WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.

Regulatory Filings • Sep 29, 2008

N-Q 1 a08-20970_1nq.htm N-Q

*UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549*

*FORM N-Q*

*QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED MANAGEMENT INVESTMENT COMPANY*

| Investment
Company Act file number | |
| --- | --- |
| Western
Asset Municipal High Income Fund Inc. | |
| (Exact name of registrant as specified in charter) | |
| 55 Water Street, New York, NY | 10041 |
| (Address of principal executive offices) | (Zip code) |
| Robert I. Frenkel, Esq. Legg Mason & Co., LLC 300 First Stamford Place, 4 th Floor Stamford, CT 06902 | |
| (Name and address of agent for service) | |
| Registrant’s
telephone number, including area code: | 1-800-451-2010 |
| Date of
fiscal year end: | October 31 |
| Date of
reporting period: | July 31,
2008 |

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ITEM 1. SCHEDULE OF INVESTMENTS

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WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.

FORM N-Q

JULY 31, 2008

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*Western Asset Municipal High Income Fund Inc.*

Schedule of Investments (unaudited) July 31, 2008

Face Amount	Security	Value
MUNICIPAL BONDS — 97.9%
Alaska — 0.7%
$ 1,055,000	Alaska
Industrial Development & Export Authority Revenue, Williams Lynxs
Alaska Cargoport, 8.125% due 5/1/31 (a)	$ 1,066,056
Arizona — 1.7%
1,740,000	Phoenix,
AZ, IDA, MFH Revenue, Ventana Palms Apartments Project, 8.000% due 10/1/34
(b)	1,895,991
1,000,000	Salt
Verde, AZ Financial Corp., Gas Revenue, 5.000% due 12/1/37	836,980
	Total Arizona	2,732,971
Arkansas — 1.0%
	Arkansas
State Development Financing Authority:
1,000,000	Hospital
Revenue, Washington Regional Medical Center, 7.375% due 2/1/29 (c)	1,074,630
600,000	Industrial
Facilities Revenue, Potlatch Corp. Projects, 7.750% due 8/1/25 (a)	635,490
	Total Arkansas	1,710,120
California — 8.5%
1,500,000	Barona,
CA, Band of Mission Indians, GO, 8.250% due 12/1/20 (d)	1,512,600
2,000,000	California
Health Facilities Financing Authority Revenue, Refunding, Cedars-Sinai
Medical Center, 5.000% due 11/15/27	1,920,920
5,000,000	California
Statewide CDA Revenue, Lodi Memorial Hospital, California Mortgage Insurance,
5.000% due 12/1/37	4,672,100
	Golden
State Tobacco Securitization Corp., California Tobacco Settlement Revenue:
2,000,000	Asset
Backed, 7.800% due 6/1/42 (c)	2,371,580
1,000,000	Enhanced
Asset Backed, 5.625% due 6/1/38 (c)	1,090,240
600,000	Redding,
CA, Redevelopment Agency, Tax Allocation, Shastec Redevelopment Project,
5.000% due 9/1/29	544,974
1,865,000	Vallejo,
CA, COP, Touro University, 7.375% due 6/1/29 (c)	1,990,664
	Total California	14,103,078
Colorado — 5.5%
	Colorado
Educational & Cultural Facilities Authority Revenue:
760,000	Charter
School, Peak to Peak Project, 7.500% due 8/15/21 (c)	843,152
	Cheyenne
Mountain Charter Academy:
680,000	5.250%
due 6/15/25	670,976
510,000	5.125%
due 6/15/32	478,288
785,000	Elbert
County Charter, 7.375% due 3/1/35	800,496
810,000	Unrefunded,
University of Denver Project, FGIC, 5.250% due 3/1/23	834,438
4,000,000	Public
Authority for Colorado Energy, Natural Gas Purchase Revenue, 6.125% due
11/15/23	3,931,480
1,000,000	Reata
South Metropolitan District, CO, GO, 7.250% due 6/1/37	919,690
500,000	Southlands,
CO, Metropolitan District No. 1, GO, 7.125% due 12/1/34 (c)	603,540
	Total Colorado	9,082,060
District of Columbia —
1.2%
1,895,000	District
of Columbia COP, District Public Safety & Emergency, AMBAC, 5.500%
due 1/1/20	1,982,170
Florida — 10.0%
950,000	Beacon
Lakes, FL, Community Development District, Special Assessment, 6.900% due
5/1/35	938,448
1,500,000	Bonnet
Creek Resort Community Development District, Special Assessment, 7.500% due
5/1/34	1,535,010
	Capital
Projects Finance Authority, FL:

**See Notes to Schedule of Investments.****

1

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*Western Asset Municipal High Income Fund Inc.*

Schedule of Investments (unaudited) (continued) July 31, 2008

Face Amount	Security	Value
Florida — 10.0%
(continued)
$ 2,000,000	Continuing
Care Retirement Glenridge on Palmer Ranch, 8.000% due 6/1/32 (c)	$ 2,357,260
2,000,000	Student
Housing Revenue, Capital Projects Loan Program, Florida University, 7.850%
due 8/15/31 (c)	2,263,880
935,000	Century
Parc Community Development District, Special Assessment, 7.000% due 11/1/31	892,654
1,000,000	Highlands
County, FL, Health Facilities Authority Revenue, Adventist Health Systems, 6.000%
due 11/15/25 (c)	1,107,680
2,000,000	Martin
County, FL, IDA Revenue, Indiantown Cogeneration Project, 7.875% due 12/15/25
(a)	2,002,880
1,000,000	Orange
County, FL, Health Facilities Authority Revenue, First Mortgage, GF, Orlando
Inc. Project, 9.000% due 7/1/31	1,079,250
345,000	Palm
Beach County, FL, Health Facilities Authority Revenue, John F. Kennedy
Memorial Hospital Inc. Project, 9.500% due 8/1/13 (e)	399,576
2,000,000	Reunion
East Community Development District, Special Assessment, 7.375% due 5/1/33	2,052,940
1,000,000	Santa
Rosa, FL, Bay Bridge Authority Revenue, 6.250% due 7/1/28	931,150
1,000,000	University
of Central Florida, COP, FGIC, 5.000% due 10/1/25	922,820
	Total
Florida	16,483,548
Georgia — 4.7%
	Atlanta,
GA, Airport Revenue:
1,000,000	FGIC,
5.625% due 1/1/30 (a)	962,060
1,000,000	FSA,
5.000% due 1/1/26	1,013,620
2,000,000	Atlanta,
GA, Development Authority Educational Facilities Revenue, Science Park LLC
Project, 5.000% due 7/1/32	1,867,620
2,500,000	Atlanta,
GA, Tax Allocation, Atlantic Station Project, 7.900% due 12/1/24 (c)	2,923,575
1,000,000	Gainesville &
Hall County, GA, Development Authority Revenue, Senior Living Facilities,
Lanier Village Estates, 7.250% due 11/15/29	1,032,070
	Total Georgia	7,798,945
Illinois — 0.5%
1,000,000	Illinois
Finance Authority Revenue, Refunding, Chicago Charter School Project, 5.000%
due 12/1/26	874,660
Indiana — 0.5%
	County
of St Joseph, IN, EDR, Holy Cross Village Notre Dame Project:
285,000	6.000%
due 5/15/26	264,417
550,000	6.000%
due 5/15/38	479,644
	Total Indiana	744,061
Kansas — 0.7%
1,150,000	Salina,
KS, Hospital Revenue, Refunding & Improvement Salina Regional
Health, 5.000% due 10/1/22	1,150,644
Kentucky — 1.1%
2,000,000	Louisville &
Jefferson County, KY, Metro Government Health System Revenue, Norton
Healthcare Inc., 5.250% due 10/1/36	1,825,680
Louisiana — 0.6%
1,000,000	Epps,
LA, COP, 8.000% due 6/1/18	999,150
Maryland — 1.5%
1,500,000	Maryland
State Economic Development Corp. Revenue, Chesapeake Bay, 7.730% due 12/1/27 (c)	1,625,325
1,000,000	Maryland
State Health & Higher EFA Revenue, Refunding, Edenwald, 5.400% due
1/1/31	897,080
	Total Maryland	2,522,405

**See Notes to Schedule of Investments.****

2

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*Western Asset Municipal High Income Fund Inc.*

Schedule of Investments (unaudited) (continued) July 31, 2008

Face Amount	Security	Value
Massachusetts — 2.1%
$ 890,000	Boston,
MA, Industrial Development Financing Authority Revenue, Roundhouse
Hospitality LLC Project, 7.875% due 3/1/25 (a)	$ 834,206
1,000,000	Massachusetts
State DFA Revenue, Briarwood, 8.250% due 12/1/30 (c)	1,140,770
1,000,000	Massachusetts
State HEFA Revenue, Caritas Christi Obligation, 6.750% due 7/1/16	1,067,010
315,000	Massachusetts
State Port Authority Revenue, 13.000% due 7/1/13 (e)	405,890
	Total Massachusetts	3,447,876
Michigan — 6.5%
2,130,000	Allen
Academy, COP, 7.500% due 6/1/23	2,029,294
	Cesar
Chavez Academy, COP:
1,000,000	6.500%
due 2/1/33	979,610
1,000,000	8.000%
due 2/1/33	1,065,750
1,000,000	Gaudior
Academy, COP, 7.250% due 4/1/34	953,030
1,750,000	Kalamazoo
Advantage Academy, COP, 8.000% due 12/1/33	1,279,215
3,000,000	Michigan
State Hospital Finance Authority, Refunding Hospital, Sparrow Obligated,
5.000% due 11/15/31	2,730,300
990,000	Star
International Academy, COP, 7.000% due 3/1/33	927,382
700,000	William
C. Abney Academy, COP, 6.750% due 7/1/19	714,875
	Total Michigan	10,679,456
Missouri — 0.8%
1,300,000	Missouri
State HEFA Revenue, Refunding, St. Lukes Episcopal, 5.000% due 12/1/21	1,287,442
Montana — 1.4%
2,385,000	Montana
State Board of Investment, Resource Recovery Revenue, Yellowstone Energy LP
Project, 7.000% due 12/31/19 (a)	2,315,167
New Hampshire — 0.9%
1,600,000	New
Hampshire HEFA Revenue, Covenant Health System, 5.500% due 7/1/34	1,556,848
New Jersey — 10.3%
1,500,000	Casino
Reinvestment Development Authority Revenue, MBIA, 5.250% due 6/1/20	1,515,300
1,000,000	New
Jersey EDA, Retirement Community Revenue, SeaBrook Village Inc., 8.250% due
11/15/30 (c)	1,137,610
	New
Jersey Health Care Facilities Financing Authority Revenue, Trinitas Hospital
Obligation Group:
5,000,000	5.250%
due 7/1/30	4,168,050
3,000,000	7.500%
due 7/1/30 (c)	3,319,050
5,000,000	New
Jersey State, EDA, Revenue, Refunding, 6.875% due 1/1/37 (a)	4,898,800
1,750,000	Tobacco
Settlement Financing Corp., 6.750% due 6/1/39 (c)	2,028,005
	Total New Jersey	17,066,815
New Mexico — 1.4%
160,000	Albuquerque,
NM, Hospital Revenue, Southwest Community Health Services, 10.000% due 8/1/12
(c)	160,000
1,000,000	Otero
County, NM, Jail Project Revenue, 7.500% due 12/1/24	1,043,770
1,000,000	Sandoval
County, NM, Incentive Payment Revenue, Refunding, 5.000% due 6/1/20	1,032,590
	Total New Mexico	2,236,360
New York — 6.6%
700,000	Brookhaven,
NY, IDA Civic Facilities Revenue, Memorial Hospital Medical Center Inc.,
8.250% due 11/15/30 (c)	794,647

**See Notes to Schedule of Investments.****

3

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*Western Asset Municipal High Income Fund Inc.*

Schedule of Investments (unaudited) (continued) July 31, 2008

Face Amount	Security	Value
New York — 6.6%
(continued)
$ 2,000,000	Metropolitan
Transportation Authority of New York, AMBAC, 5.000% due 7/1/30	$ 2,011,880
1,000,000	Monroe
County, NY, IDA, Civic Facilities Revenue, Woodland Village Project, 8.550%
due 11/15/32 (c)	1,158,560
	New
York City, NY, IDA, Civic Facilities Revenue:
1,270,000	Community
Residence for the Developmentally Disabled Project, 7.500% due 8/1/26	1,272,121
780,000	Special
Needs Facilities Pooled Program, 8.125% due 7/1/19 (c)	854,623
	New
York State Dormitory Authority Revenue:
1,500,000	Mental
Health Services Facilities Improvement, AMBAC, 5.000% due 2/15/35	1,504,950
2,500,000	New
York University Hospitals Center, 5.000% due 7/1/26	2,334,325
875,000	Suffolk
County, NY, IDA, Civic Facilities Revenue, Eastern Long Island Hospital
Association, 7.750% due 1/1/22 (c)	1,003,327
	Total New York	10,934,433
North Carolina — 0.6%
920,000	North
Carolina Medical Care Community, Health Care Facilities Revenue, First
Mortgage, DePaul Community Facilities Project, 7.625% due 11/1/29 (c)	989,423
Ohio — 2.6%
1,500,000	Cuyahoga
County, OH, Hospital Facilities Revenue, Canton Inc. Project, 7.500% due
1/1/30	1,550,490
1,500,000	Miami
County, OH, Hospital Facilities Revenue, Refunding and Improvement Upper
Valley Medical Center, 5.250% due 5/15/21	1,417,320
1,260,000	Riversouth
Authority, OH, Revenue, Riversouth Area Redevelopment, 5.000% due 12/1/25	1,291,739
	Total Ohio	4,259,549
Pennsylvania — 4.4%
1,000,000	Cumberland
County, PA, Municipal Authority Retirement Community Revenue, Wesley
Affiliate Services Inc. Project, 7.250% due 1/1/35 (c)	1,175,200
1,000,000	Lebanon
County, PA, Health Facilities Authority Revenue, Good Samaritan Hospital
Project, 6.000% due 11/15/35	964,820
1,000,000	Monroe
County, PA, Hospital Authority Revenue, Pocono Medical Center, 5.000% due
1/1/27	918,480
955,000	Northumberland
County, PA, IDA Facilities Revenue, NHS Youth Services Inc. Project, 7.500%
due 2/15/29	936,378
1,000,000	Philadelphia,
PA, Authority for IDR, Host Marriot LP Project, Remarketed 10/31/95, 7.750%
due 12/1/17 (a)	1,004,310
2,000,000	Westmoreland
County, PA, IDA Revenue, Health Care Facilities, Redstone Highlands Health,
8.125% due 11/15/30 (c)	2,272,120
	Total Pennsylvania	7,271,308
South Carolina — 0.1%
110,000	McCormick
County, SC, COP, 9.750% due 7/1/09	111,926
Tennessee — 1.9%
1,000,000	Clarksville,
TN, Natural Gas Acquisition Corp. Gas Revenue, 5.000% due 12/15/21	859,860
2,500,000	Shelby
County, TN, Health Educational & Housing Facilities Board Revenue,
Trezevant Manor Project, 5.750% due 9/1/37	2,286,625
	Total Tennessee	3,146,485
Texas — 15.2%
540,000	Bexar
County, TX, Housing Financial Corp., MFH Revenue, Continental Lady Ester,
6.875% due 6/1/29 (c)	573,032
2,000,000	Brazos
River Authority Texas PCR, TXU Co., 8.250% due 5/1/33 (a)(b)(f)	1,948,260

**See Notes to Schedule of Investments.****

4

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*Western Asset Municipal High Income Fund Inc.*

Schedule of Investments (unaudited) (continued) July 31, 2008

Face Amount	Security	Value
Texas — 15.2% (continued)
$ 1,500,000	Brazos
River, TX, Harbor Industrial Development Corp., Environmental Facilities
Revenue, Dow Chemical Co., 5.900% due 5/1/38 (a)(f)	$ 1,435,845
1,500,000	Burnet
County, TX, Public Facility Project Revenue, 7.500% due 8/1/24	1,468,620
	Garza
County, TX, Public Facility Corp.:
1,000,000	5.500%
due 10/1/18	1,012,110
2,000,000	Project
Revenue, 5.750% due 10/1/25	1,974,080
2,000,000	Gulf
Coast of Texas, IDA, Solid Waste Disposal Revenue, CITGO Petroleum Corp. Project,
7.500% due 10/1/12 (a)(f)	2,092,420
2,750,000	Houston,
TX, Airport Systems Revenue, Special Facilities, Continental Airlines Inc.
Project, 6.125% due 7/15/27 (a)	1,916,310
1,000,000	Laredo,
TX, ISD Public Facility Corp. Lease Revenue, AMBAC, 5.000% due 8/1/29	1,004,670
1,000,000	Midlothian,
TX, Development Authority, Tax Increment Contract Revenue, 6.200% due
11/15/29	987,100
2,500,000	North
Texas Tollway Authority Revenue, 5.750% due 1/1/40	2,505,250
1,000,000	North
Texas Tollway Authority, Dallas North Tollway Systems Revenue, FSA, 5.000%
due 1/1/35 (c)	1,064,700
1,500,000	Texas
State Public Finance Authority, Uplift Education, 5.750% due 12/1/27	1,419,600
1,865,000	West
Texas Detention Facility Corp. Revenue, 8.000% due 2/1/25	1,805,469
	Willacy
County, TX:
2,000,000	Local
Government Corp. Revenue, 6.875% due 9/1/28	1,897,940
	PFC
Project Revenue:
1,000,000	8.250%
due 12/1/23	989,980
1,000,000	County
Jail, 7.500% due 11/1/25	1,022,750
	Total Texas	25,118,136
Virginia — 2.9%
405,000	Alexandria,
VA, Redevelopment & Housing Authority, MFH Revenue, Parkwood Court
Apartments Project, 8.125% due 4/1/30	407,880
1,000,000	Broad
Street CDA Revenue, 7.500% due 6/1/33	1,041,430
2,500,000	Chesterfield
County, VA, EDA, Solid Waste and Sewer Disposal Revenue, Virginia Electric
Power Co. Project, 5.600% due 11/1/31 (a)	2,321,350
1,000,000	Fairfax
County, VA, EDA Revenue, Retirement Community, Greenspring Village Inc.,
7.500% due 10/1/29 (c)	1,082,140
	Total Virginia	4,852,800
West Virginia — 1.4%
2,500,000	Pleasants
County, WV, PCR, Refunding County Commission Allegheny, 5.250% due 10/15/37	2,361,000
Wisconsin — 0.6%
1,000,000	Wisconsin
State HEFA Revenue, Aurora Health Care, 6.400% due 4/15/33	1,019,720
	TOTAL
INVESTMENTS BEFORE SHORT-TERM INVESTMENTS (Cost — $162,162,413)	161,730,292
SHORT-TERM INVESTMENTS —
0.9%
Michigan — 0.1%
300,000	Michigan
Higher Education Facilities Authority, Refunding Ltd. Obligation University
Detroit, 2.100%, 8/1/08 (g)	300,000
Missouri — 0.1%
100,000	Missouri
State HEFA, Washington University, 2.150%, 8/1/08 (g)	100,000
Nevada — 0.1%
100,000	Las
Vegas Valley, NV, Water District, Water Improvement, SPA-Dexia Credit Local,
2.550%, 8/1/08 (g)	100,000

**See Notes to Schedule of Investments.****

5

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*Western Asset Municipal High Income Fund Inc.*

Schedule of Investments (unaudited) (continued) July 31, 2008

Face Amount	Security	Value
Oregon — 0.6%
$ 1,000,000	Medford,
OR, Hospital Facilities Authority Revenue, Rogue Valley Manor Project,
LOC-Bank of America N.A., 2.100%, 8/1/08 (g)	$ 1,000,000
	TOTAL
SHORT-TERM INVESTMENTS (Cost — $1,500,000)	1,500,000
	TOTAL
INVESTMENTS — 98.8% (Cost — $163,662,413#)	163,230,292
	Other Assets in Excess of Liabilities —
1.2%	1,918,747
	TOTAL NET ASSETS — 100.0%	$ 165,149,039

| (a) | Income from this issue is considered a
preference item for purposes of calculating the alternative minimum tax
(“AMT”). |
| --- | --- |
| (b) | Security is exempt from registration under
Rule 144A of the Securities Act of 1933. This security may be resold in
transactions that are exempt from registration, normally to qualified
institutional buyers. This security has been deemed liquid pursuant to
guidelines approved by the Board of Directors, unless otherwise noted. |
| (c) | Pre-Refunded bonds are escrowed with U.S.
government obligations and/or U.S. government agency securities and are
considered by the manager to be triple-A rated even if issuer has not applied
for new ratings. |
| (d) | All or a portion of this security is held
at the broker as collateral for open futures contracts. |
| (e) | Bonds are escrowed to maturity by government
securities and/or U.S. government agency securities and are considered by the
manager to be triple-A rated even if issuer has not applied for new ratings. |
| (f) | Variable rate security. Interest rate
disclosed is that which is in effect at July 31, 2008. |
| (g) | Variable rate demand obligations have a
demand feature under which the Fund can tender them back to the issuer on no
more than 7 days notice. Date shown is the date of the next interest rate
change. |
| # | Aggregate cost for federal income tax
purposes is substantially the same. |
| | Abbreviations
used in this schedule: |
| | AMBAC - Ambac Assurance
Corporation - Insured Bonds |
| | CDA - Community
Development Authority |
| | COP - Certificate of
Participation |
| | DFA - Development Finance
Agency |
| | EDA - Economic Development
Authority |
| | EDR - Economic Development
Revenue |
| | EFA - Educational
Facilities Authority |
| | FGIC - Financial Guaranty
Insurance Company - Insured Bonds |
| | FSA - Financial Security
Assurance - Insured Bonds |
| | GO - General Obligation |
| | HEFA - Health &
Educational Facilities Authority |
| | IDA - Industrial
Development Authority |
| | IDR - Industrial
Development Revenue |
| | ISD - Independent School
District |
| | LOC - Letter of Credit |
| | MBIA - Municipal Bond
Investors Assurance Corporation - Insured Bonds |
| | MFH - Multi-Family Housing |
| | PCR - Pollution Control
Revenue |
| | PFC - Public Facilities
Corporation |
| | SPA - Standby Bond
Purchase Agreement - Insured Bonds |

**See Notes to Schedule of Investments.****

6

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*Western Asset Municipal High Income Fund Inc.*

Schedule of Investments (unaudited) (continued) July 31, 2008

*Summary of Investments by Industry **

Hospitals	23.3
Pre-Refunded/Escrowed to Maturity	23.1
Leasing	13.5
Industrial Development	11.0
Special Tax	5.7
Other Revenue	5.4
Transportation	4.6
Electric	3.6
Education	3.1
Resource Recovery	2.8
Local General Obligation	2.4
Housing	1.4
Water & Sewer	0.1
	100.0 %

*As a percentage of total investments. Please note that Fund holdings are as of July 31, 2008 and are subject to change.

*Ratings Table†*

S&P/Moody’s/Fitch‡

AAA/Aaa	12.1
AA/ Aa	6.9
A	21.2
BBB/Baa	16.7
BB/Ba	3.0
B/B	1.7
CCC/Caa	1.2
A-1/VMIG1	1.0
NR	36.2
	100.0 %

*†* As a percentage of total investments.

*‡* S&P primary rating; Moody’s secondary, then Fitch.

See pages 8 and 9 for definitions of ratings.

**See Notes to Schedule of Investments.****

7

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*Bond Ratings (unaudited)*

The definitions of the applicable rating symbols are set forth below:

Standard & Poor’s Ratings Service (“Standard & Poor’s”) —Ratings from “AA” to “CCC” may be modified by the addition of a plus (+) or minus (—) sign to show relative standings within the major rating categories.

| 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
highest rated issues only in a 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 debt 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, B, | | |
| CCC, | | |
| CC and C | — | Bonds rated “BB”, “B”,
“CCC”, “CC” and “C” are regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance
with the terms of the obligation. “BB” represents the lowest degree of
speculation and “C” the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions. |
| D | — | Bonds rated “D” are in
default and payment of interest and/or repayment of principal is in arrears. |

Moody’s Investors Service (“Moody’s”) —Numerical modifiers 1, 2 and 3 may be applied to each generic rating from “Aa” to “Caa,” where 1 is the highest and 3 the lowest ranking within its generic category.

| Aaa | — | Bonds rated “Aaa” are
judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as “gilt 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 can be visualized as most unlikely to impair the
fundamentally strong position of such issues. |
| --- | --- | --- |
| Aa | — | Bonds rated “Aa” are
judged to be of high quality by all standards. Together with the “Aaa” group
they comprise what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may not be as large
as in “Aaa” securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in “Aaa” securities. |
| A | — | Bonds 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 some time in the future. |
| Baa | — | Bonds rated “Baa” are
considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. |
| Ba | — | Bonds 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 therefore |

8

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*Bond Ratings (unaudited)(continued)*

| B | — | not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class. — Bonds rated “B” generally
lack characteristics of desirable investments. 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 rated “Caa” are of
poor standing. These may be in default, or present elements of danger may
exist with respect to principal or interest. |
| Ca | — | Bonds rated “Ca” represent
obligations which are speculative in a high degree. Such issues are often in
default or have other marked short-comings. |
| C | — | Bonds rated “C” are the
lowest class of bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing. |
| Fitch
Ratings Service (“Fitch”) —Ratings from “AA” to “CCC” may be modified by the addition of a plus
(+) or minus (–) sign to | | |
| | | show relative standings
within the major rating categories. |

| AAA | — | Bonds rated “AAA” have the
highest rating assigned by Fitch. 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
highest rated issues only in a 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 debt 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, B, | | |
| CCC | | |
| and CC | — | Bonds rated “BB”, “B”,
“CCC” and “CC” are regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. “BB” represents a lower degree of speculation
than “B”, and “CC” the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions. |
| NR | — | Indicates that the bond is
not rated by Standard & Poor’s, Moody’s or Fitch. |

*Short-Term Security Ratings (unaudited)*

| SP-1 | — | Standard & Poor’s
highest rating indicating very strong or strong capacity to pay principal and
interest; those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign. |
| --- | --- | --- |
| A-1 | — | Standard & Poor’s
highest commercial paper and variable-rate demand obligation (VRDO) rating
indicating that the degree of safety regarding timely payment is either
overwhelming or very strong; those issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign. |
| VMIG 1 | — | Moody’s highest rating for issues having a
demand feature— VRDO. |
| MIG1 | — | Moody’s highest rating for
short-term municipal obligations. |
| P-1 | — | Moody’s highest rating for commercial paper
and for VRDO prior to the advent of the VMIG 1 rating. |
| F1 | — | Fitch’s highest rating indicating the
strongest capacity for timely payment of financial commitments; those issues
determined to possess overwhelming strong credit feature are denoted with a
plus (+) sign. |

9

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*Notes to Schedule of Investments (unaudited)*

*1. Organization and Significant Accounting Policies*

Western Asset Municipal High Income Fund Inc. (the “Fund”) was incorporated in Maryland and is registered as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended, (the “1940 Act”). The Fund seeks high current income exempt from federal income taxes.

The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”).

*(a) Investment Valuation.* Securities are valued at the mean between the last quoted bid and asked prices provided by an independent pricing service that are based on transactions in municipal obligations, quotations from municipal bond dealers, market transactions in comparable securities and various other relationships between securities. When prices are not readily available, or are determined not to reflect fair value, the Fund may value these securities at fair value as determined in accordance with the procedures approved by the Fund’s Board of Directors. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates fair value.

*(b) Financial Futures Contracts.* The Fund may enter into financial futures contracts typically to hedge a portion of the portfolio. Upon entering into a financial futures contract, the Fund is required to deposit cash or securities as initial margin, equal in value to a certain percentage of the contract amount (initial margin deposit). Additional securities are also segregated up to the current market value of the financial futures contracts. Subsequent payments, known as “variation margin,” are made or received by the Fund each day, depending on the daily fluctuations in the value of the underlying financial instruments. When the financial futures contracts are closed, a realized gain or loss is recognized equal to the difference between the proceeds from (or cost of) the closing transactions and the Fund’s basis in the contracts.

The risks associated with entering into financial futures contracts include the possibility that a change in the value of the contract may not correlate with the changes in the value of the underlying financial instruments. In addition, investing in financial futures contracts involves the risk that the Fund could lose more than the initial margin deposit and subsequent payments required for a futures transaction. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.

*(c) Credit and Market Risk.* The Fund invests in high yield instruments that are subject to certain credit and market risks. The yields of high yield obligations reflect, among other things, perceived credit and market risks. The Fund’s investment in securities rated below investment grade typically involves risks not associated with higher rated securities including, among others, greater risk related to timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading.

*(d) Security Transactions.* Security transactions are accounted for on a trade date basis.

*2. Investments*

At July 31, 2008, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:

Gross unrealized appreciation	$
Gross unrealized depreciation	(6,208,108	)
Net unrealized depreciation	$ (432,121	)

At July 31, 2008, the Fund had the following open futures contracts:

	Number of Contracts	Expiration Date	Basis Value	Market Value	Unrealized (Loss)
Contracts to Sell:
U.S. Treasury Bonds	215	9/08	$ 24,543,386	$ 24,832,500	$ (289,114	)

10

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*Notes to Schedule of Investments (unaudited) (continued)*

*3. Recent Accounting Pronouncements*

On September 20, 2006, the Financial Accounting Standards Board (“FASB”) released Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). FAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. The application of FAS 157 is required for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Management has determined that there is no material impact to the Fund’s valuation policies as a result of adopting FAS 157. The Fund will implement the disclosure requirements beginning with its January 31, 2009 Form N-Q.

---

In March 2008, FASB issued the Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“FAS 161”). FAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. FAS 161 requires enhanced disclosures about the Fund’s derivative and hedging activities, including how such activities are accounted for and their effect on the Fund’s financial position, performance and cash flows. Management is currently evaluating the impact the adoption of FAS 161 will have on the Fund’s financial statements and related disclosures.

11

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| ITEM 2. | CONTROLS
AND PROCEDURES. | |
| --- | --- | --- |
| | (a) | The
registrant’s principal executive officer and principal financial officer have
concluded that the registrant’s disclosure controls and procedures (as
defined in Rule 30a- 3(c) under the Investment Company Act of 1940,
as amended (the “1940 Act”)) are effective as of a date within 90 days of the
filing date of this report that includes the disclosure required by this
paragraph, based on their evaluation of the disclosure controls and
procedures required by Rule 30a-3(b) under the 1940 Act and
15d-15(b) under the Securities Exchange Act of 1934. |
| | (b) | There
were no changes in the registrant’s internal control over financial reporting
(as defined in Rule 30a-3(d) under the 1940 Act) that occurred
during the registrant’s last fiscal quarter that have materially affected, or
are likely to materially affect the registrant’s internal control over
financial reporting. |
| ITEM
3. | EXHIBITS. | |
| | Certifications pursuant to
Rule 30a-2(a) under the Investment Company Act of 1940, as amended,
are attached hereto. | |

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Western Asset Municipal High Income Fund Inc.

By:
R. Jay Gerken
Chief Executive Officer
Date:	September 29,
2008

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:
R. Jay Gerken
Chief Executive Officer
Date:	September 29,
2008

By:
Kaprel Ozsolak
Chief Financial Officer
Date:	September 29,
2008

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