Managed
                              HIGH INCOME
                                 Portfolio Inc.


                                                                          Annual

                                                                          Report
                                                                          
                                                               February 28, 1998
<PAGE>

                              Managed
                              HIGH INCOME
                                 Portfolio Inc.


LETTER TO
SHAREHOLDERS
February 28, 1998


Dear Shareholder:

      We are pleased to provide the annual report for the Managed High Income
Portfolio Inc. ("Portfolio") for the year ended February 28, 1998. During the
past year, the Portfolio distributed income dividends totaling $1.09 per share.
The table below shows the annualized distribution rate and the twelve-month
total return for the Portfolio based on its February 28, 1998 net asset value
("NAV") per share and New York Stock Exchange ("NYSE") closing price.

                                       Annualized              Twelve-Month
          Price Per Share            Distribution Rate         Total Return
          -------------             -----------------          ------------

          $11.87 (NAV)                    8.69%                   12.43%
          $11.75 (NYSE)                   8.78%                   10.96%

      The Portfolio generated a total return of 12.43% for the past year. The
Portfolio's performance was roughly in-line with the twelve-month average total
return of 12.89% for closed-end high yield bond funds as reported by Lipper
Analytical Services Inc. (Lipper is an independent mutual fund performance
tracking organization). We believe we have been able to generate consistent
performance returns in the Portfolio through prudent asset selection with a
heavy focus on companies with improving fundamentals.

Market and Economic Overview

      The high yield bond market generated competitive performance relative to
that of other bonds of similar maturities during the year as well as in
comparison to the 6% to 9% returns for intermediate-term U.S. Treasurys (i.e.,
maturities of less than 10 years) and investment-grade corporate bonds and the
roughly 12% returns for 10-year U.S. Treasurys and investment-grade corporate
bonds.


                                                                               1
<PAGE>

      After relatively strong performance through the first three quarters of
1997, the high yield bond market began to underperform that of U.S. Treasurys in
the fourth quarter as fears of an economic slowdown and lower corporate profits
caused high yield bond premiums to increase versus U.S. Treasurys. The
lower-quality high yield bonds turned in the greatest underperformance in the
fourth quarter. In periods of increasing economic uncertainty, the lower-quality
segments of the high yield bond market generally underperform versus other types
of bonds because of their greater vulnerability to weaker economic conditions
whereas the more interest-rate sensitive higher quality issues generate the
strongest total returns when general interest rates decline.

      By the start of the fourth quarter of 1997, the crisis in Asia had taken
center stage with severe currency and financial market declines in a number of
Asian countries potentially threatening economic stability not only throughout
the Far Eastern region, but the entire world. (Asia represents more than 25% of
world economic output and is a significant global producer and consumer of a
large number of products.) Consequently, there was a dramatic increase in market
volatility in the fourth quarter, especially in the stock markets both
domestically and abroad. In response, many investors began to invest more
aggressively in U.S. Treasurys which are often viewed as the ultimate safe haven
during periods of economic uncertainty.

      Despite this increasing uncertainty over future economic growth and levels
of corporate profitability, the U.S. stock markets had another strong year with
total returns in the 25%-to-33% range.

      Within the high yield bond market, the lower-quality issues generated the
strongest total returns (i.e., roughly 15% range) in the past year. This was not
surprising given the strong performance of the U.S. stock markets because the
lower-quality segment of the high yield bond market tends to track the
performance of the U.S. stock market. However, the Portfolio's relatively
high-quality orientation caused its performance to lag the high yield bond
market averages to a modest degree during the past year. Yet we remain committed
more than ever to our investment strategy of owning the better quality issues,
especially in light of the increased turbulence in a number of Asian economies.

      During the first two months of 1998, the U.S. stock market was more
volatile while most of the major stock indices moved toward record highs. And
despite record new issue supply, the high yield bond market performed extremely
well in January and February of 1998, most likely in reaction to the strength of
the U.S. stock market.


2
<PAGE>

      During the reporting period, the U.S. high yield bond market responded
favorably to strength in both the U.S. stock market and U.S. Treasury securities
market. A total of approximately $19 billion of new money flowed into open-end
high yield bond funds in 1997. In addition, there was higher institutional
demand for high yield bonds from insurance companies and pension funds. This
overall higher demand was significant enough to absorb a record total of more
than $120 billion of new high yield bond issues. As of the date of this report,
the high yield bond market is now more than $450 billion in size and that figure
represents a 25% of the entire U.S. corporate bond market.

Portfolio Strategy and Market Outlook

      During the past year, we became more conservative and increased our
weighting primarily in high-quality, defensive issues. We think that the U.S.
economy will remain mixed and that many consumer-sensitive industries will
continue to face fierce price competition. In addition, Asia's significant
problems could also put severe pressure on commodity goods prices as troubled
companies in the region try and increase their exports to make up for expected
economic declines. We believe a slowdown in overall global economic growth will
occur as the severe economic decline in Asia sharply reduces demand for many
U.S. and European products. Consequently, the first half of 1998 could see a
slight increase in default rates among select high-yield bond issuers,
especially weaker, more vulnerable companies that are already having difficulty
competing. Given the increased uncertainty over Asia, we would also expect an
increase in stock market volatility in the first and second quarters of 1998,
both domestically and abroad.

      We therefore will continue to avoid economic sectors where consumers are
spending less as well as industries facing heavy pricing competition. Our
emphasis in the Portfolio will continue to be industries that are experiencing
strong growth such as telecommunications, media, and cable television. Moreover,
the Portfolio will remain heavily weighted in stronger-rated "B" and "BB" issues
and we plan on avoiding weaker lower-tier issues that are generally rated
"CCC/Caa." Given the higher risks in many of the world's financial markets, we
believe our conservative investment strategy, which involves an emphasis on
high-rated issues, is prudent and in the best long-term interest of our
shareholders.


                                                                               3
<PAGE>

      We look forward to continuing to help you pursue your investment goals. If
you have any questions about the Portfolio, please call the First Data Investor
Services Group, Inc. at (800) 331-1710.


Sincerely,


/s/ Heath B. McLendon                          /s/ John C. Bianchi, C.F.A. 
                                                                       
Heath B. McLendon                              John C. Bianchi, C.F.A. 
Chairman                                       Vice President and      
                                               Investment Officer      
                                               
March 23, 1998

      --------------------------------------------------------------------------
      Take Advantage of the Portfolio'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? The power of automatically reinvesting your dividends is
      one of the most successful investment strategies available today.
      Systematic investments put time to work for you through the strength of
      compounding.

            As an investor in the Portfolio, you can participate in its Dividend
      Reinvestment Plan, a convenient, simple and efficient way to reinvest your
      dividends and capital gains, if any, in additional shares of the
      Portfolio. For more detailed information about the Portfolio's Dividend
      Reinvestment Plan, please refer to pages 30 and 31.
      --------------------------------------------------------------------------


4
<PAGE>

--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------

February 28, 1998

   Face
  Amount   Ratings                Security                              Value
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES - 92.1%
--------------------------------------------------------------------------------

Aerospace & Defense -- 1.8%
$ 5,875,000  BB    Airplanes Pass-Through Trust, Corporate
                     Collateralized Mortgage Obligation,
                     Series D, 10.875% due 3/15/19 ................  $ 6,625,414
 2,700,000   BB    Morgan Stanley Aircraft Finance,
                     8.700% due 3/15/23 ...........................    2,740,500
--------------------------------------------------------------------------------
                                                                       9,365,914
--------------------------------------------------------------------------------
Broadcasting-TV, Cable & Radio -- 13.6%
                   Cablevision Systems Corp., Sr. Sub. Debentures:
 9,220,000   BB-     9.875% due 2/15/13 ...........................   10,234,200
 3,250,000   BB-     10.500% due 5/15/16 ..........................    3,835,000
 3,175,000   BB-     9.875% due 4/1/23 ............................    3,508,375
                   Century Communications Corp., Sr. Notes:
   850,000   BB-     8.375% due 12/15/07 ..........................      864,875
 2,900,000   BB-     8.750% due 10/1/07 ...........................    3,037,750
 4,675,000   B-    Comcast UK Cable, Sr. Sub. Debenture,
                     step bond to yield 11.395% due 11/15/07 ......    3,845,188
 1,515,000   BBB-  Le Groupe Videotron, Sr. Notes,
                     10.625% due 2/15/05 ..........................    1,700,587
                   Marcus Cable Capital Corp., Sr. Discount Notes:
 2,400,000   B       Step bond to yield 11.392% due 8/1/04 ........    2,274,000
 1,525,000   B       Step bond to yield 12.661% due 12/15/05 ......    1,362,969
                   Rogers Cable Systems Inc.:
 2,275,000   BB+     Sr. Notes, 10.000% due 3/15/05 ...............    2,559,375
 2,575,000   BB+     Sr. Secured Debenture, 10.000% due 12/1/07 ...    2,890,438
 7,175,000   BB-     Sr. Sub. Debenture, 11.000% due 12/1/15 ......    8,457,530
 2,900,000   BB-   Rogers Communications, Sr. Notes,
                     8.875% due 7/15/07 ...........................    2,929,000
 2,500,000   CCC+  SFX Entertainment Inc., Sr. Sub. Notes,
                     9.125% due 2/1/08 (a) ........................    2,500,000
                   TV Azteca SA, Sr. Notes:
 2,300,000   B+      10.125% due 2/15/04 ..........................    2,466,750
 4,000,000   B+      10.500% due 2/15/07 ..........................    4,300,000
 7,100,000   B     UIH Australia Inc., Sr. Discount Notes,
                   step bond to yield 14.058% due 5/15/06 .........    5,058,750


                       See Notes to Financial Statements.                      5
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------

February 28, 1998 (continued)

   Face
  Amount   Ratings                Security                              Value
--------------------------------------------------------------------------------
Broadcasting-TV, Cable & Radio-- 13.6% (continued)
$1,525,000   B     UIH Australia Pacific, Sr. Discount Notes,
                     step bond to yield 14.000% due 5/15/06 .......  $ 1,067,500
12,400,000   B     United International Holdings Inc.,
                     Sr. Discount Notes, step bond to yield
                     10.447% due 2/15/08 ..........................    7,533,000
--------------------------------------------------------------------------------
                                                                      70,425,287
--------------------------------------------------------------------------------
Building/Construction -- 0.3%
 1,250,000   BB+   Trizec Finance, Sr. Notes,
                     10.875% due 10/15/05 .........................    1,417,187
--------------------------------------------------------------------------------
Chemicals -- 1.2%
 3,000,000   B     NL Industries Inc., Sr. Notes,
                     11.750% due 10/15/03 .........................    3,352,500
 2,600,000   B     Unifrax Investment Corp., Sr. Notes,
                     10.500% due 11/1/03 ..........................    2,717,000
--------------------------------------------------------------------------------
                                                                       6,069,500
--------------------------------------------------------------------------------
Conglomerate Manufacturing -- 1.9%
 2,225,000   BB-   CIA Latino Americana, Company Guaranteed,
                     11.625% due 6/1/04 (a) .......................    2,308,438
 2,600,000   B-    Eagle-Picher Industrial Inc., Sr. Sub. Notes,
                     9.375% due 3/1/08 (a) ........................    2,619,500
 2,265,000   CCC+  Interlake Corp., Sr. Sub. Debentures,
                     12.125% due 3/1/02 ...........................    2,349,937
 2,650,000   NR    Park-Ohio Industries, Sr. Sub. Notes,
                     9.250% due 12/1/07 (a) .......................    2,775,875
--------------------------------------------------------------------------------
                                                                      10,053,750
--------------------------------------------------------------------------------
Consumer Durable -- 0.3%
2,500,000+   B     Texon International, Sr. Notes,
                     10.000% due 2/1/08 (a) .......................    1,425,777
--------------------------------------------------------------------------------
Electric Utilities -- 4.7%
                   AES Corp., Sr. Sub. Notes:
 1,200,000   B+      10.250% due 7/15/06 ..........................    1,329,000
 1,325,000   B+      8.375% due 8/15/07 ...........................    1,361,438
 5,950,000   B+      8.500% due 11/1/07 (a) .......................    6,143,375


6                      See Notes to Financial Statements.
--------------------------------------------------------------------------------
<PAGE>
 
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------

February 28, 1998 (continued)

   Face
  Amount   Ratings                Security                              Value
--------------------------------------------------------------------------------
Electric Utilities -- 4.7% (continued)
                   Calpine Corp., Sr. Notes:
$3,650,000   BB-     10.500% due 5/15/06 ..........................  $ 4,051,500
 1,400,000   BB-     8.750% due 7/15/07 (a) .......................    1,452,500
 2,000,000   BB+   Cleveland Electric Illuminating Corp., Sr. Notes,
                     7.430% due 11/1/09 (a) .......................    2,075,000
 3,225,000   BB+   El Paso Electric Co., 1st Mortgage Obligation,
                     8.900% due 2/1/06 ............................    3,591,844
   750,000   BB    ESI Tractebel ACQ Corp., Debentures,
                     7.990% due 12/30/11 (a) ......................      750,000
 1,195,269   BB    Midland Cogeneration Venture, Sr. Secured Lease
                     Obligation Bond, 10.330% due 7/23/02 .........    1,286,409
 1,975,000   BBB-  Niagara Mohawk Power, 1st Mortgage
                     Obligation, 7.750% due 5/15/06 ...............    2,093,500
--------------------------------------------------------------------------------
                                                                      24,134,566
--------------------------------------------------------------------------------
Electronics/Computers -- 5.9%
 1,800,000   NR    Axiohm Transaction Solution Inc., Sr. Sub.
                     Notes, 9.750% due 10/1/07 (a) ................    1,836,000
 2,300,000   NR    Celestica International Inc., Sr. Sub. Notes,
                     10.500% due 12/31/06 .........................    2,489,750
 5,275,000   B     Fairchild Semiconductor, Sr. Sub. Notes,
                     10.125% due 3/15/07 ..........................    5,591,500
 1,900,000   B     Flextronics International Ltd., Sr. Sub. Notes,
                     8.750% due 10/15/07 (a) ......................    1,933,250
                   Unisys Corp., Sr. Notes:
 6,200,000   B+      12.000% due 4/15/03 ..........................    7,099,000
 5,775,000   B+      11.750% due 10/15/04 .........................    6,727,875
 4,700,000   B-    ViaSystems Inc., Sr. Sub. Notes,
                     9.750% due 6/1/07 ............................    4,935,000
--------------------------------------------------------------------------------
                                                                      30,612,375
--------------------------------------------------------------------------------
Finance Company -- 3.8%
 3,250,000   B     Amresco Inc., Sr. Sub. Notes,
                     10.000% due 3/15/04 ..........................    3,388,125
 8,775,000   B     First Nationwide Parent Holdings Ltd.,
                     Sr. Notes, 12.500% due 4/15/03 ...............   10,080,280
 3,200,000   B-    Ocwen Capital Trust, Company Guaranteed,
                     10.875% due 8/1/27   3,568,000


                       See Notes to Financial Statements.                      7
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------

February 28, 1998 (continued)

   Face
  Amount   Ratings                Security                              Value
--------------------------------------------------------------------------------
Finance Company -- 3.8% (continued)
$2,100,000   BB-   Ocwen Financial Corp., Notes,
                     11.875% due 10/1/03 ..........................  $ 2,373,000
--------------------------------------------------------------------------------
                                                                      19,409,405
--------------------------------------------------------------------------------
Financial Services -- 1.2%
 2,900,000   NR    Intertek Finance PLC, Sr. Sub. Notes,
                     10.250% due 11/1/06 ..........................    3,088,500
 2,750,000   B-    Outsourcing Solutions Inc., Sr. Sub. Notes,
                     11.000% due 11/1/06 ..........................    3,031,875
--------------------------------------------------------------------------------
                                                                       6,120,375
--------------------------------------------------------------------------------
Foods -- 1.9%
 1,325,000   B+    Ameriserve Food Distribution Inc.,
                     Company Guaranteed, 8.875% due 10/15/06 ......    1,371,375
 2,675,000   B-    B&G Foods Inc., Sr. Sub. Notes,
                     9.625% due 8/1/07 (a) ........................    2,748,562
 4,125,000   B     Imperial Holly Corp., Sr. Sub. Notes,
                     9.750% due 12/15/07 (a) ......................    4,253,906
 1,365,000   B-    Van de Kamp Inc., Sr. Sub. Notes,
                     12.000% due 9/15/05 ..........................    1,528,800
--------------------------------------------------------------------------------
                                                                       9,902,643
--------------------------------------------------------------------------------
Health Care -- 6.3%
 2,050,000   B-    Fisher Scientific International Inc., Sr. Sub. Notes,
                     9.000% due 2/1/08 (a) ........................    2,091,000
 2,350,000   B+    Frensenius Medical Capital Trust II, Company
                     Guaranteed, 7.875% due 2/1/08 (a) ............    2,358,813
 2,675,000   B-    Graphic Controls Corp., Sr. Sub. Notes,
                     12.000% due 9/15/05 ..........................    3,002,688
 5,100,000   BB    ICN Pharmaceuticals Inc., Sr. Notes,
                     9.250% due 8/15/05 ...........................    5,418,750
 2,425,000   B-    Integrated Health Services Inc., Sr. Sub. Notes,
                     9.250% due 1/15/08 (a) .......................    2,540,187
 7,750,000   B-    Magellan Health Services, Sr. Sub. Notes,
                     9.000% due 2/15/08 (a) .......................    7,866,250
 4,500,000   NR    Paragon Health Network, Sr. Sub. Notes,
                     9.500% due 11/1/07 (a) .......................    4,680,000


8                      See Notes to Financial Statements.
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------

February 28, 1998 (continued)

   Face
  Amount   Ratings                Security                              Value
--------------------------------------------------------------------------------
Health Care -- 6.3% (continued)
$2,600,000   NR    Pharmaceutical Fine Chemicals Inc., Sr. Sub.
                     Notes, 9.750% due 11/15/07 (a) ...............  $ 2,691,000
 2,000,000   BB-   Tenet Healthcare, Sr. Sub. Notes,
                     8.625% due 1/15/07 ...........................    2,087,500
--------------------------------------------------------------------------------
                                                                      32,736,188
--------------------------------------------------------------------------------
Hotel/Gaming -- 6.0%
 1,300,000   B     Aztar Corp., Sr. Sub. Notes,
                     13.750% due 10/1/04 ..........................    1,498,250
 3,250,000   B-    Courtyard by Marriott, Sr. Notes,
                     10.750% due 2/1/08 ...........................    3,603,438
   900,000   Ba3*  HMC Acquisition Properties, Sr. Notes,
                     9.000% due 12/15/07 ..........................      954,000
                   HMH Properties Inc.:
 2,550,000   BB-     Company Guaranteed, 8.875% due 7/15/07 .......    2,712,562
10,625,000   BB-     Sr. Notes, 9.500% due 5/15/05 ................   11,368,750
 3,025,000   BB+   Mohegan Tribal Gaming, Sr. Notes,
                     13.500% due 11/15/02 .........................    3,909,812
 3,275,000   B     Showboat Inc., Sr. Sub. Notes,
                     13.000% due 8/1/09 ...........................    3,987,312
 2,950,000   B     Signature Resorts Inc., Sr. Sub. Notes,
                     9.750% due 10/1/07 (a) .......................    3,031,125
--------------------------------------------------------------------------------
                                                                      31,065,249
--------------------------------------------------------------------------------
Insurance -- 1.2%
 3,225,000   BB+   SIG Capital Trust, Company Guaranteed,
                     9.500% due 8/15/27 ...........................    3,333,844
 2,500,000   BB-   Veritas Capital Trust, Company Guaranteed,
                     10.000% due 1/1/28 (a) .......................    2,618,750
--------------------------------------------------------------------------------
                                                                       5,952,594
--------------------------------------------------------------------------------
Leisure -- 0.5%
 3,525,000   B-    PX Escrow Corp., Sr. Discount Notes,
                     9.625% due 2/1/06 (a) ........................    2,493,938
--------------------------------------------------------------------------------
Machinery -- 2.1%
 1,750,000   B-    Alvey Systems Inc., Sr. Sub. Notes,
                     11.375% due 1/31/03 ..........................    1,830,937


                       See Notes to Financial Statements.                      9
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------

February 28, 1998 (continued)

   Face
  Amount   Ratings                Security                              Value
--------------------------------------------------------------------------------
Machinery -- 2.1% (continued)
$3,000,000   B     Goss Graphic System Inc., Sr. Sub. Notes,
                     12.000% due 10/15/06 .........................  $ 3,442,500
 4,784,000   NR    Terex Corp., Sr. Notes, 13.250% due 5/15/02 ....    5,633,160
--------------------------------------------------------------------------------
                                                                      10,906,597
--------------------------------------------------------------------------------
Metals & Mining -- 2.8%
 5,725,000   B-    Haynes International Inc., Sr. Notes,
                     11.625% due 9/1/04 ...........................    6,540,812
 6,150,000   CCC+  Kaiser Aluminum & Chemical Corp., Sr. Sub.
                     Notes, 12.750% due 2/1/03 ....................    6,565,125
 1,325,000   B-    Koppers Industry Inc., Sr. Sub. Notes,
                     9.875% due 12/1/07 (a) .......................    1,397,875
--------------------------------------------------------------------------------
                                                                      14,503,812
--------------------------------------------------------------------------------
Oil/Natural Gas -- 5.5%
 2,575,000   B     Canadian Forest Oil Ltd. Inc., Sr. Sub. Notes,
                     8.750% due 9/15/07 (a) .......................    2,620,062
 4,350,000   B+    Clark USA Inc., Sr. Notes,
                     10.875% due 12/1/05 ..........................    4,774,125
 1,550,000   B-    Coho Energy Inc., Sr. Sub. Notes,
                     8.875% due 10/15/07 ..........................    1,538,375
 4,150,000   BB-   Gulf Canada Resources Ltd., Sub. Debentures,
                     9.625% due 7/1/05 ............................    4,533,875
   250,000   BB    Hvide Marine Inc., Sr. Notes,
                     8.375% due 2/15/08 (a) .......................      246,250
 1,350,000   BB-   J Ray McDermott SA, Sr. Sub. Notes,
                     9.375% due 7/15/06 ...........................    1,458,000
                   Ocean Energy Inc., Company Guaranteed:
 2,750,000   BB-     9.750% due 10/1/06 ...........................    3,018,125
 1,250,000   BB-     8.875% due 7/15/07 ...........................    1,331,250
 3,550,000   BB-   Santa Fe Energy Resources, Sr. Sub. Debentures,
                     11.000% due 5/15/04 ..........................    3,860,625
 2,150,000   B-    Stone Energy Corp., Company Guaranteed,
                     8.750% due 9/15/07 ...........................    2,219,875
 2,625,000   BB-   United Meridian Corp., Sr. Sub. Notes,
                     10.375% due 10/15/05 .........................    2,913,750
--------------------------------------------------------------------------------
                                                                      28,514,312
--------------------------------------------------------------------------------


10                     See Notes to Financial Statements.
--------------------------------------------------------------------------------
<PAGE>
  
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------

February 28, 1998 (continued)

   Face
  Amount   Ratings                Security                              Value
--------------------------------------------------------------------------------
Oil Services -- 3.7%
$4,965,000   B+    Dawson Product Services, Sr. Notes,
                     9.375% due 2/1/07 ............................  $ 5,200,838
 2,315,000   CCC+  Deeptech International Inc., Sr. Notes,
                     12.000% due 12/15/00 .........................    2,468,369
 2,150,000   B+    ICO Inc., Sr. Notes, 10.375% due 6/1/07 ........    2,300,500
 5,625,000   B+    Parker Drilling, Sr. Notes,
                     9.750% due 11/15/06 ..........................    6,103,125
 2,600,000   BB    Pride International Inc., Sr. Notes,
                     9.375% due 5/1/07 ............................    2,808,000
--------------------------------------------------------------------------------
                                                                      18,880,832
--------------------------------------------------------------------------------
Packaging/Containers -- 1.4%
 2,500,000   B     Huntsman Packaging Corp., Sr. Sub. Notes,
                     9.125% due 10/1/07 (a) .......................    2,556,250
3,000,000+   NR    Impress Metal Holding, Sr. Sub. Notes,
                     9.875% due 5/29/07 ...........................    1,743,994
 2,750,000   B-    Tekni-Plex Inc., Sr. Sub. Notes,
                     9.250% due 3/1/08 (a) ........................    2,784,375
--------------------------------------------------------------------------------
                                                                       7,084,619
--------------------------------------------------------------------------------
Pollution Control -- 0.5%
 2,325,000   B+    Allied Waste North America Inc., Company
                     Guaranteed, 10.250% due 12/1/06 ..............    2,598,188
--------------------------------------------------------------------------------
Printing/Paper/Forest Products -- 1.6%
   966,000   B-    American Pad & Paper, Inc., Sr. Sub. Notes,
                     13.000% due 11/15/05 .........................    1,061,392
 1,250,000   B-    Indah Kiat International Finance Co., Company
                     Guaranteed, 11.875% due 6/15/02 ..............    1,062,500
 5,525,000   B+    SD Warren Co., Sr. Sub. Notes,
                     12.000% due 12/15/04 .........................    6,181,094
--------------------------------------------------------------------------------
                                                                       8,304,986
--------------------------------------------------------------------------------
Telecommunications -- 22.1%
 2,550,000   NR    Allegiance Telecom Inc., Units, step bond to yield
                     11.713% due 2/15/08 ..........................    1,389,750
 6,650,000   B3*   Clearnet Communications Inc., Sr. Discount
                     Notes, 14.750% due 12/15/05 ..................    5,369,875


                       See Notes to Financial Statements.                     11
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------

February 28, 1998 (continued)

   Face
  Amount   Ratings                Security                              Value
--------------------------------------------------------------------------------
Telecommunications -- 22.1% (continued) 
                     Colt Telecom Group PLC:
$  800,000+  B       Sr. Notes, 10.125% due 11/30/07 .............. $  1,409,400
 5,000,000   NR      Units, step bond to yield
                       11.647% due 12/15/06 .......................    4,400,000
                   Esprit Telecom Group PLC, Sr. Notes:
4,325,000+   B-      11.500% due 12/15/07 .........................    2,612,564
 2,300,000   B-      11.500% due 12/15/07 .........................    2,512,750
 1,375,000   NR    Facilicom International Inc., Sr. Notes,
                     10.500% due 1/15/08 (a) ......................    1,405,938
 3,825,000   BB-   Fonorola Inc., Sr. Notes,
                     12.500% due 8/15/02 ..........................    4,274,438
 2,650,000   B     Hermes Europe Railtel BV, Sr. Notes,
                     11.500% due 8/15/07 (a) ......................    2,974,625
 5,975,000   B     Intermedia Communications of Florida,
                     Sr. Discount Notes, 12.500% due 5/15/06 ......    4,832,280
 7,700,000   B-    Iridium LLC Capital Corp., Company
                     Guaranteed, 14.000% due 7/15/05 ..............    8,758,750
 5,525,000   B+    McLeod USA Inc., Sr. Discount Notes, step bond
                     to yield 10.577% due 3/1/07 ..................    4,171,375
 6,050,000   NR    Metronet Communications, Sr. Notes,
                     12.000% due 8/15/07 (a) ......................    7,018,000
 5,025,000   B-    Millicom International Cellular SA, Sr. Sub.
                     Discount Notes, step bond to yield
                     13.500% due 6/1/06 ...........................    3,881,813
 2,575,000   B     Netia Holdings B.V., Company Guaranteed,
                     10.250% due 11/1/07 (a) ......................    2,610,406
                   Nextel Communications, Sr. Discount Notes:
   775,000   CCC+    Step bond to yield 9.844% due 9/15/07 ........      501,813
 8,725,000   CCC+    Step bond to yield 12.168% due 8/15/04 .......    8,354,188
 5,475,000   B     Nextlink Communications, Sr. Notes,
                     12.500% due 4/15/06 ..........................    6,309,938
 1,300,000   NR    Orbital Imaging Corp., Units,
                     11.625% due 3/1/05 ...........................    1,332,500
 2,800,000   B3*   Pagemart Nationwide, Inc., Sr. Discount Notes,
                     step bond to yield 13.243% due 2/1/05 ........    2,457,000


12                     See Notes to Financial Statements.
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------

February 28, 1998 (continued)

   Face
  Amount   Ratings                Security                              Value
--------------------------------------------------------------------------------
Telecommunications -- 22.1% (continued)
$6,550,000   Caa*  Pagemart Wireless Inc., Sr. Discount Notes,
                     11.250% due 2/1/08 (a) ....................... $  3,962,750
 5,025,000   B-    Primus Telecomm Group, Sr. Notes,
                     11.750% due 8/1/04 ...........................    5,590,312
 6,375,000   B+    Qwest Communications, Sr. Discount Notes,
                     9.470% due 10/15/07 (a) ......................    4,462,500
 2,125,000   B+    Qwest Communications International, Sr. Notes,
                     10.875% due 4/1/07 2,449,063 RCN Corp.:
 5,350,000   B3*     Sr. Discount Notes, step bond to yield
                       11.171% due 10/15/07 .......................    3,497,563
 2,350,000   B3*     Sr. Notes, 10.000% due 10/15/07 (a) ..........    2,491,000
 4,125,000   B-    RSL Communications Ltd., Company
                     Guaranteed, 12.250% due 11/15/06 .............    4,702,500
 1,250,000   B-    Satelites Mexicanos SA, Sr. Notes,
                     10.125% due 11/1/04 (a) ......................    1,298,438
                   Telesystem International Wireless, Sr. Discount
                     Notes:
 2,050,000   B-        10.500% due 11/1/07 (a) ....................    1,255,625
 9,575,000   NR        Step bond to yield 13.066% due 6/30/07 (a)      6,511,000
 1,850,000   NR    WAM!Net Inc., Units, 13.250% due 3/1/05 ........    1,128,500
--------------------------------------------------------------------------------
                                                                     113,926,654
--------------------------------------------------------------------------------
Transportation -- 1.8%
 1,750,000   B+    American Reefer Co. Ltd.,
                     10.250% due 3/1/08 (a) .......................    1,767,500
 3,750,000   BB    GS Superhighways Holdings, Sr. Notes,
                     10.250% due 8/15/07 (a) ......................    2,910,938
                   Sea Containers Ltd.:
 1,200,000   BB-     Sr. Notes, 7.875% due 2/15/08 (a) ............    1,194,000
 3,130,000   BB-     Sr. Sub. Debenture, 12.500% due 12/1/04 ......    3,536,900
--------------------------------------------------------------------------------
                                                                       9,409,338
--------------------------------------------------------------------------------
                   TOTAL CORPORATE BONDS AND NOTES
                   (Cost-- $451,093,073) ..........................  475,314,086
================================================================================


                       See Notes to Financial Statements.                     13
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------

February 28, 1998 (continued)

 Shares                            Security                             Value
--------------------------------------------------------------------------------
STOCKS - 5.9%
--------------------------------------------------------------------------------

Automotive -- 0.9%
    87,625         Navistar International, Series G,
                     Preferred Convertible $6.00 ..................  $ 4,441,492
--------------------------------------------------------------------------------
Banks -- 0.3%
    63,850         California Federal Preferred Capital Corp. .....    1,755,875
--------------------------------------------------------------------------------
Broadcasting-TV, Cable & Radio -- 4.3%
    19,603         Time Warner Inc., Series M, Preferred,
                     Exchange 10.250% .............................   22,347,420
--------------------------------------------------------------------------------
Communications-Equipment & Software -- 0.0%
    12,250         Pagemart Wireless Equipment ....................      110,250
--------------------------------------------------------------------------------
Electronics/Computer -- 0.2%
    40,800         ViaSystems Inc., Series B, Preferred PIK .......      851,700
--------------------------------------------------------------------------------
Publishing -- 0.0%
       939         Primedia Inc., Series B, Preferred PIK,
                     Exchange 11.625% .............................     100,240
--------------------------------------------------------------------------------
Telecommunications -- 0.2%
     4,125         Iridium LLC Corp. ..............................      577,500
    11,580         Nextel Communications Inc. .....................      342,334
--------------------------------------------------------------------------------
                                                                         919,834
--------------------------------------------------------------------------------
                   TOTAL STOCKS
                   (Cost--  $28,956,082) ..........................   30,526,811
================================================================================
--------------------------------------------------------------------------------
WARRANTS - 0.3%
--------------------------------------------------------------------------------
Broadcasting-TV, Cable & Radio -- 0.0%
     8,625         UIH Australia, Expire 5/15/06 (b) ..............     103,500
     3,375         Wireless One Inc., Expire 10/19/00 (b) .........          844
--------------------------------------------------------------------------------
                                                                         104,344
--------------------------------------------------------------------------------
Printing/Paper/Forest Products -- 0.0%
     4,800         SD Warren Co., Expire 12/15/06 (b) .............       84,480
--------------------------------------------------------------------------------
Telecommunications -- 0.3%
     5,425         Australis Holdings Ltd., Expire 10/30/01 (b) ...            0
--------------------------------------------------------------------------------


14                     See Notes to Financial Statements.
--------------------------------------------------------------------------------
<PAGE>
  
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------

February 28, 1998 (continued)

 Shares    Ratings                 Security                             Value
--------------------------------------------------------------------------------
WARRANTS - 0.3%
    32,175         Clearnet Communications Inc.,
                     Expire 9/15/05 (a)(b) ........................  $   193,050
     4,725         Globalstar LP, Expire 2/15/04 (a)(b) ...........      661,500
Telecommunications -- 0.3% (continued)
     6,050         Metronet Communications Class B,
                     Expire 8/15/07 (a)(b) ........................      121,000
     3,900         Nextel Communications Inc., Expire 4/25/99 (b) .        6,318
    24,840         Pagemart Inc., Expire 12/31/03 (b) .............      186,300
     4,475         Primus Telecommunications, Expire 8/1/04 (b) ...      143,200
     4,125         RSL Communications Ltd.,
                     Expire 11/15/06 (a)(b) .......................      165,000
--------------------------------------------------------------------------------
                                                                       1,476,368
--------------------------------------------------------------------------------
                   TOTAL WARRANTS
                   (Cost--  $731,738) .............................    1,665,192
================================================================================
  Face
 Amount                                Security                          Value
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
REPURCHASE AGREEMENT - 1.7%
--------------------------------------------------------------------------------
 $8,752,000        Goldman Sachs, 5.590% due 3/2/98; Proceeds
                     at maturity-$8,756,076; (Fully collateralized
                     by U.S. Treasury Notes, 5.375% due 2/15/01;
                     Market value - $8,931,363)
                     (Cost - $8,752,000) ..........................    8,752,000
--------------------------------------------------------------------------------
                   TOTAL INVESTMENTS -- 100%
                   (Cost -- $489,532,893**) ....................... $516,258,089
================================================================================

(a)   Security is exempt from registration under Rule 144A of the Securities Act
      of 1933. This security may be resold in transactions that are exempt from
      registration, normally to qualified institutional buyers.
(b)   Non-income producing security.
+     Represents local currency.
**    Aggregate cost for Federal income tax purposes is substantially the same.

      See page 17 for definition of ratings.


                       See Notes to Financial Statements.                     15
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
--------------------------------------------------------------------------------

February 28, 1998 (continued)

================================================================================
                      SUMMARY OF BONDS BY COMBINED RATINGS

                                                                   % of
                                                              Total Corporate
    Moody's              and/or     Standard & Poor's         Bonds and Notes
--------------------------------------------------------------------------------
     Baa                                  BBB                       0.8%
      Ba                                   BB                      27.7
       B                                    B                      55.8
     Caa                                  CCC                       5.6
      NR                                   NR                      10.1
                                                                  -----
                                                                  100.0%
                                                                  =====


16                     See Notes to Financial Statements.
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
Bond Ratings (unaudited)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's"),
except that those identified by an asterisk(*) are rated by Moody's Investors
Service Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:

Standard & Poor's -- Ratings from "A" to "CC" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standings within the major rating
categories.

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
                  bonds in this category than for bonds in higher rated
                  categories.

BB, B, CCC  --    Bonds rated "BB", "B", "CCC" and "CC" are regarded, on
                  balance, as and CC predominantly speculative with respect to
                  capacity to pay interest and repay principal in accordance
                  with the terms of the obligation. "BB" represents the lowest
                  degree of speculation and "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 -- Numerical modifiers 1, 2 and 3 may be applied to each generic rating
from "A" to "Ca," where 1 is the highest and 3 the lowest ranking within its
generic category.

A           --    Bonds that are rated "A" possess many favorable investment
                  attributes and are to be considered as upper medium grade
                  obligations. Factors giving security to principal and interest
                  are considered adequate but elements may be present which
                  suggest a susceptibility to impairment some time in the
                  future.

Baa         --    Bonds rated "Baa" are considered to be medium grade
                  obligations; that is, they are neither highly protected nor
                  poorly secured. Interest payment 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. These bonds lack outstanding investment
                  characteristics and may have speculative characteristics as
                  well.

Ba          --    Bonds that are rated "Ba" are judged to have speculative
                  elements; their future cannot be considered as well assured.
                  Often the protection of interest and principal payments may be
                  very moderate and thereby not well safeguarded during both
                  good and bad times over the future. Uncertainty of position
                  characterizes bonds in this class.

B           --    Bonds that are rated "B" generally lack characteristics of
                  desirable investments. Assurance of interest and principal
                  payments or of maintenance of other terms of the contract over
                  any long period of time may be small.

Caa         --    Bonds that are rated "Caa" are of poor standing. These issues
                  may be in default, or present elements of danger may exist
                  with respect to principal or interest.

Ca          --    Bonds that are rated "Ca" represent obligations which are
                  speculative in a high degree. Such issues are often in default
                  or have other marked shortcomings.

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


                                                                              17
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------

February 28, 1998

--------------------------------------------------------------------------------
ASSETS:
   Investments, at value (Cost-- $489,532,893) .................. $516,258,089
   Cash .........................................................          468
   Receivable for securities sold ...............................   10,295,315
   Interest receivable ..........................................    8,671,791
   Receivable for open forward foreign
      currency contracts (Note 5) ...............................      165,878
--------------------------------------------------------------------------------
   Total Assets .................................................  535,391,541
--------------------------------------------------------------------------------
LIABILITIES:
   Payable for securities purchased .............................   12,187,194
   Investment advisory fees payable .............................      356,437
   Administration fees payable ..................................       85,042
   Accrued expenses .............................................      202,511
--------------------------------------------------------------------------------
   Total Liabilities ............................................   12,831,184
--------------------------------------------------------------------------------
Total Net Assets ................................................ $522,560,357
================================================================================
NET ASSETS:
   Par value of capital shares .................................. $     44,015
   Capital paid in excess of par value ..........................  524,531,845
   Overdistributed net investment income ........................     (157,691)
   Accumulated net realized loss from
      security transactions, futures contracts
      and options ...............................................  (28,748,222)
   Net unrealized appreciation of investments
      and foreign currencies ....................................   26,890,410
--------------------------------------------------------------------------------
Total Net Assets
   (Equivalent to $11.87 per share on 44,014,989
    shares of $0.001 par value outstanding;
    500,000,000 shares authorized) .............................. $522,560,357
================================================================================


18                     See Notes to Financial Statements.
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------

For the Year Ended February 28, 1998

--------------------------------------------------------------------------------
INVESTMENT INCOME:
   Interest                                                        $48,722,852
   Dividends                                                         3,870,074
--------------------------------------------------------------------------------
   Total Investment Income                                          52,592,926
--------------------------------------------------------------------------------
EXPENSES:
   Investment advisory fees (Note 2)                                 4,548,218
   Administration fees (Note 2)                                      1,010,715
   Shareholder communications                                          239,341
   Audit and legal                                                      57,840
   Directors' fees                                                      41,885
   Registration fees                                                    36,899
   Shareholder and system servicing fees                                21,538
   Custody                                                              20,941
   Other                                                                24,930
--------------------------------------------------------------------------------
   Total Expenses                                                    6,002,307
--------------------------------------------------------------------------------
Net Investment Income                                               46,590,619
--------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCIES, FUTURES CONTRACTS AND OPTIONS
(NOTES 3, 5, 6 and 7):
   Realized Gain (Loss) From:
     Security transactions (excluding short-term securities)         8,348,172
     Foreign currency transactions                                     123,759
     Futures contracts                                                (326,360)
     Options purchased                                                (408,685)
--------------------------------------------------------------------------------
   Net Realized Gain                                                 7,736,886
--------------------------------------------------------------------------------
   Change in Net Unrealized Appreciation of Investments
    and Foreign Currencies:
       Beginning of year                                            21,798,449
       End of year                                                  26,890,410
--------------------------------------------------------------------------------
   Increase in Net Unrealized Appreciation                           5,091,961
--------------------------------------------------------------------------------
Net Gain on Investments, Foreign Currencies,
  Futures Contracts and Options                                     12,828,847
--------------------------------------------------------------------------------
Increase in Net Assets from Operations                             $59,419,466
================================================================================


                       See Notes to Financial Statements.                     19
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------

For the Years Ended February 28,

--------------------------------------------------------------------------------
                                                        1998            1997
================================================================================
OPERATIONS:
   Net investment income ..........................  $ 46,590,619  $ 47,001,438
   Net realized gain (loss) .......................     7,736,886      (239,118)
   Increase in net unrealized appreciation ........     5,091,961     9,609,068
--------------------------------------------------------------------------------
   Increase in Net Assets From Operations .........    59,419,466    56,371,388
--------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
   Net investment income ..........................   (47,244,754)  (45,621,623)
   Capital ........................................            --      (668,631)
--------------------------------------------------------------------------------
   Decrease in Net Assets From
     Distributions to Shareholders ................   (47,244,754)  (46,290,254)
--------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
   Net asset value of shares issued for
     reinvestment of dividends ....................    16,479,649     7,000,597
--------------------------------------------------------------------------------
   Increase in Net Assets From
     Fund Share Transactions ......................    16,479,649     7,000,597
--------------------------------------------------------------------------------
Increase in Net Assets ............................    28,654,361    17,081,731

NET ASSETS:
   Beginning of year ..............................   493,905,996   476,824,265
--------------------------------------------------------------------------------
   End of year* ...................................  $522,560,357  $493,905,996
================================================================================
*Includes overdistributed net investment income of:  $   (157,691)           --
================================================================================


20                     See Notes to Financial Statements.
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

February 28, 1998

--------------------------------------------------------------------------------
   1. Significant Accounting Policies

   Managed High Income Portfolio 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 following are significant accounting policies consistently followed by
the Fund: (a) security transactions are accounted for on trade date; (b)
securities are valued at the mean between the quoted bid and ask prices provided
by an independent pricing service that are based on transactions in corporate
obligations, quotations from corporate bond dealers, market transactions in
comparable securities and various relationships between securities; (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 accretion of original issue discount, is
recorded on an accrual basis; (f) dividend income is recorded by the Fund on the
ex-dividend date; foreign dividends are recorded on the ex-dividend date or as
soon as practical after the Fund determines the existence of a dividend
declaration after exercising reasonable due diligence; (g) the accounting
records of the Fund are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars on the date
of valuation. Purchases and sales of securities and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income or expense amounts
recorded and collected or paid are adjusted when reported by the custodian; (h)
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; (i) 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. At
February 28, 1998, reclassifications were made to the Fund's capital accounts to
reflect permanent book/tax differences and income and gains available for
distributions under income tax regulations. Accordingly, overdistributed net
investment income amounting to $372,685 was reclassified to paid-in capital. Net
investment income, net realized gains and net assets were not affected by this
adjustment; and (j) estimates and assumptions are required to be made regarding
assets,


                                                                              21
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

February 28, 1998 (continued)

--------------------------------------------------------------------------------
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 addition, the Fund may enter into forward exchange contracts in order to
hedge against foreign currency risk. These contracts are marked to market daily
by recognizing the difference between the contract exchange rate and the current
market rate as an unrealized gain or loss. Realized gains or losses are
recognized when contracts are settled.

   2. Investment Advisory Agreement, Administration Agreement and Other
      Transactions

   Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual Funds
Management Inc., a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"),
acts as investment adviser to the Fund. The Fund pays MMC an advisory fee
calculated at an annual rate of 0.90% of the average daily net assets. This fee
is calculated daily and paid monthly.

   MMC also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.

   All officers and one Director of the Fund are employees of Smith Barney Inc.,
another subsidiary of SSBH.

   3. Investments

   For the year ended February 28, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities but excluding
short-term securities) were:

================================================================================
Purchases                                                           $458,697,474
--------------------------------------------------------------------------------
Sales                                                                462,861,414
================================================================================

   At February 28, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:

================================================================================
Gross unrealized appreciation                                       $29,027,465

Gross unrealized depreciation                                        (2,302,269)
--------------------------------------------------------------------------------
Net unrealized appreciation                                         $26,725,196
================================================================================


22
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

February 28, 1998 (continued)

--------------------------------------------------------------------------------
   4. Repurchase Agreements

   The Fund purchases, and its custodian takes possession of, U.S. government
securities from banks subject to agreements to resell the securities to the
sellers at a future date (generally, the next business day) at an agreed-upon
higher repurchase price. The Fund requires continual maintenance of the market
value of the collateral in amounts at least equal to the repurchase price.

   5. Forward Foreign Currency Contracts

   At February 28, 1998, the Fund had open forward foreign currency contracts as
described below. The Fund bears the market risk that arises from changes in
foreign currency exchange rates. The unrealized gain on the contracts reflected
in the accompanying financial statements were as follows:

                           Local           Market       Settlement    Unrealized
Foreign Currency         Currency           Value          Date          Gain
================================================================================
To Sell:
British Pound             797,040       $1,306,375        5/26/98     $ 27,209
Deutschemark            3,466,849        1,910,671         3/2/98       53,772
Deutschemark            4,325,000        2,385,960        3/18/98       65,854
Deutschemark            2,500,000        1,379,167        3/18/98       19,043
--------------------------------------------------------------------------------
Total Unrealized Gain on Forward
  Foreign Currency Contracts                                          $165,878
================================================================================

   6. Futures Contracts

   Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contract. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by marking to market on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are received or made and recognized as assets
due from or liabilities due to broker, depending upon whether unrealized gains
or losses are incurred. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the proceeds from (or cost of) the
closing transactions and the Fund's basis in the contract.


                                                                              23
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

February 28, 1998 (continued)

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

   The Fund enters into such contracts to hedge a portion of its portfolio. The
Fund bears the market risk that arises from changes in the value of the
financial instruments and securities indices (futures contracts).

   At February 28, 1998, the Fund had no open futures contracts.

   7. Options Contracts

   Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into closing sales transaction, the Fund will realize a gain or loss
depending on whether the sales proceeds from the closing sales transaction are
greater or less than the premium paid for the option. When the Fund exercises a
put option, it will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When the Fund exercises a call option, the cost of the security
which the Fund purchases upon exercise will be increased by the premium
originally paid.

   At February 28, 1998, the Fund had no open purchased call or put option
contracts.

   When the Fund writes a covered call or put option, an amount equal to the
premium received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss depending upon whether
the cost of the closing transaction is greater or less than the premium
originally received, without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a written call option is exercised, the proceeds of the security sold will
be increased by the premium originally received. When a written put option is
exercised, the amount of the premium received will reduce the cost of the
security which the Fund purchased upon exercise. When written index options are
exercised, settlement is made in cash.

   The risk associated with purchasing options is limited to the premium
originally paid. The Fund enters into options for hedging purposes. The risk in
writing a call option is that the Fund gives up the opportunity to participate
in any increase in the price of the underlying security beyond the exercise
price. The risk in writing a put option is that the Fund is exposed to the risk
of loss if the market price of the underlying security declines.


24
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

February 28, 1998 (continued)

--------------------------------------------------------------------------------
   During the year ended February 28, 1998, the Fund did not write any covered
call or put options.

   8. Payment-in-Kind Securities

   The Fund may invest in payment-in-kind ("PIK") securities. PIK securities pay
interest through the issuance of additional securities. PIK securities carry a
risk in that, unlike bonds which pay interest throughout the period to maturity,
the Fund will realize no cash until the cash payment dates unless a portion of
such securities are sold. If the issuer of a PIK security defaults, the Fund may
obtain no return at all on its investment.

   9. Capital Loss Carryforward

   At February 28, 1998, the Fund had, for Federal income tax purposes,
$27,703,000 of loss carryforwards available to offset future capital gains. To
the extent that these carryforward losses 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 the
last day in February of the year indicated:

                                                2003         2004        2005
================================================================================
Carryforward Amounts                         $9,349,000   $18,115,000  $239,0000
================================================================================

   10. Capital Shares

   During the years ended February 28, 1998 and 1997, capital stock transactions
were as follows:

                                         1998                       1997
                                  -------------------       --------------------
                                  Share        Amount       Shares        Amount
================================================================================
Shares issued on reinvestment   1,412,894    $16,479,649    620,506   $7,000,597
================================================================================


                                                                              25
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

For a share of capital stock outstanding throughout each year:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
                                       1998        1997        1996        1995          1994(1)
==================================================================================================
<S>                                  <C>         <C>         <C>         <C>           <C>     
Net asset value, beginning of Year   $  11.59    $  11.36    $  10.88    $  12.39      $  12.00
--------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
  Net investment income ...........      1.09        1.12        1.13        1.12          0.98
  Net realized and
    unrealized gain (loss) ........      0.28        0.21        0.65       (1.48)         0.51
--------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations      1.37        1.33        1.78       (0.36)         1.49
--------------------------------------------------------------------------------------------------
Offering costs credited (charged)
  to Paid-In Capital ..............        --          --          --        0.00*        (0.02)
--------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income ...........     (1.09)      (1.08)      (1.27)      (1.00)        (0.96)
  Net realized gains ..............        --          --          --       (0.15)        (0.12)
  Capital .........................        --       (0.02)      (0.03)         --            --
--------------------------------------------------------------------------------------------------
Total Distributions ...............     (1.09)      (1.10)      (1.30)      (1.15)        (1.08)
--------------------------------------------------------------------------------------------------
Net asset value, end of Year ......  $  11.87    $  11.59    $  11.36    $  10.88      $  12.39
--------------------------------------------------------------------------------------------------
Total Return,
  Based on Market Value ...........     10.96%      15.37%      18.83%       0.14%         6.85%++
--------------------------------------------------------------------------------------------------
Total Return,
  Based on Net Asset Value** ......     12.43%      12.65%      17.80%      (2.18)%       12.67%++
--------------------------------------------------------------------------------------------------
Net assets, end of Year (000s) ....  $522,560    $493,906    $476,824    $456,789      $520,091
--------------------------------------------------------------------------------------------------
Ratios to average net assets:
  Expenses ........................      1.18%       1.20%       1.24%       1.24%         1.19%+
  Net investment income ...........      9.19        9.89        9.74        9.96          8.74+
--------------------------------------------------------------------------------------------------
Portfolio turnover rate ...........        94%         61%         73%         62%          108%
--------------------------------------------------------------------------------------------------
Market value, End of Year .........  $ 11.750    $ 11.625    $ 11.125    $ 10.500      $ 11.750
==================================================================================================
</TABLE>

(1)   For the period from March 26, 1993 (commencement of operations) to
      February 28, 1994.
*     Amount represents less than $0.01.
**    The total return calculation assumes that dividends are reinvested in
      accordance with the Fund's dividend reinvestment plan.
++    Total return is not annualized, as it may not be representative of the
      total return for the year.
+     Annualized.


26
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------

The Shareholders and Board of Directors of the
Managed High Income Portfolio Inc.:

--------------------------------------------------------------------------------
     We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Managed High Income Portfolio Inc.
as of February 28, 1998, the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended and financial highlights for each of the years in the
three-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights for the year ended February 28,
1995 and the financial highlights for the period from March 26, 1993
(commencement of operations) to February 28, 1994 were audited by other auditors
whose report thereon, dated April 10, 1995, expressed an unqualified opinion of
those financial highlights.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
February 28, 1998, by correspondence with the custodian. As to securities
purchased or sold but not received or delivered, we performed other appropriate
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Managed High Income Portfolio Inc. as of February 28, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended and financial highlights for each of
the years in the three-year period then ended, in conformity with generally
accepted accounting principles.


                                        /s/ KPMG Peat Marwick LLP

New York, New York
April 24, 1998


                                                                              27
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                                                Net Realized             Net Increase
                                                               and Unrealized            in Net Assets
                    Investment        Net Investment             Gain (Loss)                 From
                      Income              Income               on Investments             Operations
             -----------------------------------------------------------------------------------------------
Quarter                     Per                    Per                      Per                        Per
 Ended          Total      Share    Total         Share      Total         Share       Total          Share
============================================================================================================
<S>          <C>           <C>   <C>              <C>     <C>              <C>      <C>               <C>  
May 31,
  1995       $12,525,032   $0.30 $11,084,402      $0.27   $14,597,234      $0.35    $25,681,636       $0.62
August 31,
  1995        13,294,948    0.32  11,827,361       0.28     1,313,938       0.03     13,141,299        0.31
November 30,
  1995        13,166,852    0.31  11,710,524       0.28     1,796,990       0.04     13,507,514        0.32
February 29,
  1996        12,770,322    0.30  11,311,036       0.27    11,158,398       0.26     22,469,434        0.53
May 31,
  1996        13,001,508    0.31  11,542,616       0.27    (7,102,523)     (0.17)     4,440,093        0.10
August 31,
  1996        13,247,484    0.31  11,804,210       0.29    (7,860,018)     (0.19)     3,944,192        0.10
November 30,
  1996        13,267,331    0.31  11,856,227       0.28    15,505,326       0.37     27,361,553        0.65
February 28,
  1997        13,188,573    0.31  11,798,385       0.28     8,827,165       0.20     20,625,550        0.48
May 31,
  1997        13,200,189    0.31  11,741,167       0.27    (5,289,541)     (0.12)     6,451,626        0.15
August 31,
  1997        13,358,455    0.31  11,846,555       0.28    12,682,793       0.29     24,529,348        0.57
November 30,
  1997        12,745,541    0.29  11,250,534       0.26     1,354,794       0.03     12,605,328        0.29
February 28,
  1998        13,288,741    0.30  11,752,363       0.27     4,080,801       0.09     15,833,164        0.36
============================================================================================================
</TABLE>


28
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
FINANCIAL DATA (UNAUDITED)
--------------------------------------------------------------------------------

For a share of capital stock outstanding throughout each period:

--------------------------------------------------------------------------------
                                                                      Dividend
                            NYSE         Net Asset     Dividend     Reinvestment
                        Closing Price      Value         Paid           Price
================================================================================
May 31, 1995               $10.750        $11.21        $0.093         $10.87
June 30, 1995               10.500         11.15         0.093          10.67
July 31, 1995               10.625         11.31         0.093          10.65
August 31, 1995             10.625         11.25         0.093          10.68
September 30, 1995          10.375         11.26         0.093          10.67
October 31, 1995            10.500         11.31         0.093          10.68
November 30, 1995           10.750         11.29         0.093          10.71
December 31, 1995           10.500         11.20         0.093          10.76
December 31, 1995*          10.500         11.20         0.188          10.76
January 31, 1996            11.188         11.35         0.093          11.19
February 29, 1996           11.125         11.36         0.093          11.09
March 31, 1996              10.875         11.18         0.093          10.79
April 30, 1996              10.750         11.20         0.093          10.74
May 31, 1996                10.625         11.18         0.093          10.56
June 30, 1996               10.625         11.07         0.091          10.71
July 31, 1996               10.875         10.98         0.091          10.97
August 31, 1996             11.000         11.01         0.091          11.01
September 30, 1996          11.125         11.27         0.091          11.13
October 31, 1996            11.125         11.21         0.091          11.19
November 30, 1996           11.250         11.38         0.091          11.16
December 31, 1996           11.250         11.46         0.091          11.27
January 31, 1997            11.625         11.50         0.091          11.48
February 28, 1997           11.625         11.59         0.091          11.62
March 31, 1997              11.375         11.29         0.091          11.35
April 30, 1997              11.500         11.26         0.091          11.22
May 31, 1997                11.625         11.47         0.091          11.45
June 30, 1997               11.750         11.62         0.091          11.65
July 31, 1997               12.000         11.84         0.091          11.69
August 31, 1997             11.875         11.77         0.091          11.76
September 30, 1997          12.000         11.94         0.091          11.90
October 31, 1997            11.750         11.82         0.091          11.78
November 30, 1997           12.125         11.78         0.091          11.76
December 31, 1997           12.3125        11.82         0.091          11.80
January 31, 1998            12.500         11.89         0.091          11.82
February 28, 1998           11.750         11.87         0.091          11.87
================================================================================
*Capital gain distribution.


                                                                              29
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN (UNAUDITED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
   Under the Fund's Dividend Reinvestment Plan ("Plan"), a shareholder whose
shares of Common Stock are registered in his own name will have all
distributions from the Fund reinvested automatically by First Data Investor
Services Group, Inc. ("First Data") as 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 Fund 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 First Data as dividend-paying agent.

   If the Fund declares a dividend or capital gains distribution payable either
in shares of Common Stock or in cash, shareholders who are not Plan participants
will receive cash, and Plan participants will receive the equivalent amount in
shares of Common Stock. When the market price of the Common Stock is equal to or
exceeds the net asset value per share of the Common Stock on the Valuation Date
(as defined below), Plan participants will be issued shares of Common Stock
valued at the net asset value most recently determined or, if net asset value is
less than 95% of the then current market price of the Common Stock, then at 95%
of the market value. The Valuation Date is the dividend or capital gains
distribution payment date or, if that date is not a New York Stock Exchange
("NYSE") trading day, the immediately preceding trading day.

   If the market price of the Common Stock is less than the net asset value of
the Common Stock, or if the Fund declares a dividend or capital gains
distribution payable only in cash, a broker-dealer not affiliated with Smith
Barney, as purchasing agent for Plan participants ("Purchasing Agent"), will buy
Common Stock in the open market, on the NYSE or elsewhere, for the participants'
accounts (effective June 1, 1996, the Plan's Valuation Date changed from the
payable date to the record date). If, following the commencement of the
purchases and before the Purchasing Agent has completed its purchases, the
market price exceeds the net asset value of the Common Stock, the average per
share purchase price paid by the Purchasing Agent may exceed the net asset value
of the Common Stock, resulting in the acquisition of fewer shares than if the
dividend or capital gains distribution had been paid in Common Stock issued by
the Fund at net asset value. Additionally, if the market price exceeds the net
asset value of shares before the Purchasing Agent has completed its purchases,
the Purchasing Agent is permitted to cease purchasing shares and the Fund may
issue the remaining shares at a price equal to the greater of (a) net asset
value or (b) 95% of the then current market price. In a case where the
Purchasing Agent


30
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
has terminated open market purchases and the Fund has issued the remaining
shares, the number of shares received by the participant in respect of the cash
dividend or distribution 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. First Data will apply all cash received as a dividend or
capital gains distribution to purchase Common Stock on the open market as soon
as practicable after the payable date of the dividend or capital gains
distribution, but in no event later than 30 days after that date, except when
necessary to comply with applicable provisions of the federal securities laws.

   First Data will maintain all shareholder accounts in the Plan and will
furnish 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 First Data on behalf of the Plan participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan.

   Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions. First Data's fees for handling the reinvestment of
dividends and capital gains distributions will be paid by the Fund. No brokerage
charges apply with respect to shares of Common Stock issued directly by the Fund
as a result of dividends or capital gains distributions payable either in Common
Stock or in cash. Each Plan participant will, however, bear a proportionate
share of brokerage commissions incurred with respect to open market purchases
made in connection with the reinvestment of dividends or capital gains
distributions.

   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 First Data, with the Fund's prior written consent, on at least 30
days' written notice to Plan participants. All correspondence concerning the
Plan should be directed by mail to First Data Investor Services Group, Inc.,
P.O. Box 8030, Boston, Massachusetts 02266 or by telephone at (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
shares of its common stock in the open market.


                                                                              31
--------------------------------------------------------------------------------
<PAGE>

--------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
   For Federal tax purposes the Fund hereby designates for the fiscal year ended
February 28, 1998:

   o  8.17% of the ordinary dividends paid as qualifying for the corporate
      dividends received deduction.


32
--------------------------------------------------------------------------------
<PAGE>

                              Managed
                              HIGH INCOME
                                 Portfolio Inc.

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

Directors

Paolo M. Cucchi
Andrea Farace
Paul R. Hardin
Heath B. McLendon, Chairman
Alessandro C. di Montezemolo
George M. Pavia

James J. Crisona, Emeritus

Officers

Heath B. McLendon
President and
Chief Executive Officer

Lewis E. Daidone
Senior Vice President
and Treasurer

John C. Bianchi
Vice President and
Investment Officer

Thomas M. Reynolds
Controller

Christina T. Sydor
Secretary

Investment Adviser and Administrator

Mutual Management Corp.
388 Greenwich Street
New York, New York 10013

Transfer Agent

First Data Investor Services Group, Inc.
P.O. Box 8030
Boston, Massachusetts 02266

Custodian

PNC Bank, N.A.
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
--------------------------------------------------------------------------------
<PAGE>

This report is intended only for the shareholders of Managed High Income
Portfolio 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 the report. 

FD0882 4/98