WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.

Regulatory Filings • Jan 7, 2009

N-CSR 1 a08-28932_1ncsr.htm N-CSR

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

*FORM N-CSR*

*CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES*

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, 4 th Floor Stamford, CT 06902
(Name and address of agent for
service)
Registrant’s telephone number, including
area code:	(800) 451-2010
Date of fiscal year end:	October 31
Date of reporting period:	October 31,
2008

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ITEM 1. REPORT TO STOCKHOLDERS.

The Annual Report to Stockholders is filed herewith.

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*ANNUAL REPORT* / OCTOBER 31, 2008

*Western Asset*

*Municipal High Income*

*Fund Inc.*

*(MHF)*

Managed by WESTERN ASSET

INVESTMENT PRODUCTS: NOT FDIC INSURED · NO BANK GUARANTEE · MAY LOSE VALUE

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*Fund objective*

The Fund seeks high current income exempt from federal income taxes.

*What’s inside*

Letter from the chairman	I
Fund overview	1
Fund at a glance	6
Schedule of investments	7
Statement of assets and liabilities	18
Statement of operations	19
Statements of changes in net assets	20
Financial highlights	21
Notes to financial statements	22
Report of independent register public accounting firm	27
Additional information	28
Annual chief executive officer and chief financial officer
certifications	34
Dividend reinvestment plan	35
Important tax information	37

*Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager and Western Asset Management Company (“Western Asset”) is the Fund’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc.*

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*Letter from the chairman*

Dear Shareholder,

Economic growth in the U.S. was mixed during the 12-month reporting period ended October 31, 2008. Looking back, third quarter 2007 U.S. gross domestic product (“GDP”) i growth was a strong 4.8%. However, continued weakness in the housing market, an ongoing credit crunch and soaring oil and food prices then took their toll on the economy, as fourth quarter 2007 GDP declined 0.2%. The economy then expanded 0.9% and 2.8% during the first and second quarters of 2008, respectively. This rebound was due, in part, to rising exports that were buoyed by a weakening U.S. dollar, and solid consumer spending, which was aided by the government’s tax rebate program. The dollar’s rally and the end of the rebate program, combined with other strains on the economy, then caused GDP to take a step backward in the third quarter of 2008. According to the preliminary estimate released by the U.S. Department of Commerce, third quarter 2008 GDP declined 0.5%.

The latest Bureau of Economic Research release indicates that the U.S. is currently in recession. Evidence supporting this conclusion includes a slowdown in consumer spending, with four consecutive months of declining retail sales from July through October 2008. According to the Department of Commerce, October’s 2.8% fall in retail sales is the sharpest decline since it began tracking this data in 1992. In terms of the job market, the U.S. Department of Labor reported that payroll employment declined in each of the first 10 months of 2008. Year-to-date through October, roughly 1.2 million jobs have been shed and the unemployment rate now stands at 6.5%, its highest level since 1994.

Ongoing issues related to the housing and subprime mortgage markets and seizing credit markets prompted the Federal Reserve Board (“Fed”) ii to take aggressive and, in some cases, unprecedented actions. Beginning in September 2007, the Fed reduced the federal funds rate iii from 5.25% to 4.75%. This marked the first such reduction since June 2003. The Fed then reduced the federal funds rate on six additional occasions through April 2008, bringing the federal funds rate to 2.00%. The Fed then shifted gears in the face of mounting inflationary prices and a weakening U.S. dollar. At its

Western Asset Municipal High Income Fund Inc. I

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*Letter from the chairman continued***

meetings in June, August and September 2008, the Fed held rates steady. Then, on October 8, 2008, in a global coordination effort with six central banks around the world, interest rates were cut in an attempt to reduce the strains in the global financial markets. At that time, the Fed lowered the federal funds rate from 2.00% to 1.50%. The Fed again cut rates from 1.50% to 1.00% at its regularly scheduled meeting on October 29, 2008. In conjunction with its October meeting, the Fed stated: “The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. ... Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”

In addition to the interest rate cuts, the Fed took several actions to improve liquidity in the credit markets. In March 2008, the Fed established a new lending program allowing certain brokerage firms, known as primary dealers, to also borrow from its discount window. Also in March, the Fed played a major role in facilitating the purchase of Bear Stearns by JPMorgan Chase. In mid-September 2008, it announced an $85 billion rescue plan for ailing AIG and pumped $70 billion into the financial system as Lehman Brothers’ bankruptcy and mounting troubles at other financial firms roiled the markets.

The U.S. Department of the Treasury has also taken an active role in attempting to stabilize the financial system, as it orchestrated the government’s takeover of mortgage giants Fannie Mae and Freddie Mac in September. In addition, on October 3, 2008, the Treasury’s $700 billion Troubled Asset Relief Program (“TARP”) was approved by Congress and signed into law by President Bush. As part of TARP, the Treasury had planned to make a $250 billion capital injection into some of the nation’s largest banks. However, in November 2008 (after the reporting period ended), Treasury Secretary Paulson said the Treasury no longer intended to use TARP to purchase bad loans and other troubled financial assets.

During the 12-month reporting period ended October 31, 2008, both short- and long-term Treasury yields experienced periods of extreme volatility. Investors were initially focused on the subprime segment of the mortgage-backed market. These concerns broadened, however, to include a wide range of financial institutions and markets. As a result, other fixed-income instruments also experienced increased price volatility. This unrest triggered several “flights to quality,” causing Treasury yields to move lower (and their prices higher), while riskier segments of the market saw their yields move higher (and their prices lower). This was particularly true toward the end of the reporting period, as the turmoil in the financial markets and sharply falling stock prices caused investors to flee securities that were perceived to be risky, even high-quality corporate bonds and high-grade municipal bonds.

II Western Asset Municipal High Income Fund Inc.

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At one point in September, the yield available from the three-month Treasury bill fell to 0.04%, as investors were essentially willing to forgo any return potential in order to access the relative safety of government-backed securities. During the 12 months ended October 31, 2008, two-year Treasury yields fell from 3.94% to 1.56%. Over the same time frame, 10-year Treasury yields moved from 4.48% to 4.01%.

The municipal bond market underperformed its taxable bond counterpart over the 12 months ended October 31, 2008. Over that period, the Barclays Capital Municipal Bond Index iv and the Barclays Capital U.S. Aggregate Index v returned -3.30% and 0.30%, respectively. Even though municipal securities typically hold up fairly well during periods of market volatility, the aforementioned flight to quality into Treasuries negatively impacted the tax-free bond market.

*A special note regarding increased market volatility*

In recent months, we have experienced a series of events that have impacted the financial markets and created concerns among both novice and seasoned investors alike. In particular, we have witnessed the failure and consolidation of several storied financial institutions, periods of heightened market volatility, and aggressive actions by the U.S. federal government to steady the financial markets and restore investor confidence. While we hope that the worst is over in terms of the issues surrounding the credit and housing crises, it is likely that the fallout will continue to impact the financial markets and the U.S. economy during the remainder of the year and into 2009 as well.

Like all asset management firms, Legg Mason has not been immune to these difficult and, in some ways, unprecedented times. However, today’s challenges have only strengthened our resolve to do everything we can to help you reach your financial goals. Now, as always, we remain committed to providing you with excellent service and a full spectrum of investment choices. And rest assured, we will continue to work hard to ensure that our investment managers make every effort to deliver strong long-term results.

We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our enhanced website, www.leggmason.com/cef. Here you can gain immediate access to many special features to help guide you through difficult times, including:

· Fund prices and performance,

· Market insights and commentaries from our portfolio managers, and

· A host of educational resources.

Western Asset Municipal High Income Fund Inc. III

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*Letter from the chairman continued***

During periods of market unrest, it is especially important to work closely with your financial advisor and remember that reaching one’s investment goals unfolds over time and through multiple market cycles. Time and again, history has shown that, over the long run, the markets have eventually recovered and grown.

*Information about your fund*

Please read on for a more detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.

Important information with regard to recent regulatory developments that may affect the Fund is contained in the Notes to Financial Statements included in this report.

As always, thank you for your confidence in our stewardship of your assets. We look forward to helping you meet your financial goals.

Sincerely,

*R. Jay Gerken, CFA*

Chairman, President and Chief Executive Officer

December 1, 2008

All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

| i | Gross
domestic product (“GDP”) is the market value of all final goods and services
produced within a country in a given period of time. |
| --- | --- |
| ii | The
Federal Reserve Board (“Fed”) is responsible for the formulation of policies
designed to promote economic growth, full employment, stable prices, and a
sustainable pattern of international trade and payments. |
| iii | The
federal funds rate is the rate charged by one depository institution on an
overnight sale of immediately available funds (balances at the Federal
Reserve) to another depository institution; the rate may vary from depository
institution to depository institution and from day to day. |
| iv | The
Barclays Capital (formerly Lehman Brothers) Municipal Bond Index is a market
value weighted index of investment grade municipal bonds with maturities of
one year or more. |
| v | The
Barclays Capital (formerly Lehman Brothers) U.S. Aggregate Index is a
broad-based bond index comprised of government, corporate, mortgage- and
asset-backed issues, rated investment grade or higher, and having at least
one year to maturity. |

IV Western Asset Municipal High Income Fund Inc.

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*Fund overview*

*Q. What is the Fund’s investment strategy?*

*A.* The Fund seeks high current income exempt from federal income taxes. The Fund invests primarily in intermediate- and long-term municipal debt securities issued by state and local governments. However, the Fund may invest in municipal obligations of any maturity. The Fund may invest in non-publicly traded municipal securities, zero-coupon municipal obligations, and non-appropriation or other municipal lease obligations.

At Western Asset Management Company (“Western Asset”), the Fund’s subadviser, we utilize a fixed-income team approach, with decisions derived from interaction among various investment management sector specialists. The sector teams are comprised of Western Asset’s senior portfolio managers, research analysts and an in-house economist. Under this team approach, management of client fixed-income portfolios will reflect a consensus of interdisciplinary views within the Western Asset organization.

*Q. What were the overall market conditions during the Fund’s reporting period?*

*A.* During the fiscal year, the U.S. bond market experienced periods of increased volatility. Changing perceptions regarding the economy, inflation and future Federal Reserve Board (“Fed”) i monetary policy caused bond prices to fluctuate. Two- and 10-year Treasury yields began the reporting period at 3.94% and 4.48%, respectively. Treasury yields moved lower—and their prices moved higher—toward the end of 2007 and during the first quarter of 2008, as concerns regarding the subprime mortgage market and a severe credit crunch caused a “flight to quality.” During this period, investors were drawn to the relative safety of Treasuries, while increased risk aversion caused other segments of the bond market to falter.

Treasury yields then moved higher in April, May and early June 2008, as the economy performed better than expected and inflation moved higher. Over this period, riskier fixed-income asset classes, such as high-yield bonds and emerging market debt rallied. However, the credit crunch resumed in mid-June, resulting in another flight to quality. Investors’ risk aversion then intensified in September and October 2008 given the severe disruptions in the global financial markets. During this time, virtually every asset class, with the exception of short-term Treasuries, performed poorly. At the end of the fiscal year, two- and 10-year Treasury yields were 1.56% and 4.01%, respectively.

The Fed attempted to stimulate economic growth by cutting the federal funds rate ii from 5.25% to 2.00% from September 2007 through April 2008. It then held rates steady until October 2008, citing inflationary pressures triggered by soaring oil prices. However, with the global economy moving toward a

Western Asset Municipal High Income Fund Inc. 2008 Annual Report 1

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*Fund overview continued***

recession, oil prices falling sharply, and the financial markets in disarray, the Fed lowered interest rates twice in October 2008. The first cut occurred on October 8 th , as the Fed and several other central banks around the world lowered rates in a coordinated effort. At that time, the Fed reduced the federal funds rate from 2.00% to 1.50%. Three weeks later, at its regularly scheduled meeting on October 29 th , the Fed lowered rates from 1.50% to 1.00%. The Fed also left the door open to further actions, saying: “The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.”

Tax-free bonds were not immune to the volatility in the financial markets during the reporting period. In addition to increased risk aversion, the municipal market was pressured by issues related to monoline bond insurers and a lack of liquidity. In addition, there were fears that an economic recession would negatively impact municipalities, as they would generate less tax revenues.

*Q. How did we respond to these changing market conditions?*

*A.* During the 12-month reporting period, two major themes played out as we had expected. First, the municipal yield curve iii steepened dramatically from a very flat to a more normal or, at various times, steep slope. Second, credit quality spreads significantly widened and deleveraging in the municipal market created an environment where demand for higher-quality tax-free securities increased. As a result of these developments, we extended the Fund’s duration iv and added some attractively valued lower-quality securities to the portfolio.

*Performance review*

For the 12 months ended October 31, 2008, Western Asset Municipal High Income Fund Inc. returned -9.02% based on its net asset value (“NAV”) v and -10.89% based on its New York Stock Exchange (“NYSE”) market price per share. The Fund’s unmanaged benchmark, the Barclays Capital Municipal Bond Index vi , returned -3.30% over the same time frame. The Lipper High Yield Municipal Debt Closed-End Funds Category Average vii returned -21.19% for the same period. Please note that Lipper performance returns are based on each fund’s NAV.

Certain investors may be subject to the federal alternative minimum tax, and state and local taxes will apply. Capital gains, if any, are fully taxable. Please consult your personal tax or legal adviser.

During the 12-month period, the Fund made distributions to shareholders totaling $0.42 per share. The performance table on the next page shows the Fund’s 12-month total return based on its NAV and market price as of October 31, 2008. Past performance is no guarantee of future results.

2 Western Asset Municipal High Income Fund Inc. 2008 Annual Report

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*PERFORMANCE SNAPSHOT* as of October 31, 2008 (unaudited)

| PRICE
PER SHARE | 12-MONTH TOTAL RETURN* |
| --- | --- |
| $7.08 (NAV) | -9.02 % |
| $6.53 (Market Price) | -10.89 % |

*All figures represent past performance and are not a guarantee of future results.*

• Total returns are based on changes in NAV or market price, respectively. Total returns assume the reinvestment of all distributions in additional shares in accordance with the Fund’s Dividend Reinvestment Plan.

*Q. What were the leading contributors to performance?*

*A.* An overweight to higher-quality issues contributed to the Fund’s relative performance as these positions outperformed lower-rated securities during the reporting period. An overall shorter duration versus the benchmark also helped performance as longer duration securities underperformed their shorter duration counterparts. An overweight to the Pre-refunded viii sector of the municipal market was a positive contributor as these securities benefited from the flight to quality that occurred throughout the fixed-income market. An underweight to the Housing sector was also a relative contributor as this sector performed poorly due to negative developments in the residential housing market. A lack of exposure to the Tobacco sector benefited relative performance as this was one of the worst performing areas in the municipal bond market.

*Q. What were the leading detractors from performance?*

*A.* An overweight to the Health Care 1 sector detracted from relative performance as spreads within this sector widened significantly during the fiscal year. The Fund’s exposure to the Industrial Development Revenue/Pollution Control Revenue sector was a detractor from performance as these securities, which are essentially backed by corporations, experienced significant spread widening during the reporting period. While the Fund’s duration was shorter than that of its benchmark, it held certain longer duration positions in the portfolio when the reporting period began. We also added some longer duration securities to the portfolio in the spring of 2008. These holdings detracted from results due, in part, to continued deleveraging which caused longer maturity municipal securities to lag their shorter maturity counterparts.

1 Health Care consists of the following industries: Hospitals/Nursing Facilities, Pharmacy Services, Medical Wholesale Drug Distributors, Drug Delivery Systems, Medical Products/Instruments, Medical & Laboratory Testing, Healthcare Cost Containment and Scientific Instruments.

Western Asset Municipal High Income Fund Inc. 2008 Annual Report 3

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*Fund overview continued***

*Looking for additional information?*

The Fund is traded under the symbol “MHF” and its closing market price is available in most newspapers under the NYSE listings. The daily NAV is available on-line under the symbol “XMHFX” on most financial websites. Barron’s and The Wall Street Journal’s Monday edition both carry closed-end fund tables that provide additional information. In addition, the Fund issues a quarterly press release that can be found on most major financial websites, as well as www.leggmason.com/cef.

In a continuing effort to provide information concerning the Fund, shareholders may call 1-888-777-0102 (toll free), Monday through Friday from 8:00 a.m. to 6:00 p.m. Eastern Time, for the Fund’s current NAV, market price and other information.

Thank you for your investment in Western Asset Municipal High Income Fund Inc. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.

Sincerely,

*Western Asset Management Company*

November 18, 2008

4 Western Asset Municipal High Income Fund Inc. 2008 Annual Report

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The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.

RISKS: The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. High-yield bonds involve greater credit and liquidity risks than investment grade bonds. As interest rates rise, bond prices fall, reducing the value of the Fund’s share price. Certain investors may be subject to the federal alternative minimum tax, and state and local taxes will apply. Capital gains, if any, are fully taxable.

All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

| i | The
Federal Reserve Board (“Fed”) is responsible for the formulation of policies
designed to promote economic growth, full employment, stable prices, and a
sustainable pattern of international trade and payments. |
| --- | --- |
| ii | The
federal funds rate is the rate charged by one depository institution on an
overnight sale of immediately available funds (balances at the Federal
Reserve) to another depository institution; the rate may vary from depository
institution to depository institution and from day to day. |
| iii | The
yield curve is the graphical depiction of the relationship between the yield
on bonds of the same credit quality but different maturities. |
| iv | Duration
is the measure of the price sensitivity of a fixed-income security to an
interest rate change of 100 basis points. Calculation is based on the
weighted average of the present values for all cash flows. |
| v | Net
asset value (“NAV”) is calculated by subtracting total liabilities and
outstanding preferred stock (if any) from the closing value of all securities
held by the Fund (plus all other assets) and dividing the result (total net
assets) by the total number of the common shares outstanding. The NAV
fluctuates with changes in the market prices of securities in which the Fund
has invested. However, the price at which an investor may buy or sell shares
of the Fund is at the Fund’s market price as determined by supply of and
demand for the Fund’s shares. |
| vi | The
Barclays Capital (formerly Lehman Brothers) Municipal Bond Index is a market
value weighted index of investment grade municipal bonds with maturities of
one year or more. |
| vii | Lipper, Inc.,
a wholly-owned subsidiary of Reuters, provides independent insight on global
collective investments. Returns are based on the 12-month period ended
October 31, 2008, including the reinvestment of all distributions,
including returns of capital, if any, calculated among the 14 funds in the
Fund’s Lipper category. |
| viii | A
pre-refunded bond is a bond in which the original security has been replaced
by an escrow, usually consisting of treasuries or agencies, which has been
structured to pay principal and interest and any call premium, either to a
call date (in the case of a pre-refunded bond), or to maturity (in the case
of an escrowed to maturity bond). |

Western Asset Municipal High Income Fund Inc. 2008 Annual Report 5

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*Fund at a glance (unaudited)*

*INVESTMENT BREAKDOWN (%)* As a percent of total investments — October 31, 2008

6 Western Asset Municipal High Income Fund Inc. 2008 Annual Report

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*Schedule of investments*

*October 31, 2008*

*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*

FACE AMOUNT	SECURITY	VALUE
MUNICIPAL
BONDS — 96.2%
	Alaska —
0.6%
$ 1,055,000	Alaska
Industrial Development & Export Authority Revenue, Williams Lynxs Alaska
Cargoport, 8.125% due 5/1/31 (a)	$ 911,699
	Arizona
— 1.6%
1,720,000	Phoenix, AZ,
IDA, MFH Revenue, Ventana Palms Apartments Project, 8.000% due 10/1/34*	1,853,266
1,000,000	Salt Verde,
AZ Financial Corp., Gas Revenue, 5.000% due 12/1/37	613,230
	Total Arizona	2,466,496
	Arkansas
— 1.1%
	Arkansas
State Development Financing Authority:
1,000,000	Hospital Revenue, Washington Regional
Medical Center, 7.375% due 2/1/29 (b)	1,061,200
600,000	Industrial Facilities Revenue, Potlatch
Corp. Projects, 7.750% due 8/1/25 (a)	528,138
	Total Arkansas	1,589,338
	California
— 6.1%
1,500,000	Barona, CA,
Band of Mission Indians, GO, 8.250% due 12/1/20 (c)	1,443,885
2,000,000	California
Health Facilities Financing Authority Revenue, Refunding, Cedars-Sinai
Medical Center, 5.000% due 11/15/27	1,757,380
	Golden State
Tobacco Securitization Corp., California Tobacco Settlement Revenue:
2,000,000	Asset Backed, 7.800% due 6/1/42 (b)	2,330,960
1,000,000	Enhanced Asset Backed, 5.625% due 6/1/38 (b)	1,075,040
600,000	Redding, CA,
Redevelopment Agency, Tax Allocation, Shastec Redevelopment Project, 5.000%
due 9/1/29	500,598
1,865,000	Vallejo, CA,
COP, Touro University, 7.375% due 6/1/29 (b)	1,965,262
	Total California	9,073,125
	Colorado
— 5.3%
	Colorado
Educational & Cultural Facilities Authority Revenue:
740,000	Charter School, Peak to Peak Project,
7.500% due 8/15/21 (b)	816,198
	Cheyenne Mountain Charter Academy:
680,000	5.250% due 6/15/25	570,622
510,000	5.125% due 6/15/32	392,542
785,000	Elbert County Charter, 7.375% due 3/1/35	692,582
810,000	Unrefunded, University of Denver Project,
FGIC, 5.250% due 3/1/23	793,970
4,000,000	Public
Authority for Colorado Energy, Natural Gas Purchase Revenue, 6.125% due
11/15/23	3,256,760
1,000,000	Reata South
Metropolitan District, CO, GO, 7.250% due 6/1/37	784,590
500,000	Southlands,
CO, Metropolitan District No. 1, GO, 7.125% due 12/1/34 (b)	591,460
	Total Colorado	7,898,724

See Notes to Financial Statements.

Western Asset Municipal High Income Fund Inc. 2008 Annual Report 7

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*Schedule of investments continued***

*October 31, 2008*

*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*

FACE AMOUNT	SECURITY	VALUE
	District
of Columbia — 1.3%
$ 1,895,000	District of
Columbia COP, District Public Safety & Emergency, AMBAC, 5.500% due
1/1/20	$ 1,922,838
	Florida
— 10.1%
890,000	Beacon
Lakes, FL, Community Development District, Special Assessment, 6.900% due
5/1/35	749,852
1,500,000	Bonnet Creek
Resort Community Development District, Special Assessment, 7.500% due 5/1/34	1,373,595
	Capital
Projects Finance Authority, FL:
2,000,000	Continuing Care Retirement Glenridge on
Palmer Ranch, 8.000% due 6/1/32 (b)	2,276,220
2,000,000	Student Housing Revenue, Capital Projects Loan Program, Florida
University, 7.850% due 8/15/31 (b)	2,229,820
935,000	Century Parc
Community Development District, Special Assessment, 7.000% due 11/1/31	767,008
1,000,000	Highlands
County, FL, Health Facilities Authority Revenue, Adventist Health Systems,
6.000% due 11/15/25 (b)	1,092,360
2,000,000	Martin
County, FL, IDA Revenue, Indiantown Cogeneration Project, 7.875% due 12/15/25 (a)	1,823,880
1,000,000	Orange
County, FL, Health Facilities Authority Revenue, First Mortgage, GF, Orlando
Inc. Project, 9.000% due 7/1/31	1,018,310
345,000	Palm Beach
County, FL, Health Facilities Authority Revenue, John F. Kennedy Memorial
Hospital Inc. Project, 9.500% due 8/1/13 (d)	402,322
2,000,000	Reunion East
Community Development District, Special Assessment, 7.375% due 5/1/33	1,846,560
1,000,000	Santa Rosa,
FL, Bay Bridge Authority Revenue, 6.250% due 7/1/28	740,410
1,000,000	University
of Central Florida, COP, FGIC, 5.000% due 10/1/25	850,260
	Total Florida	15,170,597
	Georgia
— 4.9%
	Atlanta, GA,
Airport Revenue:
1,000,000	FGIC, 5.625% due 1/1/30 (a)	857,630
1,000,000	FSA, 5.000% due 1/1/26	937,230
2,000,000	Atlanta, GA,
Development Authority Educational Facilities Revenue, Science Park LLC
Project, 5.000% due 7/1/32	1,672,600
2,500,000	Atlanta, GA,
Tax Allocation, Atlantic Station Project, 7.900% due 12/1/24 (b)	2,883,700
1,000,000	Gainesville &
Hall County, GA, Development Authority Revenue, Senior Living Facilities,
Lanier Village Estates, 7.250% due 11/15/29	947,500
	Total Georgia	7,298,660
	Illinois
— 0.5%
1,000,000	Illinois
Finance Authority Revenue, Refunding, Chicago Charter School Project, 5.000%
due 12/1/26	727,170

See Notes to Financial Statements.

8 Western Asset Municipal High Income Fund Inc. 2008 Annual Report

SEQ.=1,FOLIO='8',FILE='C:\JMS\105727\08-28932-1\task3284718\28932-1-bi-05.htm',USER='105727',CD='Dec 31 05:33 2008'

*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*

FACE AMOUNT	SECURITY	VALUE
	Indiana
— 0.4%
	County of
St. Joseph, IN, EDR, Holy Cross Village Notre Dame Project:
$ 285,000	6.000% due 5/15/26	$ 219,584
550,000	6.000% due 5/15/38	386,166
	Total Indiana	605,750
	Kansas —
0.7%
1,150,000	Salina, KS,
Hospital Revenue, Refunding & Improvement Salina Regional Health,
5.000% due 10/1/22	1,032,320
	Kentucky
— 0.9%
2,000,000	Louisville &
Jefferson County, KY, Metro Government Health System Revenue, Norton
Healthcare Inc., 5.250% due 10/1/36	1,379,540
	Louisiana
— 1.0%
1,000,000	Epps, LA,
COP, 8.000% due 6/1/18	920,610
1,000,000	St. John
Baptist Parish, LA, Revenue, Marathon Oil Corp., 5.125% due 6/1/37	623,940
	Total Louisiana	1,544,550
	Maryland
— 1.1%
1,500,000	Maryland
State Economic Development Corp. Revenue, Chesapeake Bay, 7.730% due 12/1/27 (b)	1,609,560
	Massachusetts
— 4.0%
890,000	Boston, MA,
Industrial Development Financing Authority Revenue, Roundhouse Hospitality
LLC Project, 7.875% due 3/1/25 (a)	745,989
3,000,000	Massachusetts
Educational Financing Authority Education Loan Revenue, 6.125% due 1/1/22 (a)	2,731,170
1,000,000	Massachusetts
State DFA Revenue, Briarwood, 8.250% due 12/1/30 (b)	1,123,150
1,000,000	Massachusetts
State HEFA Revenue, Caritas Christi Obligation, 6.750% due 7/1/16	979,470
315,000	Massachusetts
State Port Authority Revenue, 13.000% due 7/1/13 (d)	397,017
	Total Massachusetts	5,976,796
	Michigan
— 6.1%
2,130,000	Allen
Academy, COP, 7.500% due 6/1/23	1,797,315
	Cesar Chavez
Academy, COP:
1,000,000	6.500% due 2/1/33	819,390
1,000,000	8.000% due 2/1/33	975,810
1,000,000	Gaudior
Academy, COP, 7.250% due 4/1/34	807,030
1,750,000	Kalamazoo
Advantage Academy, COP, 8.000% due 12/1/33†	875,000
3,000,000	Michigan
State Hospital Finance Authority, Refunding Hospital, Sparrow Obligated,
5.000% due 11/15/31	2,322,420
990,000	Star
International Academy, COP, 7.000% due 3/1/33	785,189
700,000	William C.
Abney Academy, COP, 6.750% due 7/1/19	671,734
	Total Michigan	9,053,888

See Notes to Financial Statements.

Western Asset Municipal High Income Fund Inc. 2008 Annual Report 9

SEQ.=1,FOLIO='9',FILE='C:\JMS\105727\08-28932-1\task3284718\28932-1-bi-05.htm',USER='105727',CD='Dec 31 05:33 2008'

*Schedule of investments continued***

*October 31, 2008*

*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*

FACE AMOUNT	SECURITY	VALUE
	Missouri
— 0.7%
$ 1,300,000	Missouri
State HEFA Revenue, Refunding, St. Lukes Episcopal, 5.000% due 12/1/21	$ 1,125,891
	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)	2,101,447
	New
Hampshire — 0.9%
1,600,000	New
Hampshire HEFA Revenue, Covenant Health System, 5.500% due 7/1/34	1,287,424
	New
Jersey — 10.4%
1,500,000	Casino
Reinvestment Development Authority Revenue, MBIA, 5.250% due 6/1/20	1,418,820
1,000,000	New Jersey
EDA, Retirement Community Revenue, SeaBrook Village Inc., 8.250% due 11/15/30 (b)	1,114,460
	New Jersey Health
Care Facilities Financing Authority Revenue, Trinitas Hospital Obligation
Group:
5,000,000	5.250% due 7/1/30	3,676,550
3,000,000	7.500% due 7/1/30 (b)	3,268,890
5,000,000	New Jersey
State, EDA, Revenue, Refunding, 6.875% due 1/1/37 (a)	4,103,450
1,750,000	Tobacco
Settlement Financing Corp., 6.750% due 6/1/39 (b)	1,997,047
	Total New Jersey	15,579,217
	New
Mexico — 1.3%
1,000,000	Otero
County, NM, Jail Project Revenue, 7.500% due 12/1/24	951,660
1,000,000	Sandoval
County, NM, Incentive Payment Revenue, Refunding, 5.000% due 6/1/20	988,720
	Total New Mexico	1,940,380
	New York
— 5.8%
700,000	Brookhaven,
NY, IDA Civic Facilities Revenue, Memorial Hospital Medical Center Inc.,
8.250% due 11/15/30 (b)	782,341
2,000,000	Metropolitan
Transportation Authority of New York, AMBAC, 5.000% due 7/1/30	1,848,000
1,000,000	Monroe
County, NY, IDA, Civic Facilities Revenue, Woodland Village Project, 8.550%
due 11/15/32 (b)	1,127,640
780,000	New York
City, NY, IDA, Civic Facilities Revenue, Special Needs Facilities Pooled
Program, 8.125% due 7/1/19 (b)	841,659
	New York
State Dormitory Authority Revenue:
1,500,000	Mental Health Services Facilities
Improvement, AMBAC, 5.000% due 2/15/35	1,315,635
2,500,000	New York University Hospitals Center,
5.000% due 7/1/26	1,819,475
875,000	Suffolk
County, NY, IDA, Civic Facilities Revenue, Eastern Long Island Hospital
Association, 7.750% due 1/1/22 (b)	970,734
	Total New York	8,705,484

See Notes to Financial Statements.

10 Western Asset Municipal High Income Fund Inc. 2008 Annual Report

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*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*

FACE AMOUNT	SECURITY	VALUE
	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)	$ 968,377
	Ohio — 2.6%
1,500,000	Cuyahoga County, OH, Hospital Facilities
Revenue, Canton Inc. Project, 7.500% due 1/1/30	1,471,755
1,500,000	Miami
County, OH, Hospital Facilities Revenue, Refunding and Improvement Upper
Valley Medical Center, 5.250% due 5/15/21	1,236,975
1,260,000	Riversouth Authority, OH, Revenue,
Riversouth Area Redevelopment, 5.000% due 12/1/25	1,217,828
	Total Ohio	3,926,558
	Pennsylvania — 4.5%
1,000,000	Cumberland
County, PA, Municipal Authority Retirement Community Revenue, Wesley
Affiliate Services Inc. Project, 7.250% due 1/1/35 (b)	1,159,190
1,000,000	Lebanon
County, PA, Health Facilities Authority Revenue, Good Samaritan Hospital
Project, 6.000% due 11/15/35	762,250
1,000,000	Monroe
County, PA, Hospital Authority Revenue, Pocono Medical Center, 5.000% due
1/1/27	775,620
955,000	Northumberland
County, PA, IDA Facilities Revenue, NHS Youth Services Inc. Project, 7.500%
due 2/15/29	777,093
1,000,000	Philadelphia,
PA, Authority for IDR, Host Marriot LP Project, Remarketed 10/31/95, 7.750%
due 12/1/17 (a)	1,000,000
2,000,000	Westmoreland
County, PA, IDA Revenue, Health Care Facilities, Redstone Highlands Health,
8.125% due 11/15/30 (b)	2,211,460
	Total Pennsylvania	6,685,613
	South Carolina — 0.1%
110,000	McCormick County, SC, COP, 9.750% due
7/1/09	110,505
	Tennessee — 1.6%
1,000,000	Clarksville, TN, Natural Gas Acquisition
Corp. Gas Revenue, 5.000% due 12/15/21	730,300
2,500,000	Shelby
County, TN, Health Educational & Housing Facilities Board Revenue,
Trezevant Manor Project, 5.750% due 9/1/37	1,659,125
	Total Tennessee	2,389,425
	Texas — 15.9%
540,000	Bexar
County, TX, Housing Financial Corp., MFH Revenue, Continental Lady Ester,
6.875% due 6/1/29 (b)	566,530
1,500,000	Brazos
River, TX, Harbor Industrial Development Corp., Environmental Facilities
Revenue, Dow Chemical Co., 5.900% due 5/1/38 (a)(e)	1,181,970
2,000,000	Brazos River Authority Texas PCR, TXU Co.,
8.250% due 5/1/33 (a) *	1,516,260
1,500,000	Burnet County, TX, Public Facility Project
Revenue, 7.500% due 8/1/24	1,290,900
	Garza County, TX, Public Facility Corp.:
1,000,000	5.500% due 10/1/18	906,660
2,000,000	Project Revenue, 5.750% due 10/1/25	1,681,060

See Notes to Financial Statements.

Western Asset Municipal High Income Fund Inc. 2008 Annual Report 11

SEQ.=1,FOLIO='11',FILE='C:\JMS\105727\08-28932-1\task3284718\28932-1-bi-05.htm',USER='105727',CD='Dec 31 05:33 2008'

*Schedule of investments continued***

*October 31, 2008*

*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*

FACE AMOUNT	SECURITY	VALUE
	Texas —
15.9% continued
$ 2,000,000	Gulf Coast
of Texas, IDA, Solid Waste Disposal Revenue, CITGO Petroleum Corp. Project,
7.500% due 10/1/12 (a)(e)	$ 1,977,940
2,000,000	Harris
County, TX, Cultural Education Facilities Finance Corp., Medical Facilities
Revenue, Baylor College of Medicine, 5.625% due 11/15/32	1,797,700
2,750,000	Houston, TX,
Airport Systems Revenue, Special Facilities, Continental Airlines Inc.
Project, 6.125% due 7/15/27 (a)	1,595,000
1,000,000	Laredo, TX,
ISD Public Facility Corp. Lease Revenue, AMBAC, 5.000% due 8/1/29	947,990
1,000,000	Midlothian,
TX, Development Authority, Tax Increment Contract Revenue, 6.200% due
11/15/29	828,230
1,000,000	North Texas
Tollway Authority, Dallas North Tollway Systems Revenue, FSA, 5.000% due
1/1/35 (b)	1,052,920
2,500,000	North Texas
Tollway Authority Revenue, 5.750% due 1/1/40	2,278,400
1,500,000	Texas State
Public Finance Authority, Uplift Education, 5.750% due 12/1/27	1,191,015
1,865,000	West Texas
Detention Facility Corp. Revenue, 8.000% due 2/1/25	1,593,102
	Willacy
County, TX:
2,000,000	Local Government Corp. Revenue, 6.875% due
9/1/28	1,499,240
	PFC Project Revenue:
1,000,000	8.250% due 12/1/23	883,030
1,000,000	County Jail, 7.500% due 11/1/25	905,960
	Total Texas	23,693,907
	Virginia
— 2.9%
405,000	Alexandria,
VA, Redevelopment & Housing Authority, MFH Revenue, Parkwood Court
Apartments Project, 8.125% due 4/1/30	361,086
1,000,000	Broad Street
CDA Revenue, 7.500% due 6/1/33	926,390
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)	2,000,775
1,000,000	Fairfax
County, VA, EDA Revenue, Retirement Community, Greenspring Village Inc.,
7.500% due 10/1/29 (b)	1,071,570
	Total Virginia	4,359,821
	West
Virginia — 1.2%
2,500,000	Pleasants
County, WV, PCR, Refunding County Commission Allegheny, 5.250% due 10/15/37	1,765,300
	Wisconsin
— 0.6%
1,000,000	Wisconsin
State HEFA Revenue, Aurora Health Care, 6.400% due 4/15/33	920,350
	TOTAL
INVESTMENTS BEFORE SHORT-TERM INVESTMENTS (Cost — $160,189,995)	143,820,750

See Notes to Financial Statements.

12 Western Asset Municipal High Income Fund Inc. 2008 Annual Report

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*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*

FACE AMOUNT	SECURITY	VALUE
SHORT-TERM
INVESTMENTS — 1.4%
	Colorado
— 0.3%
$ 400,000	Colorado
Educational & Cultural Facilities Authority Revenue, National Jewish
Federation Bond Program, LOC-Bank of America N.A., 1.250%, 11/3/08 (f)	$ 400,000
	Massachusetts
— 0.2%
300,000	Massachusetts
State, GO, Central Artery, SPA-Landesbank Baden-Wuerttemburg, 1.150%, 11/3/08 (f)	300,000
	New York
— 0.2%
300,000	New York
City, NY, MFA Water & Sewer System Revenue, Second General
Resolution, Fiscal 2008, SPA-Fortis Bank SA, 1.200%, 11/3/08 (f)	300,000
	Pennsylvania
— 0.3%
400,000	Langhorne
Manor Boro, PA, Higher Education & Health Authority Retirement,
Wesley Enhanced Living, Radian, LOC-Citizens Bank of Pennsylvania, 3.400%,
11/3/08 (f)	400,000
	Utah —
0.1%
200,000	Murray City,
UT, Hospital Revenue, IHC Health Services Inc., SPA-JPMorgan Chase, 1.250%,
11/3/08 (f)	200,000
	West
Virginia — 0.3%
400,000	West
Virginia State Hospital Finance Authority Revenue, United Hospital Center
Inc., LOC-JPMorgan Chase, 1.250%, 11/3/08 (f)	400,000
	TOTAL
SHORT-TERM INVESTMENTS (Cost — $2,000,000)	2,000,000
	TOTAL
INVESTMENTS — 97.6% (Cost — $162,189,995#)	145,820,750
	Other Assets
in Excess of Liabilities — 2.4%	3,631,398
	TOTAL NET
ASSETS — 100.0%	$149,452,148

| † | Security
is currently in default. |
| --- | --- |
| * | 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. |
| (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) | All
or a portion of this security is held at the broker as collateral for open
futures contracts. |
| (d) | 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. |
| (e) | Variable
rate security. Interest rate disclosed is that which is in effect at
October 31, 2008. |
| (f) | 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 $162,142,724. |

See Notes to Financial Statements.

Western Asset Municipal High Income Fund Inc. 2008 Annual Report 13

SEQ.=1,FOLIO='13',FILE='C:\JMS\105727\08-28932-1\task3284743\28932-1-bi-07.htm',USER='105727',CD='Dec 31 06:16 2008'

*Schedule of investments continued***

*October 31, 2008*

*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*

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 |
| 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 |
| MFA | —
Municipal Finance Authority |
| MFH | —
Multi-Family Housing |
| PCR | —
Pollution Control Revenue |
| PFC | —
Public Facilities Corporation |
| Radian | —
Radian Asset Assurance |
| SPA | —
Standby Bond Purchase Agreement — Insured Bonds |

*Summary of Investments by Industry * (unaudited)*

Pre-Refunded/Escrowed to Maturity	25.4
Hospitals	18.8
Leasing	13.3
Industrial Development	11.5
Education	6.5
Special Tax	5.6
Transportation	4.6
Resource Recovery	4.2
Electric	3.5
Other Revenue	2.4
Local General Obligation	2.3
Housing	1.5
General Obligation	0.2
Water & Sewer	0.2
	100.0 %

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

See Notes to Financial Statements.

14 Western Asset Municipal High Income Fund Inc. 2008 Annual Report

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*WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.*

*Ratings Table† (October 31, 2008) (unaudited)*

S&P/Moody’s/Fitch ‡
AAA/Aaa	15.1 %
AA/ Aa	8.3
A	18.4
BBB/Baa	16.5
BB/Ba	2.8
B	1.6
CCC/Caa	1.0
A-1/VMIG1	1.4
NR	34.9
	100.0 %

| † | As
a percentage of total investments. |
| --- | --- |
| ‡ | S&P
primary rating; Moody’s secondary, then Fitch. |

See pages 16 and 17 for definitions of ratings.

See Notes to Financial Statements.

Western Asset Municipal High Income Fund Inc. 2008 Annual Report 15

SEQ.=1,FOLIO='15',FILE='C:\JMS\105727\08-28932-1\task3284743\28932-1-bi-07.htm',USER='105727',CD='Dec 31 06:16 2008'

*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 not well safeguarded during both
good and bad times over the future. Uncertainty of position characterizes
bonds in this class. |

16 Western Asset Municipal High Income Fund Inc. 2008 Annual Report

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| B | — | 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. |

Western Asset Municipal High Income Fund Inc. 2008 Annual Report 17

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*Statement of assets and liabilities*

*October 31, 2008*

ASSETS: — Investments, at value (Cost — $162,189,995)	$ 145,820,750
Cash	82,497
Interest receivable	3,510,037
Receivable from broker — variation margin
on open futures contracts	255,313
Receivable for securities sold	75,000
Prepaid expenses	10,628
Total Assets	149,754,225
LIABILITIES:
Distributions payable	86,049
Investment management fee payable	70,791
Directors’ fees payable	10,098
Accrued expenses	135,139
Total Liabilities	302,077
TOTAL NET ASSETS	$ 149,452,148
NET ASSETS:
Par value ($0.01 par value; 21,119,261
shares issued and outstanding; 500,000,000 shares authorized)	$ 211,193
Paid-in capital in excess of par value	191,771,682
Undistributed net investment income	1,079,803
Accumulated net realized loss on
investments and futures contracts	(28,192,234	)
Net unrealized depreciation on investments
and futures contracts	(15,418,296	)
TOTAL NET ASSETS	$ 149,452,148
Shares Outstanding	21,119,261
Net Asset Value	$7.08

See Notes to Financial Statements.

18 Western Asset Municipal High Income Fund Inc. 2008 Annual Report

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*Statement of operations*

*For the Year Ended October 31, 2008*

INVESTMENT INCOME: — Interest	$ 10,491,198
EXPENSES:
Investment management fee (Note 2)	916,755
Legal fees	68,727
Shareholder reports	52,150
Audit and tax	42,993
Directors’ fees	36,828
Transfer agent fees	25,991
Stock exchange listing fees	17,372
Insurance	4,543
Custody fees	2,453
Miscellaneous expenses	8,299
Total Expenses	1,176,111
NET INVESTMENT INCOME	9,315,087
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 1 AND 3):
Net Realized Loss From:
Investment transactions	(2,088,435	)
Futures contracts	(1,633,301	)
Net Realized Loss	(3,721,736	)
Change in Net Unrealized
Appreciation/Depreciation From:
Investments	(21,905,511	)
Futures contracts	1,003,307
Change in Net Unrealized
Appreciation/Depreciation	(20,902,204	)
NET LOSS ON INVESTMENTS AND FUTURES
CONTRACTS	(24,623,940	)
DECREASE IN NET ASSETS FROM OPERATIONS	$(15,308,853	)

See Notes to Financial Statements.

Western Asset Municipal High Income Fund Inc. 2008 Annual Report 19

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*Statements of changes in net assets*

FOR THE YEARS ENDED OCTOBER 31,	2008		2007
OPERATIONS:
Net investment income	$ 9,315,087		$ 8,886,879
Net realized loss	(3,721,736	)	(2,114,027	)
Change in net unrealized
appreciation/depreciation	(20,902,204	)	1,916,920
Increase (Decrease) in Net Assets From
Operations	(15,308,853	)	8,689,772
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE
1):
Net investment income	(8,918,253	)	(8,583,722	)
Decrease in Net Assets From Distributions
to Shareholders	(8,918,253	)	(8,583,722	)
FUND SHARE TRANSACTIONS:
Reinvestment of distributions (56,336 and
60,724 shares issued, respectively)	436,238		489,895
Increase in Net Assets From Fund Share Transactions	436,238		489,895
INCREASE (DECREASE) IN NET ASSETS	(23,790,868	)	595,945
NET ASSETS:
Beginning of year	173,243,016		172,647,071
End of year*	$ 149,452,148		$ 173,243,016
* Includes undistributed net investment
income of:	$ 1,079,803		$698,101

See Notes to Financial Statements.

20 Western Asset Municipal High Income Fund Inc. 2008 Annual Report

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*Financial highlights*

*FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31:*

NET ASSET VALUE, BEGINNING OF YEAR	2008 — $8.23		2007 — $8.22		2006 — $7.95		2005 — $7.84		2004 — $7.92
INCOME (LOSS) FROM OPERATIONS:
Net investment income	0.44		0.42		0.42		0.45		0.51
Net realized and unrealized gain (loss)	(1.17	)	—		0.26		0.11		(0.05	)
Total income (loss) from operations	(0.73	)	0.42		0.68		0.56		0.46
LESS DISTRIBUTIONS FROM:
Net investment income	(0.42	)	(0.41	)	(0.41	)	(0.45	)	(0.53	)
Return of capital	—		—		—		—		(0.01	)
Total distributions	(0.42	)	(0.41	)	(0.41	)	(0.45	)	(0.54	)
NET ASSET VALUE, END OF YEAR	$7.08		$8.23		$8.22		$7.95		$7.84
MARKET PRICE, END OF YEAR	$6.53		$7.75		$7.84		$7.10		$7.39
Total return, based on NAV 1,2	(9.02	)%	5.40	%	9.24	%	7.82	% 3	6.32	%
Total return, based on Market Price 2	(10.89	)%	4.06	%	16.66	%	2.16	%	3.76	%
NET ASSETS, END OF YEAR (MILLIONS)	$149		$173		$173		$167		$165
RATIOS TO AVERAGE NET ASSETS:
Gross expenses	0.71	%	0.84	% 4	0.79	%	0.85	%	0.80	%
Net expenses	0.71		0.79	4,5	0.79	5	0.85		0.80
Net investment income	5.59		5.14		5.27		5.74		6.47
PORTFOLIO TURNOVER RATE	17	%	16	%	18	%	39	%	33	%

| 1 | Performance
figures may reflect fee waivers and/or expense reimbursements. In the absence
of fee waivers and/or expense reimbursements, the total return would have
been lower. Past performance is no guarantee of future results. |
| --- | --- |
| 2 | The
total return calculation assumes that distributions are reinvested in
accordance with the Fund’s dividend reinvestment plan. Past performance is no
guarantee of future results. |
| 3 | The
prior investment manager fully reimbursed the Fund for losses incurred
resulting from an investment transaction error. Without this reimbursement,
total return would not have changed. |
| 4 | Included
in the expense ratios are certain non-recurring restructuring (and
reorganization, if applicable) fees that were incurred by the Fund during the
period. Without these fees, the gross and net expense ratios would both have
been 0.73%. |
| 5 | Reflects
fee waivers and/or expense reimbursements. |

See Notes to Financial Statements.

Western Asset Municipal High Income Fund Inc. 2008 Annual Report 21

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*Notes to financial statements*

*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”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.

*(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.

22 Western Asset Municipal High Income Fund Inc. 2008 Annual Report

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*(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 and investment income.* Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults on an expected interest payment, the Fund’s policy is to generally halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default.

*(e) Distributions to shareholders.* Distributions from net investment income for the Fund, if any, are declared and paid on a monthly basis. The Fund intends to satisfy conditions that will enable interest from municipal securities, which is exempt from federal and certain state income taxes, to retain such tax-exempt status when distributed to the shareholders of the Fund. Distributions of net realized gains, if any, are taxable and are declared at least annually. Distributions are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.

*(f) Federal and other taxes.* It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute substantially all of its taxable income and net realized gains, if any, to shareholders each year. Therefore, no federal income tax provision is required in the Fund’s financial statements.

Management has analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years and has concluded that as of October 31, 2008, no provision for income tax would be required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

*(g) Reclassification.* GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per

Western Asset Municipal High Income Fund Inc. 2008 Annual Report 23

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*Notes to financial statements continued***

share. During the current year, the following reclassifications have been made:

	Undistributed net investment income	Accumulated net realized loss	Paid-in capital
(a)	—	$747,959	$(747,959)
(b)	$(15,132)	15,132	—

(a) Reclassifications are primarily due to the expiration of a capital loss carryover.

(b) Reclassifications are primarily due to differences between book and tax accretion of market discount on fixed income securities.

*2. Investment management agreement and other transactions with affiliates*

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager and Western Asset Management Company (“Western Asset”) is the Fund’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

LMPFA provides administrative and certain oversight services to the Fund. The Fund pays LMPFA an investment management fee, calculated daily and paid monthly, at an annual rate of 0.55% of the Fund’s average daily net assets.

LMPFA has delegated to Western Asset the day-to-day portfolio management of the Fund. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Fund.

Certain officers and one Director of the Fund are employees of Legg Mason or its affiliates and do not receive compensation from the Fund.

*3. Investments*

During the year ended October 31, 2008, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:

Purchases	$32,802,438
Sales	27,553,406

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

Gross unrealized appreciation	$ 4,120,484
Gross unrealized depreciation	(20,442,458	)
Net unrealized depreciation	$ (16,321,974	)

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

	NUMBER OF CONTRACTS	EXPIRATION DATE	BASIS VALUE	MARKET VALUE	UNREALIZED GAIN
Contracts to Sell:
U.S.
Treasury 30-Year Bonds	215	12/08	$25,272,824	$24,321,875	$950,949

24 Western Asset Municipal High Income Fund Inc. 2008 Annual Report

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*4. Distributions subsequent to October 31, 2008*

On August 14, 2008, the Board of Directors (“Board”) of the Fund declared a dividend distribution in the amount of $0.037 per share payable on November 28, 2008 to shareholders of record on November 21, 2008.

On November 17, 2008, the Board of Directors of the Fund declared three dividend distributions, each in the amount of $0.0370 per share, payable on December 26, 2008, January 30, 2009 and February 27, 2009 to shareholders of record on December 19, 2008, January 23, 2009 and February 20, 2009, respectively.

*5. Income tax information and distributions to shareholders*

The tax character of distributions paid during the fiscal years ended October 31, were as follows:

	2008	2007
Distribution Paid From:
Tax-exempt income	$8,918,253	$8,583,722

As of October 31, 2008, the components of accumulated earnings on a tax basis were as follows:

Undistributed tax-exempt income — net	$ 1,103,292
Capital loss carryforward*	(27,288,556	)
Other book/tax temporary differences (a)	(974,438	)
Unrealized appreciation/(depreciation) (b)	(15,371,025	)
Total accumulated earnings/(losses) — net	$ (42,530,727	)

• The Fund had the following net capital loss carryforward remaining:

Year of Expiration	Amount
10/31/2009	$ (733,106	)
10/31/2010	(601,572	)
10/31/2011	(5,066,581	)
10/31/2012	(10,608,178	)
10/31/2013	(5,677,661	)
10/31/2015	(1,928,255	)
10/31/2016	(2,673,203	)
	$ (27,288,556	)

These amounts will be available to offset any future taxable capital gains.

(a) Other book/tax temporary differences are attributable primarily to the realization for tax purposes of unrealized gains on certain futures contracts and book/tax differences in the timing of the deductibility of various expenses.

(b) The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to the difference between book & tax accretion methods for market discount on fixed income securities.

Western Asset Municipal High Income Fund Inc. 2008 Annual Report 25

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*Notes to financial statements continued***

*6. 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.

---

During September 2008, FASB Staff Position FAS 133-1 and FASB Interpretation 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (“Amendment”) was issued and is effective for annual and interim reporting periods ending after November 15, 2008. The Amendment requires enhanced disclosures regarding credit derivatives and hybrid financial instruments containing embedded credit derivatives. Management is currently evaluating the impact the adoption of the Amendment will have on the Fund’s financial statement disclosures.

26 Western Asset Municipal High Income Fund Inc. 2008 Annual Report

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*Report of independent registered public accounting firm*

*The Board of Directors and Shareholders Western Asset Municipal High Income Fund Inc.:*

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Western Asset Municipal High Income Fund Inc. as of October 31, 2008, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and 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 as of October 31, 2008, by correspondence with the custodian. 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 audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Western Asset Municipal High Income Fund Inc. as of October 31, 2008, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.

New York, New York December 22, 2008

Western Asset Municipal High Income Fund Inc. 2008 Annual Report 27

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*Additional information (unaudited)*

*Information about Directors and Officers*

The business and affairs of Western Asset Municipal High Income Fund Inc. (“Fund”) are managed under the direction of the Board of Directors. Information pertaining to the Directors and Officers of the Fund is set forth below.

NON-INTERESTED DIRECTORS:
CAROL
L. COLMAN c/o Chairman of the Fund, Legg Mason & Co., LLC, (“Legg Mason”) 620 Eighth Avenue, New York, NY 10018
Birth year	1946
Position(s) held with Fund 1	Director
and Member of the Nominating and Audit Committees, Class I
Term of office 1 and length of time served	Since
2007
Principal occupation(s) during past 5 years	President,
Colman Consulting Co.
Number of portfolios in fund complex overseen by director (including the Fund)	23
Other board memberships held by Director	None
DANIEL
P. CRONIN c/o Chairman of the Fund, Legg Mason 620 Eighth Avenue, New York, NY 10018
Birth year	1946
Position(s) held with Fund 1	Director
and Member of the Nominating and Audit Committees, Class II
Term of office 1 and length of time served	Since
2007
Principal occupation(s) during past 5 years	Retired;
Formerly, Associate General Counsel, Pfizer Inc. (prior to and including
2004)
Number of portfolios in fund complex overseen by director (including the Fund)	23
Other board memberships held by Director	None

28 Western Asset Municipal High Income Fund Inc.

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| PAOLO
M. CUCCHI c/o Chairman of the Fund, Legg Mason 620 Eighth Avenue, New York, NY 10018 | |
| --- | --- |
| Birth year | 1941 |
| Position(s) held with Fund 1 | Director
and Member of the Nominating and Audit Committees, Class II |
| Term of office 1 and length of time served | Since
2007 |
| Principal occupation(s) during past 5 years | Professor
of Italian and French languages, Drew University (since 1984); Formerly, Vice
President and Dean of College of Liberal Arts at Drew University (from 1984
to 2008) |
| Number of portfolios in fund complex overseen by director (including the Fund) | 23 |
| Other board memberships held by Director | None |
| LESLIE
H. GELB c/o Chairman of the Fund, Legg Mason 620 Eighth Avenue, New York, NY 10018 | |
| Birth year | 1937 |
| Position(s) held with Fund 1 | Director
and Member of the Nominating and Audit Committees, Class II |
| Term of office 1 and length of time served | Since
2007 |
| Principal occupation(s) during past 5 years | President
Emeritus and Senior Board Fellow, The Council on Foreign Relations (since
2003); Formerly, President, The Council on Foreign Relations; Formerly,
Columnist, Deputy Editorial Page Editor and Editor, Op-Ed Page, The New
York Times |
| Number of portfolios in fund complex overseen by director (including the Fund) | 23 |
| Other board memberships held by Director | Director
of two registered investment companies advised by Blackstone Asia Advisors
LLC: India Fund, Inc. and Asia Tigers Fund, Inc. |

Western Asset Municipal High Income Fund Inc. 29

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*Additional information (unaudited) continued***

*Information about Directors and Officers*

| WILLIAM
R. HUTCHINSON c/o Chairman of the Fund, Legg Mason 620 Eighth Avenue, New York, NY 10018 | |
| --- | --- |
| Birth year | 1942 |
| Position(s) held with Fund 1 | Director
and Member of the Nominating and Audit Committees, Class III |
| Term of office 1 and length of time served | Since
2007 |
| Principal occupation(s) during past 5 years | President,
W.R. Hutchinson & Associates Inc. (since 2001) |
| Number of portfolios in fund complex overseen by director (including the Fund) | 23 |
| Other board memberships held by Director | Director
of Associated Banc-Corp. |
| RIORDAN
ROETT c/o Chairman of the Fund, Legg Mason 620 Eighth Avenue, New York, NY 10018 | |
| Birth year | 1938 |
| Position(s) held with Fund 1 | Director
and Member of the Nominating and Audit Committees, Class I |
| Term of office 1 and length of time served | Since
2007 |
| Principal occupation(s) during past 5 years | The
Sarita and Don Johnston Professor of Political Science and Director of
Western Hemisphere Studies, Paul H. Nitze School of Avanced International
Studies, The Johns Hopkins University (since 1993) |
| Number of portfolios in fund complex overseen by director (including the Fund) | 23 |
| Other board memberships held by Director | None |

30 Western Asset Municipal High Income Fund Inc.

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| JESWALD
W. SALACUSE c/o Chairman of the Fund, Legg Mason 620 Eighth Avenue, New York, NY 10018 | |
| --- | --- |
| Birth year | 1938 |
| Position(s) held with Fund 1 | Director
and Member of the Nominating and Audit Committees, Class III |
| Term of office 1 and length of time served | Since
2007 |
| Principal occupation(s) during past 5 years | Henry
J. Braker Professor of Commercial Law, The Fletcher School of Law and
Diplomacy, Tufts University (since 1986); President, Arbitration Tribunal,
World Bank/ICSID (since 2004) |
| Number of portfolios in fund complex overseen by director (including the Fund) | 23 |
| Other board memberships held by Director | Director
of two registered investment companies advised by Blackstone Advisors |

INTERESTED DIRECTOR:
R.
JAY GERKEN, CFA 2 Legg Mason 620 Eighth Avenue, New York, NY 10018
Birth year	1951
Position(s) held with Fund 1	Director,
Chairman, President and Chief Executive Officer, Class I
Term of office 1 and length of time served	Since
2002
Principal occupation(s) during past 5 years	Managing
Director, Legg Mason; Chairman of the Board and Trustee/Director of 163 funds
associated with Legg Mason Partners Fund Advisor, LLC. (“LMPFA”) and its
affiliates; President of LMPFA (since 2006); Chairman, President and Chief
Executive Officer of certain mutual funds associated with Legg Mason;
Formerly, Chairman, Smith Barney Fund Management LLC (“SBFM”) and Citi Fund
Management, Inc. (“CFM”) (2002 to 2005); Formerly, Chairman, President
and Chief Executive Officer, Travelers Investment Advisers Inc. (2002 to
2005)
Number of portfolios in fund complex overseen by director (including the Fund)	148
Other board memberships held by Director	None

OFFICERS:
KAPREL
OZSOLAK Legg Mason 55 Water Street, New York, NY 10041
Birth year	1965
Position(s) held with Fund 1	Chief
Financial Officer and Treasurer
Term of office 1 and length of time served	Since
2004
Principal occupation(s) during past 5 years	Director
of Legg Mason; Chief Financial Officer and Treasurer of certain funds
associated with Legg Mason; Formerly, Controller of certain funds associated
with certain predecessor firms of Legg Mason (from 2002 to 2004)

Western Asset Municipal High Income Fund Inc. 31

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*Additional information (unaudited) continued***

*Information about Directors and Officers*

| TED
P. BECKER Legg Mason 620 Eighth Avenue, New York, NY 10018 | |
| --- | --- |
| Birth year | 1951 |
| Position(s) held with Fund 1 | Chief
Compliance Officer |
| Term of office 1 and length of time served | Since
2006 |
| Principal occupation(s) during past 5 years | Director
of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of
LMPFA (since 2006); Managing Director of Compliance at Legg Mason, (since
2005); Chief Compliance Officer with certain mutual funds associated with
Legg Mason, LMPFA and certain affiliates (since 2006); Formerly, Managing
Director of Compliance at Citigroup Asset Management (“CAM”) or its
predecessors (from 2002 to 2005) |
| ROBERT
I. FRENKEL Legg Mason 100 First Stamford Place, Stamford, CT 06902 | |
| Birth year | 1954 |
| Position(s) held with Fund 1 | Secretary
and Chief Legal Officer |
| Term of office 1 and length of time served | Since
2003 |
| Principal occupation(s) during past 5 years | Managing
Director and General Counsel of Global Mutual Funds for Legg Mason and its
predecessor (since 1994); Secretary and Chief Legal Officer of mutual funds
associated with Legg Mason (since 2003); Formerly, Secretary of CFM (from
2001 to 2004) |
| THOMAS
C. MANDIA Legg Mason 100 First Stamford Place, Stamford, CT 06902 | |
| Birth year | 1962 |
| Position(s) held with Fund 1 | Assistant
Secretary |
| Term of office 1 and length of time served | Since
2006 |
| Principal occupation(s) during past 5 years | Managing
Director and Deputy General Counsel of Legg Mason (since 2005); Managing
Director and Deputy General Counsel for CAM (from 1992 to 2005) |

32 Western Asset Municipal High Income Fund Inc.

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| ALBERT
LASKAJ Legg Mason 55 Water Street, New York, NY 10041 | |
| --- | --- |
| Birth year | 1977 |
| Position(s) held with Fund 1 | Controller |
| Term of office 1 and length of time served | Since
2007 |
| Principal occupation(s) during past 5 years | Vice
President of Legg Mason (since 2008); Controller of certain funds associated
with Legg Mason (since 2007); Formerly, Assistant Controller of certain funds
associated with Legg Mason (from 2005 to 2007); Formerly, Accounting Manager
of certain funds associated with certain predecessor firms of Legg Mason
(from 2003 to 2005) |
| STEVEN
FRANK Legg Mason 55 Water Street, New York, NY 10041 | |
| Birth year | 1967 |
| Position(s) held with Fund 1 | Controller |
| Term of office 1 and length of time served | Since
2005 |
| Principal occupation(s) during past 5 years | Vice
President of Legg Mason (since 2002); Controller of certain funds associated
with Legg Mason or its predecessors (since 2005); Formerly, Assistant
Controller of certain funds associated with Legg Mason predecessors (from
2001 to 2005) |

| 1 | The
Fund’s Board of Directors is divided into three classes: Class I,
Class II and Class III. The terms of office of the
Class I, II and III Directors expire at the Annual Meetings of
Stockholders in the year 2009, year 2010 and year 2010, respectively, or
thereafter in each case when their respective successors are duly elected and
qualified. The Fund’s executive officers are chosen each year at the first
meeting of the Fund’s Board of Directors following the Annual Meeting of
Stockholders, to hold office until the meeting of the Board following the
next Annual Meeting of Stockholders and until their successors are duly
elected and qualified. |
| --- | --- |
| 2 | Mr. Gerken
is an “interested person” of the Fund as defined in the 1940 Act, because
Mr. Gerken is an officer of LMPFA and certain of its affiliates. |

Western Asset Municipal High Income Fund Inc. 33

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*Annual chief executive officer and chief financial officer certifications (unaudited)*

The Fund’s CEO has submitted to the NYSE the required annual certification, and the Fund also has included the Certifications of the Fund’s Chief Executive Officer and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act in the Fund’s Form N-CSR filed with the SEC, for the period of this report.

34 Western Asset Municipal High Income Fund Inc.

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*Dividend reinvestment plan (unaudited)*

The Fund’s policy, which may be changed by the Fund’s Board of Directors, is generally to make monthly distributions of substantially all its net investment income (i.e., income other than net realized capital gains) to the holders of the Fund’s capital shares. From time to time, when the Fund makes a substantial capital gains distribution, it may do so in lieu of paying its regular monthly dividend. Net income of the Fund consists of all income accrued on portfolio assets less all expenses of the Fund. Expenses of the Fund are accrued each day. Net realized capital gains, if any, will be distributed to shareholders at least once a year.

Under the Fund’s Dividend Reinvestment Plan (“Plan”), a shareholder whose capital shares are registered in his or her own name will have all distributions reinvested automatically by American Stock Transfer & Trust Company (“AST”), as purchasing agent under the Plan, unless the shareholder elects to receive cash. Distributions with respect to shares registered in the name of a broker-dealer or other nominee (that is, in “street name”) will be reinvested by the broker or nominee in additional capital shares under the Plan, unless the service is not provided by the broker or nominee or the shareholder elects to receive distributions in cash. Investors who own capital shares registered in street name should consult their broker-dealers for details regarding reinvestment. All distributions to shareholders who do not participate in the Plan will be paid by check mailed directly to the record holder by or under the direction of AST, as dividend-paying agent.

The number of capital shares distributed to participants in the Plan in lieu of a cash dividend is determined in the following manner. Whenever the market price of the capital shares is equal to or exceeds 98% of net asset value (“NAV”) per share on the determination date (generally, the record date for the distribution), participants will be issued capital shares valued at the greater of (1) 98% of the NAV or (2) 95% of the market price. To the extent that the Fund issues shares to participants in the Plan at a discount to NAV, the interests of remaining shareholders (i.e., those who do not participate in the Plan) in the Fund’s net assets will be proportionately diluted.

If 98% of the NAV per share of the capital shares at the time of valuation (which is the close of business on the determination date) exceeds the market price of capital shares, AST will buy capital shares in the open market, on the NYSE or elsewhere, for the participants’ accounts. If, following the commencement of the purchases and before AST has completed its purchases, the market price exceeds 98% of what the NAV per share of the capital shares was at the valuation time, AST will attempt to terminate purchases in the open market and cause the Fund to issue the remaining portion of the dividend or distribution by issuing shares at a price equal to the greater of (1) 98% of the NAV per share as of the valuation time, or (2) 95% of the then current market price. In this case, the number of shares of capital shares received by a Plan participant will be based on the weighted average of prices paid for shares purchased in the open market and the price at which the Fund issues the remaining shares. To the

Western Asset Municipal High Income Fund Inc. 35

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*Dividend reinvestment plan (unaudited) continued***

extent AST is unable to stop open market purchases and cause the Fund to issue the remaining shares, the average per share price paid by AST may exceed 98% of the NAV per share of the capital shares. AST will begin to purchase capital shares on the open market as soon as practicable after the payment date of the dividend or capital gains distribution, but in no event shall such purchases continue later than 30 days after that date, except when necessary to comply with applicable provisions of the Federal securities laws.

AST maintains all shareholder accounts in the Plan and furnishes written confirmations of all transactions in each account, including information needed by a shareholder for personal and tax records. The automatic reinvestment of dividends and capital gains distributions will not relieve Plan participants of any income tax that may be payable on the dividends or capital gains distributions. Capital shares in the account of each Plan participant will be held by AST in uncertificated form in the name of the Plan participant.

Plan participants are subject to no charge for reinvesting dividends and capital gains distributions under the Plan. AST’s fees for handling the reinvestment of dividends and capital gains distributions will be paid by the Fund. No brokerage charges shall apply with respect to its capital shares issued directly by the Fund under the Plan. Each Plan participant will, however, bear a pro-rata share of brokerage commissions actually incurred with respect to any open market purchases made under the Plan.

Experience under the Plan may indicate that changes to it are desirable. The Fund reserves the right to amend or terminate the Plan as applied to any dividend or capital gains distribution paid subsequent to written notice of the change sent to participants at least 30 days before the record date for the dividend or capital gains distribution. The Plan also may be amended or terminated by AST or the Fund on at least 30 days’ written notice to Plan participants. All correspondence concerning the Plan should be directed by mail to American Stock Transfer & Trust Company, 59 Maiden Lane, New York, New York 10038 or by telephone at 1 (877) 366-6441.

36 Western Asset Municipal High Income Fund Inc.

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*Important tax information (unaudited)*

All of the net investment income distributions paid monthly by the Fund during the taxable year ended October 31, 2008 qualify as tax-exempt interest dividends for Federal income tax purposes.

Please retain this information for your records.

Western Asset Municipal High Income Fund Inc. 37

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*Western Asset Municipal High Income Fund Inc.*

| Directors | Investment
manager |
| --- | --- |
| Carol
L. Colman | Legg
Mason Partners Fund Advisor, LLC |
| Daniel
P. Cronin | |
| Paolo
M. Cucchi | Subadviser |
| Leslie
H. Gelb | Western
Asset Management Company |
| R.
Jay Gerken, CFA | |
| Chairman | Custodian |
| William
R. Hutchinson | State
Street Bank and Trust Company |
| Riordan
Roett | 225
Franklin Street |
| Jeswald
W. Salacuse | Boston,
Massachusetts 02110 |
| Officers | Transfer
agent |
| R.
Jay Gerken, CFA | American
Stock Transfer & Trust Company |
| President and Chief Executive Officer | 59
Maiden Lane |
| | New
York, New York 10038 |
| Kaprel
Ozsolak | |
| Chief Financial Officer and Treasurer | Independent
registered public accounting firm |
| | KPMG
LLP |
| Ted
P. Becker | 345
Park Avenue |
| Chief Compliance Officer | New
York, New York 10154 |
| Robert
I. Frenkel | Legal
counsel |
| Secretary and Chief Legal
Officer | Simpson
Thacher & Bartlett LLP |
| | 425
Lexington Avenue |
| Thomas
C. Mandia | New
York, New York 10017-3909 |
| Assistant Secretary | |
| | New
York Stock Exchange Symbol |
| Albert
Laskaj | MHF |
| Controller | |
| Steven
Frank | |
| Controller | |
| Western Asset Municipal High Income Fund Inc. | |
| 55
Water Street | |
| New
York, New York 10041 | |

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| |
| --- |
| Western Asset Municipal High Income Fund Inc. |
| WESTERN
ASSET MUNICIPAL HIGH INCOME FUND INC. |
| 55
Water Street |
| New
York, New York 10041 |
| Notice
is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time, the Fund may
purchase, at market prices, shares of its common stock in the open market. |
| The
Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission (“SEC”) for the first and third quarters of each
fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s
website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at
the SEC’s Public Reference Room in Washington, D.C., and information on
the operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330. To obtain information on Form N-Q from the Fund,
shareholders can call 1-800-451-2010. |
| Information
on how the Fund voted proxies relating to portfolio securities during the
prior 12-month period ended June 30th of each year and a description of
the policies and procedures that the Fund uses to determine how to vote
proxies relating to portfolio securities are available (1) without
charge, upon request, by calling 1-800-451-2010, (2) on the Fund’s
website at www.leggmason.com/cef and (3) on the SEC’s website at
www.sec.gov. |
| This
report is transmitted to the shareholders of the Western Asset Municipal High
Income Fund Inc. for their information. This is not a prospectus, circular or
representation intended for use in the purchase of shares of the Fund or any
securities mentioned in this report. |

American Stock

Transfer & Trust Company

59 Maiden Lane

New York, New York 10038

*WAS010547 12/08 SR08-711*

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ITEM 2. CODE OF ETHICS.

The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

The Board of Directors of the registrant has determined that William R. Hutchinson, the Chairman of the Board’s Audit Committee, possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert,” and has designated Mr. Hutchinson as the Audit Committee’s financial expert. Mr. Hutchinson is an “independent” Director pursuant to paragraph (a)(2) of Item 3 to Form N-CSR.

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

a) Audit Fees . The aggregate fees billed in the last two fiscal years ending October 31, 2007 and October 31, 2008 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $37,000 in 2007 and $38,400 in 2008.

b) Audit-Related Fees . The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $3,722 in 2007 and $0 in 2008. These services consisted of procedures performed in connection with the audit performed relating to the Tender Options Bonds for the Western Asset Municipal High Income Fund Inc.

In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related services by the Auditor to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Western Asset Municipal High Income Fund Inc. (“service affiliates”), that were reasonably related to the performance of the annual audit of the service affiliates. Accordingly, there were no such fees that required pre-approval by the Audit Committee for the Reporting Periods (prior to August 6, 2003 services provided by the Auditor were not required to be pre-approved).

(c) Tax Fees . The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $5,200 in 2007 and $2,900 in 2008. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.

There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.

d) All Other Fees . There were no other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item 4 for the Western Asset Municipal High Income Fund Inc.

All Other Fees. There were no other non-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (“LMPFA”), and any entity controlling, controlled by or under common control with LMPFA that provided ongoing services to Western Asset Municipal High Income Fund Inc. requiring pre-approval by the Audit Committee in the Reporting Period.

(e) Audit Committee’s pre-approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.

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(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by LMPFA or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.

The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.

Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.

(2) For the Western Asset Municipal High Income Fund Inc., the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 0% for 2007 and 2008; Tax Fees were 100% and 0% for 2007 and 2008; and Other Fees were 100% and 0% for 2007 and 2008.

(f) N/A

(g) Non-audit fees billed by the Auditor for services rendered to Western Asset Municipal High Income Fund Inc., LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Western Asset Municipal High Income Fund Inc. during the reporting period were $0 in 2008.

(h) Yes. Western Asset Municipal High Income Fund Inc.’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates, which were not pre-approved (not requiring pre-approval), is compatible with maintaining the Accountant’s independence. All services provided by the Auditor to the Western Asset Municipal High Income Fund Inc. or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

a) The independent board members are acting as the registrant’s audit committee as specified in Section 3(a)(58)(B) of the Exchange Act . The Audit Committee consists of the following Board members:

William R. Hutchinson

Paolo M. Cucchi

Daniel P. Cronin

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Carol L. Colman

Leslie H. Gelb

Dr. Riordan Roett

Jeswald W. Salacuse

b) Not applicable

ITEM 6. SCHEDULE OF INVESTMENTS.

Included herein under Item 1.

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

*Proxy Voting Guidelines and Procedures*

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) delegates the responsibility for voting proxies for the fund to the subadviser through its contracts with the subadviser. The subadviser will use its own proxy voting policies and procedures to vote proxies. Accordingly, LMPFA does not expect to have proxy-voting responsibility for the fund. Should LMPFA become responsible for voting proxies for any reason, such as the inability of the subadviser to provide investment advisory services, LMPFA shall utilize the proxy voting guidelines established by the most recent subadviser to vote proxies until a new subadviser is retained.

The subadviser’s Proxy Voting Policies and Procedures govern in determining how proxies relating to the fund’s portfolio securities are voted and are provided below. Information regarding how each fund voted proxies (if any) relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge (1) by calling 888-425-6432, (2) on the fund’s website at http://www.leggmason.com/individualinvestors and (3) on the SEC’s website at http://www.sec.gov.

*Background*

Western Asset Management Company (“WA”) and Western Asset Management Company Limited (“WAML”) (together “Western Asset”) have adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). Our authority to vote the proxies of our clients is established through investment management agreements or comparable documents, and our proxy voting guidelines have been tailored to reflect these specific contractual obligations. In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.

In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (except that WA and WAML may so consult and agree with each other) regarding the voting of any securities owned by its clients.

*Policy*

Western Asset’s proxy voting procedures are designed and implemented in a way that is reasonably expected to ensure that proxy matters are handled in the best interest of our clients. While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately

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cast on a case-by-case basis, taking into consideration Western Asset’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent Western Asset deems appropriate).

*Procedures*

Responsibility and Oversight

The Western Asset Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.

Client Authority

Prior to August 1, 2003, all existing client investment management agreements (“IMAs”) will be reviewed to determine whether Western Asset has authority to vote client proxies. At account start-up, or upon amendment of an IMA, the applicable client IMA are similarly reviewed. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Client Account Transition Team maintains a matrix of proxy voting authority.

Proxy Gathering

Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Prior to August 1, 2003, Proxy Recipients of existing clients will be reminded of the appropriate routing to Corporate Actions for proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.

Proxy Voting

Once proxy materials are received by Corporate Actions, they are forwarded to the Compliance Department for coordination and the following actions:

a. Proxies are reviewed to determine accounts impacted.

b. Impacted accounts are checked to confirm Western Asset voting authority.

c. Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.)

d. If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably

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practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party.

e. Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Compliance Department.

f. Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials.

Timing

Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.

Recordkeeping

Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:

a. A copy of Western Asset’s policies and procedures.

b. Copies of proxy statements received regarding client securities.

c. A copy of any document created by Western Asset that was material to making a decision how to vote proxies.

d. Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests.

e. A proxy log including:

1. Issuer name;

2. Exchange ticker symbol of the issuer’s shares to be voted;

3. Council on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted;

4. A brief identification of the matter voted on;

5. Whether the matter was proposed by the issuer or by a shareholder of the issuer;

6. Whether a vote was cast on the matter;

7. A record of how the vote was cast; and

8. Whether the vote was cast for or against the recommendation of the issuer’s management team.

Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.

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Disclosure

Part II of both the WA Form ADV and the WAML Form ADV contain a description of Western Asset’s proxy policies. Prior to August 1, 2003, Western Asset will deliver Part II of its revised Form ADV to all existing clients, along with a letter identifying the new disclosure. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.

Conflicts of Interest

All proxies are reviewed by the Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:

1. Whether Western Asset (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company;

2. Whether Western Asset or an officer or director of Western Asset or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and

3. Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders.

*Voting Guidelines*

Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.

Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.

I. Board Approved Proposals

The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:

1. Matters relating to the Board of Directors

Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:

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a. Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors.

b. Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director.

c. Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences.

d. Votes are cast on a case-by-case basis in contested elections of directors.

1. Matters relating to Executive Compensation

Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:

a. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution.

b. Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options.

c. Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price.

d. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less.

1. Matters relating to Capitalization

The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.

a. Western Asset votes for proposals relating to the authorization of additional common stock.

b. Western Asset votes for proposals to effect stock splits (excluding reverse stock splits).

c. Western Asset votes for proposals authorizing share repurchase programs.

1. Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions

Western Asset votes these issues on a case-by-case basis on board-approved transactions.

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1. Matters relating to Anti-Takeover Measures

Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:

a. Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans.

b. Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions.

1. Other Business Matters

Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.

a. Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws.

b. Western Asset votes against authorization to transact other unidentified, substantive business at the meeting.

II. Shareholder Proposals

SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:

1. Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans.

2. Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals.

3. Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.

III. Voting Shares of Investment Companies

Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.

1. Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios.

2. Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or

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approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided.

IV. Voting Shares of Foreign Issuers

In the event Western Asset is required to vote on securities held in foreign issuers — i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.

1. Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management.

2. Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.

3. Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated.

4. Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights.

ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

*(a)(1):*

| NAME AND ADDRESS ADDRESS | LENGTH
OF TIME SERVED | PRINCIPAL
OCCUPATION(S) DURING PAST 5 YEARS |
| --- | --- | --- |
| S.
Kenneth Leech Western
Asset 385 East Colorado Blvd. Pasadena, CA 91101 | Since
2006 | Co-portfolio
manager of the fund; Chief Investment Officer of Western Asset since 1998. |
| Stephen
A. Walsh Western
Asset 385 East Colorado Blvd. Pasadena, CA 91101 | Since
2006 | Co-portfolio
manager of the fund; Deputy Chief Investment Officer of Western Asset since
2000. |
| Joseph
Deane Western
Asset 385 East Colorado Blvd. Pasadena, CA 91101 | Since
2006 | Co-portfolio manager of the fund;
portfolio manager at Western Asset since 2005; prior to that time,
Mr. Deane was with Citigroup Asset Management or one of its affiliates
since 1972. |

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| David Fare Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 | Since 2006 | Co-portfolio manager of the fund; portfolio manager at
Western Asset since 2005; prior to that time, Mr. Fare was with
Citigroup Asset Management or one of its affiliates since 1989. |
| --- | --- | --- |
| Robert Amodeo Western
Asset 385
East Colorado Blvd. Pasadena,
CA 91101 | Since 2007 | Co-portfolio manager of the fund;
portfolio manager at Western Asset since 2005; prior to that time,
Mr. Amodeo was a Managing Director and portfolio manager with Salomon Brothers
Asset Management Inc from 1992 to 2005. |

*(a)(2): DATA TO BE PROVIDED BY FINANCIAL CONTROL*

The following tables set forth certain additional information with respect to the fund’s portfolio managers for the fund. Unless noted otherwise, all information is provided as of October 31, 2008.

Other Accounts Managed by Portfolio Managers

The table below identifies the number of accounts (other than the fund) for which the fund’s portfolio managers have day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles, and other accounts. For each category, the number of accounts and total assets in the accounts where fees are based on performance is also indicated.

Portfolio	Registered — Investment	Other Pooled — Investment	Other
Manager(s)	Companies	Vehicles	Accounts
S. Kenneth Leech ‡	112 registered investment companies with $116.9 billion in total assets under management	239 Other pooled investment vehicles with $221.2 billion in assets under management	1,060 Other accounts with $303.2 billion in total assets under management*
Stephen A. Walsh ‡	112 registered investment companies with $116.9 billion in total assets under management	239 Other pooled investment vehicles with $221.2 billion in assets under management	1,060 Other accounts with $303.2 billion in total assets under management*
Joseph P. Deane ‡	23 registered investment companies with $20.7 billion in total assets under management	1 Other pooled investment vehicle with $8.4 billion in assets under management	22 Other accounts with $2.0 billion in total assets under management**
David T. Fare ‡	23 registered investment Companies with $20.7 billion	1 Other pooled investment vehicle with $8.4 billion in	22 Other accounts with $2.0 billion in total assets under management**

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Robert Amodeo ‡	in total assets Under management — 23 registered investment Companies with $20.7 billion in total assets Under management	assets under management — 1 Other pooled investment vehicle with $8.4 billion in assets under management	22 Other accounts with $2.0 billion in total assets under management**

• Includes 93 accounts managed, totaling $33.7 billion, for which advisory fee is performance based.

** Includes 1 account managed, totaling $337.6 million, for which advisory fee is performance based.

‡ The numbers above reflect the overall number of portfolios managed by employees of Western Asset Management Company (“Western Asset”). Mr. Leech and Mr. Walsh are involved in the management of all the Firm’s portfolios, but they are not solely responsible for particular portfolios. Western Asset’s investment discipline emphasizes a team approach that combines the efforts of groups of specialists working in different market sectors. They are responsible for overseeing implementation of Western Asset’s overall investment ideas and coordinating the work of the various sector teams. This structure ensures that client portfolios benefit from a consensus that draws on the expertise of all team members.

*(a)(3): Portfolio Manager Compensation*

With respect to the compensation of the portfolio managers, the Advisers’ compensation system assigns each employee a total compensation “target” and a respective cap, which are derived from annual market surveys that benchmark each role with their job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience, and ability to produce desired results.

Standard compensation includes competitive base salaries, generous employee benefits, and a retirement plan.

In addition, employees are eligible for bonuses. These are structured to closely align the interests of employees with those of the Advisers, and are determined by the professional’s job function and performance as measured by a formal review process. All bonuses are completely discretionary. One of the principal factors considered is a portfolio manager’s investment performance versus appropriate peer groups and benchmarks. Because portfolio managers are generally responsible for multiple accounts (including the Portfolio) with similar investment strategies, they are compensated on the performance of the aggregate group of similar accounts, rather than a specific account. A smaller portion of a bonus payment is derived from factors that include client service, business development, length of service to the Adviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the Adviser’s business.

Finally, in order to attract and retain top talent, all professionals are eligible for additional incentives in recognition of outstanding performance. These are determined based upon the factors described above and include Legg Mason, Inc. stock options and long-term incentives that vest over a set period of time past the award date.

*Potential Conflicts of Interest*

Potential conflicts of interest may arise in connection with the management of multiple accounts (including accounts managed in a personal capacity). These could include potential conflicts of interest related to the knowledge and timing of a Portfolio’s trades, investment

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opportunities and broker selection. Portfolio managers may be privy to the size, timing and possible market impact of a Portfolio’s trades.

It is possible that an investment opportunity may be suitable for both a Portfolio and other accounts managed by a portfolio manager, but may not be available in sufficient quantities for both the Portfolio and the other accounts to participate fully. Similarly, there may be limited opportunity to sell an investment held by a Portfolio and another account. A conflict may arise where the portfolio manager may have an incentive to treat an account preferentially as compared to a Portfolio because the account pays a performance-based fee or the portfolio manager, the Advisers or an affiliate has an interest in the account. The Advisers have adopted procedures for allocation of portfolio transactions and investment opportunities across multiple client accounts on a fair and equitable basis over time. All eligible accounts that can participate in a trade share the same price on a pro-rata allocation basis in an attempt to mitigate any conflict of interest. Trades are allocated among similarly managed accounts to maintain consistency of portfolio strategy, taking into account cash availability, investment restrictions and guidelines, and portfolio composition versus strategy.

With respect to securities transactions for the Portfolios, the Advisers determine which broker or dealer to use to execute each order, consistent with their duty to seek best execution of the transaction. However, with respect to certain other accounts (such as pooled investment vehicles that are not registered investment companies and other accounts managed for organizations and individuals), the Advisers may be limited by the client with respect to the selection of brokers or dealers or may be instructed to direct trades through a particular broker or dealer. In these cases, trades for a Portfolio in a particular security may be placed separately from, rather than aggregated with, such other accounts. Having separate transactions with respect to a security may temporarily affect the market price of the security or the execution of the transaction, or both, to the possible detriment of a Portfolio or the other account(s) involved. Additionally, the management of multiple Portfolios and/or other accounts may result in a portfolio manager devoting unequal time and attention to the management of each Portfolio and/or other account.

It is theoretically possible that portfolio managers could use information to the advantage of other accounts they manage and to the possible detriment of a Portfolio. For example, a portfolio manager could short sell a security for an account immediately prior to a Portfolio’s sale of that security. To address this conflict, the Advisers have adopted procedures for reviewing and comparing selected trades of alternative investment accounts (which may make directional trades such as short sales) with long only accounts (which include the Portfolios) for timing and pattern related issues. Trading decisions for alternative investment and long only accounts may not be identical even though the same Portfolio Manager may manage both types of accounts. Whether the Adviser allocates a particular investment opportunity to only alternative investment accounts or to alternative investment and long only accounts will depend on the investment strategy being implemented. If, under the circumstances, an investment opportunity is appropriate for both its alternative investment and long only accounts, then it will be allocated to both on a pro-rata basis.

A portfolio manager may also face other potential conflicts of interest in managing a Portfolio, and the description above is not a complete description of every conflict of interest that could be deemed to exist in managing both a Portfolio and the other accounts listed above.

*(a)(4): Portfolio Manager Securities Ownership*

The table below identifies the dollar range of securities beneficially owned by each portfolio managers as of October 31, 2007.

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| Portfolio
Manager(s) | Dollar Range of Portfolio Securities Beneficially Owned |
| --- | --- |
| S. Kenneth Leech | A |
| Stephen A. Walsh | A |
| Joseph P. Deane | A |
| David T. Fare | A |
| Robert Amodeo | A |

Dollar Range ownership is as follows: A: none B: $1 - $10,000 C: 10,001 - $50,000 D: $50,001 - $100,000 E: $100,001 - $500,000 F: $500,001 - $1 million G: over $1 million

ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.

None.

ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 11. 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 half-year (the registrant’s second fiscal half-year in the case of an annual report) that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting.

| ITEM 12. |
| --- |
| (a) (1) Code
of Ethics attached hereto. |
| Exhibit 99.CODE
ETH |
| (a) (2) Certifications
pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto. |
| Exhibit 99.CERT |
| (b) Certifications
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached
hereto. |
| Exhibit 99.906CERT |

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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, there unto duly authorized.

| Western
Asset Municipal High Income Fund Inc. | |
| --- | --- |
| By: | /s/ R. Jay Gerken |
| | (R.
Jay Gerken) |
| | Chief Executive Officer
of |
| | Western
Asset Municipal High Income Fund Inc. |
| Date: | January 5, 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
of
	Western
Asset Municipal High Income Fund Inc.
Date:	January 5, 2009

By:	/s/ Kaprel Ozsolak
	(Kaprel
Ozsolak)
	Chief Financial Officer
of
	Western
Asset Municipal High Income Fund Inc.
Date:	January 5, 2009

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