<DOCUMENT>
<TYPE>N-30D
<SEQUENCE>1
<FILENAME>sb125160.txt
<DESCRIPTION>QUARTERLY REPORT
<TEXT>

--------------------------------------------------------------------------------
[CLIP ART]                                                            [CLIP ART]

                                   Municipal
                                  High Income
                                   Fund Inc.

                                                                      Quarterly
                                                                        Report

                                                                      [CLIP ART]

                                                                       July 31,
                                                                         2001
--------------------------------------------------------------------------------

<PAGE>

================================== [CLIP ART] ==================================

                         Municipal High Income Fund Inc.

Dear Shareholder:

      We are pleased to provide the quarterly report for the Municipal High
Income Fund Inc. ("Fund") for the nine months ended July 31, 2001. In this
report, we summarize the period's prevailing economic and market conditions and
outline our investment strategy. We hope you find this information useful and
informative.

      During the period, the Fund distributed income dividends totaling $0.44
per share. The table below shows the annualized distribution rate and total
return based on the Fund's July 31, 2001 net asset value ("NAV") per share and
its New York Stock Exchange ("NYSE") closing price.(1)

            Price                   Annualized               Nine-Month
          Per Share            Distribution Rate(2)        Total Return(2)
         ------------          --------------------        ---------------
         $8.77 (NAV)                   6.64%                    4.20%
         $8.74 (NYSE)                  6.66%                   13.23%

      The Fund had a total return of 4.20% based on NAV and 13.23% based on its
NYSE price for the nine months ended July 31, 2001. In comparison, the Fund's
Lipper Inc. ("Lipper")(3) peer group returned 8.86% based on NAV for the same
period.

----------
(1)   The NAV is calculated by subtracting total liabilities 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 shares
      outstanding. The NAV fluctuates with changes in the market price of the
      securities in which the Fund has invested. However, the price at which the
      investor may buy or sell shares of the Fund is at their market ("NYSE")
      price as determined by supply and demand of the Fund's shares.
(2)   Total returns are based on changes in NAV and market value, respectively.
      Total returns assume the reinvestment of all dividends and/or capital
      gains distributions in additional shares. Annualized distribution rate is
      the Fund's current monthly income dividend rate, annualized and then
      divided by the NAV or the market value noted in this report. The
      annualized distribution rate assumed a current monthly income dividend
      rate of 0.0485 for twelve months. This rate is as of August 31, 2001 and
      is subject to change. The important difference between a total return and
      an annualized distribution rate is that the total return takes into
      consideration a number of factors including the fluctuation of the NAV or
      the market value during the period reported. The NAV fluctuation includes
      the effects of unrealized appreciation or depreciation in the Fund.
      Accordingly, since an annualized distribution rate only reflects the
      current monthly income dividend rate annualized, it should not be used as
      the sole indicator to judge the return you receive from your fund
      investment. Past performance is not indicative of future results.
(3)   Lipper is a major independent mutual fund tracking organization. Average
      returns are based on the nine-month period ended July 31, 2001, calculated
      among 13 funds in the high-yield municipal debt funds category.


                                       1
================================================================================
<PAGE>

================================== [CLIP ART] ==================================

Market and Economic Review

      During the period, the U.S. Federal Reserve Board ("Fed") reduced
short-term interest rates six times in an effort to prevent the economy from
slipping into recession. (Citing concerns that the economy is still showing
signs of weakness, the Fed cut the Federal Funds rate 25 basis points(4) to
3.50% on August 21st, after the Fund's reporting period ended.) This brought the
total of short-term rate cuts in the Fed's effort to forestall recession to full
three percentage points so far in 2001.

      Yields on long-term municipal bonds, however, were little changed during
the period. The Bond Buyer's 25 Revenue Bond Index ("Revenue Bond Index")(5)
fluctuated only slightly over the reporting period and stood at 5.46% at the end
of July.

      In the beginning of 2001, the municipal bond market has responded well to
heavy new issue supply. The municipal new issue volume is up sharply compared to
prior year levels for a number of reasons. First, volume slowed sharply during
the lengthy post-election period, as the nation's lawmakers focused on the
ongoing presidential battle. Second, there is often a temporary hiatus in
issuance after the presidential election as a large number of new state and
local leaders take office. Generally, as existing leaders refocus and new
leaders begin to identify their funding needs, there is an increase in demand
for capital. Third, the decline in overall interest rates -- including municipal
bond rates -- has led to a moderate increase in the level of re-fundings.
Fourth, the continuous need to expand or improve governmental facilities remains
high in a large variety of sectors such as education, transportation and
municipal utilities. Lastly, recent surveys suggest that the demand for
infrastructure and related facilities continue to expand. Some state and local
governments that had adopted a "pay as you go" strategy in past years, utilizing
budget surpluses to pay for ongoing capital projects, have now discovered the
need to resume borrowing for projects with potential long-term benefits.

Investment Strategy

      The Fund seeks high current income exempt from federal income tax(6) by
generally investing in intermediate and long-term municipal bonds.

----------
(4)   A basis point is 0.01%, or one one-hundredth of a percent.
(5)   The Revenue Bond Index is an index of 25 revenue bonds. Please note that
      an investor cannot invest directly in an index.
(6)   Certain investors may be subject to the Alternative Minimum Tax (AMT), and
      state and local taxes may apply. Capital gains, if any, are fully taxable.


                                       2
================================================================================
<PAGE>

================================== [CLIP ART] ==================================

      One of the ways we manage the Fund is to seek to create a built-in income
stream for the long term. We have maintained a long weighted-average life in the
Fund because we believe that the risk of higher inflation at the present time is
negligible. In terms of maturity, we have been moving out along the yield
curve(7) in order to take advantage of its positive slope. We incorporated
additional call protection into the Fund by selling off some of our higher
coupon bonds with shorter calls and replaced them with bonds that have a similar
high coupon structure, but are not subject to early calls. We believe our
greater emphasis on call protection may provide shareholders with consistent
income if interest rates continue to decline. We have also maintained high
average credit quality in the Fund because quality spreads(8) remained
relatively narrow. Quality spreads have narrowed considerably on medium-grade
paper and we are taking this opportunity to reduce the Fund's number of
medium-grade bonds that have lower coupons and shorter call features. Although
quality spreads on non-rated and below investment-grade bonds(9) have also
narrowed, they are still considerably wider than they were the last time
long-term rates were this low. We continue to selectively use our capacity to
make commitments in this segment of the market. On our higher-grade bonds, we
are seeking to eliminate callable bonds that have very long maturities and are
trading at or close to face value in favor of modest premiums and somewhat
shorter current coupons with better call protection.

Municipal Bond Market Outlook

      Interest rates are at cyclical lows, economic and market conditions
continue to favor investment in fixed income instruments. We believe the weak
economy provides a benign inflation outlook and we feel this latest round of
rate cuts is not likely to restore consumer confidence as long as corporate
earnings remain weak and companies continue to reduce their workforce. We
believe the Fed will probably cut rates at least once more before year-end to
bolster its already aggressive effort to stimulate the economy.

      Over the near term, we expect investors to continue shying away from
equities and to remain focused on bonds as a safe haven from the weakness in
stock prices. We also expect the collapse in short-term yields, with tax-exempt
money funds now yielding less than two percent, to push more investors off the
sidelines into longer-term bonds where they can obtain a reasonable return on
their investment.


----------
(7)   The yield curve is the graphical depiction of the relationship between the
      yield of bonds of the same credit quality but different maturities.
(8)   Spread is the difference between yields on securities of the same quality
      but different maturities or the difference between yields on securities of
      the same maturity but different quality.
(9)   Investment-grade bonds are those rated Aaa, Aa, A and Baa by Moody's
      Investors Service, Inc. or AAA, AA, A and BBB by Standard & Poor's Ratings
      Service, or that have an equivalent rating by any nationally recognized
      organization, or are determined by the portfolio manager to be of
      equivalent quality.


                                       3
================================================================================
<PAGE>

================================== [CLIP ART] ==================================

      On May 26, 2001 President Bush signed into law tax reform legislation that
will phase in lower taxes through a series of tax-bracket reductions. As of July
1, 2001, the current tax-brackets of 28% and higher were reduced by 1%.
Additional reductions of 1% are expected in 2004 and 2006 (the current top
tax-bracket of 39.6% will be reduced by 2.6% in 2006). While this does
marginally reduce the value of tax-exemption on municipals relative to taxable
instruments, taxable equivalent yields on long-term municipals are still quite
high and there has been no discernable impact on the municipal market to date.
Although some degree of adjustment in the future certainly can't be ruled out,
we believe the tax cuts are so minimal that they should not seriously erode the
value of municipals.

      Thank you for your investment in the Municipal High Income Fund Inc. We
look forward to continuing to help you pursue your financial goals.

Sincerely,


/s/ Heath B. McLendon                       /s/ Peter M. Coffey

Heath B. McLendon                           Peter M. Coffey
Chairman                                    Vice President and
                                            Investment Officer

August 31, 2001

The information provided in this letter represents the opinion of the manager
and is not intended to be a forecast of future events, a guarantee of future
results nor investment advice. Further, there is no assurance that certain
securities will remain in or out of the Fund or the percentage of the Fund's
assets in various sectors will remain the same. Please refer to pages 6 through
14 for a list and percentage breakdown of the Fund's holdings. Also, please note
any discussion of the Fund's holdings is as of July 31, 2001 and is subject to
change.


                                       4
================================================================================
<PAGE>

================================== [CLIP ART] ==================================

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

Take Advantage of the Fund's Dividend Reinvestment Plan!

Did you know that Fund investors who reinvest their dividends are taking
advantage of one of the most effective wealth-building tools available today?
Systematic investments put time to work for you through the strength of
compounding.

As an investor in the Fund, you can participate in its Dividend Reinvestment
Plan ("Plan"), a convenient, simple and efficient way to reinvest your dividends
and capital gains, if any, in additional shares of the Fund. A more complete
description of the Plan begins on page 28. Below is a short summary of how the
Plan works.

Plan Summary

If you are a Plan participant who has not elected to receive your dividends in
the form of a cash payment, then your dividend and capital gain distributions
will be reinvested automatically in additional shares of the Fund.

The number of common stock shares in the Fund you will receive in lieu of a cash
dividend is determined in the following manner. If the market price of the
common stock is equal to or higher than 98% of the net asset value ("NAV") per
share on the date of valuation, you will be issued shares for the equivalent of
either 98% of the most recently determined NAV per share or 95% of the market
price, whichever is greater.

If 98% of the NAV per share at the time of valuation is greater than the market
price of the common stock, or if the Fund declares a dividend or capital gains
distribution payable only in cash, the Fund will buy common stock for your
account in the open market or on the New York Stock Exchange.

If the Fund begins to purchase additional shares in the open market and the
market price of the shares subsequently rises above 98% of the NAV before the
purchases are completed, the Fund will attempt to cancel any remaining orders
and issue the remaining dividend or distribution in shares at 98% of the Fund's
NAV per share. In that case, the number of Fund shares you receive 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 find out more detailed information about the Plan and about how you can
participate, please call PFPC Global Fund Services at (800) 331-1710.


                                       5
================================================================================
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                             Schedule of Investments (unaudited)
                                                                   July 31, 2001
================================================================================

<TABLE>
<CAPTION>
     FACE
    AMOUNT        RATING(a)                      SECURITY                                              VALUE
===============================================================================================================
Alabama -- 4.0%
<S>               <C>      <C>                                                                     <C>
$      15,000     AA-      Alabama HFA, Single-Family Housing Revenue,
                             10.500% due 12/1/02 ..............................................    $     15,318
    4,000,000     BBB-     Butler, AL IDB, Solid Waste Disposal Revenue,
                             (James River Corp. Project), 8.000% due 9/1/28 (b) ...............       4,270,720
      615,000     NR       Capstone Improvement District of Brookwood, AL,
                             7.700% due 8/15/23 ...............................................         614,963
    1,000,000     CCC      Mobile, AL IDB, Solid Waste Disposal Revenue, (Mobile
                             Energy Services Co. Project), 6.950% due 1/1/20 ..................          50,000
    1,000,000     NR       Rainbow City, AL Special Health Care Facility Financing
                             Authority, Series A, 8.250% due 1/1/31 ...........................         996,590
    1,000,000     AAA      West Jefferson, AL Amusement & Public Park Authority
                             Revenue, (Visionland Project), (Pre-Refunded -- Escrowed
                             with U.S. government securities to 12/1/06 Call @ 102),
                             8.000% due 12/1/26 ...............................................       1,222,580
                                                                                                   ------------
                                                                                                      7,170,171
                                                                                                   ------------
Alaska -- 0.6%
    1,055,000     NR       Alaska Industrial Development and Export Authority Revenue,
                             Williams Lynxs Alaska Cargoport, 8.125% due 5/1/31 (b)                   1,068,156
                                                                                                   ------------
Arizona -- 3.5%
    1,500,000     NR       Casa Grande, AZ IDA Hospital Revenue, Series A,
                             7.625% due 12/1/29 ...............................................       1,521,495
    1,750,000     BB       Gila County, AZ IDA, Revenue, ASARCO Inc.,
                             5.550% due 1/1/27 ................................................       1,289,925
                           Maricopa, AZ IDA, Multi-Family Housing Revenue:
      500,000     NR         Avalon Apartment Projects, Series C, 10.000% due 4/1/30 ..........         517,080
    1,000,000     NR         Gran Victoria Housing LLC Project, Series B,
                               10.000% due 5/1/31 .............................................       1,026,570
    1,840,000     NR       Phoenix, AZ IDA, Multi-Family Housing Revenue, (Ventana
                             Palms Apartments Project), Series B, 8.000% due 10/1/34 ..........       1,869,054
                                                                                                   ------------
                                                                                                      6,224,124
                                                                                                   ------------
California -- 2.0%
    1,500,000     NR       Barona, CA Band of Mission Indians, 8.250% due 1/1/20 ..............       1,585,350
    1,865,000     Ba3*     Vallejo, CA COP, Touro University, 7.375% due 6/1/29 ...............       1,950,231
                                                                                                   ------------
                                                                                                      3,535,581
                                                                                                   ------------
Colorado -- 1.8%
    1,175,000     A        Denver, CO City & County Airport Revenue, Series A,
                             8.000% due 11/15/25 (b) ..........................................       1,191,638
    1,000,000     NR       Highline Business Improvement District, Littleton, CO,
                             Series B, 8.750% due 12/15/19 ....................................       1,045,290
</TABLE>

                       See Notes to Financial Statements.


                                       6
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                 Schedule of Investments (unaudited) (continued)
                                                                   July 31, 2001
================================================================================

<TABLE>
<CAPTION>
     FACE
    AMOUNT        RATING(a)                      SECURITY                                              VALUE
===============================================================================================================
<S>               <C>      <C>                                                                     <C>
Colorado -- 1.8% (continued)
$   1,000,000     BB+      Northwest Parkway Public Highway Authority, CO Revenue,
                             Series D, 7.125% due 6/15/41 .....................................    $  1,009,600
                                                                                                   ------------
                                                                                                      3,246,528
                                                                                                   ------------
Connecticut -- 1.9%
                           Connecticut State Development Authority:
    1,735,000     NR         Aquarium Project Revenue, (Mystic Marinelife Aquarium
                               Project), Series A, 7.000% due 12/1/27 .........................       1,804,591
    1,475,000     NR         Health Care Revenue, (Independent Living Project),
                               (Pre-Refunded-- Escrowed with state & local
                               government securities to 7/1/03 Call @ 102),
                               Series B, 8.000% due 7/1/17 ....................................       1,623,164
                                                                                                   ------------
                                                                                                      3,427,755
                                                                                                   ------------
Delaware -- 0.5%
    1,000,000     NR       Sussex County, DE Assisted Living Facility Revenue,
                             (Heritage at Milford Project), 7.250% due 7/1/29 .................         855,110
                                                                                                   ------------
District of Columbia -- 0.6%
    1,000,000     A1*      District of Columbia, Tobacco Settlement Financing Corp.,
                             Asset-Backed Bonds, 6.750% due 5/15/40 ...........................       1,061,250
                                                                                                   ------------
Florida -- 5.9%
    2,000,000     NR       Capital Projects Finance Authority, Student Housing Revenue,
                             Florida University, Series A, 7.850% due 8/15/31 .................       2,049,980
    2,000,000     NR       Florida Housing Finance Corp., Multi-Family Housing
                             Revenue, (Whistlers Cove Apartment Project),
                             6.500% due 1/1/39 (b) ............................................       2,001,180
    2,750,000     NR       Hillsborough County, FL IDA Revenue, (Lakeshore Villas
                             Project), Series A, 6.750% due 7/1/29 ............................       2,477,612
      875,000     NR       Homestead, FL IDR, Community Rehabilitation Providers
                             Program, Series A, 7.950% due 11/1/18 ............................         914,462
    2,000,000     BBB-     Martin County, FL IDA, IDR, (Indiantown Cogeneration Project),
                             Series A, 7.875% due 12/15/25 (b) ................................       2,104,660
    1,000,000     NR       Orange County, FL Health Facilities Authority Revenue, First
                             Mortgage, (GF/Orlando Inc. Project) 9.000% due 7/1/31 ............       1,019,610
                                                                                                   ------------
                                                                                                     10,567,504
                                                                                                   ------------
Georgia -- 3.4%
    1,500,000     NR       Atlanta, GA Urban Residential Finance Authority, Multi-Family
                             Housing Revenue, Park Place Apartments, Series A,
                             6.750% due 3/1/31 ................................................       1,455,135
    2,000,000     NR       Clayton County, GA Development Authority Revenue,
                             Senior Care Group Inc., (Bayberry Project), Series A,
                             6.750% due 7/1/29 ................................................       1,000,000
      500,000     NR       Fulton County, GA Residential Care Facilities, Senior Lien,
                             Series A, 7.000% due 7/1/29 ......................................         431,645
</TABLE>

                       See Notes to Financial Statements.


                                       7
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                 Schedule of Investments (unaudited) (continued)
                                                                   July 31, 2001
================================================================================

<TABLE>
<CAPTION>
     FACE
    AMOUNT        RATING(a)                      SECURITY                                              VALUE
===============================================================================================================
<S>               <C>      <C>                                                                     <C>
Georgia -- 3.4% (continued)
$   1,000,000     NR       Gainesville & Hall County, GA Development Authority Revenue,
                             Senior Living Facility, Lanier Village, Series C,
                             7.250% due 11/15/29 ..............................................    $    991,530
    1,435,000     NR       Savannah, GA EDA, Revenue, Marshview Inn, Series A,
                             7.125% due 7/1/29 ................................................       1,228,130
    1,000,000     NR       Walton County, GA IDA, IDR, (Walton Manufacturing Co.
                             Project), 8.500% due 9/1/07 ......................................       1,086,500
                                                                                                   ------------
                                                                                                      6,192,940
                                                                                                   ------------
Illinois -- 1.3%
                           Chicago, IL Board of Education:
    6,750,000     AAA        Capital Appreciation GO, (School Reform Project),
                               Series B-1, FGIC-Insured, zero coupon bond to yield
                               5.214% due 12/1/31 .............................................       1,268,055
    1,000,000     AAA        GO, Series A, MBIA-Insured, 5.500% due 12/1/28 ...................       1,026,070
                                                                                                   ------------
                                                                                                      2,294,125
                                                                                                   ------------
Indiana -- 1.8%
    2,500,000     BB-      East Chicago, Industrial PCR, (Inland Steel Co. Project No. 10),
                             6.800% due 6/1/13 ................................................       1,631,125
    1,000,000     B        Indiana State Development Finance Authority, PCR, (Inland
                             Steel Co. Project No. 13), 7.250% due 11/1/11 (b) ................         679,130
    1,000,000     NR       Indianapolis, IN Multi-Family Revenue, (Lake Nora Fox Club
                             Project), Series B, 7.500% due 10/1/29 ...........................         990,590
                                                                                                   ------------
                                                                                                      3,300,845
                                                                                                   ------------
Kentucky -- 0.9%
    1,500,000     BBB-     Kenton County, KY Airport Board Revenue, (Delta Airlines
                             Project), Project A, 7.500% due 2/1/20 (b) .......................       1,550,505
                                                                                                   ------------
Louisiana -- 5.6%
    1,200,000     A3*      Lake Charles, LA Harbor & Terminal District, Port Facilities
                             Revenue, (Trunkline LNG Co. Project) ,
                             7.750% due 8/15/22 ...............................................       1,279,644
    2,000,000     NR       Louisiana Local Government Environmental Facilities,
                             Community Development Authority Revenue, St. James
                             Place, Series A, 8.000% due 11/1/25 ..............................       2,037,360
    1,500,000     NR       Louisiana Public Facilities Authority Hospital Revenue, (Lake
                             Charles Memorial Hospital Project), 8.625% due 12/1/30 ...........       1,543,935
                           Port of New Orleans, LA IDR:
                             Avondale Industries, Inc. Project:
      925,000     NR           8.250% due 6/1/04 ..............................................         984,940
    2,900,000     NR           8.500% due 6/1/14 ..............................................       3,160,797
    1,000,000     BB-        Continental Grain, Co. Project, 7.500% due 7/1/13 ................       1,031,880
                                                                                                   ------------
                                                                                                     10,038,556
                                                                                                   ------------
</TABLE>

                       See Notes to Financial Statements.


                                       8
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                 Schedule of Investments (unaudited) (continued)
                                                                   July 31, 2001
================================================================================

<TABLE>
<CAPTION>
     FACE
    AMOUNT        RATING(a)                      SECURITY                                              VALUE
===============================================================================================================
<S>               <C>      <C>                                                                     <C>
Maine -- 0.0%
                           Maine State Housing Authority, Mortgage Purchase Revenue:
$      15,000     AA         Series C-2, 7.000% due 11/15/32 (b) ..............................    $     15,758
       20,000     AA         Series D-1, 8.300% due 11/15/28 (b) ..............................          20,067
                                                                                                   ------------
                                                                                                         35,825
                                                                                                   ------------
Maryland -- 1.7%
    3,000,000     NR       Maryland State Economic Development Corporate Revenue,
                             Chesapeake Bay, Series A, 7.730% due 12/1/27 .....................       3,137,490
                                                                                                   ------------
Massachusetts -- 9.2%
    1,000,000     NR       Boston, MA Industrial Development Financing Authority
                             Revenue, (Roundhouse Hospitality LLC Project),
                             7.875% due 3/1/25 (b) ............................................       1,027,690
                           Massachusetts State Development Finance Agency Revenue:
    1,000,000     NR         Alliance Health Care Facility, Series A, 7.100% due 7/1/32 .......         930,630
    1,000,000     NR         Briarwood, Series B, 8.250% due 12/1/30 ..........................       1,007,850
                           Massachusetts State Health & Educational Facilities
                             Authority Revenue:
    1,000,000     AAA          Beth Israel Deaconess Medical Center, Series G-4,
                                 AMBAC-Insured, Variable Rate INFLOS,
                                 7.508% due 7/1/25 (c) ........................................       1,049,650
    1,250,000     Ba2*         St. Memorial Medical Center Project, Series A,
                                 6.000% due 10/1/23 ...........................................       1,013,188
    1,680,000     A+       Massachusetts State HFA, Single-Family Housing Revenue,
                             Series 38, 7.200% due 12/1/26 (b) ................................       1,777,473
                           Massachusetts State Industrial Finance Agency Revenue:
    2,000,000     NR         Assisted Living Facility, (Marina Bay LLC Project),
                               7.500% due 12/1/27 (b) .........................................       1,974,820
                           Resource Recovery Revenue, (SEMASS Partnership Project):
    1,700,000     NR           Series A, 9.000% due 7/1/15 ....................................       1,776,364
    5,640,000     NR           Series B, 9.250% due 7/1/15 (b) ................................       5,896,620
                                                                                                   ------------
                                                                                                     16,454,285
                                                                                                   ------------
Michigan -- 3.0%
    2,000,000     BB-      Detroit, MI Local Development Finance Authority, Tax Increment,
                             Series A, 5.500% due 5/1/21 ......................................       1,745,000
                           Garden City, MI Hospital Finance Authority, Hospital Revenue
                             Garden City Hospital Obligation Group, Series A:
    2,000,000     B1*          5.625% due 9/1/10 ..............................................       1,660,000
    1,000,000     B1*          5.750% due 9/1/17 ..............................................         738,050
    2,000,000     NR       Michigan State Strategic Fund, Resource Recovery Limited
                             Obligation Revenue, Central Wayne Energy Recovery LP,
                             Series A, 6.900% due 7/1/19 (b) ..................................       1,300,000
                                                                                                   ------------
                                                                                                      5,443,050
                                                                                                   ------------
</TABLE>

                       See Notes to Financial Statements.


                                       9
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                 Schedule of Investments (unaudited) (continued)
                                                                   July 31, 2001
================================================================================

<TABLE>
<CAPTION>
     FACE
    AMOUNT        RATING(a)                      SECURITY                                              VALUE
===============================================================================================================
<S>               <C>      <C>                                                                     <C>
Minnesota -- 2.5%
$   1,000,000     NR       Minneapolis & St. Paul MN Metropolitan Airports Community
                             Special Facility Revenue, (Northwest Airlines Project),
                             Series A, 7.000% due 4/1/25 (b) ..................................    $    968,480
    2,000,000     NR       Sartell, MN Health Care & Housing Facilities Revenue,
                             (Foundation for Healthcare Project), Series A,
                             6.500% due 9/1/16 ................................................       1,843,040
    2,000,000     NR       St. Paul, MN Housing & Redevelopment Authority
                             Hospital Revenue, (Healtheast Project), Series A,
                             6.625% due 11/01/17 ..............................................       1,688,080
                                                                                                   ------------
                                                                                                      4,499,600
                                                                                                   ------------
Montana -- 2.4%
    4,530,000     NR       Montana State Board of Investment Resource Recovery
                             Revenue, (Yellowstone Energy LP Project),
                             7.000% due 12/31/19 (b) ..........................................       4,340,193
                                                                                                   ------------
New Hampshire -- 0.5%
    1,000,000     BBB-     New Hampshire Higher Educational & Health Facilities
                             Authority Revenue, New Hampshire College,
                             6.375% due 1/1/27 ................................................         964,040
                                                                                                   ------------
New Jersey -- 5.3%
    3,000,000     B1*      Camden County, NJ Improvement Authority Revenue, (Health
                             Care Redevelopment Project - Cooper Health System),
                             5.875% due 2/15/15 ...............................................       2,282,580
                           New Jersey EDA, Series A:
    1,000,000     NR         Healthcare Facility Revenue, (Sayreville Senior Living Project),
                               6.375% due 4/1/29 ..............................................         420,000
    1,000,000     NR         Retirement Community Revenue, 8.250% due 11/15/30 ................       1,024,870
                           New Jersey Health Care Facilities Financing Authority Revenue:
      735,000     Baa3*      Palisades Medical Center Obligation Group, Un-Refunded,
                               7.600% due 7/1/21 ..............................................         738,903
    2,000,000     NR         Raritan Bay Medical Center, 7.250% due 7/1/27 ....................       2,001,440
    3,000,000     BBB-       Trinitas Hospital Obligation Group, 7.500% due 7/1/30 ............       3,140,580
                                                                                                   ------------
                                                                                                      9,608,373
                                                                                                   ------------
New Mexico -- 0.2%
      415,000     AAA      New Mexico Mortgage Finance Authority, Single-Family
                             Mortgage Program, Series B, FHA-Insured,
                             8.300% due 3/1/20 (b) ............................................         431,687
                                                                                                   ------------
New York -- 5.2%
      700,000     NR       Brookhaven, NY IDA Agency, Memorial Hospital
                             Medical Center, Series A, 8.250% due 11/15/30 ....................         727,482
</TABLE>

                       See Notes to Financial Statements.


                                       10
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                 Schedule of Investments (unaudited) (continued)
                                                                   July 31, 2001
================================================================================

<TABLE>
<CAPTION>
     FACE
    AMOUNT        RATING(a)                      SECURITY                                              VALUE
===============================================================================================================
<S>               <C>      <C>                                                                     <C>
New York -- 5.2% (continued)
                           Monroe County, NY IDA Agency:
$   1,900,000     NR         Empire Sports Project, Series A, 6.250% due 3/1/28 ...............    $  1,566,246
    1,000,000     NR         Woodland Village Project, 8.550% due 11/15/32 ....................       1,037,910
    1,100,000     AAA      New York City, NY GO, Series H, MBIA-Insured,
                             Variable rate due 8/1/13 .........................................       1,100,000
                           New York City, NY IDA, Civic Facility Revenue:
    1,400,000     NR         7.500% due 8/1/26 ................................................       1,423,492
    1,400,000     NR         Special Needs Facility Pooled Program, Series A-1,
                               8.125% due 8/1/19 ..............................................       1,453,382
                           Suffolk County, NY IDA Civic Facility Revenue,
                             Southampton Hospital Association:
    1,000,000     NR           Series A, 7.250% due 1/1/20 ....................................         966,470
    1,000,000     NR           Series B, 7.625% due 1/1/30 ....................................         992,430
                                                                                                   ------------
                                                                                                      9,267,412
                                                                                                   ------------
North Carolina -- 2.1%
    2,300,000     NR       Charlotte, NC Special Facilities Revenue, Charlotte/Douglas
                             International Airport, 5.600% due 7/1/27 (b) .....................       1,631,436
                           North Carolina Medical Care Commission:
                             Health Care Facilities Revenue, First Mortgage,
                             (De Paul Community Facilities Project):
    1,340,000     NR           6.125% due 1/1/28 ..............................................       1,140,166
    1,000,000     NR           7.625% due 11/1/29 .............................................         992,370
                                                                                                   ------------
                                                                                                      3,763,972
                                                                                                   ------------
Ohio -- 1.9%
    1,500,000     BBB      Cuyahoga County, OH Hospital Facilities Revenue,
                             (Canton Inc. Project), 7.500% due 1/1/30 .........................       1,618,110
                           Montgomery County, OH Health Systems Revenue, Series B-1,
                             Escrowed with state & local government securities
                             to 7/1/06 Call @ 102:
    1,035,000     AAA          Pre-Refunded, 8.100% due 7/1/18 ................................       1,253,996
      465,000     AAA          Un-Refunded, 8.100% due 7/1/18 .................................         537,810
    1,250,000     NR       Ohio State Solid Waste Revenue, Republic Engineered
                             Steels Inc.,  9.000% due 6/1/21 (b) ..............................          62,500
                                                                                                   ------------
                                                                                                      3,472,416
                                                                                                   ------------
Oklahoma -- 0.8%
    2,000,000     B-       Oklahoma Development Finance Authority Revenue,
                             Hillcrest Healthcare System, Series A,
                             5.625% due 8/15/29 ...............................................       1,420,640
                                                                                                   ------------
</TABLE>

                       See Notes to Financial Statements.


                                       11
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                 Schedule of Investments (unaudited) (continued)
                                                                   July 31, 2001
================================================================================

<TABLE>
<CAPTION>
     FACE
    AMOUNT        RATING(a)                      SECURITY                                              VALUE
===============================================================================================================
<S>               <C>      <C>                                                                     <C>
Pennsylvania -- 13.8%
$   2,200,000     B        Allegheny County, PA IDA, Airport Special Facilities Revenue,
                             (USAir Inc. Project), Series B, 8.500% due 3/1/21 (b) ............    $  2,150,632
                           Beaver County, PA IDA, PCR:
    1,500,000     BB+        Cleveland Electric Illuminating Co. Project,
                               7.625% due 5/1/25 ..............................................       1,613,400
    2,000,000     BB+        Toledo Edison Co. Project, 7.625% due 5/1/20 .....................       2,151,200
    3,000,000     NR       Dauphin County, PA General Authority Revenue, Hotel &
                             Conference Center-Hyatt Regency, 6.200% due 1/1/29 ...............       2,736,000
      200,000     AA       Geisinger Authority, PA Health System,
                             Variable Rate due 8/1/28 .........................................         200,000
    2,500,000     A3*      Luzerne County, PA IDA, Exempt Facilities Revenue,
                             (Pennsylvania Gas & Water Co. Project), Series B,
                             7.125% due 12/1/22 (b) ...........................................       2,637,250
    2,840,000     NR       Montgomery County, PA Higher Education & Health Authority
                             Revenue, Temple Continuing Care Center,
                             6.625% due 7/1/19 ................................................       2,528,083
      255,000     NR       Northumberland County, PA IDA, IDR, (Beverly Enterprises Inc.
                             Project), 6.875% due 2/1/03 ......................................         254,339
    1,000,000     AAA      Philadelphia, PA General Obligation, FSA-Insured,
                             5.000% due 9/15/31 ...............................................         974,130
    1,000,000     NR       Philadelphia, PA Authority for Industrial Development Revenue,
                             (Host Marriott LP Project), Remarketed 10/31/95,
                             7.750% due 12/1/17 (b) ...........................................       1,065,270
                           Scranton-Lackawanna, PA Health & Welfare Authority Revenue,
      500,000     BBB-++     Allied Services Rehab Hospitals Project, Series A,
                               7.600% due 7/15/20 .............................................         517,820
                             Moses Taylor Hospital Project:
    1,905,000     BBB-         6.150% due 7/1/14 ..............................................       1,765,630
    3,050,000     BBB-         6.250% due 7/1/20 ..............................................       2,704,191
    1,500,000     NR       Waterlefe Community Development District, FL Golf Course
                             Revenue, 8.125% due 10/1/25 ......................................       1,510,215
    2,000,000     NR       Westmoreland County, PA IDA, Redstone, Series B,
                             8.125% due 11/15/30 ..............................................       2,011,620
                                                                                                   ------------
                                                                                                     24,819,780
                                                                                                   ------------
South Carolina -- 2.3%
                           Connector 2000 Association Inc., SC Toll Road Revenue,
                             Sr. Notes:
                               Capital Appreciation, Series B:
    3,100,000     BBB-           Zero coupon bond to yield 7.956% due 1/1/27 ..................         485,584
    7,750,000     BBB-           Zero coupon bond to yield 8.150% due 1/1/34 ..................         728,500
    2,000,000     BBB-         Southern Connector Project, Series A,
                                 5.375% due 1/1/38 ............................................       1,621,980
</TABLE>

                       See Notes to Financial Statements.


                                       12
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                 Schedule of Investments (unaudited) (continued)
                                                                   July 31, 2001
================================================================================

<TABLE>
<CAPTION>
     FACE
    AMOUNT        RATING(a)                      SECURITY                                              VALUE
===============================================================================================================
<S>               <C>      <C>                                                                     <C>
South Carolina -- 2.3% (continued)
$     600,000     NR       Florence County, SC IDR, Stone Container Corp.,
                             7.375% due 2/1/07 ................................................    $    605,232
      655,000     NR       McCormick County, SC COP, 9.750% due 7/1/09 ........................         658,615
                                                                                                   ------------
                                                                                                      4,099,911
                                                                                                   ------------
South Dakota -- 0.9%
    1,685,000     NR       Oglala Sioux Tribe, SD Pine Ridge County, Revenue Bonds,
                             7.500% due 7/1/13 ................................................       1,689,482
                                                                                                   ------------
Tennessee -- 0.8%
    1,415,000     NR       Shelby County, TN Health, Educational & Housing Facilities
                             Board Revenue, Multi-Family Housing, (Hedgerow
                             Apartments Project), 6.875% due 7/1/36 ...........................       1,368,659
                                                                                                   ------------
Texas -- 8.4%
                           Bexar County, TX Housing Financial Corporation,
                             Multi-Family Housing:
    1,000,000     NR           Continental Lady Ester, Series A, 6.875% due 6/1/29 ............         969,190
    1,195,000     Baa3*        Nob Hill Apartments, Series B, 8.500% due 6/1/31 ...............       1,188,320
    2,000,000     Ba2*     El Paso, TX International Airport Revenue, Special Facilities,
                             (Marriott Corp. Project), 7.750% due 3/1/12 ......................       2,054,760
    3,000,000     BB       Houston, TX Airport Systems Revenue Special Facilities,
                             Continental Airlines Inc., Series C,
                             6.125% due 7/15/27 (b) ...........................................       2,674,680
                           Houston, TX Hotel Occupancy Tax & Special Revenue,
                             Capital Appreciation, Series B, AMBAC-Insured:
    3,000,000     AAA          Zero coupon bond to yield due 9/1/32 ...........................         542,400
    1,000,000     AAA          Zero coupon bond to yield due 9/1/33 ...........................         170,580
   10,000,000     AAA      Houston, TX Water & Sewer System Revenue, Capital
                             Appreciation, Series A, FSA-Insured, zero coupon bond to
                             yield 5.500% due 12/1/28 .........................................       2,252,100
    1,000,000     CCC++    Northgate Crossing, TX GO Municipal Utility, District No. 1,
                             8.875% due 12/1/13 ...............................................       1,015,880
                           Sam Rayburn, TX Municipal Power Agency, Series A:
    2,645,000     BB         6.750% due 10/1/14 ...............................................       2,675,312
    1,500,000     BB         6.250% due 10/1/17 ...............................................       1,471,470
                                                                                                   ------------
                                                                                                     15,014,692
                                                                                                   ------------
Utah -- 1.8%
    1,645,000     NR       Hurricane, UT Health Facilities Development Revenue,
                             (Mission Health Services Project), 10.500% due 7/1/20 ............       1,316,000
    2,000,000     NR       Utah State HFA Revenue, (RHA Community Services
                             of Utah Inc. Project), Series A, 6.875% due 7/1/27 ...............       1,886,080
                                                                                                   ------------
                                                                                                      3,202,080
                                                                                                   ------------
</TABLE>

                       See Notes to Financial Statements.


                                       13
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                 Schedule of Investments (unaudited) (continued)
                                                                   July 31, 2001
================================================================================

<TABLE>
<CAPTION>
     FACE
    AMOUNT        RATING(a)                      SECURITY                                              VALUE
===============================================================================================================
<S>               <C>      <C>                                                                     <C>
Virginia -- 2.2%
$     595,000     NR       Alexandria, VA Redevelopment & Housing Authority,
                             Multi-Family Housing Revenue, (Parkwood Court
                             Apartments Project), Series C, 8.125% due 4/1/30 .................    $    613,344
    1,000,000     NR       Fairfax County, VA EDA Revenue, Retirement Community,
                             Greenspring Village Inc., Series A, 7.500% due 10/1/29 ...........       1,073,400
   23,400,000     BBB-     Pocahontas Parkway Association, VA Toll Road Revenue,
                             Capital Appreciation, Sr. Notes, Series B, zero coupon
                             bond to yield 7.438% due 8/15/34 .................................       2,327,596
                                                                                                   ------------
                                                                                                      4,014,340
                                                                                                   ------------
West Virginia -- 0.6%
    1,000,000     NR       West Virginia EDA Revenue, (Stonewall Jackson Project),
                             Series B, 8.000% due 4/1/30 ......................................       1,038,330
                                                                                                   ------------
Wisconsin -- 0.6%
    1,770,000     NR       Wisconsin State Health & Educational Facilities Authority
                             Revenue, Benchmark Healthcare of Green Bay Inc. Project,
                             Series A, 7.750% due 5/1/27 ......................................       1,062,000
                                                                                                   ------------

                           TOTAL INVESTMENTS -- 100%
                           (Cost -- $186,568,581**) ...........................................    $179,681,407
                                                                                                   ============
</TABLE>

----------
(a)   All ratings are by Standard & Poor's Ratings Service ("Standard &
      Poor's"), except those which are identified by an asterisk (*) are rated
      by Moody's Investors Service, Inc. ("Moody's"), or those which are
      identified by a double dagger (++) are rated by Fitch IBCA, Duff & Phelps
      ("Fitch").
(b)   Income from this issue is considered a preference item for purposes of
      calculating the alternative minimum tax.
(c)   Residual interest bonds-coupon varies inversely with level of short-term
      tax-exempt interest rates.
**    Aggregate cost for Federal income tax purposes is substantially the same.

      See pages 16 through 18 for definitions of ratings and certain security
      descriptions.

                       See Notes to Financial Statements.


                                       14
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                  Summary of Municipal Bonds by Combined Ratings
                                                       July 31, 2001 (unaudited)

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

--------------------------------------------------------------------------------
                                        Standard &          Percent of
         Moody's         and/or          Poor's         Total Investments
--------------------------------------------------------------------------------
           Aaa                             AAA                   6.6%
           Aa                              AA                    0.1
            A                               A                    4.4
           Baa                             BBB                  14.3*
           Ba                              BB                   12.4
            B                               B                    5.0
           Caa                             CCC                   0.6**
           NR                              NR                   56.6
                                                               -----
                                                               100.0%
                                                               =====

 *    0.3% was rated by Fitch IBCA, Duff & Phelps.
**    0.6% was rated by Fitch IBCA, Duff & Phelps.

                       See Notes to Financial Statements.


                                       15
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                                        Bond Ratings (unaudited)

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

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

Standard & Poor's Ratings Service ("Standard & Poor's") -- Ratings from "AA" to
"CC" may be modified by the addition of a plus (+) or a 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 issue only in a
              small degree.
A          -- Bonds rated "A" have a strong capacity to pay interest and repay
              principal although it is 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 debt in this
              category than in higher rated categories.
BB, B,     -- Bonds rated "BB", "B", "CCC" and "CC" are regarded, on balance, as
CCC and CC    predominantly speculative and 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.

Moody's Investors Service, Inc. ("Moody's") -- Numerical modifiers 1, 2 and 3
may be applied to each generic rating from "Aa" to "B," where 1 is the highest
and 3 the lowest rating 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
              as can be visualized are 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 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.


                                       16
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                            Bond Ratings (unaudited) (continued)

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

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 thereby
              not well safeguarded during both good and bad times over the
              future. Uncertainty of position characterizes bonds in this class.
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 many long period
              of time may be small.

Fitch IBCA, Duff & Phelps ("Fitch") -- Ratings from "BBB" to "C" may be modified
by the addition of a plus (+) sign or minus (-) to show relative standings with
the major ratings categories.

BBB        -- Bonds rated "BBB" by Fitch currently have a low expectation of
              credit risk. The capacity for timely payment of financial
              commitments is considered to be adequate. Adverse changes in
              economic conditions and circumstances, however, are more likely to
              impair this capacity. This is the lowest investment grade category
              assigned by Fitch.

CCC,       -- Default on bonds rated "CCC", "CC" and "C" by Fitch is a real
CC and C      possibility. The capacity to meet financial commitments depends
              solely on a sustained, favorable business and economic
              environment. Default of some kind on bonds rated "CC" appears
              probable, a "C" rating indicates imminent default.

NR         -- Indicates that the bond is not rated by Standard & Poor's, Moody's
              or Fitch.

                                             Short-Term Bond Ratings (unaudited)
================================================================================

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.


                                       17
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                               Security Descriptions (unaudited)

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

ABAG       -- Association of Bay Area Governments
AIG        -- American International Guaranty
AMBAC      -- American Municipal Bond
                Assurance Corporation
BAN        -- Bond Anticipation Notes
BIG        -- Bond Investors Guaranty
CGIC       -- Capital Guaranty Insurance Company
CHFCLI     -- California Health Facility
                Construction Loan Insurance
CONNIE     -- College Construction Loan
 LEE       --   Insurance Association
COP        -- Certificate of Participation
EDA        -- Economic Development Authority
ETM        -- Escrowed to Maturity
FGIC       -- Financial Guaranty Insurance Company
FHA        -- Federal Housing Administration
FHLMC      -- Federal Home Loan Mortgage
                Corporation
FLAIRS     -- Floating Adjustable Interest Rate
                Securities
FNMA       -- Federal National Mortgage Association
FRTC       -- Floating Rate Trust Certificates
FSA        -- Financing Security Assurance
GIC        -- Guaranteed Investment Contract
GNMA       -- Government National Mortgage
                Association
GO         -- General Obligation
HDC        -- Housing Development Corporation
HFA        -- Housing Finance Authority
IDA        -- Industrial Development
                Authority
IDB        -- Industrial Development Board
IDR        -- Industrial Development Revenue
INFLOS     -- Inverse Floaters
ISD        -- Independent School District
LOC        -- Letter of Credit
MBIA       -- Municipal Bond Investors
                Assurance Corporation
MVRICS     -- Municipal Variable Rate Inverse
                Coupon Security
PCR        -- Pollution Control Revenue
PSFG       -- Permanent School Fund
                Guaranty
RAN        -- Revenue Anticipation Notes
RIBS       -- Residual Interest Bonds
RITES      -- Residual Interest
                Tax-Exempt Securities
SYCC       -- Structured Yield Curve
                Certificate
TAN        -- Tax Anticipation Notes
TECP       -- Tax-Exempt Commercial Paper
TOB        -- Tender Option Bonds
TRAN       -- Tax and Revenue Anticipation
                Notes
VA         -- Veterans Administration
VRWE       -- Variable Rate Wednesday
                Demand


                                       18
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                 Statement of Assets and Liabilities (unaudited)
                                                                   July 31, 2001

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

ASSETS
   Investments, at value (Cost -- $186,568,581) ..............    $ 179,681,407
   Cash ......................................................           11,415
   Interest receivable .......................................        2,836,873
                                                                  -------------
   Total Assets ..............................................      182,529,695
                                                                  -------------

LIABILITIES:
   Payable for securities purchased ..........................        1,500,000
   Dividends payable .........................................          219,686
   Investment advisory fee payable ...........................           66,453
   Administration fee payable ................................           32,966
   Accrued expenses ..........................................            7,115
                                                                  -------------
   Total Liabilities .........................................        1,826,220
                                                                  -------------
Total Net Assets .............................................    $ 180,703,475
                                                                  =============

NET ASSETS:
   Par value of capital shares ...............................    $     206,064
   Capital paid in excess of par value .......................      191,267,849
   Undistributed net investment income .......................          311,335
   Accumulated net realized loss from security transactions ..       (4,194,599)
   Net unrealized depreciation of investments ................       (6,887,174)
                                                                  -------------
Total Net Assets .............................................    $ 180,703,475
                                                                  =============
Shares Outstanding ...........................................       20,606,445
                                                                  -------------
Net Asset Value ..............................................    $        8.77
                                                                  -------------

                       See Notes to Financial Statements.


                                       19
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                             Statement of Operations (unaudited)
                                         For the Nine Months Ended July 31, 2001

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

INVESTMENT INCOME:
   Interest ..................................................     $ 10,203,570
                                                                   ------------

EXPENSES:
   Investment advisory fees (Note 3) .........................          538,128
   Administration fees (Note 3) ..............................          269,064
   Shareholder communications ................................          127,929
   Audit and legal ...........................................           36,231
   Directors' fees ...........................................           24,598
   Shareholder and system servicing fees .....................           22,370
   Pricing service fees ......................................           12,285
   Custody ...................................................            5,716
   Other .....................................................            5,301
                                                                   ------------
   Total Expenses ............................................        1,041,622
                                                                   ------------
Net Investment Income ........................................        9,161,948
                                                                   ------------

REALIZED AND UNREALIZED LOSS ON
INVESTMENTS (NOTE 4):
   Realized Loss From Security Transactions
   (excluding short-term securities):
     Proceeds from sales .....................................       19,800,887
     Cost of securities sold .................................       20,388,954
                                                                   ------------
   Net Realized Loss .........................................         (588,067)
                                                                   ------------

   Change in Net Unrealized Depreciation of Investments:
     Beginning of period .....................................       (5,349,978)
     End of period ...........................................       (6,887,174)
                                                                   ------------
   Increase in Net Unrealized Depreciation ...................       (1,537,196)
                                                                   ------------
Net Loss on Investments ......................................       (2,125,263)
                                                                   ------------
Increase in Net Assets From Operations .......................     $  7,036,685
                                                                   ============

                       See Notes to Financial Statements.


                                       20
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                             Statements of Changes in Net Assets
                              For the Nine Months Ended July 31, 2001 (unaudited
                                             and the Year Ended October 31, 2000

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

                                                      2001             2000
                                                      ----             ----
Operations:
   Net investment income .....................   $   9,161,948    $  12,187,511
   Net realized loss .........................        (588,067)        (747,050)
   Increase in net unrealized depreciation ...      (1,537,196)      (2,294,875)
                                                 -------------    -------------
   Increase in Net Assets From Operations ....       7,036,685        9,145,586
                                                 -------------    -------------

DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 2):
   Net investment income .....................      (8,954,283)     (11,904,853)
                                                 -------------    -------------
   Decrease in Net Assets From
     Distributions to Shareholders ...........      (8,954,283)     (11,904,853)
                                                 -------------    -------------

FUND SHARE TRANSACTIONS (NOTE 6):
   Net asset value of shares issued for
     reinvestment of dividends ...............       1,295,238               --
                                                 -------------    -------------
   Increase in Net Assets From
     Fund Share Transactions .................       1,295,238               --
                                                 -------------    -------------
Decrease in Net Assets .......................        (622,360)      (2,759,267)

NET ASSETS:
   Beginning of period .......................     181,325,835      184,085,102
                                                 -------------    -------------
   End of period* ............................   $ 180,703,475    $ 181,325,835
                                                 =============    =============

* Includes undistributed net investment
    income of ................................   $     311,335    $     103,670
                                                 =============    =============


                      See Notes to Financial Statements.


                                       21
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                       Notes to Financial Statements (unaudited)

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

      1.    Significant Accounting Policies

      Municipal High Income Fund Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.

      The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) securities are
valued at the mean between the bid and asked prices provided by an independent
pricing service. Securities with no readily obtainable market quotations are
valued at fair value as determined by an independent pricing service under the
supervision of the Fund's Board of Directors; (c) securities maturing within 60
days are valued at cost plus accreted discount, or minus amortized premium,
which approximates value; (d) gains or losses on the sale of securities are
calculated by using the specific identification method; (e) interest income,
adjusted for amortization of premium and accretion of original issue discount,
is recorded on an accrual basis, market discount is recognized on disposition of
security; (f) dividends and distributions to shareholders are recorded on the
ex-dividend date; (g) the Fund intends to comply with the applicable provisions
of the Internal Revenue Code of 1986, as amended, pertaining to regulated
investment companies and to make distributions of taxable income sufficient to
relieve it from substantially all Federal income and excise taxes; (h) the
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles; and (i) 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.

      In November 2000 the American Institute of Certified Public Accountants
("AICPA") issued a revised version of the AICPA Audit and Accounting Guide for
Investment Companies ("Guide"). This revised version is effective for financial
statements issued for fiscal years beginning after December 15, 2000. One of the
new provisions in the Guide requires investment companies to amortize premiums
and accrete discounts on fixed income securities. The Fund currently does not
accrete market discount. Upon adoption, the Fund will be required to record a
cumulative effect adjustment to conform with accounting principles generally
accepted in the United States of America. The effect of this adjustment will be
to either increase or decrease net investment income with an offsetting decrease
or increase to unrealized appreciation (depreciation) of securities. This
adjustment will therefore, have no effect on the net assets of the Fund. At this
time, the Fund has not completed its analysis of the impact of this accounting
change.


                                       22
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                           Notes to Financial Statements (unaudited) (continued)

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

      2.    Exempt-Interest Dividends and Other Distributions

      The Fund intends to satisfy conditions that will enable interest from
municipal securities, which is exempt from Federal income tax, to retain such
tax-exempt status when distributed to the shareholders of the Fund.

      Capital gains distributions, if any, are taxable to shareholders, and are
declared and paid at least annually.

      3.    Investment Advisory Agreement, Administration Agreement and Other
            Transactions

      Smith Barney Fund Management LLC ("SBFM"), formerly known as SSB Citi Fund
Management LLC, a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"),
which, in turn, is a subsidiary of Citigroup Inc. ("Citigroup"), acts as
investment adviser to the Fund. The Fund pays SBFM an advisory fee calculated at
an annual rate of 0.40% of the average daily net assets. SBFM also acts as the
administrator of the Fund for which it receives a fee calculated at an annual
rate of 0.20% of the average daily net assets. These fees are calculated daily
and paid monthly.

      All officers and one Director of the Fund are employees of Citigroup or
its affiliates.

      4.    Investments

      During the nine months ended July 31, 2001, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:

Purchases ..........................................                 $23,273,233
                                                                     -----------
Sales ..............................................                 $19,800,887
                                                                     ===========

    At July 31, 2001, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:

Gross unrealized appreciation ..........................           $  5,503,302
Gross unrealized depreciation ..........................            (12,390,476)
                                                                   ------------
Net unrealized depreciation ............................           $ (6,887,174)
                                                                   ============


                                       23
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                           Notes to Financial Statements (unaudited) (continued)

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

      5.    Capital Loss Carryforwards

      At October 31, 2000, the Fund had, for Federal income tax purposes,
approximately $3,606,000 of capital loss carryforwards available to offset
future capital gains. To the extent that these capital loss carryforwards are
used to offset capital gains, it is probable that the gains so offset will not
be distributed. The amount and expiration of the carryforwards are indicated
below. Expiration occurs on October 31 of the year indicated:

<TABLE>
<CAPTION>
                           2002       2003      2004      2005      2007      2008
                        ----------  --------  --------  --------  --------  --------
<S>                     <C>         <C>       <C>       <C>       <C>       <C>
Carryforward amounts    $1,197,000  $270,000  $205,000  $400,000  $786,000  $748,000
</TABLE>

      6.    Capital Shares

      At July 31, 2001, the Fund had 500,000,000 shares of capital stock
authorized with a par value of $0.01 per share. Capital stock transactions were
as follows:

                                     Nine Months Ended             Year Ended
                                       July 31, 2001            October 31, 2000
                                     -----------------          ----------------
                                     Shares     Amount          Shares    Amount
                                    -------  ----------         ------    ------
Shares issued on reinvestment ...   151,362  $1,295,238           --        --
                                    =======  ==========         ======    ======


                                       24
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                                            Financial Highlights

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

For a share of capital stock outstanding throughout each year ended October 31,
unless otherwise noted:

<TABLE>
<CAPTION>
                                  2001(1)         2000         1999         1998         1997         1996
                                 --------       --------     --------     --------     --------     --------
<S>                              <C>            <C>          <C>          <C>          <C>          <C>
Net Asset Value,
  Beginning of Period ........   $   8.86       $   9.00     $   9.77     $   9.76     $   9.53     $   9.51
                                 --------       --------     --------     --------     --------     --------
Income (Loss) From Operations:
  Net investment income ......       0.45           0.60         0.58         0.60         0.61         0.63
  Net realized and
    unrealized gain (loss) ...      (0.10)         (0.16)       (0.76)        0.03         0.24           --
                                 --------       --------     --------     --------     --------     --------
Total Income (Loss)
  From Operations ............       0.35           0.44        (0.18)        0.63         0.85         0.63
                                 --------       --------     --------     --------     --------     --------
Less Distributions From:
  Net investment income ......      (0.44)         (0.58)       (0.59)       (0.61)       (0.62)       (0.61)
  In excess of net
    investment income ........         --             --           --        (0.01)          --           --
                                 --------       --------     --------     --------     --------     --------
Total Distributions ..........      (0.44)         (0.58)       (0.59)       (0.62)       (0.62)       (0.61)
                                 --------       --------     --------     --------     --------     --------
Net Asset Value,
  End of Period ..............   $   8.77       $   8.86     $   9.00     $   9.77     $   9.76     $   9.53
                                 ========       ========     ========     ========     ========     ========
Total Return,
  Based on Market Value ......      13.23%++        9.39%      (15.76)%       9.34%       17.22%       10.22%
                                 --------       --------     --------     --------     --------     --------
Total Return,
  Based on Net Asset Value ...       4.20%++        5.97%       (1.79)%       6.75%        9.41%        7.39%
                                 --------       --------     --------     --------     --------     --------
Net Assets,
  End of Period (000s) .......   $180,703       $181,326     $184,085     $197,944     $194,133     $187,303
                                 ========       ========     ========     ========     ========     ========
Ratios to Average Net Assets:
  Expenses ...................       0.77%+         0.71%        0.73%        0.74%        0.74%        0.77%
  Net investment income ......       6.81+          6.72         6.08         6.07         6.38         6.65
Portfolio Turnover Rate ......         11%            27%          27%          57%          35%          17%

Market Value, End of Period ..   $  8.740       $  8.125     $  8.000     $ 10.125     $  9.875     $  9.000
</TABLE>

----------
(1)   For the nine months ended July 31, 2001 (unaudited).

++    Total return is not annualized, as it may not be representative of the
      total return for the year.

+     Annualized.


                                       25
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                            Financial Data Per Share of Common Stock (unaudited)

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

                                                                     Dividend
 Record      Payable         NYSE         Net Asset    Dividend    Reinvestment
  Date        Date      Closing Price*     Value*        Paid          Price
 ------      -------    --------------    ---------    --------    ------------
11/23/98    11/27/98        $10.188        $9.72       $0.0510         $9.68
12/21/98    12/24/98         10.000         9.71        0.0485          9.52
 1/26/99     1/29/99          9.625         9.73        0.0485          9.53
 2/23/99     2/26/99          9.625         9.71        0.0485          9.52
 3/23/99     3/26/99          9.750         9.67        0.0485          9.48
 4/27/99     4/30/99          9.563         9.64        0.0485          9.45
 5/25/99     5/28/99          9.250         9.58        0.0485          9.35
 6/22/99     6/25/99          9.000         9.46        0.0485          9.08
 7/27/99     7/30/99          8.938         9.46        0.0485          8.84
 8/24/99     8/27/99          8.562         9.27        0.0485          8.79
 9/21/99     9/24/99          8.375         9.22        0.0485          8.37
10/26/99    10/29/99          7.625         9.00        0.0485          7.98
11/22/99    11/26/99          7.938         9.03        0.0485          7.74
12/27/99    12/30/99          7.313         8.86        0.0485          7.38
 1/25/00     1/28/00          7.750         8.70        0.0485          7.84
 2/22/00     2/25/00          7.813         8.65        0.0485          7.66
 3/28/00     3/31/00          7.438         8.80        0.0485          7.58
 4/25/00     4/28/00          7.625         8.76        0.0485          7.62
 5/23/00     5/26/00          7.750         8.60        0.0485          7.75
 6/27/00     6/30/00          7.563         8.74        0.0485          7.85
 7/25/00     7/28/00          8.094         8.78        0.0485          8.28
 8/22/00     8/25/00         8.4375         8.84        0.0485          8.51
 9/26/00     9/29/00         8.1875         8.83        0.0485          8.36
10/24/00    10/27/00         8.1250         8.86        0.0485          8.10
11/20/00    11/24/00          8.060         8.25        0.0485          7.96
12/26/00    12/29/00         8.0625         8.81        0.0485          8.49
 1/23/01     1/26/01         8.8125         8.79        0.0485          8.61
 2/20/01     2/23/01          8.740         8.77        0.0485          8.60
 3/27/01     3/30/01          8.380         8.77        0.0485          8.57
 4/24/01     4/27/01          8.680         8.67        0.0485          8.50
 5/22/01     5/25/01          8.620         8.69        0.0485          8.52
 6/26/01     6/29/01          8.630         8.71        0.0485          8.54
 7/24/01     7/27/01          8.570         8.75        0.0485          8.57

-------
*As of record date.


                                       26
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                     Quarterly Results of Operations (unaudited)

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

<TABLE>
<CAPTION>
                                                                                           Net Increase
                                           Net                 Net Realized                 (Decrease)
                Investment              Investment            and Unrealized              in Net Assets
                  Income                  Income                Gain (Loss)              From Operations
            -------------------    -------------------    ----------------------     ----------------------
 Quarter                   Per                    Per                       Per                        Per
  Ended        Total      Share       Total      Share        Total        Share         Total        Share
--------      ------      -----       -----      -----        -----        -----         -----        -----
<S>         <C>           <C>      <C>           <C>      <C>             <C>        <C>            <C>
 1/31/99    $3,334,071    $0.16    $2,963,369    $0.15    $  (585,286)    $(0.03)    $ 2,378,083    $  0.12
 4/30/99     3,361,488     0.16     2,990,635     0.15     (2,036,950)     (0.10)        953,685       0.05
 7/31/99     3,265,290     0.16     2,898,717     0.14     (4,105,413)     (0.20)     (1,206,696)     (0.06)
10/31/99     3,269,246     0.16     2,951,688     0.14     (8,885,590)     (0.43)     (5,933,902)     (0.29)
 1/31/00     3,388,350     0.17     3,059,977     0.15     (7,328,329)     (0.35)     (4,268,352)     (0.20)
 4/30/00     3,238,496     0.16     2,931,920     0.14      1,882,412       0.09       4,814,332       0.23
 7/31/00     3,448,458     0.17     3,122,207     0.16      1,208,370       0.05       4,330,577       0.21
10/31/00     3,397,409     0.17     3,073,407     0.15      1,195,622       0.05       4,269,029       0.20
 1/31/01     3,404,660     0.17     3,063,827     0.15     (1,657,885)     (0.08)      1,405,942       0.07
 4/30/01     3,342,684     0.16     2,998,954     0.15     (2,152,580)     (0.11)        846,374       0.04
 7/31/01     3,456,226     0.17     3,099,167     0.15      1,685,202       0.09       4,784,369       0.24
</TABLE>


                                       27
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                          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 common stock. 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 interest 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
the shareholders at least once a year.

      Under the Fund's Dividend Reinvestment Plan ("Plan"), a shareholder whose
common stock is registered in his or her own name will have all distributions
reinvested automatically by PFPC Global Fund Services ("PFPC"), 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 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 common stock 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 PFPC, as
dividend-paying agent.

      The number of shares of common stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price of the common stock 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 shares of common stock 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 common stock at the time of valuation
(which is the close of business on the determination date) exceeds the market
price of common stock, or if the Fund declares a dividend or capital gains
distribution payable only in cash, PFPC will buy common stock in the open
market, on the NYSE or elsewhere, for the participants' accounts. If, following
the commencement of the purchases and before PFPC has completed its purchases,
the market price exceeds 98% of what the NAV per share of the common stock was
at the valuation time, PFPC 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 common stock received by a Plan
participant will be based on the


                                       28
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                              Dividend Reinvestment Plan (unaudited) (continued)

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

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 extent PFPC is
unable to stop open market purchases and cause the Fund to issue the remaining
shares, the average per share price paid by PFPC may exceed 98% of the NAV per
share of the common stock. PFPC will begin to purchase common stock 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.

      PFPC 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. Common stock in the account of each Plan participant will be held
by PFPC an 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. PFPC'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 shares of common stock
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 PFPC or the Fund on at least 30 days' written notice to Plan
participants. All correspondence concerning the Plan should be directed by mail
to PFPC Global Fund Services, P.O. Box 8030, Boston, Massachusetts 02266-8030 or
by telephone at 1-800-331-1710.

      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. As of July 31,
2001, the Fund has not repurchased any shares.


                                       29
<PAGE>

[CLIP ART]                                       Municipal High Income Fund Inc.
                                                          Management of the Fund

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

Directors

Allan J. Bloostein
Martin Brody
Dwight B. Crane
Paolo M. Cucchi
Robert A. Frankel
Paul Hardin
William R. Hutchinson
Heath B. McLendon, Chairman
George M. Pavia

Charles F. Barber, Emeritus

Officers

Heath B. McLendon
President and
Chief Executive Officer

Lewis E. Daidone
Senior Vice President
and Treasurer

Peter M. Coffey
Vice President and
Investment Officer

Michael J. Maher
Investment Officer

Anthony Pace
Controller

Christina T. Sydor
Secretary

Investment Adviser and Administrator

Smith Barney Fund Management LLC
125 Broad Street
10th Floor, MF-2
New York, New York 10004

Transfer Agent

PFPC Global Fund Services
P.O. Box 8030
Boston, Massachusetts 02266-8030

Custodian

PFPC Trust Company
8800 Tinicum Blvd.
Third Floor Suite 200
Philadelphia, Pennsylvania 19153


                                       30
<PAGE>

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<PAGE>

                     (This page intentionally left blank.)

<PAGE>

                                   [CLIP ART]


This report is intended only for shareholders of Municipal High Income Fund Inc.
It is not a Prospectus, circular or representation intended for use in the
purchase or sale of shares of the Fund or of any securities mentioned in this
report.

                         Municipal High Income Fund Inc.
                                125 Broad Street
                                10th Floor, MF-2
                               New York, NY 10004

                                  FD01013 9/01

</TEXT>
</DOCUMENT>
