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


                               Managed Municipals
                                 Portfolio Inc.



                                  Annual Report

                                  May 31, 1998

                                     [LOGO]

================================================================================
<PAGE>
 
                                     [LOGO]

                               Managed Municipals
                                 Portfolio Inc.

                                  May 31, 1998

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

Dear Shareholder:

     We are pleased to provide the annual report for the Managed Municipal
Portfolio Inc. ("Portfolio") for the period ended May 31, 1998. Over the
one-year period covered by this report, the Portfolio distributed income
dividends totaling $0.61 per share. The table below shows the annualized
distribution rate and one year total return based on the Portfolio's May 31,
1998 net asset value ("NAV") per share and its New York Stock Exchange ("NYSE")
closing price.

<TABLE>
<CAPTION>
                    Price            Annualized            One-Year
                  Per Share      Distribution Rate*      Total Return
                  ---------      ------------------      ------------
<S>                                     <C>                 <C>   
              $12.37 (NAV)              4.85%               12.14%
              $11.00 (NYSE)             5.45%                2.08%
</TABLE>

     In comparison, general closed-end municipal bond funds posted an average
total return on NAV of 12.42% for the same time period, as reported by Lipper
Analytical Services, Inc. (Lipper is a major fund-tracking organization.)

Municipal Bond Market Update

     The past year under review has seen a clear dichotomy develop between
domestic and international pressures on the bond markets. Recently, the weakness
in Southeast Asia has kept inflationary pressures low and has provided a soft
economic backdrop, which in turn has helped to support bond prices. With respect
to the U.S. economy, the data has been quite different and indicates powerful
economic growth, tight labor markets and some signs of higher inflationary
pressures. These conditions would normally point to a Federal Reserve Board
("Fed") tightening of short-term interest rates and weakening bond prices.
However, Asia's 


----------
*    This distribution assumes that the current monthly income dividend rate
     rate of $0.05 per share will be paid for twelve months.

------------------------------------[LOGO]--------------------------------------
                                       1
<PAGE>
 
problems have put Fed monetary policy temporarily on hold and have created a
classic standoff between the bulls and the bears. Some investors may perceive
this standoff as relative calm in a market that is actually more turbulent than
it may appear. While the market may seem calm on the surface, pressures from
both viewpoints are building. We expect that one side will ultimately prevail
and become dominant, probably before the end of the year. In our opinion,
current domestic concerns should outweigh foreign considerations among Fed
policy-makers.

Investment Strategy

     The yield curve has become extremely flat in the last few months. (The
yield curve shows the difference between short- and long-term yields.) That
means there is little extra yield being offered by owning longer maturity bonds
and taking on the added risks of higher interest rate volatility.

     We have attempted to increase the Portfolio's average coupon rates and
decrease its average maturity from where we were last year. (Coupon is the
interest rate on a debt security the issuer promises to pay to the holder until
maturity, expressed as an annual percentage of face value. Average maturity is a
dollar weighted average maturity of bonds contained in the portfolio.) While
this may be a more conservative investment strategy, for us it appears to be a
rare opportunity to come in shorter on the yield curve in the municipal bond
market without any appreciable sacrifice in the income stream. With today's low
interest rates, we think our strategy is prudent.

     As of May 31, 1998, approximately 85% of the Portfolio's holdings were
rated investment grade (BBB/Baa and higher) by either Standard & Poor's Ratings
Service or Moody's Investor Service Inc., with about 54% of the Portfolio
invested in AAA/Aaa bonds, the highest rating. (Investment-grade bonds are those
rated in one of the four highest ratings categories by nationally recognized
statistical rating organization, or determined by the manager to be of
equivalent quality.) The Portfolio's largest holdings are concentrated in
hospital bonds (14.5%), transportation bonds (12.4%) and utility bonds (11.7%)
because we believed they offer good relative values.


------------------------------------[LOGO]--------------------------------------
                                       2
<PAGE>
 
Municipal Bond Market Outlook

     Municipal bonds today trade at approximately 90% of 30-year U.S. Treasury
bonds, which is an extremely attractive after tax spread. U.S. Treasury bond
rates have been pushed down by several forces, but most recently by foreign
capital exiting Asia in a "flight to quality". Because these foreign investors
do not gain any benefit from tax-exempt income, municipal bonds have not
appreciated as much as U.S. Treasurys of late. It also means that when the tide
turns, the Fund's currently more defensive investment strategy should hold us in
good stead in any future market sell-off.

     We have also seen a significant increase in the volume of new issues in the
municipal bond market taking advantage of historically low interest rates. We
believe the municipal market is comparatively inexpensive and provides us with a
broad spectrum of securities to choose from. For us, that means the issues we
will consider will probably remain high in credit quality and somewhat shorter
in maturity than in past market cycles.

     In closing, thank you for investing in the Managed Municipals Portfolio
Inc. We look forward to continuing to help you pursue your financial goals.

     Sincerely,






/s/ Heath B. McLendon             /s/ Joseph P. Deane

Heath B. McLendon                 Joseph P. Deane
Chairman                          Vice President and
                                  Investment Officer



June 30, 1998

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                                       3
<PAGE>
 
================================================================================
                             Schedule of Investments
                                  May 31, 1998
================================================================================

<TABLE>
<CAPTION>
    Face
   Amount       Ratings                     Security                       Value
===================================================================================

====================================
 MUNICIPAL BONDS AND NOTES -- 100.0%
====================================
<S>             <C>     <C>                                            <C>
California -- 12.7%
$   4,540,000   Baa3*   California Educational Facilities Authority
                          Revenue, (Pooled College & University
                          Projects), Series A, 5.625% due 7/1/23       $  4,591,075
    4,000,000   Aaa*    California Health Facilities Finance Authority
                          Revenue, Stanford Health Care, Series A,
                          5.000% due 11/15/18                             3,940,000
    1,000,000   AAA     California State Public Works Board, Lease
                          Revenue, Department of Corrections,
                          California Prison, AMBAC-Insured,
                          5.250% due 1/1/21                               1,006,250
    2,755,000   AA      California Statewide Community Development
                          Authority, COP, (St. Joseph Health System),
                          5.250% due 7/1/21                               2,751,556
    1,000,000   AAA     Campbell, CA Unified School District, GO,
                          FGIC-Insured, 5.000% due 8/1/17                   991,250
    2,000,000   AAA     Los Angeles, CA Public Works, Financing
                          Authority Lease Revenue, Multiple Capital
                          Projects, Series A, AMBAC-Insured,
                          5.125% due 6/1/17                               2,007,500
    3,300,000   A-      Los Angeles, CA Regional Airport Improvement
                          Corp., Los Angeles International Airport
                          Lease Revenue, 6.500% due 1/1/32(a)             3,436,125
                        Los Angeles County, CA Metropolitan,
                          Transportation Authority, Sales Tax Revenue,
                          MBIA-Insured:
    7,700,000   AAA          5.250% due 7/1/17                            7,834,750
    3,000,000   AAA          5.250% due 7/1/18                            3,037,500
                        Metropolitan Water District, Southern
                          California Waterworks Revenue Refunding:
                             Series A:
    3,000,000   AA             5.000% due 7/1/16                          2,985,000
    1,500,000   AA             5.000% due 7/1/18                          1,481,250
    7,500,000   AAA          Series B, MBIA-Insured, 4.750% due 7/1/21    7,106,250
    3,140,000   AAA     Rancho Mirage, CA Redevelopment Agency,
                          Tax Allocation Refunding, (1984 Project),
                          Series A, MBIA-Insured, 5.000% due 4/1/24       3,077,200
</TABLE>

                                                           See Notes to
                                                           Financial Statements.

------------------------------------[LOGO]--------------------------------------
                                       4
<PAGE>
 
================================================================================
                             Schedule of Investments
                            May 31, 1998 (continued)
================================================================================

<TABLE>
<CAPTION>
    Face
   Amount       Ratings                     Security                       Value
===================================================================================
<S>             <C>     <C>                                            <C>
California -- 12.7% (continued)
$   4,250,000   AAA     Riverside County, CA COP, (1997 Lease
                          Refunding Project), MBIA-Insured,
                          5.125% due 11/1/17                           $  4,271,250
                        Sacramento County, CA COP,
                          (Public Facilities Project):
    3,500,000   AAA          AMBAC-Insured, 4.750% due 10/1/27            3,294,375
    2,750,000   AAA          MBIA-Insured, 5.375% due 2/1/19              2,801,563
-----------------------------------------------------------------------------------
                                                                         54,612,894
-----------------------------------------------------------------------------------
Colorado -- 13.4%
                        Arapahoe County, CO Capital Improvement,
                          Public Highway Authority:
    5,270,000   AAA          E-470 Public Highway Authority, Series A,
                               MBIA-Insured, 5.000% due 9/1/21            5,151,425
    3,000,000   AAA*         Pre-Refunded -- Escrowed with U.S.
                               government securities to 8/31/05
                               Call @ 103, 7.000% due 8/31/26(b)          3,577,500
                        Colorado Health Facilities Authority Revenue:
    2,500,000   AAA       Sisters of Charity Leavenworth,
                             MBIA-Insured, 5.125% due 12/1/18             2,493,750
    3,555,000   AA        Catholic Health Initiatives, Series A,
                             5.000% due 12/1/18                           3,488,344
    2,000,000   BBB+    Colorado Springs, CO Airport Revenue,
                          Series A, 7.000% due 1/1/22(a)                  2,187,500
   60,000,000   AAA*    Dawson Ridge, CO Metropolitan District No. 1,
                          Series B, (Escrowed to Maturity with Refco
                          Strips), zero coupon due 10/1/22               16,350,000
                        Denver, CO City & County Airport Revenue,
                          Series C:
    3,155,000   Baa1*        6.750% due 11/15/22(a)(b)                    3,423,175
   10,165,000   Baa1*        6.125% due 11/15/25(a)                      10,622,425
    8,160,000   NR           Escrowed to Maturity with U.S. government
                               securities, 6.125% due 11/15/25(a)(c)      9,220,800
      845,000   AAA*         Pre-Refunded-- Escrowed with U.S.
                               government securities to 11/15/02
                               Call @ 102, 6.750% due 11/15/22(a)           944,288
-----------------------------------------------------------------------------------
                                                                         57,459,207
-----------------------------------------------------------------------------------
</TABLE>

                                                           See Notes to
                                                           Financial Statements.

------------------------------------[LOGO]--------------------------------------
                                       5
<PAGE>
 
================================================================================
                             Schedule of Investments
                            May 31, 1998 (continued)
================================================================================

<TABLE>
<CAPTION>
    Face
   Amount       Ratings                     Security                       Value
===================================================================================
<S>             <C>     <C>                                            <C>
Connecticut -- 0.3%
$   1,200,000   AA-     Connecticut State Community Development
                          Authority, Special Obligation, Series A,
                          5.550% due 12/15/15                          $  1,255,500
-----------------------------------------------------------------------------------
Florida -- 3.2%
    2,480,000   AAA     Florida State Turnpike Authority Revenue
                          Refunding, FGIC-Insured, 5.000% due 7/1/16      2,461,400
    5,000,000   BBB-    Martin County, FL IDA, (Indiantown
                          Cogeneration Project), Series A,
                          7.875% due 12/15/25(a)                          5,818,750
                        Tampa, FL Revenue Bonds,
                          (Florida Aquarium Inc. Project):
    2,800,000   NR           7.550% due 5/1/12(d)                         3,189,125
    2,000,000   NR           7.750% due 5/1/27(b)                         2,292,500
-----------------------------------------------------------------------------------
                                                                         13,761,775
-----------------------------------------------------------------------------------
Hawaii -- 0.9%
    4,010,000   AAA     Hawaii State GO, Series CP, FGIC-Insured,
                          5.000% due 10/1/15                              3,979,925
-----------------------------------------------------------------------------------
Illinois -- 1.4%
    2,000,000   AAA*    Illinois Health Facilities Authority Revenue,
                          Memorial Health Systems, MBIA-Insured,
                          5.250% due 10/1/18                              2,015,000
    4,000,000   AAA     Illinois State GO, FGIC-Insured,
                          5.250% due 12/1/20                              4,050,000
-----------------------------------------------------------------------------------
                                                                          6,065,000
-----------------------------------------------------------------------------------
Indiana -- 1.3%
    5,000,000   Aa3*    Indiana Port Commission Revenue Refunding
                          Project, (Cargill Inc. Project),
                          6.875% due 5/1/12(b)                            5,500,000
-----------------------------------------------------------------------------------
Louisiana -- 1.4%
    5,500,000   Aa3*    Saint Martin Parish, LA Industrial Revenue,
                          (Cargill Inc. Project), 6.625% due 10/1/12      6,015,625
-----------------------------------------------------------------------------------
Maryland -- 0.7%
   10,000,000   NR      Maryland State Energy Financing Administration,
                          Solid Waste Disposal Revenue, Limited
                          Obligation, (Hagerstown Project),
                          9.000% due 10/15/16(b)(e)                       3,100,000
-----------------------------------------------------------------------------------
</TABLE>

                                                           See Notes to
                                                           Financial Statements.

------------------------------------[LOGO]--------------------------------------
                                       6
<PAGE>
 
================================================================================
                             Schedule of Investments
                            May 31, 1998 (continued)
================================================================================

<TABLE>
<CAPTION>
    Face
   Amount       Ratings                     Security                       Value
===================================================================================
<S>             <C>     <C>                                            <C>

Massachusetts -- 2.7%
$   2,000,000   AAA     Massachusetts State Housing Finance Agency,
                          Housing Development, Series B,
                          MBIA-Insured, 5.300%, 12/1/17                $  2,015,000
   10,000,000   NR      Massachusetts State Industrial Finance
                          Authority, Solid Waste Disposal Revenue,
                          Massachusetts Recycling Association,
                          Series A, 9.000% due 8/1/16(b)(e)               3,750,000
                        Massachusetts State Water Resource Authority,
                          MBIA-Insured:
    4,000,000   AAA          Series B, 5.000% due 12/1/25                 3,900,000
    2,000,000   AAA          Series C, 5.250% due 12/1/20                 2,010,000
-----------------------------------------------------------------------------------
                                                                         11,675,000
-----------------------------------------------------------------------------------
Michigan -- 7.2%
    1,675,000   AA+     Michigan Municipal Bond Authority Revenue,
                          State Revolving Fund, 5.125% due 10/1/20        1,677,094
                        Michigan State Hospital Finance Authority
                          Revenue Refunding:
    2,000,000   AAA          Detriot Medical Group, Series A,
                               MBIA-Insured, 5.250% due 8/15/27           1,997,500
    1,000,000   AAA          Oakwood Obligation Group, Series A,
                               FSA-Insured, 5.000% due 8/15/18              980,000
    8,000,000   NR      Michigan State Strategic Fund Resources
                          Recovery, Limited Obligation Revenue,
                          Central Wayne Energy Recovery,
                          Series A, 7.000% due 7/1/27(a)                  8,030,000
   16,375,000   NR      Midland County, MI Education Development
                          Corp., PCR, Limited Obligation, Series B,
                          9.500% due 7/23/09(a)(b)                       18,012,500
-----------------------------------------------------------------------------------
                                                                         30,697,094
-----------------------------------------------------------------------------------
Minnesota -- 1.1%
    2,500,000   Aa3*    Duluth, MN Seaway Port Authority, IDA,
                          Dock & Wharf Revenue, (Cargill Inc. Project),
                          6.800% due 5/1/12                               2,734,375
      525,000   A2*     Minnesota State Higher Education Facilities
                          Authority Revenue, University St. Thomas
                          Education, Series 3, 5.375% due 4/1/18            532,219
    1,250,000   AA+     Minnesota State Housing Financing Agency,
                          Single-Family Mortgage, Series I,
                          5.500% due 1/1/17                               1,282,812
-----------------------------------------------------------------------------------
                                                                          4,549,406
-----------------------------------------------------------------------------------
</TABLE>

                                                           See Notes to
                                                           Financial Statements.

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                                       7
<PAGE>
 
================================================================================
                             Schedule of Investments
                            May 31, 1998 (continued)
================================================================================

<TABLE>
<CAPTION>
    Face
   Amount       Ratings                     Security                       Value
===================================================================================
<S>             <C>     <C>                                            <C>
Missouri -- 0.6%
$   1,000,000   AAA     Fenton, MO COP, Capital Improvement
                          Projects, MBIA-Insured, 5.125% due 9/1/17    $  1,001,250
    1,575,000   AAA     St. Louis, MO Board of Education, GO,
                          Missouri Direct Deposit Program, Series B,
                          FGIC-Insured, 5.000% due 4/1/16                 1,565,156
-----------------------------------------------------------------------------------
                                                                          2,566,406
-----------------------------------------------------------------------------------
Montana -- 1.9%
    8,000,000   NR      Montana State Board Investment Resource
                          Recovery, (Yellowstone Energy Project),
                          7.000% due 12/31/19                             8,130,000
-----------------------------------------------------------------------------------
New Jersey -- 2.0%
    5,200,000   A+      Hudson County, NJ Improvement Authority,
                          6.625% due 8/1/25                               5,661,500
    2,830,000   AAA     Middlesex County, NJ COP, MBIA-Insured,
                          5.200% due 6/15/18                              2,868,913
-----------------------------------------------------------------------------------
                                                                          8,530,413
-----------------------------------------------------------------------------------
New York -- 9.4%
                        Long Island Power Authority, NY Electric
                          Systems Revenue, Series A:
    8,000,000   AAA          FSA-Insured, 5.000% due 12/1/18              7,860,000
    3,000,000   A-           5.500% due 12/1/29                           3,030,000
    1,500,000   A2*     New York City Municipal Water Financing
                          Authority, Water & Sewer System Revenue,
                          Series A, 5.125% due 6/15/21                    1,483,125
    2,000,000   AAA     New York City Transitional Finance Authority
                          Revenue, Future Tax Secured, Series C,
                          FGIC-Insured, 5.000% due 5/1/17                 1,975,000
    1,090,000   AAA     New York State Dormitory Authority Lease
                          Revenue, Health Facilities Improvement
                          Program, Series A, FSA-Insured,
                          5.500% due 5/15/16                              1,137,688
                        New York State Dormitory Authority Revenue:
    1,000,000   AAA       City University Systems, Series A,
                             FGIC-Insured, 5.000% due 7/1/16                990,000
    4,000,000   AAA     Mental Health Services Facilities Improvement,
                             Series D, FSA-Insured, 5.125% due 8/15/17    4,010,000
    6,000,000   AAA       Montefiore Medical Center, AMBAC-Insured,
                             5.250% due 2/1/15                            6,097,500
    5,000,000   A-        State University Educational Facilities,
                             5.000% due 5/15/14                           4,993,750
</TABLE>

                                                           See Notes to
                                                           Financial Statements.

------------------------------------[LOGO]--------------------------------------
                                       8
<PAGE>
 
================================================================================
                             Schedule of Investments
                            May 31, 1998 (continued)
================================================================================

<TABLE>
<CAPTION>
    Face
   Amount       Ratings                     Security                       Value
===================================================================================
<S>             <C>     <C>                                            <C>
New York -- 9.4% (continued)
$   3,000,000   AAA     New York State Local Government Assistance
                          Corp. Refunding, Series B, MBIA-Insured,
                          4.875% due 4/1/20                            $  2,906,250
    1,000,000   AAA     New York State Medcare Mental Health
                          Services, FGIC-Insured, 5.250% due 2/15/19      1,003,750
    5,000,000   Aa3*    Triborough Bridge & Tunnel Authority of NY,
                          General Purpose, Series A, 5.000% due 1/1/24    4,881,250
-----------------------------------------------------------------------------------
                                                                         40,368,313
-----------------------------------------------------------------------------------
Ohio -- 4.3%
    2,000,000   AAA     Akron, OH Economic Development Revenue,
                          MBIA-Insured, 5.000% 12/1/18                    1,980,000
    1,000,000   AAA     Cleveland-Cuyahoga County, OH Port Authority
                          Revenue, Rock & Roll Hall of Fame,
                          AMBAC-Insured, 5.400% due 12/1/15               1,031,250
    6,360,000   AAA     Cuyahoga County, OH Hospital Revenue
                          Refunding, (Metrohealth System), Series A,
                          MBIA-Insured, 5.125% due 2/15/14                6,415,650
    2,000,000   AAA     Ohio State Higher Educational Facilities
                          Community Revenue, (University Dayton
                          Project), AMBAC-Insured, 5.350% due 12/1/17     2,067,500
    1,645,000   AAA     Ohio State Water Development Authority
                          Revenue, Fresh Water Series A, FSA-Insured,
                          5.000% due 6/1/16                               1,630,606
    5,320,000   AAA     Portage County, OH GO, MBIA-Insured,
                          5.250% due 12/1/17                              5,399,800
-----------------------------------------------------------------------------------
                                                                         18,524,806
-----------------------------------------------------------------------------------
Pennsylvania -- 3.3%
    1,000,000   AAA     Allegheny County, PA Airport Revenue,
                          Pittsburgh International Airport, Series B,
                          MBIA-Insured, 5.000% due 1/1/19                   982,500
    6,000,000   AAA     Altoona, PA City Authority, Water Revenue,
                          FGIC-Insured, 5.000% due 11/1/19                5,895,000
    2,865,000   Aaa*    Delaware County, PA Authority Revenue,
                          Villanova University, Series A,
                          MBIA-Insured, 5.000% due 12/1/18                2,825,606
    3,500,000   AAA     Montgomery County, PA Higher Education &
                          Health Authority Revenue, Holy Redeemer
                          Health, Series A, AMBAC-Insured,
                          5.250% due 10/1/17                              3,530,625
</TABLE>

                                                           See Notes to
                                                           Financial Statements.

------------------------------------[LOGO]--------------------------------------
                                       9
<PAGE>
 
================================================================================
                             Schedule of Investments
                            May 31, 1998 (continued)
================================================================================

<TABLE>
<CAPTION>
    Face
   Amount       Ratings                     Security                       Value
===================================================================================
<S>             <C>     <C>                                            <C>

Pennsylvania -- 3.3% (continued)
$   1,000,000   AAA     Pittsburgh, PA Water & Sewer Authority,
                          Water & Sewer System Revenue, Series C,
                          FSA-Insured, 5.000% due 9/1/17               $    988,750
-----------------------------------------------------------------------------------
                                                                         14,222,481
-----------------------------------------------------------------------------------
Puerto Rico -- 0.5%
    2,000,000   AAA     Puerto Rico Commonwealth Infrastructure
                          Financing Authority, AMBAC-Insured,
                          5.000% due 7/1/16                               2,007,500
-----------------------------------------------------------------------------------
South Carolina -- 2.4%
    4,000,000   AAA     Lexington County, SC Health Services
                          District Inc., Hospital Revenue
                          Refunding & Improvement, FSA-Insured,
                          5.250% due 11/1/17                              4,060,000
    2,000,000   A3*     Myrtle Beach, SC COP, Myrtle Beach
                          Convention Center, 6.875% due 7/1/07            2,237,500
    4,140,000   AAA     Piedmont, SC Municipal Power Agency,
                          Electric Revenue Refunding, Series A,
                          MBIA-Insured, 4.875% due 1/1/16                 4,026,150
-----------------------------------------------------------------------------------
                                                                         10,323,650
-----------------------------------------------------------------------------------
Tennessee -- 0.3%
    1,150,000   NR      Hardeman County, TN Correctional Facilities
                          Corp., 7.750% due 8/1/17                        1,288,000
-----------------------------------------------------------------------------------
Texas -- 13.7%
    1,000,000   Aaa*    Amarillo, TX Health Facilities Corp.,
                          Baptist St. Anthony's Hospital Corp.,
                          FSA-Insured, 5.000%, due 1/1/22                   968,750
    3,990,000   Aaa*    Azle, TX ISD, GO, PSFG, Series C,
                          5.000% due 2/15/22                              3,910,200
    2,000,000   AAA     Bexar County, TX Health Facilities Development
                          Corp. Revenue, Baptist Health Systems,
                          Series A, MBIA-Insured, 5.250% due 11/15/27     2,000,000
    2,000,000   AAA     Brownsville, TX Utility Systems Revenue,
                          AMBAC-Insured, 5.250% due 9/1/20                2,012,500
                        Burleson, TX ISD GO, PSFG:
    1,160,000   Aaa*      6.750% due 8/1/24                               1,302,100
    2,840,000   NR        Pre-Refunded-- Escrowed with
                             U.S. government securities to 8/1/06
                             Call @ 100, 6.750% due 8/1/24(c)             3,305,050
</TABLE>

                                                           See Notes to
                                                           Financial Statements.

------------------------------------[LOGO]--------------------------------------
                                      10
<PAGE>
 
================================================================================
                             Schedule of Investments
                            May 31, 1998 (continued)
================================================================================

<TABLE>
<CAPTION>
    Face
   Amount       Ratings                     Security                       Value
===================================================================================
<S>             <C>     <C>                                            <C>
Texas -- 13.7% (continued)
$   2,960,000   AA-     Fort Worth, TX Higher Education Financing
                          Corp., Higher Education Revenue,
                          (Texas Christian University Project),
                          5.000% due 3/15/14                           $  2,960,000
    1,000,000   AA      Harris County, TX Health Facilities
                          Development Corp. Revenue, School Health
                          Care Systems, Series B, 5.750% due 7/1/27       1,047,500
                        Harris County, TX Toll Road, GO:
    8,000,000   AAA       Sr. Lien, FGIC-Insured, 5.375% due 8/15/20      8,120,000
    5,185,000   AA        Sub. Lien, 5.125% due 8/15/16                   5,210,925
    2,000,000   AAA     Leander, TX ISD, GO, PSFG,
                          5.625% due 8/15/18                              2,040,840
    2,670,000   AAA     Manor, TX ISD, GO, Refunding, PSFG,
                          5.000% due 8/1/17                               2,636,625
    2,000,000   AAA     Nueces River Authority, Texas Water Supply
                          Facilities, FSA-Insured, 5.500% due 3/1/27      2,057,500
    2,975,000   AAA     Springtown, TX ISD, GO, Refunding, PSFG,
                          5.000% due 2/15/18                              2,934,094
                        Texas Water Development Board Revenue,
                          State Revolving Fund, Sr. Lien, Series B:
    3,000,000   AAA          5.000% due 7/15/14                           3,026,250
    1,000,000   AAA          5.000% due 7/15/15                           1,005,000
    5,000,000   AAA          5.000% due 7/15/16                           5,012,500
    8,000,000   AAA          5.000% due 7/15/19                           7,940,000
    1,510,000   AAA     West Texas Municipal Power Agency Revenue,
                          MBIA-Insured, 5.000% due 2/15/15                1,496,788
-----------------------------------------------------------------------------------
                                                                         58,986,622
-----------------------------------------------------------------------------------
Utah -- 0.9%
    4,000,000   A+      Intermountain Power Agency, Utah Power
                          Supply Revenue Refunding, Series D,
                          5.000% due 7/1/21                               3,905,000
-----------------------------------------------------------------------------------
Virginia -- 3.8%
    4,700,000   A2*     Harrisonburg, VA Redevelopment & Housing
                          Authority, (Jail & Courthouse Project), Public
                          Facilities Lease Revenue, 6.500% due 9/1/14     4,935,000
                        Virginia College Building Authority, Virginia
                          Educational Facilities Revenue,
                          21st Century College Program:
    3,590,000   AA           5.250% due 8/1/13                            3,702,187
    3,805,000   AA           5.250% due 8/1/14                            3,909,637
</TABLE>

                                                           See Notes to
                                                           Financial Statements.

------------------------------------[LOGO]--------------------------------------
                                      11
<PAGE>
 
================================================================================
                             Schedule of Investments
                            May 31, 1998 (continued)
================================================================================

<TABLE>
<CAPTION>
    Face
   Amount       Ratings                     Security                       Value
===================================================================================
<S>             <C>     <C>                                            <C>
Virginia -- 3.8% (continued)
                        Virginia State HDA, Multi-Family Housing:
$   1,655,000   AA+       Series D, 6.250% due 1/1/15                  $  1,779,125
    1,235,000   AAA       Series H, AMBAC-Insured,
                             6.300% due 11/1/15                           1,330,712
      600,000   AA+       Series K, 5.800% due 11/1/10                      645,000
-----------------------------------------------------------------------------------
                                                                         16,301,661
-----------------------------------------------------------------------------------
Virgin Islands -- 0.2%
    1,000,000   BBB     Virgin Islands Public Finance Authority
                          Revenue, Senior Lien, Series A,
                          5.500% due 10/1/22                              1,013,750
-----------------------------------------------------------------------------------
Washington -- 7.2%
                        Chelan County, WA GO, Public Utilities,
                          District No. 1, Columbus River Rock:
                             MBIA-Insured, Series A:
   20,685,000   AAA            Zero coupon due 6/1/21                     6,257,213
   22,685,000   AAA            Zero coupon due 6/1/22                     6,521,938
    4,750,000   AA           Series B, Remarketed 7/1/92, Mandatory
                               put 7/1/19, 6.750% due 7/1/62(a)(b)        5,052,812
   10,550,000   AA-     Washington State Health Care Facilities,
                          Authority Revenue, Sisters of Providence
                          Hospital, 7.875% due 10/1/10(b)                11,248,937
    2,000,000   AAA     Washington State Public Power Supply System,
                          Project Number 2, Series A, FSA-Insured,
                          5.125% due 7/1/11                               2,040,000
-----------------------------------------------------------------------------------
                                                                         31,120,900
-----------------------------------------------------------------------------------
West Virginia -- 1.2%
                        Marion County, WV Community Solid
                          Waste Disposal Facilities Revenue,
                          Adirondack Recycling:
    4,525,174   NR           Series A, 8.000% due 12/1/25                 4,525,174
      632,431   NR           Series B, 10.000% due 12/1/25                  632,431
-----------------------------------------------------------------------------------
                                                                          5,157,605
-----------------------------------------------------------------------------------
Wisconsin -- 2.0%
    4,070,000   AA      Wisconsin State GO, Series B, 6.600%
                          due 1/1/22(a)                                   4,375,250
</TABLE>

                                                           See Notes to
                                                           Financial Statements.

------------------------------------[LOGO]--------------------------------------
                                      12
<PAGE>
 
================================================================================
                             Schedule of Investments
                            May 31, 1998 (continued)
================================================================================

<TABLE>
<CAPTION>
    Face
   Amount       Ratings                     Security                       Value
===================================================================================
<S>             <C>     <C>                                            <C>
Wisconsin -- 2.0% (continued)
                        Wisconsin State Health & Educational
                          Facilities Authority Revenue, MBIA-Insured:
$   3,000,000   AAA          Aurora Health Care Inc.,
                               5.250% due 8/15/17                      $  3,041,250
    1,000,000   AAA          The Medical College of Wisconsin Inc.
                               Project, 5.400% due 12/1/16                1,025,000
-----------------------------------------------------------------------------------
                                                                          8,441,500
-----------------------------------------------------------------------------------
                        TOTAL INVESTMENTS -- 100%
                        (COST -- $415,044,410**)                       $429,560,033
                                                                       ============
-----------------------------------------------------------------------------------
</TABLE>

(a)  Income from this issue is considered a preference item for purposes of
     calculating the alternative minimum tax.

(b)  Security segregated by Custodian for open purchase commitments.

(c)  Pre-Refunded bonds escrowed by U.S. government securities and bonds
     escrowed to maturity by U.S. government securities are considered by
     manager to be triple-A rated even if issuer has not applied for new
     ratings.

(d)  Security partially segregated by Custodian for futures contracts
     commitments.

(e)  Security is in default.

**   Aggregate cost for Federal income tax purposes is substantially the same.

     See pages 14 and 15 for definition of ratings and certain security
     descriptions.

================================================================================
                   Summary of Investments by Combined Ratings
                                  May 31, 1998
================================================================================

<TABLE>
<CAPTION>
================================================================================
                                                               Percentage of
     Moody's       and/or         Standard & Poor's          Total Investments
================================================================================
<S>                                       <C>                        <C>  
       Aaa                                AAA                        54.1%
       Aa                                 AA                         17.2
        A                                  A                          7.0
       Baa                                BBB                         6.4
       NR                                 NR                         15.3
                                                                    -----
                                                                    100.0%
                                                                    ===== 
================================================================================
</TABLE>

                                                           See Notes to
                                                           Financial Statements.

------------------------------------[LOGO]--------------------------------------
                                      13
<PAGE>
 
================================================================================
                                  Bond Ratings
                                   (unaudited)
================================================================================

All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's"),
except those identified by an asterisk (*) which 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 "AA" to "BBB" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standings within the major
rating categories.

AAA   -- Bonds rated "AAA" have the highest rating assigned by Standard &
         Poor's. Capacity to pay interest and repay principal is extremely
         strong.

AA    -- Bonds rated "AA" have a very strong capacity to pay interest and
         repay principal and differs from the highest rated issue only in a
         small degree.

A     -- Bonds rated "A" have a strong capacity to pay interest and repay
         principal although it is somewhat more susceptible to the adverse
         effects of changes in circumstances and economic conditions than debt
         in higher rated categories.

BBB   -- Bonds rated "BBB" are regarded as having an adequate capacity to pay
         interest and repay principal. Whereas they normally exhibit adequate
         protection parameters, adverse economic conditions or changing
         circumstances are more likely to lead to a weakened capacity to pay
         interest and repay principal for bonds in this category than in higher
         rated categories.

Moody's -- Numerical modifiers 1, 2 and 3 may be applied to each generic rating
from "Aa" to "Baa," where 1 is the highest and 3 the lowest ranking within its
generic category.

Aaa   -- Bonds rated "Aaa" are judged to be of the best quality. They carry
         the smallest degree of investment risk and are generally referred to as
         "gilt edge." Interest payments are protected by a large or by an
         exceptionally stable margin and principal is secure. While the various
         protective elements are likely to change, such changes as can be
         visualized are most unlikely to impair the fundamentally strong
         position of such issues.

Aa    -- Bonds rated "Aa" are judged to be of high quality by all standards.
         Together with the "Aaa" group they comprise what are generally known as
         high grade bonds. They are rated lower than the best bonds because
         margins of protection may not be as large in "Aaa" securities or
         fluctuation of protective elements may be of greater amplitude or there
         may be other elements present which make the long-term risks appear
         somewhat larger than in "Aaa" securities.

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

Baa   -- Bonds rated "Baa" are considered as medium grade obligations, i.e.,
         they are neither highly protected nor poorly secured. Interest payments
         and principal security appear adequate for the present but certain
         protective elements may be lacking or may be characteristically
         unreliable over any great length of time. Such bonds lack outstanding
         investment characteristics and in fact have speculative characteristics
         as well.

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


------------------------------------[LOGO]--------------------------------------
                                      14
<PAGE>
 
================================================================================
                           Short-Term Security Ratings
                                   (unaudited)
================================================================================

SP-1  -- Standard & Poor's highest rating indicating very strong or strong
         capacity to pay principal and interest; those issues determined to
         possess overwhelming safety characteristics are denoted with a plus (+)
         sign.

A-1   -- Standard & Poor's highest commercial paper and variable-rate demand
         obligation (VRDO) rating indicating that the degree of safety regarding
         timely payment is either overwhelming or very strong; those issues
         determined to possess overwhelming safety characteristics are denoted
         with a plus (+) sign.

VMIG 1-- Moody's highest rating for issues having a demand feature -- VRDO.

P-1   -- Moody's highest rating for commercial paper and for VRDO prior to
         the advent of the VMIG 1 rating.


================================================================================
                              Security Descriptions
                                   (unaudited)
================================================================================

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

------------------------------------[LOGO]--------------------------------------
                                      15
<PAGE>
 
<TABLE>
===============================================================================
                       Statement of Assets and Liabilities
===============================================================================

<CAPTION>
                                                                   May 31, 1998
===============================================================================
<S>                                                                <C>
ASSETS:
   Investments, at value (Cost-- $415,044,410)                     $429,560,033
   Interest receivable                                                6,390,940
-------------------------------------------------------------------------------
   Total Assets                                                     435,950,973
-------------------------------------------------------------------------------
LIABILiTIES:
   Payable for securities purchased                                   5,905,016
   Dividends payable                                                    783,996
   Payable to bank                                                      720,121
   Investment advisory fees payable                                     243,774
   Administration fees payable                                           70,586
   Accrued expenses                                                      75,853
-------------------------------------------------------------------------------
   Total Liabilities                                                  7,799,346
-------------------------------------------------------------------------------
Total Net Assets                                                   $428,151,627
===============================================================================

NET ASSETS:
   Par value of capital shares                                     $     34,607
   Capital paid in excess of par value                              413,576,918
   Overdistributed net investment income                               (800,035)
   Accumulated net realized gain from
     security transactions and futures contracts                        824,514
   Net unrealized appreciation of investments                        14,515,623
-------------------------------------------------------------------------------
TOTAL NEt ASSETS
   (Equivalent to $12.37 per share on 34,606,953 shares of $0.001
     par value outstanding: 500,000,000 shares authorized)         $428,151,627
===============================================================================
</TABLE>

                                                           See Notes to
                                                           Financial Statements.

------------------------------------[LOGO]--------------------------------------
                                      16
<PAGE>
 
================================================================================
                             Statement of Operations
================================================================================

<TABLE>
<CAPTION>
                                                                      Year
                                                                      Ended
                                                                     5/31/98
===============================================================================
<S>                                                                <C>
INVESTMENT INCOME:
   Interest                                                        $ 22,738,512
-------------------------------------------------------------------------------
EXPENSES:
   Investment advisory fees (Note 3)                                  2,969,275
   Administration fees (Note 3)                                         848,364
   Shareholder communications                                           218,605
   Audit and legal                                                       55,614
   Directors' fees                                                       41,873
   Registration fees                                                     32,174
   Shareholder and system servicing fees                                 20,039
   Custody                                                               19,043
   Pricing service fees                                                  14,284
   Other                                                                 10,270
-------------------------------------------------------------------------------
   Total Expenses                                                     4,229,541
-------------------------------------------------------------------------------
Net Investment Income                                                18,508,971
-------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FUTURES CONTRACtS (NOTES 4 AND 5):
   Realized Gain (Loss) From:
     Security transactions (excluding short-term securities)          7,600,057
     Futures contracts                                                  (53,000)
-------------------------------------------------------------------------------
   Net Realized Gain                                                  7,547,057
-------------------------------------------------------------------------------
   Change in Net Unrealized Appreciation (Depreciation)
   of Investments:
     Beginning of year                                               (6,878,902)
     End of year                                                     14,515,623
-------------------------------------------------------------------------------
   Increase in Net Unrealized Appreciation                           21,394,525
-------------------------------------------------------------------------------
Net Gain on Investments and Futures Contracts                        28,941,582
-------------------------------------------------------------------------------
Increase in Net Assets From Operations                             $ 47,450,553
===============================================================================
</TABLE>


                                                           See Notes to
                                                           Financial Statements.

------------------------------------[LOGO]--------------------------------------
                                      17
<PAGE>
 
================================================================================
                       Statements of Changes in Net Assets
================================================================================

<TABLE>
<CAPTION>
                                                  Year Ended         Year Ended
                                                    5/31/98           5/31/97
===============================================================================
<S>                                              <C>               <C>
OPERATIONS:
   Net investment income                         $ 18,508,971      $ 23,131,200
   Net realized gain                                7,547,057         8,491,422
   Increase (decrease) in net
     unrealized appreciation                       21,394,525        (5,938,398)
-------------------------------------------------------------------------------
   Increase in Net Assets From Operations          47,450,553        25,684,224
-------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NoTE 2):
   Net investment income                          (20,844,655)      (22,772,196)
   Net realized gains                             (10,411,885)      (10,177,035)
-------------------------------------------------------------------------------
   Decrease in Net Assets From
     Distributions to Shareholders                (31,256,540)      (32,949,231)
-------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
   Net asset value of shares issued
     for reinvestment of dividends                    671,821           626,322
-------------------------------------------------------------------------------
   Increase in Net Assets From
     Fund Share Transactions                          671,821           626,322
-------------------------------------------------------------------------------
Increase (Decrease) in Net Assets                  16,865,834        (6,638,685)
NET ASSETS:
   Beginning of year                              411,285,793       417,924,478
-------------------------------------------------------------------------------
   End of year*                                  $428,151,627      $411,285,793
===============================================================================
* Includes undistributed (overdistributed) net
    investment income of:                        $   (800,035)     $  1,535,649
===============================================================================
</TABLE>

                                                           See Notes to
                                                           Financial Statements.

------------------------------------[LOGO]--------------------------------------
                                      18
<PAGE>
 
================================================================================
                          Notes to Financial Statements
================================================================================

     1. Significant Accounting Policies

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

     The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) securities are
valued at the mean between bid and ask prices provided by an independent pricing
service that are based on transactions in municipal obligations, quotations from
municipal bond dealers, market transactions in comparable securities and various
relationships between securities; (c) securities maturing within 60 days or less
are valued at cost plus accreted discount, or minus amortized premium, which
approximates value; (d) gains or losses on sale of securities are calculated by
using the specific identification method; (e) interest income, adjusted for
amortization of premium and accretion of original issue discount, is recorded on
an accrual basis; market discount is recognized upon the disposition of the
security; (f) dividends and distributions to shareholders are recorded on the
ex-dividend date; (g) the Fund intends to comply with the applicable provisions
of the Internal Revenue Code of 1986, as amended, pertaining to regulated
investment companies and to make distributions of taxable income sufficient to
relieve it from substantially all Federal income and excise taxes; (h) the
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. At May 31, 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; and (i) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.

     2. Exempt-Interest Dividends and Other Distributions

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

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

------------------------------------[LOGO]--------------------------------------
                                      19
<PAGE>
 
================================================================================
                          Notes to Financial Statements
                                   (continued)
================================================================================

     3. Investment Advisory Agreement, Administration Agreement and Other
        Transactions

     Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), acts as investment adviser to the Fund. The Fund pays
MMC a fee calculated at an annual rate of 0.70% of the average daily net assets
of the Fund. 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.

     4. Investments

     For the year ended May 31, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:

<TABLE>
================================================================================
<S>                                                               <C>         
Purchases                                                         $376,023,101
--------------------------------------------------------------------------------
Sales                                                              390,066,877
================================================================================
</TABLE>

     At May 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:

<TABLE>
================================================================================
<S>                                                                <C>         
Gross unrealized appreciation                                      $ 27,665,623
Gross unrealized depreciation                                       (13,150,000)
--------------------------------------------------------------------------------
Net unrealized appreciation                                         $14,515,623
================================================================================
</TABLE>


     5. 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 contracts. 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, 

------------------------------------[LOGO]--------------------------------------
                                      20
<PAGE>
 
================================================================================
                          Notes to Financial Statements
                                   (continued)
================================================================================

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.

     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 May 31, 1998, the Fund had no open futures contracts.

     6. Capital Shares

     During the year ended May 31, 1998, capital stock transactions were as
follows:

<TABLE>
<CAPTION>
                                          1998                    1997
                                   -------------------    --------------------  
                                   Shares      Amount     Shares      Amount
================================================================================
<S>                                <C>        <C>         <C>        <C>     
Shares issued on reinvestment      54,539     $671,821    53,994     $626,322
================================================================================
</TABLE>


     7. Securities Traded on a When-Issued Basis

     In a when issued transaction, the Fund commits to purchasing securities for
which specific information is not yet known at the time of the trade. Securities
purchased on a when-issued basis are not settled until they are delivered to the
Fund. Beginning on the date the Fund enters into the when-issued transaction,
the custodian maintains cash, U.S. government securities or other liquid high
grade debt obligations in a segregated account equal in value to the purchase
price of the when-issued security. These transactions are subject to market
fluctuations and their current value is determined in the same manner as for
other securities.

     At May 31, 1998, the Fund held three when-issued securities with a total
cost of $5,905,017.

------------------------------------[LOGO]--------------------------------------
                                      21
<PAGE>
 
================================================================================
                              Financial Highlights
================================================================================

For a share of capital stock outstanding throughout each year:

<TABLE>
<CAPTION>
                                         1998        1997       1996        1995        1994
==============================================================================================
<S>                                    <C>         <C>         <C>         <C>         <C>      
Net Asset Value, Beginning of Year     $ 11.90     $ 12.11     $ 12.55     $ 12.26     $ 13.00
----------------------------------------------------------------------------------------------
Income From Operations:
   Net investment income                  0.54        0.67        0.67        0.72        0.67
   Net realized and
     unrealized gain (loss)               0.83        0.08       (0.35)       0.49       (0.23)
----------------------------------------------------------------------------------------------
Total Income
   From Operations                        1.37        0.75        0.32        1.21        0.44
----------------------------------------------------------------------------------------------
Less Distributions From:
   Net investment income                 (0.61)      (0.66)      (0.75)      (0.67)      (0.67)
   Net realized gains                    (0.29)      (0.30)      (0.01)      (0.25)      (0.51)
----------------------------------------------------------------------------------------------
Total Distributions                      (0.90)      (0.96)      (0.76)      (0.92)      (1.18)
----------------------------------------------------------------------------------------------
Net Asset Value, End of Year           $ 12.37     $ 11.90     $ 12.11     $ 12.55     $ 12.26
----------------------------------------------------------------------------------------------
Total Return, Based on Market Value*      2.08%       7.89%       8.26%       8.40%       2.98%
----------------------------------------------------------------------------------------------
Total Return, Based on
   Net Asset Value*                      12.14%       6.59%       2.79%      10.96%       3.45%
----------------------------------------------------------------------------------------------
Net Assets, End of Year (millions)     $   428     $   411     $   418     $   433     $   423
----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
   Expenses                               0.99%       1.00%       1.00%       1.02%       1.00%
   Net investment income                  4.35        5.56        5.35        5.97        5.15
----------------------------------------------------------------------------------------------
Portfolio Turnover Rate                     87%        113%         45%         93%         72%
----------------------------------------------------------------------------------------------
Market Value, End of Year              $11.000     $11.625     $11.690     $11.500     $11.500
==============================================================================================
</TABLE>

*    The total return calculation assumes that dividends are reinvested in
     accordance with the Fund's dividend reinvestment plan.


------------------------------------[LOGO]--------------------------------------
                                      22
<PAGE>
 
================================================================================
                          Independent Auditors' Report
================================================================================

The Shareholders and Board of Directors of
Managed Municipals Portfolio Inc.

     We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Managed Municipals Portfolio Inc.
as of May 31, 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 each of the years in the
two-year period ended May 31, 1995 were audited by other auditors whose report
thereon, dated July 12, 1995, expressed an unqualified opinion on 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 May
31, 1998 by correspondence with the custodian. As to securities purchased but
not yet received, we performed other appropriate auditing 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 the
Managed Municipals Portfolio Inc. as of May 31, 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
July 15, 1998


------------------------------------[LOGO]--------------------------------------
                                      23
<PAGE>
 
================================================================================
                         Quarterly Results of Operations
                                   (unaudited)
================================================================================

<TABLE>
<CAPTION>
                                                                             Net Realized and                 Net Increase
                                                                                Unrealized                    (Decrease) in
                        Investment              Net Investment                Gain (Loss) on                 Net Assets From
                          Income                    Income                     Investments                     Operations
                -------------------------------------------------------------------------------------------------------------------
                                  Per                       Per                             Per                            Per
Quarter Ended       Total        Share       Total         Share          Total            Share           Total          Share
===================================================================================================================================
<S>             <C>              <C>      <C>              <C>        <C>                 <C>           <C>               <C>     
August 31,
  1995          $6,836,154       $0.20    $5,726,578       $0.17      $ (4,006,671)       $(0.12)      $  1,719,907       $ 0.05
November 30,                                                                                                             
  1995           6,832,879        0.20     5,725,758        0.17         9,842,182          0.29         15,567,940         0.45
February 29,                                                                                                             
  1996           6,815,655        0.19     5,690,615        0.16          (268,190)        (0.01)         5,422,425         0.16
May 31,                                                                                                                  
  1996           6,848,128        0.20     5,871,300        0.17       (17,496,145)        (0.51)       (11,624,845)       (0.34)
August 31,                                                                                                               
  1996           7,112,514        0.21     6,061,372        0.18        (2,945,507)        (0.09)         3,115,865         0.09
November 30,                                                                                                             
  1996           6,873,415        0.20     5,826,055        0.17        17,188,697          0.50         23,014,752         0.67
February 28,                                                                                                             
  1997           6,706,752        0.19     5,680,888        0.16        (9,381,274)        (0.27)        (3,700,386)       (0.11)
May 31,                                                                                                                  
  1997           6,582,277        0.19     5,562,885        0.16        (2,308,892)        (0.06)         3,253,993         0.10
August 31,                                                                                                               
  1997           5,809,421        0.17     4,751,757        0.14        11,642,588          0.34         16,394,345         0.48
November 30,                                                                                                             
  1997           5,571,655        0.16     4,540,883        0.13         9,907,664          0.29         14,448,547         0.42
February 28,                                                                                                             
  1998           5,677,656        0.16     4,609,822        0.13         7,399,266          0.21         12,009,088         0.34
May 31,                                                                                                                  
  1998           5,679,780        0.16     4,606,509        0.13            (7,936)        (0.00)         4,598,573         0.13
====================================================================================================================================
</TABLE>


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                                      24
<PAGE>
 
================================================================================
                                 Financial Data
                                   (unaudited)
================================================================================


For a share of capital stock outstanding throughout each period:

<TABLE>
<CAPTION>
                                 NYSE           Net                      Dividend
  Record       Payable          Closing        Asset       Dividend    Reinvestment
   Date          Date           Price+        Value+         Paid          Price
====================================================================================
<S>            <C>             <C>            <C>           <C>           <C>
  6/23/95       6/30/95        $11.625        $12.49        $0.064        $11.86
  7/26/95       7/31/95         11.750         12.33         0.064         11.84
  8/22/95       8/25/95         11.750         12.20         0.064         11.90
  9/26/95       9/29/95         11.750         12.38         0.064         11.87
 10/24/95      10/27/95         11.750         12.46         0.064         11.92
 11/20/95      11/24/95         11.875         12.59         0.064         11.99
 12/26/95      12/29/95         12.125         12.69         0.064         12.30
  1/23/96       1/26/96         12.500         12.66         0.064         12.51
  2/20/96       2/23/96         12.250         12.68         0.064         12.14
  3/26/96       3/29/96         11.750         12.43         0.060         11.61
  4/23/96       4/26/96         11.250         12.24         0.060         11.53
  5/28/96       5/31/96         11.813         12.25         0.060         11.65
  6/25/96       6/28/96         11.500         12.05         0.060         11.49
  7/23/96       7/26/96         11.875         12.05         0.060         11.87
  8/27/96       8/30/96         11.688         12.12         0.060         11.72
  9/24/96       9/27/96         11.625         12.13         0.060         11.64
 10/22/96      10/25/96         11.625         12.23         0.060         11.57
 11/25/96      11/29/96         11.500         12.44         0.060         11.57
 12/23/96*     12/27/96         11.375         12.12         0.295         11.73
  1/28/97       1/31/97         11.625         11.88         0.060         11.75
  2/25/97       2/28/97         11.750         12.07         0.060         11.78
  3/24/97       3/27/97         11.500         11.73         0.060         11.53
  4/22/97       4/25/97         11.563         11.60         0.060         11.57
  5/27/97       5/30/97         11.375         11.82         0.060         11.68
  6/24/97       6/27/97         11.750         12.06         0.060         11.98
  7/22/97       7/25/97         12.000         12.43         0.060         12.08
  8/26/97       8/29/97         11.750         12.17         0.060         11.83
  9/23/97       9/26/97         11.750         12.30         0.056         11.91
 10/28/97      10/31/97         11.375         12.33         0.056         11.60
 11/24/97      11/28/97         11.563         12.41         0.056         11.64
 12/22/97*     12/26/97         11.625         12.39         0.294         12.24
  1/27/98       1/30/98         11.938         12.41         0.056         12.04
  2/24/98       2/27/98         11.938         12.39         0.056         11.60
  3/24/98       3/27/98         11.125         12.36         0.050         11.34
  4/21/98       4/24/98         11.1875        12.23         0.050         11.10
  5/26/98       5/29/98         10.875         12.34         0.050         11.15
====================================================================================
</TABLE>

+    As of record date.

*    Capital gain distribution.


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                                      25
<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 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.

     The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. 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 date of valuation, Plan participants will be
issued shares of Common Stock at a price equal to the greater of net asset value
most recently determined as described below under "Net Asset Value" or 95% of
the market price of the Common Stock.

     If the market price of the Common Stock is less than the net asset value of
the Common Stock at the time of valuation, or if the Fund declares a dividend or
capital gains distribution payable only in cash, First Data will buy Common
Stock in the open market, on the New York Stock Exchange or elsewhere, for the
participant accounts. If following the commencement of the purchases and before
First Data has completed its purchases, the market price exceeds the net asset
value of the Common Stock, First Data will attempt to terminate purchases in the
open market and cause the Fund to issue the remaining portion of the dividend or
distribution in shares at a price equal to the greater of (a) net asset value or
(b) 95% of the then current market price. In this case, the number of shares
received by a Plan participant will be based on the weighted average of prices
paid for shares purchased in the open market and the price at which the Fund
issues the remaining shares. To the extent First Data is unable to stop open
market purchases and cause the Fund to issue the remaining shares, 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. First Data will begin to purchase Common Stock
on the open market as soon as practicable after the payment date of the dividend
or capital gains distribution, but in no event shall such purchases continue
later than 30 days after that date, except when necessary to comply with
applicable provisions of the federal securities laws.


------------------------------------[LOGO]--------------------------------------
                                      26
<PAGE>
 
================================================================================
                           Dividend Reinvestment Plan
                             (unaudited) (continued)
================================================================================

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

     Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions under the Plan. 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 under the Plan. Each Plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to any open
market purchases made under the Plan.

     Experience under the Plan may indicate that changes to it are desirable.
The Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by 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 1-800-331-1710.

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

     Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time the Fund may purchase
shares of its common stock in the open market.



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                                      27
<PAGE>
 
================================================================================
                                 Tax Information
                                   (unaudited)
================================================================================

     For Federal tax purposes the Fund hereby designates for the fiscal year
ended May 31, 1998:

     o    99.81% of the dividends paid by the fund from net investment income as
          tax exempt for regular Federal income tax purposes.

     o    The Taxpayer Relief Act of 1997 enacted differing rates of tax on
          various long-term capital gain transactions. As a result, the Fund
          designates:

          o    Total long-term capital gain distributions paid of $4,645,941.
               $3,054,118 are considered "28 percent rate gains".
               $1,591,823 are considered "20 percent rate gains".


  
------------------------------------[LOGO]--------------------------------------
                                      28
<PAGE>
 
                               Managed Municipals
                                 Portfolio Inc.


Directors                            Investment Adviser and Administrator  
Allan J. Bloostein                   Mutual Management Corp.               
Martin Brody                         388 Greenwich Street                  
Dwight B. Crane                      New York, New York 10013              
Robert A. Frankel                                                          
William R. Hutchinson                Transfer Agent                        
Heath B. McLendon, Chairman          First Data Investor Services          
                                      Group, Inc.                          
Charles F. Barber, Emeritus          P.O. Box 8030                         
                                     Boston, Massachusetts 02266           
Officers                                                                   
Heath B. McLendon                    Custodian                             
President and                        PNC Bank, N.A.                        
Chief Executive Officer              17th & Chestnut Streets               
                                     Philadelphia, Pennsylvania 19103      
Lewis E. Daidone                                                           
Senior Vice President                
and Treasurer

Joseph P. Deane
Vice President and
Investment Officer

David Fare
Investment Officer

Thomas M. Reynolds
Controller

Christina T. Sydor
Secretary