WESTERN ASSET MUNICIPAL HIGH INCOME FUND INC.

Regulatory Filings • Mar 25, 2010

N-Q 1 a10-4137_3nq.htm N-Q

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

*FORM N-Q*

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

| Investment
Company Act file number | |
| --- | --- |
| Western
Asset Municipal High Income Fund Inc. | |
| (Exact name of registrant as specified in charter) | |
| 55 Water Street, New York, NY | 10041 |
| (Address of principal executive offices) | (Zip code) |
| Robert I. Frenkel, Esq. Legg Mason & Co., LLC 100 First Stamford Place Stamford, CT 06902 | |
| (Name and address of agent for service) | |
| Registrant’s
telephone number, including area code: | Funds
Investor Services 1-888-777-0102 |
| Date of
fiscal year end: | October 31 |
| Date of
reporting period: | January 31,
2010 |

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ITEM 1. SCHEDULE OF INVESTMENTS

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WESTERN ASSET

MUNICIPAL HIGH INCOME FUND INC.

FORM N-Q

JANUARY 31, 2010

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*Western Asset Municipal High Income Fund Inc.*

Schedule of Investments (unaudited) January 31, 2010

Face Amount	Security	Value
MUNICIPAL BONDS — 98.2%
Alaska — 0.6%
$ 1,055,000	Alaska Industrial Development &
Export Authority Revenue, Williams Lynxs Alaska Cargoport, 8.125% due 5/1/31 (a)	$ 936,365
Arizona — 1.8%
1,000,000	Pima County, AZ, IDA, Revenue,
Tucson Electric Power Co., 5.750% due 9/1/29	1,008,930
1,500,000	Salt Verde, AZ Financial
Corp., Gas Revenue, 5.000% due 12/1/37	1,279,410
500,000	University Medical Center
Corp., AZ, Hospital Revenue, 6.250% due 7/1/29	535,195
	Total Arizona	2,823,535
Arkansas
— 1.0%
	Arkansas State Development Financing Authority:
1,000,000	Hospital Revenue, Washington Regional Medical Center, 7.375% due 2/1/29 (b)	1,000,000
600,000	Industrial Facilities Revenue, Potlatch Corp. Projects, 7.750% due 8/1/25 (a)	608,784
	Total Arkansas	1,608,784
California
— 6.7%
1,500,000	Barona, CA, Band of
Mission Indians, GO, 8.250% due 12/1/20	1,412,115
2,000,000	California Health
Facilities Financing Authority Revenue, Refunding, Cedars-Sinai Medical Center, 5.000% due 11/15/27	1,947,000
2,000,000	Golden State Tobacco
Securitization Corp., California Tobacco Settlement Revenue, Asset Backed, 7.800% due 6/1/42 (b)	2,419,080
	M-S-R Energy Authority, CA:
2,000,000	7.000% due 11/1/34	2,228,100
2,000,000	6.500% due 11/1/39	2,108,940
600,000	Redding, CA, Redevelopment
Agency, Tax Allocation, Shastec Redevelopment Project, 5.000% due 9/1/29	529,512
	Total California	10,644,747
Colorado
— 5.9%
	Colorado Educational & Cultural
Facilities Authority Revenue:
705,000	Charter School, Peak to Peak Project, 7.500% due
8/15/21 (b)	763,698
	Cheyenne Mountain Charter Academy:
680,000	5.250% due 6/15/25	695,368
510,000	5.125% due 6/15/32	500,978
785,000	Elbert County Charter, 7.375% due 3/1/35	732,970
810,000	Unrefunded, University of Denver Project, NATL/FGIC, 5.250% due 3/1/23	856,065
4,000,000	Public Authority for
Colorado Energy, Natural Gas Purchase Revenue, 6.125% due 11/15/23	4,344,040
1,000,000	Reata South Metropolitan
District, CO, GO, 7.250% due 6/1/37	811,920
500,000	Southlands, CO,
Metropolitan District No. 1, GO, 7.125% due 12/1/34 (b)	625,725
	Total Colorado	9,330,764
District
of Columbia — 1.3%
1,895,000	District of Columbia COP,
District Public Safety & Emergency, AMBAC, 5.500% due 1/1/20	1,996,894
Florida
— 7.9%
875,000	Beacon Lakes, FL,
Community Development District, Special Assessment, 6.900% due 5/1/35	838,644
1,500,000	Bonnet Creek Resort
Community Development District, Special Assessment, 7.500% due 5/1/34	1,225,560
2,000,000	Capital Projects Finance
Authority, FL, Student Housing Revenue, Capital Projects Loan Program,
Florida University, 7.850% due 8/15/31 (b)	2,136,220

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

1

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*Western Asset Municipal High Income Fund Inc.*

Schedule of Investments (unaudited) (continued) January 31, 2010

Face Amount	Security	Value
Florida
— 7.9% (continued)
$ 905,000	Century Parc Community
Development District, Special Assessment, 7.000% due 11/1/31	$ 878,366
1,000,000	Highlands County, FL,
Health Facilities Authority Revenue, Adventist Health Systems, 6.000% due 11/15/25 (b)	1,128,050
2,000,000	Martin County, FL, IDA
Revenue, Indiantown Cogeneration Project, 7.875% due 12/15/25 (a)	2,097,140
1,000,000	Orange County, FL, Health
Facilities Authority Revenue, First Mortgage, GF, Orlando Inc. Project,
9.000% due 7/1/31	992,360
290,000	Palm Beach County, FL,
Health Facilities Authority Revenue, John F. Kennedy Memorial Hospital Inc. Project, 9.500% due 8/1/13 (c)	338,230
2,000,000	Reunion East Community
Development District, Special Assessment, 7.375% due 5/1/33	1,446,180
1,000,000	Santa Rosa, FL, Bay Bridge
Authority Revenue, 6.250% due 7/1/28	577,730
1,000,000	University of Central
Florida, COP, FGIC, 5.000% due 10/1/25	946,920
	Total Florida	12,605,400
Georgia
— 7.0%
	Atlanta, GA, Airport Revenue:
1,000,000	AGM, 5.000% due 1/1/26	1,029,320
1,000,000	FGIC, 5.625% due 1/1/30 (a)	1,002,900
	Atlanta, GA:
2,000,000	Development Authority Educational Facilities Revenue, Science Park
LLC Project, 5.000% due 7/1/32	2,002,540
2,500,000	Tax Allocation, Atlantic Station Project, 7.900% due 12/1/24 (b)	2,850,475
2,000,000	Water & Wastewater Revenue, 6.250% due 11/1/39	2,107,160
1,000,000	DeKalb, Newton &
Gwinnett Counties, GA, Joint Development Authority Revenue, GGC Foundation
LLC Project, 6.125% due 7/1/40	1,097,750
1,000,000	Gainesville & Hall
County, GA, Development Authority Revenue, Senior Living Facilities, Lanier
Village Estates, 7.250% due 11/15/29	1,010,120
	Total Georgia	11,100,265
Hawaii
— 2.8%
	Hawaii State Department of Budget &
Finance Special Purpose:
2,000,000	Revenue, Hawaiian Electric Co., 6.500% due 7/1/39	2,149,840
	Senior
Living Revenue:
550,000	6.400% due 11/15/14	556,105
1,500,000	7.500% due 11/15/15	1,550,190
200,000	15 Craigside Project, 8.750% due 11/15/29	219,256
	Total Hawaii	4,475,391
Illinois
— 0.6%
1,000,000	Illinois Finance Authority
Revenue, Refunding, Chicago Charter School Project, 5.000% due 12/1/26	907,690
Indiana
— 0.4%
	County of St. Joseph, IN, EDR, Holy Cross Village
Notre Dame Project:
285,000	6.000% due 5/15/26	244,909
550,000	6.000% due 5/15/38	434,473
	Total Indiana	679,382
Kansas
— 0.7%
1,150,000	Salina, KS, Hospital
Revenue, Refunding & Improvement Salina Regional Health, 5.000% due
10/1/22	1,179,325
Kentucky
— 1.9%
1,000,000	Louisville &
Jefferson County, KY, Metro Government Health System Revenue, Norton
Healthcare Inc., 5.250% due 10/1/36	953,080

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

2

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*Western Asset Municipal High Income Fund Inc.*

Schedule of Investments (unaudited) (continued) January 31, 2010

Face Amount	Security	Value
Kentucky
— 1.9% (continued)
$ 2,000,000	Owen County, KY,
Waterworks System Revenue, Kentucky American Water Co. Project, 6.250% due 6/1/39	$ 2,136,720
	Total Kentucky	3,089,800
Louisiana
— 1.2%
1,000,000	Epps, LA, COP, 8.000% due
6/1/18	1,004,110
1,000,000	St. John Baptist Parish, LA,
Revenue, Marathon Oil Corp., 5.125% due 6/1/37	949,930
	Total Louisiana	1,954,040
Massachusetts
— 2.0%
860,000	Boston, MA, Industrial
Development Financing Authority Revenue, Roundhouse Hospitality LLC Project,
7.875% due 3/1/25 (a)	722,022
	Massachusetts State:
1,000,000	DFA Revenue, Briarwood, 8.250% due 12/1/30 (b)	1,071,700
1,000,000	HEFA Revenue, Caritas Christi Obligation, 6.750%
due 7/1/16	1,043,010
265,000	Port Authority Revenue, 13.000% due 7/1/13 (c)	323,957
	Total Massachusetts	3,160,689
Michigan
— 5.3%
2,130,000	Allen Academy, COP, 7.500%
due 6/1/23	1,875,443
	Cesar Chavez Academy, COP:
1,000,000	6.500% due 2/1/33	847,970
1,000,000	8.000% due 2/1/33	1,002,020
1,000,000	Gaudior Academy, COP,
7.250% due 4/1/34	852,690
2,000,000	Royal Oak, MI, Hospital
Finance Authority Revenue, William Beaumont Hospital, 8.250% due 9/1/39	2,364,460
975,000	Star International
Academy, COP, 7.000% due 3/1/33	817,801
700,000	William C. Abney Academy,
COP, 6.750% due 7/1/19	692,762
	Total Michigan	8,453,146
Missouri
— 0.8%
1,300,000	Missouri State HEFA
Revenue, Refunding, St. Lukes Episcopal, 5.000% due 12/1/21	1,312,636
Montana
— 1.2%
2,330,000	Montana State Board of
Investment, Resource Recovery Revenue, Yellowstone Energy LP Project, 7.000%
due 12/31/19 (a)	1,909,388
New
Hampshire — 1.0%
1,600,000	New Hampshire HEFA
Revenue, Healthcare System, Covenant Health System, 5.500% due 7/1/34	1,578,768
New
Jersey — 8.6%
1,500,000	Casino Reinvestment Development
Authority Revenue, NATL, 5.250% due 6/1/20	1,527,765
1,000,000	New Jersey EDA, Retirement
Community Revenue, SeaBrook Village Inc., 8.250% due 11/15/30 (b)	1,072,120
	New Jersey Health Care Facilities Financing
Authority Revenue, Trinitas Hospital Obligation Group:
5,000,000	5.250% due 7/1/30	4,194,600
3,000,000	7.500% due 7/1/30 (b)	3,114,000
5,000,000	New Jersey State, EDA,
Revenue, Refunding, 6.875% due 1/1/37 (a)	3,792,950
	Total New Jersey	13,701,435
New
Mexico — 0.6%
1,000,000	Otero County, NM, Jail
Project Revenue, 7.500% due 12/1/24	960,210

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

3

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*Western Asset Municipal High Income Fund Inc.*

Schedule of Investments (unaudited) (continued) January 31, 2010

Face Amount	Security	Value
New
York — 3.4%
$ 700,000	Brookhaven, NY, IDA Civic
Facilities Revenue, Memorial Hospital Medical Center Inc., 8.250% due
11/15/30 (b)	$ 748,048
2,000,000	Brooklyn Arena, NY, Local
Development Corp., Barclays Center Project, 6.250% due 7/15/40	2,044,260
1,000,000	Monroe County, NY, IDA,
Civic Facilities Revenue, Woodland Village Project, 8.550% due 11/15/32 (b)	1,080,090
695,000	New York City, NY, IDA,
Civic Facilities Revenue, Special Needs Facilities Pooled Program, 8.125% due
7/1/19 (b)	709,977
800,000	Suffolk County, NY, IDA,
Civic Facilities Revenue, Eastern Long Island Hospital Association, 7.750%
due 1/1/22 (b)	885,368
	Total New York	5,467,743
Ohio
— 2.7%
1,500,000	Cuyahoga County, OH,
Hospital Facilities Revenue, Canton Inc. Project, 7.500% due 1/1/30	1,517,970
1,500,000	Miami County, OH, Hospital
Facilities Revenue, Refunding and Improvement Upper Valley Medical Center,
5.250% due 5/15/21	1,486,035
1,260,000	Riversouth Authority, OH,
Revenue, Riversouth Area Redevelopment, 5.000% due 12/1/25	1,320,178
	Total Ohio	4,324,183
Pennsylvania
— 5.7%
1,000,000	Cumberland County, PA,
Municipal Authority Retirement Community Revenue, Wesley Affiliate Services
Inc. Project, 7.250% due 1/1/35 (b)	1,181,580
1,000,000	Lebanon County, PA, Health
Facilities Authority Revenue, Good Samaritan Hospital Project, 6.000% due
11/15/35	926,010
1,000,000	Monroe County, PA,
Hospital Authority Revenue, Pocono Medical Center, 5.000% due 1/1/27	949,580
920,000	Northumberland County, PA,
IDA Facilities Revenue, NHS Youth Services Inc. Project, 7.500% due 2/15/29	798,312
2,000,000	Pennsylvania Economic
Development Financing Authority, Health Systems Revenue, Albert Einstein
Healthcare, 6.250% due 10/15/23	2,108,320
1,000,000	Philadelphia, PA,
Authority for IDR, Host Marriot LP Project, Remarketed 10/31/95, 7.750% due
12/1/17 (a)	1,002,420
2,000,000	Westmoreland County, PA,
IDA Revenue, Health Care Facilities, Redstone Highlands Health, 8.125% due
11/15/30 (b)	2,138,980
	Total Pennsylvania	9,105,202
Tennessee
— 4.4%
1,000,000	Clarksville, TN, Natural
Gas Acquisition Corp. Gas Revenue, 5.000% due 12/15/21	985,870
1,000,000	Johnson City, TN,
Health & Educational Facilities Board, Hospital Revenue, Mountain
States Health Alliance, 5.500% due 7/1/36	968,830
2,500,000	Shelby County, TN, Health
Educational & Housing Facilities Board Revenue, Trezevant Manor
Project, 5.750% due 9/1/37	2,131,075
3,000,000	Tennessee Energy
Acquisition Corp., Gas Revenue, 5.250% due 9/1/26	2,912,610
	Total Tennessee	6,998,385
Texas
— 16.6%
1,500,000	Brazos River, TX, Harbor
Industrial Development Corp., Environmental Facilities Revenue, Dow Chemical
Co., 5.900% due 5/1/28 (a)(d)	1,468,695
1,500,000	Burnet County, TX, Public
Facility Project Revenue, 7.500% due 8/1/24	1,506,465
	Garza County, TX, Public Facility Corp.:
1,000,000	5.500% due 10/1/18	939,500
2,000,000	Project Revenue, 5.750% due 10/1/25	2,044,620
2,000,000	Gulf Coast of Texas, IDA,
Solid Waste Disposal Revenue, CITGO Petroleum Corp. Project, 7.500% due 10/1/12
(a)(d)	2,051,820

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

4

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*Western Asset Municipal High Income Fund Inc.*

Schedule of Investments (unaudited) (continued) January 31, 2010

Face Amount	Security	Value
Texas
— 16.6% (continued)
$ 2,000,000	Harris County, TX,
Cultural Education Facilities Finance Corp., Medical Facilities Revenue,
Baylor College of Medicine, 5.625% due 11/15/32	$ 1,851,280
2,750,000	Houston, TX, Airport
Systems Revenue, Special Facilities, Continental Airlines Inc. Project,
6.125% due 7/15/27 (a)	2,426,518
1,000,000	Laredo, TX, ISD Public
Facility Corp. Lease Revenue, AMBAC, 5.000% due 8/1/29	1,009,450
1,000,000	Midlothian, TX,
Development Authority, Tax Increment Contract Revenue, 6.200% due 11/15/29	1,005,900
2,500,000	North Texas Tollway
Authority Revenue, 5.750% due 1/1/40	2,552,375
2,000,000	Texas Midwest Public
Facility Corp. Revenue, Secure Treatment Facility Project, 9.000% due 10/1/30	2,075,440
2,000,000	Texas Private Activity
Bond Surface Transportation Corp., Senior Lien, 6.875% due 12/31/39	2,078,900
1,500,000	Texas State Public Finance
Authority, Uplift Education, 5.750% due 12/1/27	1,459,140
1,865,000	West Texas Detention
Facility Corp. Revenue, 8.000% due 2/1/25	1,654,553
	Willacy County, TX:
1,025,000	Local Government Corp. Revenue, 6.875% due 9/1/28	888,634
	PFC Project Revenue:
1,000,000	8.250% due 12/1/23	924,840
580,000	County Jail, 7.500% due 11/1/25	509,588
	Total Texas	26,447,718
U.S.
Virgin Islands — 1.7%
2,500,000	Virgin Islands Public
Finance Authority Revenue, Matching Fund Loan, 6.750% due 10/1/37	2,662,100
Virginia
— 2.3%
345,000	Alexandria, VA, Redevelopment &
Housing Authority, MFH Revenue, Parkwood Court Apartments Project, 8.125% due
4/1/30	321,909
1,000,000	Broad Street CDA Revenue,
7.500% due 6/1/33	899,980
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)	2,465,750
	Total Virginia	3,687,639
West
Virginia — 1.5%
2,500,000	Pleasants County, WV, PCR,
Refunding County Commission Allegheny, 5.250% due 10/15/37	2,380,750
Wisconsin
— 0.6%
1,000,000	Wisconsin State HEFA
Revenue, Aurora Health Care, 6.400% due 4/15/33	1,018,060
	TOTAL INVESTMENTS BEFORE SHORT-TERM INVESTMENTS (Cost — $157,846,079)	156,500,434
SHORT-TERM
INVESTMENTS — 1.8%
Colorado
— 0.1%
100,000	Colorado
Educational & Cultural Facilities Authority Revenue, YMCA Rockies
Project, LOC-Bank of America N.A., 0.200%, 2/1/10 (e)	100,000
Florida
— 0.8%
1,300,000	Florida State Municipal
Power Agency Revenue, All Requirements Power Supply, LOC-SunTrust Bank,
0.240%, 2/1/10 (e)	1,300,000
Puerto
Rico — 0.9%
	Commonwealth of Puerto Rico, GO, Public
Improvements:
100,000	AGM, SPA-Dexia Bank, 0.230%, 2/4/10 (e)	100,000

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

5

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*Western Asset Municipal High Income Fund Inc.*

Schedule of Investments (unaudited) (continued) January 31, 2010

Face Amount	Security	Value
Puerto
Rico — 0.9% (continued)
$ 1,300,000	LOC-Wachovia Bank N.A., 0.180%, 2/1/10 (e)	$ 1,300,000
	Total Puerto Rico	1,400,000
	TOTAL SHORT-TERM INVESTMENTS (Cost — $2,800,000)	2,800,000
	TOTAL INVESTMENTS — 100.0% (Cost —
$160,646,079#)	159,300,434
	Other Assets in Excess of
Liabilities — 0.0%	1,034
	TOTAL NET ASSETS — 100.0%	$ 159,301,468

| (a) — (b) | Income
from this issue is considered a preference item for purposes of calculating
the alternative minimum tax (“AMT”). — Pre-Refunded
bonds are escrowed with U.S. government obligations and/or U.S. government
agency securities and are considered by the manager to be triple-A rated even
if issuer has not applied for new ratings. | | |
| --- | --- | --- | --- |
| (c) | Bonds
are escrowed to maturity by government securities and/or U.S. government
agency securities and are considered by the manager to be triple-A rated even
if issuer has not applied for new ratings. | | |
| (d) | Maturity
date shown represents the mandatory tender date. | | |
| (e) | Variable
rate demand obligations have a demand feature under which the Fund can tender
them back to the issuer or liquidity provider on no more than 7 days notice.
Date shown is the date of the next interest rate change. | | |
| # | Aggregate
cost for federal income tax purposes is substantially the same. | | |
| | Abbreviations
used in this schedule: | | |
| | AGM | - | Assured
Guaranty Municipal Corp. - Insured Bonds |
| | AMBAC | - | American
Municipal Bond Assurance Corporation - Insured Bonds |
| | CDA | - | Community
Development Authority |
| | COP | - | Certificate
of Participation |
| | DFA | - | Development
Finance Agency |
| | EDA | - | Economic
Development Authority |
| | EDR | - | Economic
Development Revenue |
| | FGIC | - | Financial
Guaranty Insurance Company - Insured Bonds |
| | GO | - | General
Obligation |
| | HEFA | - | Health &
Educational Facilities Authority |
| | IDA | - | Industrial
Development Authority |
| | IDR | - | Industrial
Development Revenue |
| | ISD | - | Independent
School District |
| | LOC | - | Letter
of Credit |
| | MFH | - | Multi-Family
Housing |
| | NATL | - | National
Public Finance Guarantee Corporation - Insured Bonds |
| | PCR | - | Pollution
Control Revenue |
| | PFC | - | Public
Facilities Corporation |
| | SPA | - | Standby
Bond Purchase Agreement - Insured Bonds |

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

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*Western Asset Municipal High Income Fund Inc.*

Schedule of Investments (unaudited) (continued) January 31, 2010

| Summary of Investments by Industry
* | |
| --- | --- |
| Health Care | 19.6 % |
| Industrial Revenue | 16.7 |
| Pre-Refunded/Escrowed to Maturity | 14.8 |
| Leasing | 11.1 |
| Power | 8.8 |
| Special Tax Obligation | 5.1 |
| Education | 5.0 |
| Other | 4.8 |
| Transportation | 4.5 |
| Solid Waste/Resource Recovery | 4.0 |
| Local General Obligation | 2.3 |
| Water & Sewer | 1.3 |
| Housing | 0.2 |
| Short-Term Investment | 1.8 |
| | 100.0 % |

*As a percentage of total investments. Please note that Fund holdings are as of January 31, 2010 and are subject to change.

*Ratings Table†*

S&P/Moody’s/Fitch ‡
AAA/Aaa	5.5 %
AA/Aa	0.8
A	26.6
BBB/Baa	27.0
BB/Ba	7.2
CCC/Caa	1.5
CC/Ca	0.4
A-1/VMIG1	1.8
NR	29.2
	100.0 %

† As a percentage of total investments.

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

See pages 8 and 9 for definitions of ratings.

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

7

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*Bond Ratings (unaudited)*

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

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

| AAA | — | Bonds rated “AAA” have the
highest rating assigned by Standard & Poor’s. Capacity to pay
interest and repay principal is extremely strong. |
| --- | --- | --- |
| AA | — | Bonds rated “AA” have a
very strong capacity to pay interest and repay principal and differ from the
highest rated issues only in a small degree. |
| A | — | Bonds rated “A” have a
strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories. |
| BBB | — | Bonds rated “BBB” are
regarded as having an adequate capacity to pay interest and repay principal.
Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds in this
category than in higher rated categories. |
| BB, B, CCC, CC and C | — | Bonds rated “BB”, “B”,
“CCC”, “CC” and “C” are regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance
with the terms of the obligation. “BB” represents the lowest degree of
speculation and “C” the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions. |
| D | — | Bonds rated “D” are in
default and payment of interest and/or repayment of principal is in arrears. |
| Moody’s
Investors Service (“Moody’s”) —Numerical modifiers 1, 2
and 3 may be applied to each generic rating from “Aa” to “Caa,” where 1 is
the highest and 3 the lowest ranking within its generic category. | | |
| Aaa | — | Bonds rated “Aaa” are
judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as “gilt edge.” Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to
change, such changes can be visualized as most unlikely to impair the
fundamentally strong position of such issues. |
| Aa | — | Bonds rated “Aa” are
judged to be of high quality by all standards. Together with the “Aaa” group
they comprise what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may not be as large
as in “Aaa” securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in “Aaa” securities. |
| A | — | Bonds rated “A” possess
many favorable investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and interest are
considered adequate but elements may be present which suggest a
susceptibility to impairment some time in the future. |
| Baa | — | Bonds rated “Baa” are
considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. |
| Ba | — | Bonds rated “Ba” are
judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate and therefore |

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*Bond Ratings (unaudited)(continued)*

| B | — | not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class. — Bonds rated “B” generally
lack characteristics of desirable investments. Assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small. |
| --- | --- | --- |
| Caa | — | Bonds rated “Caa” are of
poor standing. These may be in default, or present elements of danger may
exist with respect to principal or interest. |
| Ca | — | Bonds rated “Ca” represent
obligations which are speculative in a high degree. Such issues are often in
default or have other marked short-comings. |
| C | — | Bonds rated “C” are the
lowest class of bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing. |
| Fitch Ratings Service (“Fitch”) —Ratings from
“AA” to “CCC” may be modified by the addition of a plus (+) or minus (–) sign
to show relative standings within the major rating categories. | | |
| AAA | — | Bonds rated “AAA” have the
highest rating assigned by Fitch. Capacity to pay interest and repay
principal is extremely strong. |
| AA | — | Bonds rated “AA” have a
very strong capacity to pay interest and repay principal and differ from the
highest rated issues only in a small degree. |
| A | — | Bonds rated “A” have a
strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories. |
| BBB | — | Bonds rated “BBB” are
regarded as having an adequate capacity to pay interest and repay principal.
Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds in this
category than in higher rated categories. |
| BB, B, CCC and CC | — | Bonds rated “BB”, “B”,
“CCC” and “CC” are regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. “BB” represents a lower degree of speculation
than “B”, and “CC” the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions. |
| NR | — | Indicates that the bond is
not rated by Standard & Poor’s, Moody’s or Fitch. |
| Short-Term Security Ratings (unaudited) | | |
| SP-1 | — | Standard & Poor’s
highest rating indicating very strong or strong capacity to pay principal and
interest; those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign. |
| A-1 | — | Standard & Poor’s
highest commercial paper and variable-rate demand obligation (VRDO) rating
indicating that the degree of safety regarding timely payment is either
overwhelming or very strong; those issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign. |
| VMIG 1 | — | Moody’s highest rating for
issues having a demand feature—VRDO. |
| MIG 1 | — | Moody’s highest rating for
short-term municipal obligations. |
| P-1 | — | Moody’s highest rating for
commercial paper and for VRDO prior to the advent of the VMIG 1 rating. |
| F1 | — | Fitch’s highest rating
indicating the strongest capacity for timely payment of financial
commitments; those issues determined to possess overwhelming strong credit
feature are denoted with a plus (+) sign. |

9

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*Notes to Schedule of Investments (unaudited)*

*1. Organization and Significant Accounting Policies*

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

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

*(a) Investment Valuation.* Securities are valued at the mean between the last quoted bid and asked prices provided by an independent pricing service, which 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 values these securities at fair value as determined in accordance with procedures approved by the Fund’s Board of Directors. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates fair value.

The Fund has adopted Financial Accounting Standards Board Codification Topic 820 (“ASC Topic 820”). ASC Topic 820 establishes a single definition of fair value, creates a three-tier hierarchy as a framework for measuring fair value based on inputs used to value the Fund’s investments, and requires additional disclosure about fair value. The hierarchy of inputs is summarized below.

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

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

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

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

The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of the security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to convert future amounts to a single present amount.

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

| DESCRIPTION | QUOTED
PRICES (LEVEL 1) | OTHER SIGNIFICANT OBSERVABLE INPUTS (LEVEL 2) | SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) | TOTAL |
| --- | --- | --- | --- | --- |
| Municipal bonds† | — | $ 156,500,434 | — | $ 156,500,434 |
| Short-term investments† | — | 2,800,000 | — | 2,800,000 |
| Total investments | — | $ 159,300,434 | — | $ 159,300,434 |

† See Schedule of Investments for additional detailed categorizations.

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

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

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

*2. Investments*

At January 31, 2010, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:

Gross unrealized appreciation	$
Gross unrealized depreciation	(7,302,684	)
Net unrealized depreciation	$ (1,345,645	)

*3. Derivative Instruments and Hedging Activities*

Financial Accounting Standards Board Codification Topic 815 (“ASC Topic 815”) requires enhanced disclosure about an entity’s derivative and hedging activities.

During the period ended January 31, 2010, the Fund did not invest in any derivative instruments.

11

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ITEM 2. CONTROLS AND PROCEDURES.

(a) The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934.

(b) There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal quarter that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting.

ITEM 3. EXHIBITS.

Certifications pursuant to Rule 30a-2(a) under the Investment Company Act of 1940, as amended, are attached hereto.

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SIGNATURES

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

*Western Asset Municipal High Income Fund Inc.*

By
R. Jay Gerken
Chief Executive Officer

Date: March 25, 2010

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

By
R. Jay Gerken
Chief Executive Officer

Date: March 25, 2010

By
Kaprel Ozsolak
Chief Financial Officer

Date: March 25, 2010

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