WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.

Regulatory Filings • Sep 28, 2009

N-Q 1 a09-23777_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 100 First Stamford Place Stamford, CT 06902 | |
| (Name and address of agent for service) | |
| Registrant’s
telephone number, including area code: | 1-888-777-0102 |
| Date of
fiscal year end: | October 31 |
| Date of
reporting period: | July 31,
2009 |

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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, 2009

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*Western Asset Municipal High Income Fund Inc.*

Schedule of Investments (unaudited) July 31, 2009

Face Amount	Security	Value
MUNICIPAL BONDS† — 99.2%
Alaska — 0.6%
$ 1,055,000	Alaska Industrial Development & Export Authority Revenue, Williams
Lynxs Alaska Cargoport, 8.125% due 5/1/31 (a)	$ 896,128
Arizona — 2.3%
1,720,000	Phoenix, AZ, IDA, MFH Revenue, Ventana Palms Apartments Project,
8.000% due 10/1/34 (e)	1,774,679
1,500,000	Salt Verde, AZ Financial Corp., Gas Revenue, 5.000% due 12/1/37	1,123,320
500,000	University Medical Center Corp., AZ, Hospital Revenue, 6.250% due
7/1/29	502,895
	Total Arizona	3,400,894
Arkansas — 1.0%
	Arkansas State Development Financing Authority:
1,000,000	Hospital
Revenue, Washington Regional Medical Center, 7.375% due 2/1/29 (b)	1,026,860
600,000	Industrial
Facilities Revenue, Potlatch Corp. Projects, 7.750% due 8/1/25 (a)	535,194
	Total Arkansas	1,562,054
California — 4.1%
1,500,000	Barona, CA, Band of Mission Indians, GO, 8.250% due 12/1/20	1,369,260
2,000,000	California Health Facilities Financing Authority Revenue, Refunding,
Cedars-Sinai Medical Center, 5.000% due 11/15/27	1,814,740
2,000,000	Golden State Tobacco Securitization Corp., California Tobacco
Settlement Revenue, Asset Backed, 7.800% due 6/1/42 (b)	2,441,240
600,000	Redding, CA, Redevelopment Agency, Tax Allocation, Shastec
Redevelopment Project, 5.000% due 9/1/29	486,606
	Total California	6,111,846
Colorado — 5.7%
	Colorado Educational & Cultural Facilities Authority
Revenue:
740,000	Charter
School, Peak to Peak Project, 7.500% due 8/15/21 (b)	822,184
	Cheyenne
Mountain Charter Academy:
680,000	5.250%
due 6/15/25	564,740
510,000	5.125%
due 6/15/32	387,503
785,000	Elbert
County Charter, 7.375% due 3/1/35	683,201
810,000	Unrefunded,
University of Denver Project, FGIC, 5.250% due 3/1/23	845,608
4,000,000	Public Authority for Colorado Energy, Natural Gas Purchase Revenue,
6.125% due 11/15/23	3,901,200
1,000,000	Reata South Metropolitan District, CO, GO, 7.250% due 6/1/37	721,590
500,000	Southlands, CO, Metropolitan District No. 1, GO, 7.125% due
12/1/34 (b)	628,745
	Total Colorado	8,554,771
District of Columbia —
1.3%
1,895,000	District of Columbia COP, District Public Safety &
Emergency, AMBAC, 5.500% due 1/1/20	1,957,649
Florida — 8.0%
880,000	Beacon Lakes, FL, Community Development District, Special Assessment,
6.900% due 5/1/35	591,061
1,500,000	Bonnet Creek Resort Community Development District, Special
Assessment, 7.500% due 5/1/34	1,201,335
2,000,000	Capital Projects Finance Authority, FL, Student Housing Revenue,
Capital Projects Loan Program, Florida University, 7.850% due 8/15/31 (b)	2,201,540
920,000	Century Parc Community Development District, Special Assessment,
7.000% due 11/1/31	694,885
1,000,000	Highlands County, FL, Health Facilities Authority Revenue, Adventist
Health Systems, 6.000% due 11/15/25 (b)	1,147,190

**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, 2009

Face Amount	Security	Value
Florida — 8.0% (continued)
$ 2,000,000	Martin County, FL, IDA Revenue, Indiantown Cogeneration Project,
7.875% due 12/15/25 (a)	$ 1,991,520
1,000,000	Orange County, FL, Health Facilities Authority Revenue, First
Mortgage, GF, Orlando Inc. Project, 9.000% due 7/1/31	963,870
290,000	Palm Beach County, FL, Health Facilities Authority Revenue, John F.
Kennedy Memorial Hospital Inc. Project, 9.500% due 8/1/13 (c)	338,584
2,000,000	Reunion East Community Development District, Special Assessment,
7.375% due 5/1/33	1,364,260
1,000,000	Santa Rosa, FL, Bay Bridge Authority Revenue, 6.250% due 7/1/28	602,350
1,000,000	University of Central Florida, COP, FGIC, 5.000% due 10/1/25	918,020
	Total Florida	12,014,615
Georgia — 7.8%
	Atlanta, GA, Airport Revenue:
1,000,000	FGIC,
5.625% due 1/1/30 (a)	928,420
1,000,000	FSA,
5.000% due 1/1/26	1,024,680
	Atlanta, GA:
2,000,000	Development
Authority Educational Facilities Revenue, Science Park LLC Project, 5.000%
due 7/1/32	1,882,180
2,500,000	Tax
Allocation, Atlantic Station Project, 7.900% due 12/1/24 (b)	2,929,525
3,000,000	Water &
Wastewater Revenue, 6.250% due 11/1/39	2,939,790
1,000,000	DeKalb, Newton & Gwinnett Counties, GA, Joint Development
Authority Revenue, GGC Foundation LLC Project, 6.125% due 7/1/40	1,032,530
1,000,000	Gainesville & Hall County, GA, Development Authority
Revenue, Senior Living Facilities, Lanier Village Estates, 7.250% due
11/15/29	976,020
	Total Georgia	11,713,145
Hawaii — 1.4%
2,000,000	Hawaii State Department of Budget & Finance Special Purpose
Revenue, Hawaiian Electric Co., 6.500% due 7/1/39	2,027,220
Illinois — 0.5%
1,000,000	Illinois Finance Authority Revenue, Refunding, Chicago Charter School
Project, 5.000% due 12/1/26	736,290
Indiana — 0.4%
	County of St. Joseph, IN, EDR, Holy Cross Village Notre Dame Project:
285,000	6.000%
due 5/15/26	219,459
550,000	6.000%
due 5/15/38	394,823
	Total Indiana	614,282
Kansas — 0.7%
1,150,000	Salina, KS, Hospital Revenue, Refunding & Improvement Salina
Regional Health, 5.000% due 10/1/22	1,118,594
Kentucky — 1.9%
1,000,000	Louisville & Jefferson County, KY, Metro Government Health
System Revenue, Norton Healthcare Inc., 5.250% due 10/1/36	865,770
2,000,000	Owen County, KY, Waterworks System Revenue, Kentucky American Water
Co. Project, 6.250% due 6/1/39	2,036,500
	Total Kentucky	2,902,270
Louisiana — 1.2%
1,000,000	Epps, LA, COP, 8.000% due 6/1/18	933,650
1,000,000	St. John Baptist Parish, LA, Revenue, Marathon Oil Corp., 5.125% due
6/1/37	848,910
	Total Louisiana	1,782,560

**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, 2009

Face Amount	Security	Value
Maryland — 1.0%
$ 1,500,000	Maryland State Economic Development Corp. Revenue, Chesapeake Bay,
7.730% due 12/1/27 (b)	$ 1,550,595
Massachusetts — 4.1%
860,000	Boston, MA, Industrial Development Financing Authority Revenue,
Roundhouse Hospitality LLC Project, 7.875% due 3/1/25 (a)	693,590
3,000,000	Massachusetts Educational Financing Authority Education Loan Revenue,
6.125% due 1/1/22 (a)	3,070,770
1,000,000	Massachusetts State DFA Revenue, Briarwood, 8.250% due 12/1/30 (b)	1,104,280
265,000	Massachusetts State Port Authority Revenue, 13.000% due 7/1/13 (c)	328,454
1,000,000	Massachusetts State, HEFA Revenue, Caritas Christi Obligation, 6.750%
due 7/1/16	1,014,250
	Total Massachusetts	6,211,344
Michigan — 7.0%
2,130,000	Allen Academy, COP, 7.500% due 6/1/23	1,784,003
	Cesar Chavez Academy, COP:
1,000,000	6.500%
due 2/1/33	789,590
1,000,000	8.000%
due 2/1/33	939,870
1,000,000	Gaudior Academy, COP, 7.250% due 4/1/34	797,230
3,000,000	Michigan State Hospital Finance Authority, Refunding Hospital,
Sparrow Obligated, 5.000% due 11/15/31	2,477,580
2,000,000	Royal Oak, MI, Hospital Finance Authority Revenue, William Beaumont
Hospital, 8.250% due 9/1/39	2,279,620
975,000	Star International Academy, COP, 7.000% due 3/1/33	764,351
700,000	William C. Abney Academy, COP, 6.750% due 7/1/19	664,160
	Total Michigan	10,496,404
Missouri — 0.8%
1,300,000	Missouri State HEFA Revenue, Refunding, St. Lukes Episcopal, 5.000%
due 12/1/21	1,245,985
Montana — 1.3%
2,345,000	Montana State Board of Investment, Resource Recovery Revenue,
Yellowstone Energy LP Project, 7.000% due 12/31/19 (a)	1,950,477
New Hampshire — 1.0%
1,600,000	New Hampshire HEFA Revenue, Healthcare System, Covenant Health
System, 5.500% due 7/1/34	1,445,136
New Jersey — 8.8%
1,500,000	Casino Reinvestment Development Authority Revenue, NATL, 5.250% due
6/1/20	1,514,865
1,000,000	New Jersey EDA, Retirement Community Revenue, SeaBrook Village Inc.,
8.250% due 11/15/30 (b)	1,097,730
	New Jersey Health Care Facilities Financing Authority Revenue,
Trinitas Hospital Obligation Group:
5,000,000	5.250%
due 7/1/30	3,765,950
3,000,000	7.500%
due 7/1/30 (b)	3,208,170
5,000,000	New Jersey State, EDA, Revenue, Refunding, 6.875% due 1/1/37 (a)	3,681,300
	Total New Jersey	13,268,015
New Mexico — 1.3%
1,000,000	Otero County, NM, Jail Project Revenue, 7.500% due 12/1/24	930,350
1,000,000	Sandoval County, NM, Incentive Payment Revenue, Refunding, 5.000% due
6/1/20	1,045,610
	Total New Mexico	1,975,960

**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, 2009

Face Amount	Security	Value
New York — 3.7%
$ 700,000	Brookhaven, NY, IDA Civic Facilities Revenue, Memorial Hospital
Medical Center Inc., 8.250% due 11/15/30 (b)	$ 771,267
1,000,000	Monroe County, NY, IDA, Civic Facilities Revenue, Woodland Village
Project, 8.550% due 11/15/32 (b)	1,114,100
2,000,000	MTA, New York Service Contract, Refunding, AMBAC, 5.000% due 7/1/30	2,016,040
695,000	New York City, NY, IDA, Civic Facilities Revenue, Special Needs
Facilities Pooled Program, 8.125% due 7/1/19 (b)	730,424
840,000	Suffolk County, NY, IDA, Civic Facilities Revenue, Eastern Long
Island Hospital Association, 7.750% due 1/1/22 (b)	952,585
	Total New York	5,584,416
North Carolina — 0.6%
905,000	North Carolina Medical Care Community, Health Care Facilities
Revenue, First Mortgage, DePaul Community Facilities Project, 7.625% due
11/1/29 (b)	937,209
Ohio — 2.7%
1,500,000	Cuyahoga County, OH, Hospital Facilities Revenue, Canton Inc.
Project, 7.500% due 1/1/30	1,463,205
1,500,000	Miami County, OH, Hospital Facilities Revenue, Refunding and
Improvement Upper Valley Medical Center, 5.250% due 5/15/21	1,301,280
1,260,000	Riversouth Authority, OH, Revenue, Riversouth Area Redevelopment,
5.000% due 12/1/25	1,301,252
	Total Ohio	4,065,737
Pennsylvania — 5.9%
1,000,000	Cumberland County, PA, Municipal Authority Retirement Community
Revenue, Wesley Affiliate Services Inc. Project, 7.250% due 1/1/35 (b)	1,199,320
1,000,000	Lebanon County, PA, Health Facilities Authority Revenue, Good
Samaritan Hospital Project, 6.000% due 11/15/35	835,700
1,000,000	Monroe County, PA, Hospital Authority Revenue, Pocono Medical Center,
5.000% due 1/1/27	869,270
940,000	Northumberland County, PA, IDA Facilities Revenue, NHS Youth Services
Inc. Project, 7.500% due 2/15/29	776,515
2,000,000	Pennsylvania Economic Development Financing Authority, Health Systems
Revenue, Albert Einstein Healthcare, 6.250% due 10/15/23	2,004,260
1,000,000	Philadelphia, PA, Authority for IDR, Host Marriot LP Project,
Remarketed 10/31/95, 7.750% due 12/1/17 (a)	915,670
2,000,000	Westmoreland County, PA, IDA Revenue, Health Care Facilities,
Redstone Highlands Health, 8.125% due 11/15/30 (b)	2,199,080
	Total Pennsylvania	8,799,815
Tennessee — 2.3%
1,000,000	Clarksville, TN, Natural Gas Acquisition Corp. Gas Revenue, 5.000%
due 12/15/21	856,220
1,000,000	Johnson City, TN, Health & Educational Facilities Board,
Hospital Revenue, Mountain States Health Alliance, 5.500% due 7/1/36	799,020
2,500,000	Shelby County, TN, Health Educational & Housing Facilities
Board Revenue, Trezevant Manor Project, 5.750% due 9/1/37	1,852,575
	Total Tennessee	3,507,815
Texas — 15.2%
1,500,000	Brazos River, TX, Harbor Industrial Development Corp., Environmental
Facilities Revenue, Dow Chemical Co., 5.900% due 5/1/28 (a)(d)	1,307,865
1,500,000	Burnet County, TX, Public Facility Project Revenue, 7.500% due 8/1/24	1,449,075
	Garza County, TX, Public Facility Corp.:
1,000,000	5.500%
due 10/1/18	909,190
2,000,000	Project
Revenue, 5.750% due 10/1/25	1,990,260

**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, 2009

Face Amount	Security	Value
Texas — 15.2% (continued)
$ 2,000,000	Gulf Coast of Texas, IDA, Solid Waste Disposal Revenue, CITGO
Petroleum Corp. Project, 7.500% due 9/30/12 (a)(d)	$ 2,069,780
2,000,000	Harris County, TX, Cultural Education Facilities Finance Corp.,
Medical Facilities Revenue, Baylor College of Medicine, 5.625% due 11/15/32	1,998,520
2,750,000	Houston, TX, Airport Systems Revenue, Special Facilities, Continental
Airlines Inc. Project, 6.125% due 7/15/27 (a)	1,872,585
1,000,000	Laredo, TX, ISD Public Facility Corp. Lease Revenue, AMBAC, 5.000%
due 8/1/29	982,630
1,000,000	Midlothian, TX, Development Authority, Tax Increment Contract Revenue,
6.200% due 11/15/29	891,150
2,500,000	North Texas Tollway Authority Revenue, 5.750% due 1/1/40	2,454,050
2,000,000	Texas Midwest Public Facility Corp. Revenue, Secure Treatment
Facility Project, 9.000% due 10/1/30	2,009,560
1,500,000	Texas State Public Finance Authority, Uplift Education, 5.750% due
12/1/27	1,150,920
1,865,000	West Texas Detention Facility Corp. Revenue, 8.000% due 2/1/25	1,591,069
	Willacy County, TX:
1,025,000	Local
Government Corp. Revenue, 6.875% due 9/1/28	836,400
	PFC
Project Revenue:
1,000,000	8.250%
due 12/1/23	892,320
580,000	County
Jail, 7.500% due 11/1/25	489,021
	Total Texas	22,894,395
U.S. Virgin Islands — 1.7%
2,500,000	Virgin Islands Public Finance Authority Revenue, Matching Fund Loan,
6.750% due 10/1/37	2,506,975
Virginia — 2.9%
345,000	Alexandria, VA, Redevelopment & Housing Authority, MFH
Revenue, Parkwood Court Apartments Project, 8.125% due 4/1/30	305,435
1,000,000	Broad Street CDA Revenue, 7.500% due 6/1/33	811,550
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)	2,247,850
1,000,000	Fairfax County, VA, EDA Revenue, Retirement Community, Greenspring
Village Inc., 7.500% due 10/1/29 (b)	1,030,760
	Total Virginia	4,395,595
West Virginia — 1.4%
2,500,000	Pleasants County, WV, PCR, Refunding County Commission Allegheny,
5.250% due 10/15/37	2,149,725
Wisconsin — 0.6%
1,000,000	Wisconsin State HEFA Revenue, Aurora Health Care, 6.400% due 4/15/33	951,980
	TOTAL INVESTMENTS — 99.2% (Cost — $159,072,022#)	149,329,896
	Other Assets in Excess of Liabilities —
0.8%	1,261,619
	TOTAL NET ASSETS — 100.0%	$ 150,591,515

| † | Under the Statement of Financial Accounting
Standards No. 157, all securities are deemed Level 2. Please refer to
Note 1 of the Notes to Schedule of Investments. |
| --- | --- |
| (a) | Income from this issue is considered a
preference item for purposes of calculating the alternative minimum tax
(“AMT”). |
| (b) | 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. |
| (c) | 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. |
| (d) | Maturity date shown represents the
mandatory tender date. |
| (e) | 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. |
| # | Aggregate cost for federal
income tax purposes is substantially the same. |

**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, 2009

| Abbreviations
used in this schedule: — AMBAC | - | American Municipal Bond
Assurance Corporation - Insured Bonds |
| --- | --- | --- |
| CDA | - | Community Development
Authority |
| COP | - | Certificate of
Participation |
| DFA | - | Development Finance Agency |
| EDA | - | Economic Development
Authority |
| EDR | - | Economic Development
Revenue |
| 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 |
| MFH | - | Multi-Family Housing |
| MTA | - | Metropolitan
Transportation Authority |
| NATL | - | National Public Finance
Guarantee Corporation - Insured Bonds |
| PCR | - | Pollution Control Revenue |
| PFC | - | Public Facilities
Corporation |

**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, 2009

| Summary of Investments by Industry
* | |
| --- | --- |
| Health Care | 19.5 % |
| Pre-Refunded/Escrowed to Maturity | 18.6 |
| Industrial Revenue | 14.5 |
| Leasing | 12.0 |
| Education | 7.1 |
| Power | 5.3 |
| Special Tax Obligation | 4.9 |
| Transportation | 4.7 |
| Solid Waste/Resource Recovery | 4.2 |
| Other | 3.6 |
| Local General Obligation | 2.2 |
| Water & Sewer | 2.0 |
| Housing | 1.4 |
| | 100.0 % |

*As a percentage of total investments. Please note that Fund holdings are as of July, 31, 2009 and are subject to change.

Ratings Table†
S&P/Moody’s/Fitch‡
AAA/Aaa	8.9 %
AA/Aa	3.6
A	26.3
BBB/Baa	25.5
BB/Ba	5.0
B	1.3
CC/Ca	0.4
NR	29.0
	100.0 %

*†* As a percentage of total investments.

*‡* In the event that a security is rated by multiple nationally recognized statistical rating organizations (“NRSROs”) and receives different ratings, the fund will treat the security as being rated in the lowest rating category received from an NRSRO.

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 |

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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. |

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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.

The Fund adopted Statement of Financial Accounting Standard No. 157 (“FAS 157”). FAS 157 establishes a single definition of fair value, creates a three-tier hierarchy as a framework for measuring fair value based on inputs used to value the Fund’s investments, and requires additional disclosure about fair value. The hierarchy of inputs is summarized below.

· Level 1 – quoted prices in active markets for identical investments

· Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

· Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used in valuing the Fund’s assets carried at fair value:

Description	Quoted Prices (Level 1)	Other Significant Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Municipal Bonds†	—	$ 149,329,896	—

† See Schedule of Investments for additional detailed categorizations.

*(b) 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.

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

*2. Investments*

At July 31, 2009, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:

Gross unrealized appreciation	$
Gross unrealized depreciation	(13,956,957	)
Net unrealized depreciation	$ (9,742,126	)

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

*3. Derivative instruments and hedging activities*

Financial Accounting Standards Board Statement of Financial Accounting Standards No. 161, “Disclosure about Derivative Instruments and Hedging Activities, ” requires enhanced disclosure about an entity’s derivative and hedging activities.

At July 31, 2009, the Fund did not hold any derivative instruments.

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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	/s/ R. Jay Gerken
	R. Jay Gerken
	Chief Executive Officer
Date:	September 28, 2009

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	/s/ R. Jay Gerken
	R. Jay Gerken
	Chief Executive Officer
Date:	September 28, 2009
By	/s/ Kaprel Ozsolak
	Kaprel Ozsolak
	Chief Financial Officer
Date:	September 28, 2009

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