury Bonds which
contracts are owned by the Corporation.

(b) For so long as any shares of AMPS are rated by Moody's, the
Corporation will not buy or sell futures contracts, write, purchase or sell
call options on futures contracts or purchase put options on futures
contracts or write call options (except covered call options) on portfolio
securities unless it receives written confirmation from Moody's that engaging
in such transactions would not impair the ratings then assigned to the shares
of AMPS by Moody's, except that the Corporation may purchase or sell
exchange-traded futures contracts based on the Municipal Index or Treasury
Bonds and purchase, write or sell exchange-traded put options on such futures
contracts and purchase, write or sell exchange-traded call options on such
futures contracts (collectively, "Moody's Hedging Transactions"), subject to
the following limitations:

(i) the Corporation will not engage in any Moody's Hedging
Transaction based on the Municipal Index (other than Closing
Transactions) which would cause the Corporation at the time of such
transaction to own or have sold

(A) outstanding futures contracts based on the Municipal Index exceeding
in number 10% of the average number of daily traded futures contracts
based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal
-----------------------
or (B) outstanding futures contracts based on the Municipal Index
having a Market Value exceeding 50% of the Market Value of all Municipal
Bonds constituting Moody's Eligible Assets owned by the Corporation
(other than Moody's Eligible Assets already subject to a Moody's Hedging
Transaction);

46
<PAGE>

(ii) the Corporation will not engage in any Moody's Hedging
Transaction based on Treasury Bonds (other than Closing Transactions)
which would cause the Corporation at the time of such transaction to own
or have sold

(A) outstanding futures contracts based on Treasury Bonds having an
aggregate Market Value exceeding 20% of the aggregate Market Value of
Moody's Eligible Assets owned by the Corporation and rated Aa by Moody's
(or, if not rated by Moody's but rated by S&P, rated AAA by S&P) or

(B) outstanding futures contracts based on Treasury Bonds having an
aggregate Market Value exceeding 40% of the aggregate Market Value of
all Municipal Bonds constituting Moody's Eligible Assets owned by the
Corporation (other than Moody's Eligible Assets already subject to a
Moody's Hedging Transaction) and rated Baa or A by Moody's (or, if not
rated by Moody's but rated by S&P, rated A or AA by S&P) (for purposes
of the foregoing clauses (i) and (ii), the Corporation shall be deemed
to own the number of futures contracts that underlie any outstanding
options written by the Corporation);

(iii) the Corporation will engage in Closing Transactions to close
out any outstanding futures contract based on the Municipal Index if the
amount of open interest in the Municipal Index as reported by The Wall
--------
Street Journal is less than 5,000;
--------------

(iv) the Corporation will engage in a Closing Transaction to close
out any outstanding futures contract by no later than the fifth Business
Day of the month in which such contract expires and will engage in a
Closing Transaction to close out any outstanding option on a futures
contract by no later than the first Business Day of the month in which
such option expires;

(v) the Corporation will engage in Moody's Hedging Transactions
only with respect to futures contracts or options thereon having the
next settlement date or the settlement date immediately thereafter;

(vi) in the event the Corporation writes a futures contract or
option thereon which requires delivery of an underlying security, it
shall hold such underlying security in its portfolio;

47
<PAGE>

(vii) the Corporation will not engage in options and futures
transactions for leveraging or speculative purposes and will not write
any call options or sell any futures contracts for the purpose of
hedging the anticipated purchase of an asset prior to completion of such
purchase; and

(viii) the Corporation will not enter into an option or futures
transaction unless, after giving effect thereto, the Corporation would
continue to have Moody's Eligible Assets with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount.

For purposes of determining whether the Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS
Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets
which the Corporation is obligated to deliver or receive pursuant to an
outstanding futures contract or option shall be as follows: (i) assets
subject to call options written by the Corporation which are either exchange-
traded and "readily reversible" or which expire within 49 days after the date
as of which such valuation is made shall be valued at the lesser of
(a) Discounted Value and (b) the exercise price of the call option written by
the Corporation; (ii) assets subject to call options written by the
Corporation not meeting the requirements of clause (i) of this sentence shall
have no value; (iii) assets subject to put options written by the Corporation
shall be valued at the lesser of (A) the exercise price and (B) the
Discounted Value of the subject security;

(iv) futures contracts shall be valued at the lesser of

(A) settlement price and (B) the Discounted Value of the subject security,
provided that, if a contract matures within 49 days after the date as of
which such valuation is made, where the Corporation is the seller the
contract may be valued at the settlement price and where the Corporation is
the buyer the contract may be valued at the Discounted Value of the subject
securities and (v) where delivery may be made to the Corporation with any
security of a class of securities, the Corporation shall assume that it will
take delivery of the security with the lowest Discounted Value.

For purposes of determining whether the Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS
Basic Maintenance Amount, the following amounts shall be
subtracted from the aggregate Discounted Value of the Moody's Eligible Assets
held by the Corporation: (i) 10% of the exercise price of a written call
option; (ii) the exercise price of any written put option;
(iii) where the Corporation is the seller under a futures contract, 10% of
the settlement price of the futures contract; (iv)
48
<PAGE>

where the Corporation is the purchaser under a futures contract, the
settlement price of assets purchased under such futures contract; (v) the
settlement price of the underlying futures contract if the Corporation
writes put options on a futures contract; and (vi) 105% of the Market Value
of the underlying futures contracts if the Corporation writes call options
on a futures contract and does not own the underlying contract.

(c) For so long as any shares of AMPS are rated by Moody's, the
Corporation will not enter into any contract to purchase securities for a
fixed price at a future date beyond customary settlement time (other than
such contracts that constitute Moody's Hedging Transactions that are
permitted under paragraph 9(b) of these Articles Supplementary), except that
the Corporation may enter into such contracts to purchase newly-issued
securities on the date such securities are issued ("Forward Commitments"),
subject to the following limitations:

(i) the Corporation will maintain in a segregated account with its
custodian cash, cash equivalents or short-term, fixed-income securities
rated P-1, MIG-1 or VMIG-1 by Moody's and maturing prior to the date of
the Forward Commitment with a Market Value that equals or exceeds the
amount of the Corporation's obligations under any Forward Commitments to
which it is from time to time a party or long-term fixed income
securities with a Discounted Value that equals or exceeds the amount of
the Corporation's obligations under any Forward Commitment to which it
is from time to time a party; and

(ii) the Corporation will not enter into a Forward Commitment
unless, after giving effect thereto, the Corporation would continue to
have Moody's Eligible Assets with an aggregate Discounted Value equal to
or greater than the AMPS Basic Maintenance Amount.

For purposes of determining whether the Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS
Basic Maintenance Amount, the Discounted Value of all
Forward Commitments to which the Corporation is a party and of all securities
deliverable to the Corporation pursuant to such Forward Commitments shall be
zero.

(d) For so long as shares of AMPS are rated by S&P or Moody's, the
Corporation will not, unless it has received written confirmation from S&P
and/or Moody's, as the case may be, that such action
49
<PAGE>

would not impair the ratings then assigned to shares of AMPS by S&P and/or
Moody's, as the case may be, (i) borrow money except for the purpose of
clearing transactions in portfolio securities (which borrowings shall under
any circumstances be limited to the lesser of $10 million and an amount
equal to 5% of the Market Value of the Corporation's assets at the time of
such borrowings and which borrowings shall be repaid within 60 days and not
be extended or renewed and shall not cause the aggregate Discounted Value of
Moody's Eligible Assets to be less than the AMPS Basic Maintenance Amount),

(ii) engage in short sales of securities, (iii) lend any securities, (iv)
issue any class or series of stock ranking prior to or on a parity with the
AMPS with respect to the payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up of the Corporation, (v) reissue
any AMPS previously purchased or redeemed by the Corporation,
(vi) merge or consolidate into or with any other corporation or entity, (vii)
change the Pricing Service or (viii) engage in reverse repurchase agreements.

10. Notice. All notices or communications, unless otherwise
------
specified in the By-Laws of the Corporation or these Articles Supplementary,
shall be sufficiently given if in writing and delivered in person or mailed
by first-class mail, postage prepaid. Notice shall be deemed given on the
earlier of the date received or the date seven days after which such notice
is mailed.

11. Auction Procedures. (a) Certain definitions. As used in this
------------------ -------------------
paragraph 11, the following terms have the following meanings, unless the
context otherwise requires:

(i) "AMPS" means the shares of AMPS being auctioned pursuant to
this paragraph 11.

(ii) "Auction Date" means the first Business Day preceding the
first day of a Dividend Period.

(iii) "Available AMPS" has the meaning specified in paragraph
11(d)(i) below.

(iv) "Bid" has the meaning specified in paragraph 11(b)(i) below.

(v) "Bidder" has the meaning specified in paragraph 11(b)(i)
below.

(vi) "Hold Order" has the meaning specified in paragraph 11(b)(i)
below.

(vii) "Maximum Applicable Rate" for any Dividend Period is the
Applicable Percentage of the Reference Rate. The Applicable Percentage
is determined based on (i) the lower of the credit rating or ratings
assigned on such date to such shares by Moody's and S&P (or if Moody's
or S&P or both shall not
50
<PAGE>

make such rating available, the equivalent of
either or both of such ratings by a Substitute Rating Agency or two
Substitute Rating Agencies or, in the event that only one such rating
shall be available, such rating) and

(ii) whether the Corporation has provided notification to the Auction
Agent prior to the Auction establishing the Applicable Rate for any
dividend pursuant to paragraph 2(f) hereof that net capital gains or
other taxable income will be included in such dividend on shares of AMPS
as follows:

<TABLE>
<CAPTION>
Applicable Applicable
Percentage of Percentage of
Credit Ratings Reference Reference
-------------- Rate - Rate -
No Notification Notification
Moody's S&P --------------- -------------
------- -----------
<S> <C> <C> <C>
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%

</TABLE>

The Corporation shall take all reasonable action necessary to enable S&P
and Moody's to provide a rating for the AMPS. If either S&P or Moody's shall
not make such a rating available, or neither S&P nor Moody's shall make such
a rating available, Merrill Lynch, Pierce, Fenner & Smith Incorporated or its
affiliates and successors, after consultation with the Corporation, shall
select a nationally recognized statistical rating organization or two
nationally recognized statistical rating organizations to act as a Substitute
Rating Agency or Substitute Rating Agencies, as the case may be.

(viii) "Order" has the meaning specified in paragraph 11(b)(i) below.

(ix) "Sell Order" has the meaning specified in paragraph 11(b)(i)
below.

(x) "Submission Deadline" means 1:00 P.M., New York City time, on
any Auction Date or such other time on any Auction Date as may be
specified by the Auction Agent from time to time as the time by which
each Broker-Dealer must submit to the Auction Agent in writing all
Orders obtained by it for the Auction to be conducted on such Auction
Date.

(xi) "Submitted Bid" has the meaning specified in paragraph
11(d)(i) below.

(xii) "Submitted Hold Order" has the meaning specified in paragraph
11(d)(i) below.

(xiii) "Submitted Order" has the meaning specified in paragraph
11(d)(i) below.

51
<PAGE>

(xiv) "Submitted Sell Order" has the meaning specified in paragraph
11(d)(i) below.

(xv) "Sufficient Clearing Bids" has the meaning specified in
paragraph 11(d)(i) below.

(xvi) "Winning Bid Rate" has the meaning specified in paragraph
11(d)(i) below.

(b) Orders by Beneficial Owners, Potential Beneficial Owners,
---------------------------------------------------------
Existing Holders and Potential Holders.
- ---------------------------------------

(i) Unless otherwise permitted by the Corporation, Beneficial
Owners and Potential Beneficial Owners may only participate in Auctions
through their Broker-Dealers. Broker-Dealers will submit the Orders of their
respective customers who are Beneficial Owners and Potential Beneficial
Owners to the Auction Agent, designating themselves as Existing Holders in
respect of shares subject to Orders submitted or deemed submitted to them by
Beneficial Owners and as Potential Holders in respect of shares subject to
Orders submitted to them by Potential Beneficial Owners. A Broker-Dealer may
also hold shares of AMPS in its own account as a Beneficial Owner. A Broker-
Dealer may thus submit Orders to the Auction Agent as a Beneficial Owner or a
Potential Beneficial Owner and therefore participate in an Auction as an
Existing Holder or Potential Holder on behalf of both itself and its
customers. On or prior to the Submission Deadline on each Auction Date:

(A) each Beneficial Owner may submit to its Broker-Dealer
information as to:

(1) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner desires to
continue to hold without regard to the Applicable Rate for the next
succeeding Dividend Period;

(2) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner desires to
continue to hold, provided that the Applicable
Rate for the next succeeding Dividend Period shall not be less than
the rate per annum specified by such Beneficial Owner; and/or

(3) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner offers to sell
without regard to the Applicable Rate for the next succeeding
Dividend Period; and

(B) each Broker-Dealer, using a list of Potential Beneficial
Owners that shall be maintained in good faith for the purpose of
conducting a competitive Auction, shall contact Potential Beneficial

52
<PAGE>

Owners, including Persons that are not Beneficial Owners, on such list
to determine the number of Outstanding shares, if any, of AMPS which
each such Potential Beneficial Owner offers to purchase, provided that
the Applicable Rate for the next succeeding Dividend Period shall not be
less than the rate per annum specified by such Potential Beneficial
Owner.

For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this paragraph 11(b)(i) is hereinafter
referred to as an "Order" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order, including a Broker-Dealer acting in such
capacity for its own account, is hereinafter referred to as a "Bidder"; an
Order containing the information referred to in clause (A)(1) of this
paragraph 11(b)(i) is hereinafter referred to as a "Hold Order"; an Order
containing the information referred to in clause (A)(2) or (B) of this
paragraph 11(b)(i) is hereinafter referred to as a "Bid"; and an Order
containing the information referred to in clause (A)(3) of this paragraph
11(b)(i) is hereinafter referred to as a "Sell Order". Inasmuch as a Broker-
Dealer participates in an Auction as an Existing Holder or a Potential Holder
only to represent the interests of a Beneficial Owner or Potential Beneficial
Owner, whether it be its customers or itself, all discussion herein relating
to the consequences of an Auction for Existing Holders and Potential Holders
also applies to the underlying beneficial ownership interests represented.

(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable
offer to sell:

(1) the number of Outstanding shares of AMPS specified in such Bid
if the Applicable Rate determined on such Auction Date shall be less
than the rate per annum specified in such Bid; or

(2) such number or a lesser number of Outstanding shares of AMPS
to be determined as set forth in paragraph 11(e)(i)(D) if the Applicable
Rate determined on such Auction Date shall be equal to the rate per
annum specified therein; or

(3) a lesser number of Outstanding shares of AMPS to be determined
as set forth in paragraph 11(e)(ii)(C) if such specified rate per annum
shall be higher than the Maximum Applicable Rate and Sufficient Clearing
Bids do not exist.

53
<PAGE>

(B) A Sell Order by an Existing Holder shall constitute an
irrevocable offer to sell:

(1) the number of Outstanding shares of AMPS specified in
such Sell Order; or

(2) such number or a lesser number of Outstanding shares of
AMPS to be determined as set forth in paragraph 11(e)(ii)(C) if
Sufficient Clearing Bids do not exist.

(1) the number of Outstanding shares of AMPS specified in
such Bid if the Applicable Rate determined on such Auction Date
shall be higher than the rate per annum specified in such Bid; or

(2) such number or a lesser number of Outstanding shares of
AMPS to be determined as set forth in paragraph 11(e)(i)(E) if the
Applicable Rate determined on such Auction Date shall be equal to
the rate per annum specified therein.

(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the
Corporation) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and specifying with respect to each Order:

(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Corporation);

(B) the aggregate number of Outstanding shares of AMPS that are
the subject of such Order;

(1) the number of Outstanding shares, if any, of AMPS subject
to any Hold Order placed by such Existing Holder;

(2) the number of Outstanding shares, if any, of AMPS subject
to any Bid placed by such Existing Holder and the rate per annum
specified in such Bid; and

54
<PAGE>

(3) the number of Outstanding shares, if any, of AMPS subject
to any Sell Order placed by such Existing Holder; and

(D) to the extent such Bidder is a Potential Holder, the rate per
annum specified in such Potential Holder's Bid.

(ii) If any rate per annum specified in any Bid contains more than
three figures to the right of the decimal point, the Auction Agent shall
round such rate up to the next highest one-thousandth (.001) of 1%.

(iii) If an Order or Orders covering all of the Outstanding shares of
AMPS held by an Existing Holder are not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent shall deem a Hold Order (in the
case of an Auction relating to a Dividend Period which is not a Special
Dividend Period) and a Sell Order (in the case of an Auction relating to a
Special Dividend Period) to have been submitted on behalf of such Existing
Holder covering the number of Outstanding shares of AMPS held by such
Existing Holder and not subject to Orders submitted to the Auction Agent.

(iv) If one or more Orders on behalf of an Existing Holder covering in
the aggregate more than the number of Outstanding shares of AMPS held by such
Existing Holder are submitted to the Auction Agent, such Order shall be
considered valid as follows and in the following order of priority:

(A) any Hold Order submitted on behalf of such Existing Holder
shall be considered valid up to and including the number of Outstanding
shares of AMPS held by such Existing Holder; provided that if more than
one Hold Order is submitted on behalf of such Existing Holder and the
number of
shares of AMPS subject to such Hold Orders exceeds the number of
Outstanding shares of AMPS held by such Existing Holder, the number of
shares of AMPS subject to each of such Hold Orders shall be reduced pro
rata so that such Hold Orders, in the aggregate, will cover exactly the
number of Outstanding shares of AMPS held by such Existing Holder;

(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per
annum if more than one Bid is submitted on behalf of such Existing
Holder, up to and including the excess of the number of Outstanding
shares of AMPS held by such Existing Holder over the number of shares of
AMPS subject to any Hold Order referred to in
55
<PAGE>

paragraph 11(c)(iv)(A)
above (and if more than one Bid submitted on behalf of such Existing
Holder specifies the same rate per annum and together they cover more
than the remaining number of shares that can be the subject of valid
Bids after application of paragraph 11(c)(iv)(A) above and of the
foregoing portion of this paragraph 11(c)(iv)(B) to any Bid or Bids
specifying a lower rate or rates per annum, the number of shares subject
to each of such Bids shall be reduced pro rata so that such Bids, in the
aggregate, cover exactly such remaining number of shares); and the
number of shares, if any, subject to Bids not valid under this paragraph
11(c)(iv)(B) shall be treated as the subject of a Bid by a Potential
Holder; and

(C) any Sell Order shall be considered valid up to and including
the excess of the number of Outstanding shares of AMPS held by such
Existing Holder over the number of shares of AMPS subject to Hold Orders
referred to in paragraph 11(c)(iv)(A) and Bids referred to in paragraph
11(c)(iv)(B); provided that if more than one Sell Order is submitted on
behalf of any Existing Holder and the number of shares of AMPS subject
to such Sell Orders is greater than such excess, the number of shares of
AMPS subject to each of such Sell Orders shall be reduced pro rata so
that such Sell Orders, in the aggregate, cover exactly the number of
shares of AMPS equal to such excess.

(v) If more than one Bid is submitted on behalf of any Potential
Holder, each Bid submitted shall be a separate Bid with the rate per annum
and number of shares of AMPS specified.

(vi) Any Order submitted by a Beneficial Owner as a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date shall be irrevocable.

(d) Determination of Sufficient Clearing Bids, Winning Bid
------------------------------------------------------
Rate and Applicable Rate.
- ------------------------

(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it
by the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order", 56
<PAGE>

a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or
as a "Submitted Order") and shall determine:

(A) the excess of the total number of Outstanding shares of AMPS
over the number of Outstanding shares of AMPS that are the subject of
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available AMPS");

(B) from the Submitted Orders whether the number of Outstanding
shares of AMPS that are the subject of Submitted Bids by Potential
Holders specifying one or more rates per annum equal to or lower than
the Maximum Applicable Rate exceeds or is equal to the sum of:

(1) the number of Outstanding shares of AMPS that are the
subject of Submitted Bids by Existing Holders specifying one or
more rates per annum higher than the Maximum Applicable Rate, and

(2) the number of Outstanding shares of AMPS that are subject
to Submitted Sell Orders (if such excess or such equality exists
(other than because the number of Outstanding shares of AMPS in
clauses (1) and (2) above are each zero because all of the
Outstanding shares of AMPS are the subject of Submitted Hold
Orders), such Submitted Bids by Potential Holders being hereinafter
referred to collectively as "Sufficient Clearing Bids"); and

(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:

(1) each Submitted Bid from Existing Holders specifying the
Winning Bid Rate and all other Submitted Bids from Existing Holders
specifying lower rates per annum were rejected, thus entitling such
Existing Holders to continue to hold the shares of AMPS that are
the subject of such Submitted Bids, and

(2) each Submitted Bid from Potential Holders specifying the
Winning Bid Rate and all other Submitted Bids from Potential
Holders specifying lower rates per annum were accepted, thus
entitling the Potential Holders to purchase the shares of AMPS that
are the subject of such Submitted Bids,
57
<PAGE>

would result in the number
of shares subject to all Submitted Bids specifying the Winning Bid
Rate or a lower rate per annum being at least equal to the Available
AMPS.

(ii) Promptly after the Auction Agent has made the determinations
pursuant to paragraph 11(d)(i), the Auction Agent shall advise the
Corporation of the Maximum Applicable Rate and, based on such determinations,
the Applicable Rate for the next succeeding Dividend Period as follows:

(A) if Sufficient Clearing Bids exist, that the Applicable Rate
for the next succeeding Dividend Period shall be equal to the Winning
Bid Rate;

(B) if Sufficient Clearing Bids do not exist (other than because
all of the Outstanding shares of AMPS are the subject of Submitted Hold
Orders), that the Applicable Rate for the next succeeding Dividend
Period shall be equal to the Maximum Applicable Rate; or

(C) if all of the Outstanding shares of AMPS are the subject of
Submitted Hold Orders, that the Dividend Period next succeeding the
Auction shall automatically be the same length as the immediately
preceding Dividend Period and the Applicable Rate for the next
succeeding Dividend Period shall be equal to 59% of the Reference Rate
(or 90% of such rate if the Corporation has provided notification to the
Auction Agent prior to the Auction establishing the Applicable Rate for
any dividend pursuant to paragraph 2(f) hereof that net capital gains or
other taxable income will be included in such dividend on shares of
AMPS) on the date of the Auction.

(e) Acceptance and Rejection of Submitted Bids and Submitted Sell
-----------------------------------------------
Orders and Allocation of Shares. Based on the determinations made pursuant
to paragraph 11(d)(i), the Submitted Bids and Submitted Sell Orders shall be
accepted or rejected and the Auction Agent shall take such other action as
set forth below:

(i) If Sufficient Clearing Bids have been made, subject to the
provisions of paragraph 11(e)(iii) and paragraph 11(e)(iv), Submitted Bids
and Submitted Sell Orders shall be accepted or rejected in the following
order of priority and all other Submitted Bids shall be rejected:

(A) the Submitted Sell Orders of Existing Holders shall be
accepted and the Submitted Bid of each of the Existing Holders
specifying any rate per annum that is higher than the Winning Bid Rate
58
<PAGE>

shall be accepted, thus requiring each such Existing Holder to sell the
Outstanding shares of AMPS that are the subject of such Submitted Sell
Order or Submitted Bid;

(B) the Submitted Bid of each of the Existing Holders specifying
any rate per annum that is lower than the Winning Bid Rate shall be
rejected, thus entitling each such Existing Holder to continue to hold
the Outstanding shares of AMPS that are the subject of such Submitted
Bid;

(C) the Submitted Bid of each of the Potential Holders specifying
any rate per annum that is lower than the Winning Bid Rate shall be
accepted;

(D) the Submitted Bid of each of the Existing Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
Outstanding shares of AMPS that are the subject of such Submitted Bid,
unless the number of Outstanding shares of AMPS subject to all such
Submitted Bids shall be greater than the number of Outstanding shares of
AMPS ("Remaining Shares") equal to the excess of the Available AMPS over
the number of Outstanding shares of AMPS subject to Submitted Bids
described in paragraph 11(e)(i)(B) and paragraph 11(e)(i)(C), in which
event the Submitted Bids of each such Existing Holder shall be accepted,
and each such Existing Holder shall be required to sell Outstanding
shares of AMPS, but only in an amount equal to the difference between
(1) the number of Outstanding shares of AMPS then held by such Existing
Holder subject to such Submitted Bid and (2) the number of shares of
AMPS obtained by multiplying (x) the number of Remaining Shares by (y) a
fraction the numerator of which
shall be the number of Outstanding shares of AMPS held by such Existing
Holder subject to such Submitted Bid and the denominator of which shall
be the sum of the number of Outstanding shares of AMPS subject to such
Submitted Bids made by all such Existing Holders that specified a rate
per annum equal to the Winning Bid Rate; and

(E) the Submitted Bid of each of the Potential Holders specifying
a rate per annum that is equal to the Winning Bid Rate shall be accepted
but only in an amount equal to the number of Outstanding shares of AMPS
obtained by multiplying (x) the difference between the Available AMPS
and the number of Outstanding shares of AMPS subject to Submitted Bids
described in paragraph
59
<PAGE>

11(e)(i)(B), paragraph 11(e)(i)(C) and paragraph
11(e)(i)(D) by (y) a fraction the numerator of which shall be the number
of Outstanding shares of AMPS subject to such Submitted Bid and the
denominator of which shall be the sum of the number of Outstanding
shares of AMPS subject to such Submitted Bids made by all such Potential
Holders that specified rates per annum equal to the Winning Bid Rate.

(ii) If Sufficient Clearing Bids have not been made (other than because
all of the Outstanding shares of AMPS are subject to Submitted Hold Orders),
subject to the provisions of paragraph 11(e)(iii), Submitted Orders shall be
accepted or rejected as follows in the following order of priority and all
other Submitted Bids shall be rejected:

(A) the Submitted Bid of each Existing Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable Rate
shall be rejected, thus entitling such Existing Holder to continue to
hold the Outstanding shares of AMPS that are the subject of such
Submitted Bid;

(B) the Submitted Bid of each Potential Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable Rate
shall be accepted, thus requiring such Potential Holder to purchase the
Outstanding shares of AMPS that are the subject of such Submitted Bid;
and

(C) the Submitted Bids of each Existing Holder specifying any rate
per annum that is higher than the Maximum Applicable Rate shall be
accepted and the Submitted Sell Orders of each Existing Holder shall be
accepted, in both cases only in an amount equal to the difference
between (1) the number of Outstanding shares of AMPS then held by such
Existing Holder subject to such Submitted
Bid or Submitted Sell Order and (2) the number of shares of AMPS
obtained by multiplying (x) the difference between the Available AMPS
and the aggregate number of Outstanding shares of AMPS subject to
Submitted Bids described in paragraph 11(e)(ii)(A) and paragraph
11(e)(ii)(B) by (y) a fraction the numerator of which shall be the
number of Outstanding shares of AMPS held by such Existing Holder
subject to such Submitted Bid or Submitted Sell Order and the
denominator of which shall be the number of Outstanding shares of AMPS
subject to all such Submitted Bids and Submitted Sell Orders.

60
<PAGE>

(iii) If, as a result of the procedures described in paragraph 11(e)(i)
or paragraph 11(e)(ii), any Existing Holder would be entitled or required to
sell, or any Potential Holder would be entitled or required to purchase, a
fraction of a share of AMPS on any Auction Date, the Auction Agent shall, in
such manner as in its sole discretion it shall determine, round up or down
the number of shares of AMPS to be purchased or sold by any Existing Holder
or Potential Holder on such Auction Date so that each Outstanding share of
AMPS purchased or sold by each Existing Holder or Potential Holder on such
Auction Date shall be a whole share of AMPS.

(iv) If, as a result of the procedures described in paragraph 11(e)(i),
any Potential Holder would be entitled or required to purchase less than a
whole share of AMPS on any Auction Date, the Auction Agent shall, in such
manner as in its sole discretion it shall determine, allocate shares of AMPS
for purchase among Potential Holders so that only whole shares of AMPS are
purchased on such Auction Date by any Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing
any shares of AMPS on such Auction Date.

(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell
Orders on behalf of Existing Holders or Potential Holders, the aggregate
number of Outstanding shares of AMPS to be purchased and the aggregate number
of the Outstanding shares of AMPS to be sold by such Potential Holders and
Existing Holders and, to the extent that such aggregate number of Outstanding
shares to be purchased and such aggregate number of Outstanding shares to be
sold differ, the Auction Agent shall determine to which other Broker-Dealer
or Broker-Dealers acting for one or
more purchasers such Broker-Dealer shall deliver, or from which other
Broker-Dealer or Broker-Dealers acting for one or more sellers such
Broker-Dealer shall receive, as the case may be, Outstanding shares of AMPS.

(f) Miscellaneous. The Corporation may interpret the provisions of
-------------
this paragraph 11 to resolve any inconsistency or ambiguity, remedy any
formal defect or make any other change or modification that does not
substantially adversely affect the rights of Beneficial Owners of AMPS. A
Beneficial Owner or an Existing Holder (A) may sell, transfer or otherwise
dispose of shares of AMPS only pursuant to a Bid or Sell Order in accordance
with the procedures described in this paragraph 11 or to or through a
Broker-Dealer, provided that in the case of all transfers other than pursuant
to Auctions such Beneficial Owner or Existing Holder, its
61

<PAGE>

Broker-Dealer, if
applicable, or its Agent Member advises the Auction Agent of such transfer
and (B) except as otherwise required by law, shall have the ownership of the
shares of AMPS held by it maintained in book entry form by the Securities
Depository in the account of its Agent Member, which in turn will maintain
records of such Beneficial Owner's beneficial ownership. Neither the
Corporation nor any Affiliate shall submit an Order in any Auction. Any
Beneficial Owner that is an Affiliate shall not sell, transfer or otherwise
dispose of shares of AMPS to any Person other than the Corporation. All of
the Outstanding shares of AMPS shall be represented by a single certificate
registered in the name of the nominee of the Securities Depository unless
otherwise required by law or unless there is no Securities Depository. If
there is no Securities Depository, at the Corporation's option and upon its
receipt of such documents as it deems appropriate, any shares of AMPS may be
registered in the Stock Register in the name of the Beneficial Owner thereof
and such Beneficial Owner thereupon will be entitled to receive certificates
therefor and required to deliver certificates therefor upon transfer or
exchange thereof.

12. Securities Depository; Stock Certificates. (a) If there is a
-----------------------------------------
Securities Depository, one certificate for all of the shares of AMPS shall be
issued to the Securities Depository and registered in the name of the
Securities Depository or its nominee. Additional certificates may be issued
as necessary to represent shares of AMPS. All such certificates shall bear a
legend to the effect that such certificates are issued subject to the
provisions restricting the transfer of shares of AMPS contained in these
Articles Supplementary. Unless the Corporation shall have elected, during a
Non-Payment Period, to waive this requirement, the Corporation will
also issue stop-transfer instructions to the Auction Agent for the shares of
AMPS. Except as provided in paragraph (b) below, the Securities Depository
or its nominee will be the Holder, and no Beneficial Owner shall receive
certificates representing its ownership interest in such shares.

(b) If the Applicable Rate applicable to all shares of AMPS shall be
the Non-Payment Period Rate or there is no Securities Depository, the
Corporation may at its option issue one or more new certificates with respect
to such shares (without the legend referred to in paragraph 12(a)) registered
in the names of the Beneficial Owners or their nominees and rescind the
stop-transfer instructions referred to in paragraph 12(a) with respect to
such shares.

62
<PAGE>

IN WITNESS WHEREOF, MUNIYIELD ARIZONA FUND II, INC. has caused these
presents to be signed in its name and on its behalf by a duly authorized
officer and attested by its Secretary, and its corporate seal to be hereunto
affixed, and the said officers of the Corporation further acknowledge said
instrument to be the corporate act of the Corporation, and state under the
penalties of perjury that to the best of their knowledge, information and
belief the matters and facts herein set forth with respect to approval are
true in all material respects, all on ___________, 1994.

MUNIYIELD ARIZONA FUND II, INC.

By _______________________
Name:
Title:

Attest:

___________________________
Mark Goldfus
Secretary

<PAGE>
EXHIBIT (4)

AGREEMENT AND PLAN OF REORGANIZATION

PLAN OF REORGANIZATION
----------------------

AGREEMENT
---------

1
<PAGE>
In order to consummate the Reorganization and in consideration of the
premises and the covenants and agreements hereinafter set forth, and
intending to be legally bound, Arizona I and Arizona II hereby agree as
follows:

1. Representations and Warranties of Arizona I.
-------------------------------------------

Arizona I represents and warrants to, and agrees with, Arizona II that:

(e) Arizona II has been furnished with a statement of assets,
liabilities and capital and a schedule of investments of Arizona I, each as
of October 31, 1993, said financial statements having been examined by
Deloitte & Touche LLP, independent public accountants. An unaudited
statement of assets, liabilities and capital of Arizona I and an unaudited
schedule of investments of Arizona I, each as of the Valuation Time, will be
furnished to Arizona II at or prior to the Exchange Date for the purpose of
determining the number of shares of Arizona II Common Stock and shares of
Arizona II Series B AMPS to be issued pursuant to Section 4 of this Agreement;
and each will fairly present the financial position of Arizona I as of the
Valuation Time in conformity with generally accepted accounting principles
applied on a consistent basis.

2
<PAGE>
(g) Arizona II has been furnished with (i) the prospectus of
Arizona I, dated July 23, 1993, relating to the Arizona I Common Stock (the
"Arizona I Common Stock Prospectus") and (ii) the prospectus of Arizona I,
dated August 25, 1993, relating to the Arizona I AMPS (the "Arizona I AMPS
Prospectus"); and said prospectuses do not contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.

(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Arizona I of the
Reorganization, except such as may be required under the Securities Act of
1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934,
as amended (the "1934 Act"), and the 1940 Act or state securities laws
(which term as used herein shall include the laws of the District of
Columbia and Puerto Rico).

3
<PAGE>

(p) Arizona I is authorized to issue 200,000,000 shares of capital
stock, par value $.05 per share, each outstanding share of which is fully
paid, nonassessable and has full voting rights.

(q) All of the issued and outstanding shares of Arizona I Common
Stock and Arizona I AMPS were offered for sale and sold in conformity with
all applicable Federal and state securities laws.

(s) Arizona I will not sell or otherwise dispose of any of the
shares of Arizona II to be received in the Reorganization, except in
distribution to the stockholders of Arizona I.

2. Representations and Warranties of Arizona II.
--------------------------------------------

Arizona II represents and warrants to, and agrees with, Arizona I that:

(c) Arizona I has been furnished with a statement of assets,
liabilities and capital and a schedule of investments of Arizona II, each as
of October 31, 1993, said financial statements having been examined by
Deloitte & Touche LLP, independent public accountants. An unaudited
statement of assets, liabilities
and capital of Arizona II and an unaudited schedule of investments of Arizona
II, each as of the Valuation Time, will be furnished to Arizona I at or prior
to the Exchange Date for the purpose of determining the number of shares of
Arizona II Common Stock and shares of Arizona II Series B AMPS to be issued
4
<PAGE>
pursuant to Section 4 of this Agreement; each will fairly present the
financial position of Arizona II as of the Valuation Time in conformity with
generally accepted accounting principles applied on a consistent basis.

(k) The N-14 Registration Statement, on its effective date, at the
time of the stockholders' meetings referred to in Section 6(a) of this
Agreement and at the Exchange Date, insofar as it relates to Arizona II (i)
complied or will comply in all material respects with the provisions of the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder and (ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements
therein not misleading; and the prospectus included therein did not or will
not contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
5
<PAGE>
circumstances under which they were made, not misleading; provided, however,
that the representations and warranties in this subsection only shall apply
to statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by Arizona II for
use in the N-14 Registration Statement as provided in Section 7 of this
Agreement.

(l) Arizona II is authorized to issue 200,000,000 shares of
capital stock, par value $.10 per share, each outstanding share of which is
fully paid, nonassessable and has full voting rights.

3. The Reorganization.
------------------

(b) Arizona I will pay or cause to be paid any interest it
receives on or after the Exchange Date with respect to the Investments
transferred to Arizona II hereunder.

(c) The Valuation Time shall be 4:00 P.M., New York time, on
___________, 1994, or such earlier or later day and time as mutually may be
agreed upon in writing (the "Valuation Time").

6
<PAGE>

5. Payment of Expenses.
-------------------

(a) Arizona II shall pay, subsequent to the Exchange Date, all
expenses incurred in connection with the Reorganization, including, but not
limited to, all costs related to the preparation and distribution of the N-14
Registration Statement and the fees of special counsel to the Reorganization.
Such fees and expenses shall
7
<PAGE>
include legal, accounting and state securities or blue sky fees, printing
costs, filing fees, stock exchange fees, rating agency fees, portfolio
transfer taxes (if any), and any similar expenses incurred in connection with
the Reorganization. Neither Arizona I nor Arizona II shall pay any expenses
of its respective stockholders arising out of or in connection with the
Reorganization.

(b) If for any reason the Reorganization is not consummated, no
party shall be liable to any other party for any damages resulting therefrom,
including, without limitation, consequential damages.

6. Covenants of Arizona I and Arizona II.
-------------------------------------

(b) Arizona I and Arizona II each covenants to operate its
respective business as presently conducted between the date hereof and the
Exchange Date.

(g) Arizona I and Arizona II each agrees that by the Exchange Date
all of its Federal and other tax returns and reports required to be filed on
or before such date shall have been filed and all taxes shown as due on said
returns either have been paid or adequate liability reserves have been
provided for the
8
<PAGE>
payment of such taxes. In connection with this covenant, the funds agree to
cooperate with each other in filing any tax return, amended return or claim
for refund, determining a liability for taxes or a right to a refund of taxes
or participating in or conducting any audit or other proceeding in respect of
taxes. Arizona II agrees to retain for a period of ten (10) years following
the Exchange Date all returns, schedules and work papers and all material
records or other documents relating to tax matters of Arizona I for its
taxable period first ending after the Exchange Date and for all prior taxable
periods. Any information obtained under this subsection shall be kept
confidential except as otherwise may be necessary in connection with the
filing of returns or claims for refund or in conducting an audit or other
proceeding. After the Exchange Date, Arizona I shall prepare, or cause its
agents to prepare, any Federal, state or local tax returns, including any
Forms 1099, required to be filed by Arizona I with respect to Arizona I's
final taxable year ending with its complete liquidation and for any prior
periods or taxable years and further shall cause such tax returns and Forms
1099 to be duly filed with the appropriate taxing authorities.
Notwithstanding the aforementioned provisions of this subsection, any
expenses incurred by Arizona I (other than for payment of taxes) in
connection with the preparation and filing of said tax returns and Forms 1099
after the Exchange Date shall be borne by Arizona I to the extent such
expenses have been accrued by Arizona I in the ordinary course without regard
to the Reorganization; any excess expenses shall be borne by Fund Asset
Management, L.P. ("FAM") at the time such tax returns and Forms 1099 are
prepared.

(i) Following the consummation of the Reorganization, Arizona II
expects to stay in existence and continue its business as a closed-end
management investment company registered under the 1940 Act.

7. Exchange Date.
-------------

(b) Arizona I will deliver to Arizona II on the Exchange Date
confirmations or other adequate evidence as to the tax basis of each of the
Investments delivered to Arizona II hereunder, certified by Deloitte &
Touche LLP.

(c) Arizona II shall have made prior arrangements for the delivery
on the Exchange Date of the Investments to The Bank of New York as the
custodian for Arizona II.

9
<PAGE>

8. Arizona I Conditions.
--------------------

The obligations of Arizona I hereunder shall be subject to the following
conditions:

(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.

(e) That Arizona I shall have received an opinion of Galland,
Kharasch, Morse & Garfinkle, P.C., Maryland counsel to Arizona I, in form
satisfactory to Arizona I and dated the Exchange Date, to the effect that (i)
Arizona II is a corporation duly organized, validly existing and in good
standing in conformity with the laws of the State of Maryland; (ii) the
Arizona II Common Stock and Arizona II Series B AMPS to be delivered to
Arizona I stockholders as provided for by this Agreement are duly authorized
and, upon delivery, will be validly issued and outstanding and fully paid and
nonassessable by Arizona II, and no stockholder of Arizona II has any
preemptive right to subscription or purchase in respect thereof (pursuant to
the Articles of Incorporation, as amended, or the by-laws of Arizona II or,
to the best of such counsel's knowledge, otherwise); (iii) this Agreement has
been duly authorized, executed and delivered by Arizona II, and represents a
valid and binding contract, enforceable in accordance with its terms, subject
to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance
and similar laws relating to or affecting creditors' rights
generally and court decisions with respect thereto; provided, that such
--------
counsel shall express no opinion with respect to the application of equitable
principles in any proceeding, whether at law or in equity; (iv) the execution
and delivery of this Agreement did not, and the consummation of the
Reorganization will not, violate the Articles of Incorporation, as amended,
or the by-laws of Arizona II; (v) no consent, approval, authorization or
order of any Maryland court or governmental authority is required for the
consummation by Arizona I of the Reorganization, except such as have been
obtained under Maryland law; and (vi) such opinion is solely for the benefit
of Arizona I and its Directors and officers. In giving the opinion set forth
above, Galland, Kharasch, Morse & Garfinkle, P.C. may state that it is
relying on certificates of officers of Arizona I and Arizona II with regard
to matters of fact and certain certificates and written statements of
government officials with respect to the good standing of Arizona I and
Arizona II.

10
<PAGE>

(f) That Arizona I shall have received an opinion of Brown & Wood,
as counsel to Arizona I, in form satisfactory to Arizona I and dated the
Exchange Date, to the effect that (i) no consent, approval, authorization or
order of any United States Federal court or governmental authority is
required for the consummation by Arizona I and Arizona II of the
Reorganization, except such as have been obtained under the 1933 Act, the
1934 Act and the 1940 Act and the published rules and regulations of the
Commission thereunder and such as may be required under state securities or
blue sky laws; (ii) the N-14 Registration Statement has become effective
under the 1933 Act, no stop order suspending the effectiveness of the N-14
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated under the 1933 Act, and
the N-14 Registration Statement, and each amendment or supplement thereto, as
of their respective effective dates, appear on their face to be appropriately
responsive in all material respects to the requirements of the 1933 Act, the
1934 Act and the 1940 Act and the published rules and regulations of the
Commission thereunder; (iii) the descriptions in the N-14 Registration
Statement of statutes, legal and governmental proceedings and contracts and
other documents are accurate and fairly present the information required to
be shown; and (iv) such counsel do not know of any statutes, legal or
governmental proceedings or contracts or other documents related to the
Reorganization of a character required to be described in the N-14
Registration Statement which are not described therein or, if required to be
filed, filed as required; (v) the execution and delivery of this Agreement
does not, and the consummation of the Reorganization will not, violate any
material provision of any agreement (known to such counsel) to which either
Arizona I or Arizona II is a party or by which either Arizona I or Arizona II
is bound; (vi) neither Arizona I nor Arizona II, to the knowledge of such
counsel, is required to qualify to do business as a foreign corporation in
any jurisdiction except as may be required by state securities or blue sky
laws, and except where each has so qualified or the failure so to qualify
would not have a material adverse effect on Arizona I, Arizona II, or their
respective stockholders; (vii) such counsel does not have actual knowledge of
any material suit, action or legal or administrative proceeding pending or
threatened against Arizona I or Arizona II, the unfavorable outcome of which
would materially and adversely affect Arizona I or Arizona II; and (viii) all
corporate actions required to be taken by Arizona I and Arizona II to
authorize this Agreement and to effect the Reorganization have been duly
authorized by all necessary corporate actions on the part of Arizona I and
Arizona II. Such opinion also shall state that (x) while such counsel cannot
make any representation as to the accuracy or completeness of statements of
fact in the N-14 Registration Statement or any amendment or supplement
thereto, nothing has come to their attention that would lead them to believe
that, on the respective effective dates of the N-14 Registration Statement
and any amendment or supplement thereto, (1) the N-14 Registration Statement
or any amendment or supplement thereto contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and (2)
the prospectus included in the N-14 Registration Statement contained any
untrue statement of a material fact or omitted to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (y) such counsel do not
express any opinion or belief as to the financial statements, other financial
data, statistical data or information relating to Arizona I or Arizona II
contained or incorporated by reference in the N-14 Registration Statement.
In giving the opinion set forth above, Brown & Wood may state that it is
relying on certificates of officers of Arizona I and Arizona II with regard
to matters of fact and certain certificates and written statements of
governmental officials with respect to the good standing of Arizona I and
Arizona II and on the opinion of Galland, Kharasch, Morse & Garfinkle, P.C.
as to matters of Maryland law.

(g) That Arizona I shall have received a private letter ruling
from the Internal Revenue Service, to the effect that for Federal income tax
purposes (i) the transfer of substantially all of the Investments of Arizona
I to Arizona II in exchange solely for Arizona II Common Stock and Arizona II
Series B AMPS as provided in this Agreement will constitute a reorganization
within the meaning of Section 368(a)(1)(D) of the Code; (ii) in accordance
with Section 361(a) of the Code, no gain or loss will be recognized to
Arizona I as a result of the Reorganization; (iii) under Section 1032 of the
Code, no gain or loss will be recognized to Arizona II as a result of the
Reorganization; (iv) in accordance with Section 354(a)(1) of the Code, no
gain or loss will be recognized to the stockholders of Arizona I on the
receipt of Arizona II Common Stock and Arizona II Series B AMPS in exchange
for their corresponding Arizona I Common Stock and Arizona I AMPS; (v) in
accordance
11
<PAGE>
with Section 362(b) of the Code, the tax basis of the Arizona I assets in the
hands of Arizona II will be the same as the tax basis of such assets in the
hands of Arizona I immediately prior to the consummation of the
Reorganization; (vi) in accordance with Section 358 of the Code, immediately
after the Reorganization, the tax basis of the Arizona II Common Stock and
Arizona II Series B AMPS received by the stockholders of Arizona I in the
Reorganization will be equal, in the aggregate, to the tax basis of the
shares of Arizona I surrendered in exchange; (vii) in accordance with Section
1223 of the Code, a stockholder's holding period for the Arizona II Common
Stock and Arizona II Series B AMPS will be determined by including the period
for which he or she held the Arizona I Common Stock and Arizona I AMPS
exchanged therefor, provided, that such Arizona I shares were held as a
capital asset; (viii) in accordance with Section 1223 of the Code, Arizona
II's holding period with respect to the Arizona I assets transferred will
include the period for which such assets were held by Arizona I; and (ix) the
taxable year of Arizona I will end on the effective date of the
Reorganization and pursuant to Section 381(a) of the Code and regulations
thereunder, Arizona II will succeed to and take into account certain tax
attributes of Arizona I, such as earnings and profits, capital loss
carryovers and method of accounting.

(h) That all proceedings taken by Arizona II and its counsel in
connection with the Reorganization and all documents incidental thereto shall
be satisfactory in form and substance to Arizona I.

(j) That Arizona I shall have received from Deloitte & Touche LLP
a letter dated as of the effective date of the N-14 Registration Statement
and a similar letter dated within five days prior to the Exchange Date, in
form and substance satisfactory to Arizona I, to the effect that (i) they are
independent public accountants with respect to Arizona II within the meaning
of the 1933 Act and the applicable published rules and regulations
thereunder; (i) in their opinion, the financial statements and supplementary
information of Arizona II included or incorporated by reference in the N-14
Registration Statement and reported on by them comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act
and the published rules and regulations thereunder; (ii) on the basis of
limited procedures agreed upon by Arizona I and Arizona II and described in
such letter (but not an examination in accordance with generally accepted
auditing standards) consisting of a reading of any unaudited interim
financial statements and unaudited supplementary information of Arizona II
included in the N-14 Registration Statement, and inquiries of certain
officials of Arizona II responsible for financial and accounting matters,
nothing came to their attention that caused them to believe that (a) such
unaudited financial statements and related unaudited supplementary
information do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules
and regulations thereunder, (b) such unaudited financial statements are not
fairly presented in conformity with generally accepted accounting principles,
applied on a basis substantially consistent with that of the audited
financial statements, or (c) such unaudited supplementary information is not
fairly stated in all material respects in relation to the unaudited financial
statements taken as a whole; and (iii) on the basis of limited procedures
agreed upon by Arizona I and Arizona II and described in such letter (but not
an examination in accordance with generally accepted auditing standards), the
information relating to Arizona I appearing in the N-14 Registration
Statement, which information is expressed in dollars (or percentages derived
from such dollars) concerning Arizona II (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting records
of Arizona II or from schedules prepared by officials of Arizona II having
responsibility for financial and reporting matters and such information is in
agreement with such records, schedules or computations made therefrom.

(k) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, no other legal,
administrative or other proceeding shall
12
<PAGE>
be instituted or threatened which would materially affect the financial
condition of Arizona II or would prohibit the Reorganization.

9. Arizona II Conditions.
---------------------

The obligations of Arizona II hereunder shall be subject to the
following conditions:

(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of the
holders of (i) more than fifty percent of the Arizona II Common Stock and
Arizona II AMPS, voting together as a single class, and (ii) more than fifty
percent of the Arizona II AMPS, voting separately as a class, in each case
issued and outstanding and entitled to vote thereon; and that Arizona I shall
have delivered to Arizona II a copy of the resolution approving this
Agreement adopted by Arizona I's Board of Directors, certified by the
Secretary of Arizona I.
(b) That Arizona I shall have furnished to Arizona II a statement
of Arizona I's assets, liabilities and capital, with values determined as
provided in Section 4 of this Agreement, together with a schedule of
investments with their respective dates of acquisition and tax costs, all as
of the Valuation Time, certified on Arizona I's behalf by its President (or
any Vice President) and its Treasurer, and a certificate of both such
officers, dated the Exchange Date, certifying that there has been no material
adverse change in the financial position of Arizona I since _______________,
1994, other than changes in the Investments since that date or changes in the
market value of the Investments.

(d) That Arizona I shall have delivered to Arizona II a letter
from Deloitte & Touche LLP, dated the Exchange Date, stating that such firm
has performed a limited review of the Federal, state and local income tax
returns of Arizona I for the period ended ______________, 1994 (which returns
originally were prepared and filed by Arizona I), and that based on such
limited review, nothing came to their attention which caused them to believe
that such returns did not properly reflect, in all material respects, the
Federal, state and local income taxes of Arizona I for the period covered
thereby; and that for the period from _____________, 1994 to and including
the Exchange Date and for any taxable year of Arizona I ending upon the
liquidation of Arizona I, such firm has performed a limited review to
ascertain the amount of applicable Federal, state and local taxes, and has
determined that either such amount has been paid or reserves established for
payment of such taxes, this review to be based on unaudited financial data;
and that based on such limited review, nothing has come to their attention
which caused them to believe that the taxes paid or reserves set aside for
payment of such taxes were not adequate in all material respects for the
satisfaction of Federal, state and local taxes for the period from
_____________, 1994 to and including the Exchange Date and for any taxable
year of Arizona I ending upon the liquidation of Arizona I or that Arizona I
would not continue to qualify as a regulated investment company for Federal
income tax purposes.

13
<PAGE>

(e) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.

(h) That Arizona II shall have received a private letter ruling
from the Internal Revenue Service with respect to the matters specified in
Section 8(g) of this Agreement.

(i) That Arizona II shall have received from Deloitte & Touche LLP
a letter dated as of the effective date of the N-14 Registration Statement
and a similar letter dated within five days prior to the Exchange Date, in
form and substance satisfactory to Arizona II, to the effect that (i) they
are independent public accountants with respect to Arizona I within the
meaning of the 1933 Act and the applicable published rules and regulations
thereunder; (ii) in their opinion, the financial statements and supplementary
information of Arizona I included or incorporated by reference in the N-14
Registration Statement and reported on by them comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act
and the published rules and regulations thereunder; (iii) on the basis of
limited procedures agreed upon by Arizona I and Arizona II and described in
such letter (but not an examination in accordance with generally accepted
auditing standards) consisting of a reading of any unaudited interim
financial statements and unaudited supplementary information of Arizona I
included in the N-14 Registration Statement, and inquiries of certain
officials of Arizona I responsible for financial and accounting matters,
nothing came to their attention that caused them to believe that (a) such
unaudited financial statements and related unaudited supplementary
information do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules
and regulations thereunder, (b) such unaudited financial statements are not
fairly presented in conformity with generally accepted accounting principles,
applied on a basis substantially consistent with that of the audited
financial statements, or (c) such unaudited supplementary information is not
fairly stated in all material respects in relation to the unaudited financial
statements taken as a whole; and (iv) on the basis of limited procedures
agreed upon by Arizona I and Arizona II and described in such letter (but not
an examination in accordance with generally accepted auditing standards), the
information relating to Arizona I appearing in the
14
<PAGE>
N-14 Registration Statement, which information is expressed in dollars (or
percentages derived from such dollars) concerning Arizona I (with the
exception of performance comparisons, if any), has been obtained from the
accounting records of Arizona I or from schedules prepared by officials of
Arizona I having responsibility for financial and reporting matters and such
information is in agreement with such records, schedules or computations made
therefrom.

(n) That all proceedings taken by Arizona I and its counsel in
connection with the Reorganization and all documents incidental thereto shall
be satisfactory in form and substance to Arizona II.

10. Termination, Postponement and Waivers.
-------------------------------------

(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect, and
there shall not be any liability on the part of either Arizona I
15
<PAGE>
or Arizona II or persons who are their directors, trustees, officers, agents
or stockholders in respect of this Agreement.

(e) The respective representations and warranties contained in
Sections 1 and 2 of this Agreement shall expire with, and be terminated by,
the consummation of the Reorganization, and neither Arizona I nor Arizona II
nor any of their officers, directors or trustees, agents or stockholders
shall have any liability with respect to such representations or warranties
after the Exchange Date. This provision shall not protect any officer,
director or trustee, agent or stockholder of Arizona I or Arizona II against
any liability to the entity for which that officer, director or trustee,
agent or stockholder so acts or to its stockholders to which that officer,
director or trustee, agent or stockholder otherwise would be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties in the conduct of such office.

11. Indemnification.
---------------

<PAGE>

Agreement should prove false or erroneous in any material respect, (ii) any
covenant has been breached in any material respect, or (iii) any claim is
made alleging that (a) the N-14 Registration Statement included any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements therein, not
misleading or (b) the Proxy Statement and Prospectus delivered to the
stockholders of Arizona II and forming a part of the N-14 Registration
Statement included any untrue statement of a material fact or omitted to
state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading, except
insofar as such claim is based on written information furnished to Arizona II
by Arizona I.

(c) In the event that any claim is made against Arizona II in
respect of which indemnity may be sought by Arizona II from Arizona I under
Section 11(a) of this Agreement, or in the event that any claim is made
against Arizona I in respect of which indemnity may be sought by Arizona I
from Arizona II under Section 11(b) of this Agreement, then the party seeking
indemnification (the Indemnified Party"), with reasonable promptness and
before payment of such claim, shall give written notice of such claim to the
other party (the "Indemnifying Party"). If no objection as to the validity
of the claim is made in writing to the Indemnified Party by the Indemnifying
Party within thirty (30) days after the giving of notice hereunder, then the
Indemnified Party may pay such claim and shall be entitled to reimbursement
therefor, pursuant to this Agreement. If, prior to the termination of such
thirty-day period, objection in writing as to the validity of such claim is
made to the Indemnified Party, the Indemnified Party shall withhold payment
thereof until the validity of such claim is established (i) to the
satisfaction of the Indemnifying Party, or (ii) by a final determination of a
court of competent jurisdiction, whereupon the Indemnified Party may pay such
claim and shall be entitled to reimbursement thereof, pursuant to this
Agreement, or (iii) with respect to any tax claims, within seven (7) calendar
days following the earlier of (A) an agreement between Arizona I and Arizona
II that an indemnity amount is payable, (B) an assessment of a tax by a
taxing authority, or (C) a "determination" as defined in Section 1313(a) of
the Code. For purposes of this Section 13, the term "assessment" shall have
the same meaning as used in Chapter 63 of the Code and Treasury Regulations
thereunder, or any comparable provision under the laws of the appropriate
taxing authority. In the event of any objection by the Indemnifying Party,
the Indemnifying Party promptly shall investigate the claim, and if it is not
satisfied with the validity thereof, the Indemnifying Party shall conduct the
defense against such claim. All costs and expenses incurred by the
Indemnifying Party in connection with such investigation and defense of such
claim shall be borne by it. These indemnification provisions are in addition
to, and not in limitation of, any other rights the parties may have under
applicable law.

12. Other Matters.
-------------

THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
EXCEPT TO MUNIYIELD ARIZONA FUND II, INC. (OR ITS STATUTORY
SUCCESSOR) OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A REGISTRATION
STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES
ACT OF 1933 OR (II) IN THE OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT REQUIRED.

17
<PAGE>

18
<PAGE>
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.

MUNIYIELD ARIZONA FUND, INC.

By:___________________________

Witness:

_____________________

MUNIYIELD ARIZONA FUND II, INC.

By:___________________________

Witness:

_____________________

19
<PAGE>
EXHIBIT (12)

Index Number: 0368.04-00

"This document may not be used or cited as
precedent. Section 6110(j)(3) of the
Internal Revenue Code."

Mr. Mark B. Goldfus Keith G. Medleau
Secretary
MuniYield Arizona Fund, Inc. (202) 662-7550
800 Scudders Mill Road
Plainsboro, NJ 08536 CC:DOM:CORP:5-TR-31-885-94

Acquiring = MuniYield Arizona Fund II, Inc.
E.I.N. 22-3260381

Target = MuniYield Arizona Fund, Inc.
E.I.N. 22-3246522

Manager = Fund Asset Management, L.P.

a = October 31
- -

b = Auction Rate Market
- -

State X = Maryland

State Y = Arizona

X = Merrill Lynch & Co. Inc.

Y = Arizona Municipal Bonds

Z = Puerto Rican obligations

Dear Mr. Goldfus:

This letter is in response to a letter from your authorized
representatives dated March 22, 1994, in which rulings were requested on your
behalf as to the federal income tax consequences of a proposed transaction.
Specifically, rulings were requested under Section 368(a)(1)(D) of the
Internal Revenue Code. Additional information was submitted in letters dated
June 14, 1994, and June 30, 1994. The information submitted for
consideration is summarized below.

Acquiring is a State X management company, uses the accrual method of
accounting and is on a fiscal year ending a. Acquiring has two classes of
-
stock, voting common stock and voting b preferred stock, both of which are
-
widely held. Acquiring's investment objective is to provide maximum current
income exempt from Federal and State Y income taxes. Acquiring invests
primarily in Y and also in Z.

1
<PAGE>

Target also is a widely-held State X management company. Like
Acquiring, Target uses the accrual method of accounting, is on a fiscal year
ending a, has two classes of stock, voting common stock and voting b
- -
preferred stock, and has the investment objective of providing maximum
current income exempt from Federal and State Y income taxes. Target also
invests primarily in Y and in Z.

Manager, which is owned and controlled by X, provides management
services to Acquiring and Target.

For what are represented to be valid business reasons, the following
transaction is proposed:

(i) Acquiring will acquire all of Target's assets in exchange for its
voting common stock and voting b preferred stock ("Acquiring Shares") and its
-
assumption of Target's liabilities.

(ii) Target will liquidate and distribute the Acquiring Shares to its
shareholders. Each Target common stock shareholder will be entitled to
receive a proportionate number of shares of Acquiring common stock equal to
the aggregate net asset value represented by the Target common stock owned by
such shareholder on the exchange date. Each Target b preferred stock
-
shareholder will be entitled to receive a number of shares of Acquiring b
preferred stock having a liquidation preference equal to the liquidation
preference of the Target shares owned by such shareholder on the exchange
date.

(iii) Acquiring will be renamed Target.

The following representations have been made in connection with the
proposed transaction:

(a) The fair market value of the Acquiring stock received by each Target
shareholder will be approximately equal to the fair market value of the
Target stock surrendered in the exchange.

(b) There is no plan or intention by the Target shareholders who own 5
percent or more of the Target stock, and to the best of the knowledge of
management of Target, there is no plan or intention on the part of the
remaining shareholders of Target to sell, exchange, or otherwise dispose of a
number of shares of Acquiring stock received in the transaction that would
reduce Target shareholders' ownership of Acquiring stock to a number of
shares having a value, as of the date of the transaction, of less than 50
percent of the value of all of the formerly outstanding stock of Target as of
the same date.

For purposes of this representation, shares of Target stock exchanged
for cash or other property, surrendered by dissenters, or exchanged for cash
in lieu of fractional shares of Acquiring stock will be treated as
outstanding Target stock on the date of the transaction. Moreover, shares of
Target stock and shares of Acquiring stock held by Target shareholders and
otherwise sold, redeemed, or disposed of prior or subsequent to the
transaction will be considered in making this representation.

(c) Acquiring will acquire at least 90 percent of the fair market value
of the net assets and at least 70 percent of the fair market value of the
gross assets held by Target immediately prior to the transaction. For
purposes of this representation, amounts paid by Target to dissenters,
amounts used by Target to pay its reorganization expenses, amounts paid by
Target to shareholders who receive cash or other property and all redemptions
and distributions (except for regular, normal dividends) made by Target
immediately preceding the transfer will be included as assets of Target held
immediately prior to the transaction.

(d) After the proposed transaction, the shareholders of Target will be
in control of Acquiring within the meaning of Section 368(a)(2)(H) of the Code.

(e) Acquiring has no plan or intention to reacquire any of its stock
issued in the transaction other than in the ordinary course of its business.

2
<PAGE>

(f) Acquiring has no plan or intention to sell or otherwise dispose of
any of the assets of Target acquired in the transaction, except for
dispositions made in the ordinary course of business.

(g) The liabilities of Target assumed by Acquiring and the liabilities
to which the transferred assets are subject were incurred by Target in the
ordinary course of its business and are associated with the assets
transferred.

(h) Following the transaction, Acquiring will continue the historic
business of Target or use a significant portion of Target's historic business
assets in a business.

(i) At the time of the proposed transaction, Acquiring will not have
outstanding any warrants, options, convertible securities or any other type
of right pursuant to which any person could acquire stock in Acquiring that,
if exercised or converted, would affect Target shareholders' acquisition or
retention of control of Acquiring, as defined in Section 368(a)(2)(H) of the
Code.

(j) Acquiring, Target and Target's shareholders will pay their
respective expenses, if any, incurred in connection with the proposed
transaction.

(k) There is no intercorporate indebtedness existing between Target and
Acquiring that was issued, acquired, or will be settled at a discount.

(l) Acquiring and Target each qualify as a regulated investment company
(RIC) under Section 851 of the Code and thus should be treated as RICs for
purposes of Section 368(a)(2)(F)(i) and (iii). After the proposed
transaction, Acquiring will continue to qualify as a RIC under Section 851.

(m) The fair market value of the assets of Target transferred to
Acquiring will equal or exceed the sum of the liabilities assumed by
Acquiring, plus the amount of liabilities, if any, to which the transferred
assets are subject.

(n) The total adjusted basis of the assets transferred by Target will
equal or exceed the sum of the liabilities assumed by Acquiring plus the
amount of liabilities, if any, to which the transferred assets are subject.

(o) Target is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A).

(p) Target will distribute the stock of Acquiring it receives pursuant
to the plan of reorganization.

Based solely on the information submitted and on the representations set
forth above, it is held as follows:

(1) The acquisition by Acquiring of substantially all of the assets of
Target, as described above, in exchange for Acquiring stock and the
assumption of the above-described liabilities will constitute a
reorganization within the meaning of Section 368(a)(1)(D) of the Code.
Acquiring and Target will each be a "party to a reorganization" within the
meaning of Section 368(b).

(2) Target will recognize no gain or loss on the transfer of its assets
to Acquiring and the assumption by Acquiring of Target's liabilities in
exchange solely for voting shares of stock in Acquiring (SectionSection
361(a) and 357(a)). Also, Target will recognize no gain or loss on the
distribution to its shareholders of the Acquiring stock that Target will
receive in the transaction (Section 361(c)(1)).

(3) Acquiring will not recognize any gain or loss on the receipt of
Target's assets in exchange for shares of Acquiring stock (Section 1032(a)).

3
<PAGE>

(4) The basis of Target's assets in the hands of Acquiring will be the
same as the basis of those assets in the hands of Target immediately prior to
the proposed transaction (Section 362(b)).

(5) Acquiring's holding period of Target's assets will include the
period during which such assets were held by Target (Section 1223(2)).

(6) Common and b preferred stock shareholders of Target will not
-
recognize any gain or loss on their respective receipt of common and b
-
preferred stock of Acquiring solely in exchange for their Target stock
(Section 354(a)(1).

(7) The basis of the Acquiring shares received by the Target
shareholders will be the same as the basis of the Target shares surrendered
in exchange therefor (Section 358(a)(1)).

(8) Target shareholders' holding period of the Acquiring shares will
include the period during which the Target shares exchanged were held,
provided that the Target shares are held as a capital asset in the hands of
the Target shareholders on the date of the exchange (Section 1223(1)).

(9) Where a dissenting Target shareholder receives cash solely in
exchange for his or her stock, such cash will be treated as having been
received by the shareholder as a distribution in redemption of his or her
stock subject to the provisions and limitations of Section 302 of the Code.

(10) The taxable year of Target will end on the effective date of the
proposed transaction (Section 381(b)(1)). In addition, pursuant to Section
381(a) of the Code and Section 1.381-l(a) of the Income Tax Regulations,
Acquiring will succeed to and take into account the items of Target described
in Section 381(c),including the earnings and profits, or deficit in earnings
and profits, of Target as of the date of the transaction. Any deficit in
earnings and profits of Target will be used only to offset earnings and
profits accumulated after the effective date of the proposed transaction.
These items will be taken into account by Acquiring subject to the conditions
and limitations specified in SectionSection 381, 382, 383 and 384 of the Code
and the regulations thereunder.

No opinion is expressed about the tax treatment of the proposed
transaction under other provisions of the Code and regulations or about the
tax treatment of any conditions existing at the time of, or effects resulting
from, the transactions that are not specifically covered by the above
rulings. No opinion is expressed about whether Acquiring or Target qualifies
(or will qualify) as a regulated investment company that is taxable under
Subchapter M, part I of the Code.

This ruling is directed only to the taxpayer who requested it. Section
6110(j)(3) of the Code provides that it may not be used or cited as
precedent.

Temporary or final regulations pertaining to one or more of the issues
addressed in this ruling have not been adopted. Therefore, this ruling will
be modified or revoked by the adoption of temporary or final regulations, to
the extent the regulations are inconsistent with any conclusion of this
ruling. See section 11.04 of Rev. Proc. 94-1, 1994-1 I.R.B. 10, 39-40.
---
However, when the criteria of section 11.05 are satisfied, a ruling is not
revoked or modified retroactively, except in rare or unusual circumstances.

It is important that a copy of this letter be attached to the federal
income tax returns of the taxpayers involved for the taxable year in which
the transaction covered by this letter is consummated.

4
<PAGE>
Pursuant to the power of attorney on file in this office, a copy of this
letter has been sent to your authorized representative.

Sincerely,

Assistant Chief Counsel (Corporate)

By: /s/ David P. Madden
_______________________________
David P. Madden
Chief, Branch 5

5
INDEPENDENT AUDITORS' CONSENT

MuniYield Arizona Fund, Inc.:

We consent to the use in this Registration Statement on Form N-14 of our report
dated December 6, 1993 appearing in the Proxy Statement and Prospectus, which is
a part of such Registration Statement, and to the reference to us under the
caption "Experts" also appearing in such Proxy Statement and Prospectus.

DELOITTE & TOUCHE LLP
Princeton, New Jersey
October 3, 1994

INDEPENDENT AUDITORS' CONSENT

MuniYield Arizona Fund II, Inc.:

DELOITTE & TOUCHE LLP
Princeton, New Jersey
October 3, 1994

INDEPENDENT AUDITORS' CONSENT

Fund Asset Management, Inc.

We consent to the use in this Registration Statement on Form N-14 of our report
dated February 28, 1994 appearing in the Proxy Statement and Prospectus, which
is a part of such Registration Statement, and to the reference to us under the
caption "Experts" also appearing in such Proxy Statement and Prospectus.

DELOITTE & TOUCHE LLP
Princeton, New Jersey
October 3, 1994