As filed with the Securities and Exchange Commission on January 9, 2004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file Number: 811-3802
NEUBERGER BERMAN INCOME FUNDS
-----------------------------
(Exact Name of the Registrant as Specified in Charter)
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
(Address of Principal Executive Offices - Zip Code)
Registrant's Telephone Number, including area code: (212) 476-8800
Peter E. Sundman, Chief Executive Officer
Neuberger Berman Income Funds
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Arthur Delibert, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
(Names and Addresses of agents for service)
Date of fiscal year end: October 31, 2003
Date of reporting period: October 31, 2003
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO SHAREHOLDERS
ANNUAL REPORT
OCTOBER 31, 2003
[NEUBERGER BERMAN LOGO]
A LEHMAN BROTHERS COMPANY
NEUBERGER BERMAN
INCOME FUNDS
INVESTOR CLASS SHARES
TRUST CLASS SHARES
CASH RESERVES
GOVERNMENT MONEY FUND
HIGH INCOME BOND FUND
LIMITED MATURITY BOND FUND
MUNICIPAL MONEY FUND
MUNICIPAL SECURITIES TRUST
<Page>
CONTENTS
THE FUNDS
<Table>
CHAIRMAN'S LETTER 2
PORTFOLIO COMMENTARY/ GROWTH OF A DOLLAR CHARTS
Limited Maturity Bond Fund 4
High Income Bond Fund 6
Municipal Securities Trust 8
Municipal Money Fund 10
Cash Reserves 11
Government Money Fund 12
SCHEDULE OF INVESTMENTS
Cash Reserves 15
Government Money Fund 17
High Income Bond Fund 18
Limited Maturity Bond Fund 24
Municipal Money Fund 27
Municipal Securities Trust 35
FINANCIAL STATEMENTS 40
FINANCIAL HIGHLIGHTS (ALL CLASSES) PER SHARE DATA
Cash Reserves 56
Government Money Fund 57
High Income Bond Fund 58
Limited Maturity Bond Fund 59
Municipal Money Fund 60
Municipal Securities Trust 61
REPORT OF INDEPENDENT AUDITORS 64
DIRECTORY 65
TRUSTEES AND OFFICERS 66
</Table>
"Neuberger Berman" and the Neuberger Berman logo are service marks of Neuberger
Berman, LLC. "Neuberger Berman Management Inc." and the individual fund names in
this shareholder report are either service marks or registered service marks of
Neuberger Berman Management Inc. (C)2003 Neuberger Berman Management Inc. All
rights reserved.
1
<Page>
[PHOTO OF PETER SUNDMAN]
CHAIRMAN'S LETTER
Dear Fellow Shareholder,
After a three-year bull market in bonds, we entered fiscal 2003 in a somewhat
cautious frame of mind. The economy appeared to have bottomed, and although
leading economic indices were mixed, we recognized the potential for an economic
recovery vigorous enough to put upward pressure on interest rates and downward
pressure on bond prices.
Throughout the first half of the fiscal year, bonds bounced around in response
to mixed signals on the economy. Behaving quite normally, bonds rallied on bad
news and retreated on good news. Then in the summer, bonds sailed into "a
perfect storm." The stock market, which began advancing in mid-March, started
siphoning more money out of the bond market. More consistently encouraging
economic news caused interest rates to spike. Finally, the U.S. Treasury
announced it would substantially increase the issuance of bonds to help finance
the growing federal budget deficit. Increasing supply combined with softening
demand put pressure on Treasuries prices. All these forces converged in July and
bonds had their worst single month since 1981. Although bonds rebounded in
August and September, they fell again in October, as more good economic news was
released.
In this environment, corporate bonds, especially high-yield corporates,
outperformed all other sectors. Like all fixed-income securities, corporate
bonds are subject to interest rate risk. However, in the early stages of
economic recoveries, corporates benefit as credit quality improves along with
the economy. Although credit spreads (the spread between higher-and lower-rated
bonds) narrowed considerably in fiscal 2003, corporate bonds maintained a
meaningful yield advantage over Treasuries.
Looking back, our caution was clearly warranted. The conservative strategies we
employed helped preserve shareholder capital during the summer months when bond
market volatility punished more aggressive investors. I am pleased to report
that all of our fixed-income funds had shortened their portfolio duration (the
standard measure of interest rate risk) in time to reduce the damage inflicted
when interest rates spiked in July.
2
<Page>
NEUBERGER BERMAN OCTOBER 31, 2003
Looking ahead, we believe there are good reasons to remain cautious. Calendar
third-quarter Gross Domestic Product (GDP) growth came in at a phenomenally
strong 8.2% and fourth-quarter GDP growth may also be impressive. At issue is
how vibrant the economy will be in 2004. The economic optimists believe consumer
spending will remain strong as more Americans come back to work, and that
capital spending, which has been trending higher, will accelerate. The
pessimists argue that strong growth in third and fourth quarter 2003 is simply
the result of rebuilding inventories, which were drawn down to historically low
levels in the second quarter. They believe that consumer spending, which has
been fueled by mortgage refinancing and tax cuts, will fall off in the year
ahead as rising mortgage rates put an end to the refinancing boom and soaring
federal budget deficits prevent additional tax relief. The pessimists also point
to excess capacity in many industries limiting a capital spending rebound.
We understand that the financial markets are largely unpredictable, and
therefore, with an eye toward capital preservation, we strive to build
fixed-income portfolios with the most favorable risk/reward characteristics. Put
another way, we always look both ways, down and up, before we make investment
decisions. Whether it be adjusting our portfolios' duration to stay on the right
side of interest rate trends, altering sector allocation as fundamentals shift,
or evaluating individual securities, our goal is to protect our shareholders'
hard earned money.
In closing, following three great years for bonds, returns were more modest in
fiscal 2003. We are pleased that all our fixed-income portfolios generated
positive total returns. We believe bonds play a beneficial role for all
investors, by providing income and portfolio stability throughout the
increasingly volatile financial market cycles.
Sincerely,
/s/ Peter Sundman
PETER SUNDMAN
CHAIRMAN OF THE BOARD
NEUBERGER BERMAN INCOME FUNDS
3
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LIMITED MATURITY BOND FUND Portfolio Commentary
In the year ending October 31, 2003, Neuberger Berman Limited Maturity Bond Fund
Investor Class returned 3.23%, and the Neuberger Berman Limited Maturity Bond
Fund Trust Class returned 3.00%, outperforming the Merrill Lynch 1-3 Year
Treasury Index benchmark, which returned 2.01%.
Sector allocation, security selection and duration management were important
factors in achieving these results. At the beginning of fiscal 2003, the
portfolio had a relatively conservative duration of 1.7 years, reflecting our
recognition that low interest rates provide a thin cushion to offset falling
security prices in a rising interest rate environment. We began shortening
duration in the first quarter of 2003, in response to more consistently positive
economic news, and hit a duration low of 1.2 years in July 2003. This helped us
limit losses in July, the worst month for bonds since December 1981, as measured
by the Lehman Brothers U.S. Aggregate Index. At the close of this reporting
period, portfolio duration was 1.4 years, an indication that we are still
concerned about interest rate risk and determined to preserve shareholder
capital if interest rates trend higher in the year ahead.
AVERAGE ANNUAL TOTAL RETURN(1),(2)
<Table>
<Caption>
INVESTOR CLASS TRUST CLASS(6) MERRILL LYNCH 1-3 YEAR
TREASURY INDEX
1 YEAR 3.23% 3.00% 2.01%
5 YEAR 4.89% 4.77% 5.32%
10 YEAR 5.00% 4.90% 5.66%
LIFE OF FUND(3) 6.25% 6.20% 6.77%
- ------------------------------------------------------------------------------------
INCEPTION DATE 06/09/1986 08/30/1993
</Table>
[CHART]
COMPARISON OF A $10,000 INVESTMENT
<Table>
<Caption>
INVESTOR CLASS MERRILL LYNCH 1-3 YEAR TREASURY INDEX
1993 $ 10,000 $ 10,000
1994 $ 10,012 $ 10,119
1995 $ 10,846 $ 11,024
1996 $ 11,436 $ 11,676
1997 $ 12,232 $ 12,433
1998 $ 12,834 $ 13,390
1999 $ 13,088 $ 13,791
2000 $ 13,673 $ 14,629
2001 $ 15,261 $ 16,213
2002 $ 15,782 $ 17,007
2003 $ 16,292 $ 17,349
</Table>
This chart shows the value of a hypothetical $10,000 investment in the Fund over
the past 10 fiscal years, or since the Fund's inception, if it has not operated
for 10 years. The graphs are based on the Investor Class shares only;
performance of other classes will vary due to differences in fee structures (see
Average Annual Total Return chart above). The result is compared with
benchmarks, which may include a broad-based market index and/or a narrower
index. Please note that market indexes do not include expenses. All results
include the reinvestment of dividends and capital gain distributions. Results
represent past performance and do not indicate future results. The chart and
table do not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
Please see Endnotes for additional information.
The 30-day SEC yield of the Investor Class Shares ending 10/31/03 was 1.62%, and
the Trust Class Shares was 1.52%.
The composition, industries and holdings of the fund are subject to change.
Investment return will fluctuate. Share values of the Limited Maturity Bond Fund
will also fluctuate, and your shares, when redeemed, may be worth more or less
than you paid for them. Past performance is no guarantee of future results.
4
<Page>
We made several advantageous sector allocation moves as well. We increased our
allocation to corporate credits from 47.3% of portfolio assets at the end of
October 2002 to maintain a weighting close to 50% for the balance of the fiscal
year, ending the period at 53.2%. With corporate bonds materially outperforming
all other fixed-income sectors in fiscal 2003, we were generously rewarded. Our
securities selection in the corporate sector also contributed to returns.
We dramatically reduced our allocation to government agency bonds from 26.2% at
the end of March to 9.9% at the end of April and 0% by the end of June. This was
done for valuation reasons (agency yields had come down to a level barely above
Treasury yields). However, our decision to get out of agencies proved
serendipitous as well in that we avoided the sharp sell-off sparked by negative
headlines surrounding earnings restatements and management changes at Freddie
Mac and a call for more thorough regulatory oversight at both Freddie Mac and
Fannie Mae. Although we think the controversy regarding these two powerful
forces in the mortgage markets is not necessarily a credit event, we believe
that certain agencies may remain under pressure, and therefore, we continue to
avoid them.
In the mortgage sector we maintained a fairly modest average weighting of 9.8%
during this period. Our allocation to this high quality sector was tempered by
the fast prepayment environment spawned by low interest rates. Mortgage returns
during fiscal 2003 were positive but lagged other fixed-income sectors. However,
with the refinancing boom ending, prepayment risk diminishing and yields well
above Treasuries, we believe the mortgage sector is positioned to deliver solid
returns going forward.
Looking ahead, we remain cautious. A weakening dollar, an expanding budget
deficit, rising commodity prices, a strengthening global economy and a
relatively steep yield curve have put us on alert that this period of falling
interest rates may be over. If we feel prevailing economic trends justify a
reversal of the Fed's current accommodative monetary policy, we will further
reduce the portfolio's interest rate exposure so that we can quickly roll over
into higher yielding securities.
After recent years' exceptional performance, bond yields have come down
substantially and no longer look very exciting relative to the kind of returns
stock market investors enjoyed this year. Investors with short memories may
quickly forget what bonds did for them during the painful three-year bear market
in stocks. We think that would be a big mistake. Bonds can provide income and
relative safety of principal -- two important functions in today's highly
volatile financial markets.
Sincerely,
/s/ Ted Giuliano
/s/ Catherine Waterworth
TED GIULIANO
AND
CATHERINE WATERWORTH
PORTFOLIO CO-MANAGERS
5
<Page>
HIGH INCOME BOND FUND Portfolio Commentary
The Neuberger Berman High Income Bond Fund provided consistent performance
during the fiscal year ended October 31, 2003, returning 12.14% to investors.
The Fund's returns trailed the Lehman Brothers Intermediate Ba U.S. High Yield
Index, which posted a return of 20.79% for the period, and the Lipper High
Current Yield Fund Index, which returned 30.28%.
We believe that our returns for the period are best understood in the
perspective of the Fund's longer-term performance. In fiscal year 2002, when the
high-yield market was struggling, the Fund surpassed its benchmarks by 10 and 12
percentage points, respectively. Still, we did not boast about this achievement,
believing that our quality-focused, modest-duration portfolio is supposed to
outperform in such circumstances. As such, the Fund's corresponding deficit for
2003 should come as no surprise to our investors, since the same factors that
help us in a downdraft impede our performance in a full-blown bull market. Over
time, we think that our investors have been -- and will continue to be -- well
served by our approach. During the current reporting period, we remained true to
our investment discipline, staying broadly and evenly invested in the face of
record calls and tenders for our holdings -- with borrowers taking advantage of
low interest rates to refinance -- and as the assets in the Fund expanded more
than three fold.
AVERAGE ANNUAL TOTAL RETURN(1),(2)
<Table>
<Caption>
INVESTOR CLASS(9) LEHMAN INTERMEDIATE Ba
US HIGH YIELD INDEX
1 YEAR 12.14% 20.79%
5 YEAR 7.43% 6.49%
10 YEAR 7.53% 7.58%
LIFE OF FUND(3) 8.38% 8.36%
- ---------------------------------------------------------------------------
INCEPTION DATE 02/01/1992
</Table>
[CHART]
COMPARISON OF A $10,000 INVESTMENT
<Table>
<Caption>
INVESTOR CLASS LEHMAN INTERMEDIATE Ba US HIGH YIELD INDEX
1993 $ 10,000 $ 10,000
1994 $ 10,178 $ 10,205
1995 $ 11,422 $ 11,807
1996 $ 12,567 $ 12,993
1997 $ 14,141 $ 14,543
1998 $ 14,440 $ 15,165
1999 $ 15,226 $ 15,689
2000 $ 16,111 $ 16,326
2001 $ 17,298 $ 17,806
2002 $ 18,426 $ 17,191
2003 $ 20,664 $ 20,764
</Table>
This chart shows the value of a hypothetical $10,000 investment in the Fund over
the past 10 fiscal years, or since the Fund's inception, if it has not operated
for 10 years. The result is compared with benchmarks, which may include a
broad-based market index and/or a narrower index. Please note that market
indexes do not include expenses. All results include the reinvestment of
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The chart and table do not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or the redemption of
Fund shares.
Please see Endnotes for additional information.
The 30-day SEC yield of the Investor Class Shares was 5.88% for the period
ending October 31, 2003.
The composition, industries and holdings of the fund are subject to change.
Investment return will fluctuate. Share values of the High Income Bond Fund will
also fluctuate, and your shares, when redeemed, may be worth more or less than
you paid for them. Past performance is no guarantee of future results.
6
<Page>
The surge in the overall high-yield securities market can be attributed
primarily to positive investor reaction to the historically wide yield spread
opportunities available through much of the year. During the first half of
fiscal 2003, gains came in spite of continued economic weakness, geopolitical
turmoil and corporate governance concerns. A combination of heightened investor
interest, low government bond market yields, and a renewed focus on
income-oriented investment alternatives caused bond prices to rise dramatically.
As the economic picture began to improve later in the year, high-yield
securities continued to excel. As a result, the relative value provided by
high-yield securities has been reduced, and the market's spread over Treasuries
is now below historic averages.
While a conservative stance was not as rewarding in fiscal 2003 as it was in the
prior year, the high-yield market's outsized gains and the relatively low yields
for bonds overall suggest that now is not a time to reach for yield by dabbling
in speculative issues or significantly lengthening duration. The Fund's
portfolio composition has reflected our disciplined investment process and our
preference for relatively high-quality companies that display market leadership,
stable and proven managements, financial flexibility, the ability to cover their
fixed charges, and a forthrightness in dealing with investors. Of the Fund's
non-cash (or cash equivalent) holdings, the percentage of BB securities remained
relatively steady for the past 12 months, closing the period at 47.9% of bonds
in the portfolio. The percentage of BBB securities declined to 7.9% of bonds in
the Fund, while B securities accounted for 43.0% of bonds in the Fund. In
addition, the Fund maintained its discipline in regards to the maturity and
duration, which rose modestly to 5.3 years and 3.7 years, respectively, as of
October 31, 2003.
As we have noted in the past, we are not market prognosticators, but we have
successfully managed portfolios of high-yield bonds through various market
environments. We believe that our disciplined strategy will continue to provide
an effective method of preserving and enhancing our clients' assets. Through
disciplined portfolio management, rigorous fundamental analysis, in-depth market
knowledge, and disciplined approach to portfolio management, we will continue to
focus on our longstanding investment objective of high total returns, while
remaining mindful of the need for capital preservation.
Sincerely,
/s/ Wayne C. Plewniak
WAYNE C. PLEWNIAK
SENIOR PORTFOLIO MANAGER
7
<Page>
MUNICIPAL SECURITIES TRUST Portfolio Commentary
For the twelve months ended October 31, 2003, the Neuberger Berman Municipal
Securities Trust returned 4.50%, trailing the Lehman Brothers 7-Year GO Index's
5.67% return, and about even with the Lipper Intermediate Municipal Debt Fund
Index's 4.53% return.
It was quite a challenge to navigate the stormy municipal securities market this
year. Near record supply combined with softening demand put downward pressure on
municipal securities prices. Volatility created by the "here today, gone
tomorrow" economic recovery also kept us on alert. Finally, deteriorating
municipal balance sheets resulting from the decline in tax revenues made our
credit analysis of prospective investments even more critical than normal. Our
vigilance and dedication to quality helped us weather the storm and deliver
respectable returns to shareholders.
Opportunistic duration management, (extending portfolio duration from 5.3 years
at the end of October 2002 to 6.6 years in December 2002, and then reducing
duration to 4.9 years in June 2003), aided performance as bonds performed
relatively well in the December-May time frame before declining sharply in July.
In adjusting portfolio duration, our motto is "we'd rather be a month
AVERAGE ANNUAL TOTAL RETURN(1),(2)
<Table>
<Caption>
INVESTOR CLASS(8) LEHMAN BROTHERS
7-YEAR GO INDEX
1 YEAR 4.50% 5.67%
5 YEAR 4.97% 5.62%
10 YEAR 5.00% 5.80%
LIFE OF FUND(3) 6.02% 6.79%
- ---------------------------------------------------------------------------
INCEPTION DATE 07/09/1987
</Table>
[CHART]
COMPARISON OF A $10,000 INVESTMENT
<Table>
<Caption>
INVESTOR CLASS LEHMAN BROTHERS 7-YEAR GO INDEX
1993 $ 10,000 $ 10,000
1994 $ 9,743 $ 9,797
1995 $ 10,751 $ 11,040
1996 $ 11,173 $ 11,565
1997 $ 11,923 $ 12,442
1998 $ 12,785 $ 13,368
1999 $ 12,653 $ 13,378
2000 $ 13,470 $ 14,282
2001 $ 14,802 $ 15,669
2002 $ 15,595 $ 16,627
2003 $ 16,296 $ 17,571
</Table>
This chart shows the value of a hypothetical $10,000 investment in the Fund over
the past 10 fiscal years, or since the Fund's inception, if it has not operated
for 10 years. The result is compared with benchmarks, which may include a
broad-based market index and/or a narrower index. Please note that market
indexes do not include expenses. All results include the reinvestment of
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The chart and table do not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or the redemption of
Fund shares.
Please see Endnotes for additional information.
For the period ending 10/31/03, the 30-day SEC yield of the Municipal Securities
Trust was 2.67% and the tax-equivalent yield was 4.11% for an investor in the
highest federal income tax bracket (35% for calendar year 2003).
The composition, industries and holdings of the fund are subject to change.
Investment return will fluctuate. Share values of the Municipal Securities Trust
will also fluctuate, and your shares, when redeemed, may be worth more or less
than you paid for them. Past performance is no guarantee of future
results.
8
<Page>
early, than a day late," a reflection of our sensitivity to interest rate risk.
Sector allocation shifts also contributed to performance. We increased the
percentage of portfolio assets allocated to revenue bonds from 40.5% at the
beginning of the reporting period to 50.4% at the end of February 2003, and
maintained a weighting near 50% for the balance of the year. We reduced our
allocation to General Obligation bonds (GOs) from 46.2% at the beginning of
fiscal 2003 to 40.9% at its end. This worked to our advantage as "essential
service" revenue bonds (electric, water, and sewer) outperformed GOs, which came
under pressure due to rising municipal deficits. We avoided most California and
New York GOs, which were hit rather hard when rising deficits made front-page
news. We spent considerable time and energy independently evaluating the credit
quality of our GO portfolio, examining such things as local unemployment rates,
average household income, the largest taxpayers in the community (better it be a
healthy business rather than a deteriorating one), diversification of the tax
base, and the track record of municipal governments in dealing with deficit
situations.
With investment grade credit spreads quite narrow, there was little reason to
invest in lower quality credits. Consequently, the portfolio's average credit
rating remained a strong AA+. Our lowest-rated holdings were rated A, and
represented only 0.1% of the portfolio.
Looking ahead to 2004, with interest rates at historical lows and the economy
gaining momentum, we believe interest rates are more likely to rise than fall.
We can't (and would never try) to predict precisely when rates will begin
trending higher or attempt to pinpoint which part of the yield curve will be
impacted first. However, we will respond quickly to any change in interest
rates, and adjust weighted average maturity and duration accordingly. We will
remain committed to quality. As the economy recovers and municipal balance
sheets improve, we may take advantage of slightly lower investment grade credits
if they offer meaningfully higher yields. In the interim, we believe there is no
reason to own anything but the best in the municipal securities market.
Following a four-year bull market in bonds, the capital appreciation potential
of municipal bonds may be limited and there is risk of a market downturn.
However, although yields in virtually every fixed-income sector are now
relatively uninspiring, municipal securities are attractively priced relative to
Treasuries. Muni yields are now in the range of 88%-90% of Treasuries yields,
well above the historic average, providing tax advantages for investors in
slightly lower (but still high) income tax brackets.
In closing, the only certainty in the municipal securities market is that prices
will continue to rise and fall. Since its inception, the Neuberger Berman
Municipal Securities Trust has fulfilled its mandate to provide its shareholders
income, stability, and safety of principal through a high quality municipal
securities portfolio. We will strive to continue this record of performance.
Sincerely,
/s/ Ted Giuliano
/s/ Thomas Brophy
/s/ Kelly Landron
TED GIULIANO,
THOMAS BROPHY
AND
KELLY LANDRON
PORTFOLIO CO-MANAGERS
9
<Page>
MUNICIPAL MONEY FUND Portfolio Commentary
For the six months ended October 31, 2003, the Neuberger Berman Municipal Money
Fund returned 0.19% versus 0.20% for the Money Fund Report Tax-Free National
Retail Average. For the twelve months ended on the same date, the Fund returned
0.50% versus the benchmark's 0.51%.
Throughout this difficult environment for short-term municipal debt, we remained
focused on quality. Like the Federal Government, states and municipalities are
faced with lower tax revenues and rising deficits. Consequently, we spent a
great deal of time and energy independently evaluating the credit quality of
prospective investments. This will continue to be especially critical until the
recovering economy and rising tax revenues shore up state and municipal balance
sheets.
In anticipation of a more vibrant economic recovery, we were also particularly
sensitive to interest rate risk. Consequently, the overwhelming majority of
portfolio assets were invested in securities providing protection against the
potential for rising interest rates. At the end of this reporting period 79% of
portfolio assets (70.3% in variable rate demand notes and 8.7% in tax-exempt
commercial paper) were invested in securities that adjust interest rate payments
in response to rising rates.
For most of fiscal 2003, the municipal money fund yield curve was quite flat,
with longer maturity securities providing little yield advantage. Consequently,
the portfolio's weighted average maturity (WAM), which began the year at 23.8
days and fell as low as l9.2 days in early January, was well below benchmark
average. Due to increasing supply and soft demand, the yield curve began to
steepen in August, inspiring us to extend WAM to 53.6 days at the end of fiscal
2003. Over the course of the year, the portfolio's weighted average maturity
also fluctuated with Fund cash flows, increasing during periods in which
outflows forced us to raise cash by liquidating shorter maturity holdings.
Looking ahead, with interest rates at 40-year lows and the economy gaining
momentum, we think interest rates are more likely to rise than fall in the year
ahead. Consequently, we remain cautious and have positioned the portfolio
accordingly. With the portfolio's weighted average maturity closing the year at
53.6 days, it is long enough to take advantage of the higher yields provided by
longer maturities, but short enough to respond quickly to any rise in short-term
interest rates. Of course, with capital preservation our top priority, the
portfolio remains concentrated in high credit quality securities.
In closing, municipal money fund yields are not particularly exciting in this
environment. However, we remain committed to fulfilling our dual mandates of
providing liquidity and a tax-advantaged safe harbor for shareholders'
hard-earned savings.
Sincerely,
/s/ Ted Giuliano
/s/ Thomas Brophy
/s/ Kelly Landron
TED GIULIANO,
THOMAS BROPHY
AND
KELLY LANDRON
PORTFOLIO CO-MANAGERS
For the period ending 10/31/03, the 7-day current yield of the Municipal Money
Fund was 0.36% and the tax-equivalent yield was 0.55% for an investor in the
highest federal income tax bracket (35% for calendar year 2003). The 7-day
effective yield was 0.36% and the tax-equivalent yield was 0.55% for an investor
in the highest federal income tax bracket (35% for calendar year 2003).
The composition, industries and holdings of the fund are subject to change.
Investment return will fluctuate. Past performance is no guarantee of future
results.
10
<Page>
CASH RESERVES Portfolio Commentary
For the six months ended October 31, 2003, Neuberger Berman Cash Reserves
returned 0.25% compared to the Money Fund Report Taxable First Tier Retail
Average's 0.22%. For the twelve months ended on the same date, the Fund returned
0.66% versus the benchmark's 0.56%. The Fund closed fiscal 2003 with a 7-day
current yield of 0.46% and a 7-day effective yield of 0.46%.
The continued record new issuance of short-term Treasury securities, along with
growing evidence that the economy was gaining momentum, were the primary factors
influencing the money markets in fiscal 2003. The large supply of Treasuries
being issued to finance the increasing Federal budget deficit wasn't problematic
until the surging stock market began siphoning money from the money markets and
reduced demand put pressure on short-term Treasuries prices. Agency issues also
came under pressure following this summer's negative publicity regarding Freddie
Mac and Fannie Mae's accounting practices.
After a dearth of commercial paper issuance, we are now beginning to see high
quality issuers in the market place. This issuance has given us an opportunity
to diversify from governments and pick up some incremental yield while
maintaining our high credit quality standards. We want to stress to our
shareholders that we consider diversification to be our first line of defense
and we do not concentrate in any one sector or industry.
With rates still hovering at 40-year lows and with interest rates unlikely to
fall significantly from here, we have chosen to reduce the weighted average
maturity of the portfolio from 65.4 days at the end of fiscal 2002 to 56.8 days
at the end of fiscal 2003. It is our opinion that as investor expectations
normalize, rates may begin an upward march -- perhaps in the near future.
This is not an environment where one can be careless. As we have stated in past
reports, our challenge is to deliver competitive returns with safety of
principal as our most important objective. As you have entrusted us with your
assets, we will strive to continue along this path.
Sincerely,
/s/ Ted Giuliano
/s/ Catherine Waterworth
TED GIULIANO
AND
CATHERINE WATERWORTH
PORTFOLIO CO-MANAGERS
/s/ Cynthia Damian
/s/ Alyssa Juros
CYNTHIA DAMIAN
AND
ALYSSA JUROS
PORTFOLIO ASSOCIATE MANAGERS
The composition, industries and holdings of the fund are subject to change.
Investment return will fluctuate. Past performance is no guarantee of future
results.
11
<Page>
GOVERNMENT MONEY FUND Portfolio Commentary
For the six months ended October 31, 2003, Neuberger Berman Government Money
Fund returned 0.31% compared to the Money Fund Report Government & Agencies
Retail Average's 0.22%. For the twelve months ended on the same date, the Fund
returned 0.78% verses the benchmark's 0.55%. The Fund closed fiscal 2003 with a
7-day current yield of 0.55% and a 7-day effective yield of 0.55%.
The continued record new issuance of short-term Treasury securities, along with
growing evidence that the economy was gaining momentum, were the primary factors
influencing the money markets in fiscal 2003. The large supply of Treasuries
being issued to finance the increasing Federal budget deficit wasn't problematic
until the surging stock market began siphoning money from the money markets and
reduced demand put pressure on short-term Treasuries prices. Agency issues also
came under pressure following this summer's negative publicity regarding Freddie
Mac and Fannie Mae's accounting practices.
It is no secret that the United States government is attempting to fund a
sizable budget deficit and is using the money market end of the yield curve as
its conduit. This avails us of a virtually limitless supply of securities,
albeit interest rates continue to be at extremely low levels.
In the spirit of maintaining high credit quality consistent with liquidity and
safety of principal, we have decreased our holdings of agencies from 54.0% at
the end of the last fiscal year to 38.7% while increasing our holdings of U.S.
Treasuries from 46.4% at the end of the last fiscal year to 65.7%. The
compression of yields in all sectors of the money markets is so intense that it
does not pay, in our opinion, to stray from U.S. Treasuries at this time.
With rates still hovering at 40-year lows and with interest rates unlikely to
fall significantly from here, we have chosen to reduce the weighted average
maturity of the portfolio, from 59.4 days at the end of the last fiscal year, to
55.3 days. It is our opinion that rates may begin an upward climb -- perhaps in
the near future.
We do not believe this is an environment where one can be careless. As always,
our most important objective is to deliver safety of principal with competitive
returns.
Sincerely,
/s/ Ted Giuliano
/s/ Catherine Waterworth
TED GIULIANO
AND
CATHERINE WATERWORTH
PORTFOLIO CO-MANAGERS
/s/ Cynthia Damian
/s/ Alyssa Juros
CYNTHIA DAMIAN
AND
ALYSSA JUROS
PORTFOLIO ASSOCIATE MANAGERS
The composition, industries and holdings of the fund are subject to change.
Investment return will fluctuate. Past performance is no guarantee of future
results.
12
<Page>
ENDNOTES
1. One-year and average annual total returns are for the periods ended October
31, 2003. Results are shown on a "total return" basis and include
reinvestment of all dividends and capital gain distributions. Performance
data quoted represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment will
fluctuate so that the shares, when redeemed, may be worth more or less than
their original cost.
2. Neuberger Berman Management Inc. ("Management") has contractually
undertaken to reimburse the following funds so that the total operating
expenses exclusive of taxes, interest, brokerage commissions and
extraordinary expenses are limited to 0.65% for Neuberger Berman Cash
Reserves, 1.00% for Neuberger Berman High Income Bond Fund, 0.70% for
Neuberger Berman Limited Maturity Bond Fund (Investor Class), 0.80% for
Neuberger Berman Limited Maturity Bond Fund (Trust Class), and 0.65% for
Neuberger Berman Municipal Securities Trust, of average daily net assets.
Each undertaking lasts until October 31, 2006. Each of these funds has
contractually undertaken to reimburse Management for the excess expenses
paid by Management, provided the reimbursements do not cause its total
operating expenses, (exclusive of taxes, interest, brokerage commissions
and extraordinary expenses) to exceed the above stated expense limitation
and the reimbursements are made within three years after the year that
Management incurred the expense. Management has voluntarily agreed to
reimburse certain operating expenses of Neuberger Berman Government Money
Fund so that expenses are limited to 0.45% of average daily net assets.
This arrangement can be terminated without notice to the fund. For the
twelve months ended October 31, 2002, there were no reimbursements of
expenses by Management to Cash Reserves. Absent such reimbursements, the
total returns of Neuberger Berman's Limited Maturity Bond Fund Investor
Class, Limited Maturity Bond Fund Trust Class, High Income Bond Fund,
Government Money and Municipal Securities Trust would have been less.
3. From commencement of operations.
4. "Current yield" of a money market fund refers to the income generated by an
investment in the Fund over a recent 7-day period. This income is then
"annualized." The "effective yield" is calculated similarly but, when
annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "current
yield" because of the compounding effect of this assumed reinvestment.
Yields of a money market fund will fluctuate and past performance is not a
guarantee of future results.
5. An investment in a money market fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. There
can be no assurance that a money market fund will be able to maintain a
stable net asset value of $1.00 per share. The return on an investment in
Neuberger Berman Government Money Fund, Neuberger Berman Municipal Money
Fund, or Neuberger Berman Cash Reserves will fluctuate.
6. Performance prior to August 1993 is for the Investor Class, which has lower
expenses and typically higher returns than the Trust Class. In addition,
Management caps the Trust Class expenses. Absent such arrangement, which is
subject to change, the total return would have been less.
7. Tax-equivalent effective yield is the taxable effective yield that an
investor would have had to receive in order to realize the same level of
yield after Federal taxes at the highest Federal tax rate, currently 35% in
2003, assuming that all of the Fund's income is exempt from Federal income
taxes.
8. A portion of the income of Neuberger Berman Municipal Money Fund and
Neuberger Berman Municipal Securities Trust may be subject to the Federal
alternative minimum tax for certain investors.
9. This Fund is the successor to the Lipper High Income Bond Fund ("Lipper
Fund"). The total return and data for the periods prior to September 7,
2002, are those of the Lipper High Income Bond Fund Premier Class. The data
reflects performance of the Lipper Fund for the period April 1, 1996,
through September 6, 2002, and the performance of Lipper Fund's predecessor
partnership for the period February 1, 1992 (date of inception), through
March 31, 1996, as applicable. The investment policies, objectives,
guidelines and restrictions of the Fund are in all material respects
equivalent to those of the Lipper Fund which were in all material respects
equivalent to those of its predecessor partnership. Had Lipper Fund's
predecessor partnership been subject to the provisions of the 1940 Act, its
investment performance may have been adversely affected. Returns would have
been lower if the manager of the Lipper Fund had not waived certain of its
fees during the periods shown.
13
<Page>
GLOSSARY OF INDICES
<Table>
<Caption>
THE MERRILL LYNCH 1-3 YEAR TREASURY INDEX: An unmanaged total return market value index consisting of all
coupon-bearing U.S. Treasury publicly placed debt securities with
maturities between 1 and 3 years.
THE LEHMAN BROTHERS 7-YEAR GENERAL OBLIGATION INDEX: An unmanaged total return performance benchmark for the
intermediate-term,7-year, investment grade General Obligations (State
and Local) tax-exempt bond market.
THE MONEY FUND REPORT TAXABLE FIRST TIER Measures the performance of retail money market mutual funds which
RETAIL AVERAGE: hold "First Tier" securities as defined by Rule 2a-7 of the Investment
Company Act of 1940 (not including Second Tier Commercial
Paper). First Tier securities are those rated in the highest short-term
rating category by two or more nationally recognized statistical
ratings organizations.
THE MONEY FUND REPORT TREASURY RETAIL AVERAGE: Measures the performance of retail money market mutual funds which
invest only in obligations of the U.S. Treasury (T-Bills).
THE MONEY FUND REPORT GOVERNMENT AND AGENCIES Measures the performance of retail money market mutual funds which
RETAIL AVERAGE: invest in obligations of the U.S. Treasury (T-Bills), repurchase
agreements, or U.S. Government Agency securities.
THE MONEY FUND REPORT TAX-FREE NATIONAL Measures all national tax-free and municipal retail funds. Portfolio
RETAIL AVERAGE: holdings of tax-free funds includes Rated and Unrated Demand
Notes, Rated and Unrated General Market Notes, Commercial Paper, Put
Bonds -- 6 months or less, Put Bonds -- over 6 months, AMT Paper, and
Other Tax-Free holdings.
LEHMAN BROTHERS INTERMEDIATE Ba U.S. An unmanaged index comprised of BB rated bonds with maturities of less
HIGH YIELD INDEX: than 10 years.
</Table>
Please note that indices do not take into account any fees and expenses of
investing in the individual securities that they track, and that investors
cannot invest directly in any index or average. Data about the performance of
each index are prepared or obtained by Management and include reinvestment of
all dividends and capital gain distributions. Each Portfolio may invest in many
securities not included in its respective index.
14
<Page>
SCHEDULE OF INVESTMENTS Cash Reserves
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE ++
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
U.S. TREASURY SECURITIES-BACKED BY THE FULL FAITH
AND CREDIT OF THE U.S. GOVERNMENT (11.3%)
$ 15,000 U.S. Treasury Bills, 1.11%, due 11/6/03 TSY TSY $ 14,999
15,000 U.S. Treasury Bills, 0.92%, due 11/20/03 TSY TSY 14,993
5,000 U.S. Treasury Bills, 0.94%, due 11/28/03 TSY TSY 4,997
15,000 U.S. Treasury Bills, 0.92%, due 1/2/04 TSY TSY 14,977
20,000 U.S. Treasury Bills, 0.92% & 0.94%, due 2/5/04 TSY TSY 19,952
-------------
TOTAL U.S. TREASURY SECURITIES-BACKED BY THE FULL FAITH
AND CREDIT OF THE U.S. GOVERNMENT 69,918
-------------
U.S. GOVERNMENT AGENCY SECURITIES (26.4%)
8,659 Federal Farm Credit Bank, Disc. Notes, 1.08%, due 11/14/03 AGY AGY 8,656
10,000 Federal Farm Credit Bank, Disc. Notes, 1.12%, due 12/19/03 AGY AGY 9,986
9,098 Federal Farm Credit Bank, Disc. Notes, 1.12%, due 3/17/04 AGY AGY 9,060
7,000 Federal Home Loan Bank, Bonds, 1.20%, due 8/20/04 AGY AGY 7,000
18,950 Federal Home Loan Bank, Disc. Notes, 1.11%, due 11/5/03 AGY AGY 18,949
6,598 Federal Home Loan Bank, Disc. Notes, 1.02%, due 11/7/03 AGY AGY 6,597
10,000 Federal Home Loan Bank, Disc. Notes, 1.02%, due 11/12/03 AGY AGY 9,997
15,000 Federal Home Loan Bank, Disc. Notes, 1.02%, due 11/19/03 AGY AGY 14,993
8,000 Federal Home Loan Bank, Disc. Notes, 1.10%, due 11/21/03 AGY AGY 7,996
10,000 Federal Home Loan Bank, Disc. Notes, 1.10%, due 2/27/04 AGY AGY 9,965
15,000 Federal Home Loan Bank, Disc. Notes, 1.07%, due 3/5/04 AGY AGY 14,945
20,000 Sallie Mae, Disc. Notes, 0.95%, due 11/3/03 AGY AGY 20,000
5,000 Sallie Mae, Disc. Notes, 0.96%, due 11/14/03 AGY AGY 4,998
10,000 Tennessee Valley Authority, Disc. Notes, 0.95%, due 12/4/03 AGY AGY 9,992
10,000 Tennessee Valley Authority, Disc. Notes, 0.96%, due 12/11/03 AGY AGY 9,990
-------------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES 163,124
-------------
CERTIFICATES OF DEPOSIT (17.7%)
10,000 American Express Centurion Bank, Domestic CD,
1.04%, due 11/28/03 P-1 A-1 10,000
10,000 Canadian Imperial Bank, Yankee CD, 1.07%, due 1/7/04 P-1 A-1 10,000
2,000 Citigroup NA, Domestic CD, 1.06%, due 12/15/03 P-1 A-1+ 2,000
10,000 Deutsche Bank AG, Yankee CD, 1.05%, due 12/19/03 P-1 A-1+ 10,000
12,000 Dexia Bank NY, Yankee CD, 1.08%, due 1/23/04 P-1 A-1+ 12,000
13,000 Lloyd's TSB Bank PLC, Yankee CD,
1.08%, due 1/30/04 & 4/30/04 P-1 A-1+ 13,000
5,000 Rabobank Nederland, Yankee CD, 1.08%, due 12/29/03 P-1 A-1+ 5,000
15,000 Royal Bank of Scotland NY, Yankee CD, 1.06% & 1.07%,
due 12/10/03 & 12/17/03 P-1 A-1+ 15,000
5,000 Societe Generale, Yankee CD, 1.06%, due 12/2/03 P-1 A-1+ 5,000
12,000 Svenska Handelsbanken AB, Yankee CD, 1.10%, due 1/20/04 P-1 A-1 12,000
15,000 Wells Fargo Bank NA, Domestic CD, 1.04%, due 12/4/03 P-1 A-1+ 15,000
-------------
TOTAL CERTIFICATES OF DEPOSIT 109,000
-------------
COMMERCIAL PAPER (45.3%)
14,200 ABN AMRO North America Finance, Inc., 1.02% & 1.07%,
due 11/17/03 & 1/14/04 P-1 A-1+ 14,178
12,000 Alcon Capital Corp., 1.03% & 1.04%, due 11/18/03 P-1 A-1+ 11,995
15,000 ANZ (Delaware), Inc., 1.03% & 1.04%,
due 11/13/03 & 11/24/03 P-1 A-1+ 14,993
10,000 Aventis SA, 1.05%, due 12/9/03 P-1 A-1 9,989
15,000 Banc One Corp., 1.02% & 1.04%, due 11/24/03 & 12/22/03 P-1 A-1 14,987
</Table>
See Notes to Schedule of Investments
15
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE ++
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 10,000 Barclays U.S. Funding Corp.,
1.03%, due 11/3/03 & 11/19/03 P-1 A-1+ $ 9,997
10,000 BASF AG, 1.07%, due 12/19/03 P-1 A-1+ 9,986
10,000 Bear Stearns Co., Inc., 1.07%, due 12/22/03 P-1 A-1 9,985
12,000 BNP Paribas Finance,
1.02% & 1.18%, due 12/3/03 & 5/14/04 P-1 A-1+ 11,951
12,000 Citigroup Global Markets, Inc., 1.05% & 1.07%,
due 11/19/03 & 1/8/04 P-1 A-1+ 11,984
3,000 Dexia Delaware LLC, 1.04%, due 11/26/03 P-1 A-1+ 2,998
3,000 General Electric Capital Corp., 1.11%, due 1/14/04 P-1 A-1+ 2,993
10,000 Goldman Sachs Group, Inc., 1.13%, due 4/19/04 P-1 A-1 9,947
7,000 J.P. Morgan Chase & Co., 1.08%, due 2/20/04 P-1 A-1+ 6,977
10,000 Kimberly-Clark Corp., 1.00%, due 11/6/03 P-1 A-1+ 9,999
10,000 Merrill Lynch & Co., 1.03%, due 11/6/03 P-1 A-1 9,999
10,000 Novartis Finance Corp., 1.02%, due 11/7/03 P-1 A-1+ 9,999
10,600 Paccar Financial Corp., 1.02%, due 11/10/03 P-1 A-1+ 10,598
4,000 Pfizer, Inc., 1.02%, due 11/24/03 P-1 A-1+ 3,998
10,000 Private Export Funding Corp., 1.08%, due 4/20/04 P-1 A-1+ 9,950
10,000 Procter & Gamble, Inc., 1.02%, due 11/7/03 P-1 A-1+ 9,999
10,000 Shell Finance UK PLC, 1.02%, due 12/10/03 P-1 A-1+ 9,990
10,600 Societe Generale NA, Inc., 1.03% & 1.14%,
due 11/3/03 & 5/28/04 P-1 A-1+ 10,561
12,000 Toyota Motor Credit Corp., 1.06%, due 1/27/04 P-1 A-1+ 11,970
25,000 UBS Finance (Delaware), Inc., 1.03% & 1.17%,
due 11/3/03 & 4/30/04 P-1 A-1+ 24,942
15,000 Westpac Capital Corp., 1.07% & 1.08%,
due 1/12/04 & 2/6/04 P-1 A-1+ 14,965
-------------
TOTAL COMMERCIAL PAPER 279,930
-------------
REPURCHASE AGREEMENTS (0.1%)
898 State Street Bank and Trust Co. Repurchase Agreement,
0.97%, due 11/3/03, dated 10/31/03, Maturity Value
$898,073, Collateralized by $920,000 U.S. Treasury
Notes, 1.63%, due 1/31/05 (Collateral Value $926,037) 898
-------------
TOTAL INVESTMENTS (100.8%) 622,870
Liabilities, less cash, receivables and other assets [(0.8%)] (5,170)
-------------
TOTAL NET ASSETS (100.0%) $ 617,700
-------------
</Table>
16
<Page>
SCHEDULE OF INVESTMENTS Government Money Fund
<Table>
<Caption>
PRINCIPAL AMOUNT VALUE ++
(000'S OMITTED) (000'S OMITTED)
U.S. TREASURY SECURITIES-BACKED BY THE FULL FAITH AND CREDIT OF THE U.S. GOVERNMENT (63.0%)
$ 25,000 U.S. Treasury Bills, 1.11%, due 11/6/03 $ 24,998
70,000 U.S. Treasury Bills, 0.87% & 0.93%, due 11/13/03 69,983
75,000 U.S. Treasury Bills, 0.89% & 0.92%, due 11/20/03 74,968
70,000 U.S. Treasury Bills, 0.91% & 0.95%, due 11/28/03 69,955
30,000 U.S. Treasury Bills, 0.92%, due 12/4/03 29,976
50,000 U.S. Treasury Bills, 0.93%, due 12/11/03 49,951
50,000 U.S. Treasury Bills, 0.93%, due 12/18/03 49,942
55,000 U.S. Treasury Bills, 0.91% & 0.95%, due 12/26/03 54,925
40,000 U.S. Treasury Bills, 0.94%, due 1/2/04 39,937
90,000 U.S. Treasury Bills, 0.91% & 0.92%, due 1/15/04 89,834
25,000 U.S. Treasury Bills, 0.94%, due 1/22/04 24,948
20,000 U.S. Treasury Bills, 0.93%, due 1/29/04 19,955
30,000 U.S. Treasury Bills, 0.92%, due 2/5/04 29,928
30,000 U.S. Treasury Bills, 0.92%, due 2/12/04 29,923
20,000 U.S. Treasury Bills, 1.03%, due 2/19/04 19,938
-------------
TOTAL U.S. TREASURY SECURITIES-BACKED BY THE FULL
FAITH AND CREDIT OF THE U.S. GOVERNMENT 679,161
-------------
U.S. GOVERNMENT AGENCY SECURITIES (38.7%)
8,200 Federal Farm Credit Bank, Disc. Notes, 0.95%, due 11/7/03 8,199
22,228 Federal Farm Credit Bank, Disc. Notes, 1.12%, due 12/19/03 22,196
10,000 Federal Farm Credit Bank, Disc. Notes, 1.07%, due 4/15/04 9,951
13,000 Federal Farm Credit Bank, Disc. Notes, 1.11%, due 4/26/04 12,930
12,000 Federal Home Loan Bank, Bonds, 1.20%, due 8/20/04 12,000
60,000 Federal Home Loan Bank, Disc. Notes, 1.00% & 1.02%, due 11/7/03 59,993
25,000 Federal Home Loan Bank, Disc. Notes, 1.02%, due 11/12/03 24,994
30,000 Federal Home Loan Bank, Disc. Notes, 1.02%, due 11/19/03 29,986
25,000 Federal Home Loan Bank, Disc. Notes, 1.10%, due 11/21/03 24,986
23,847 Federal Home Loan Bank, Disc. Notes, 1.08%, due 1/30/04 23,784
15,200 Federal Home Loan Bank, Disc. Notes, 1.11%, due 2/4/04 15,156
30,000 Federal Home Loan Bank, Disc. Notes, 1.10%, due 2/27/04 29,894
43,600 Federal Home Loan Bank, Disc. Notes, 1.08%, due 3/12/04 43,431
10,000 Federal Home Loan Bank, Disc. Notes, 1.15%, due 6/3/04 9,932
64,949 Tennessee Valley Authority, Disc. Notes, 0.91% & 0.92%, due 11/20/03 64,921
25,000 Tennessee Valley Authority, Disc. Notes, 0.95%, due 12/4/03 24,980
-------------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES 417,333
-------------
REPURCHASE AGREEMENTS (2.7%)
29,456 State Street Bank and Trust Co. Repurchase Agreement, 0.97%, due
11/3/03, dated 10/31/03, Maturity Value $29,458,381, Collateralized
by $30,145,000 U.S. Treasury Notes, 1.63%, due 1/31/05
(Collateral Value $30,342,811) 29,456
-------------
TOTAL INVESTMENTS (104.4%) 1,125,950
Liabilities, less cash, receivables and other assets [(4.4%)] (47,605)
-------------
TOTAL NET ASSETS (100.0%) $ 1,078,345
-------------
</Table>
See Notes to Schedule of Investments
17
<Page>
SCHEDULE OF INVESTMENTS High Income Bond Fund
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE+
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
CORPORATE DEBT SECURITIES (91.6%)
$ 2,500 Abitibi-Consolidated, Inc., Guaranteed Notes, 6.95%,
due 12/15/06 Ba1 BB+ $ 2,577
2,250 Abitibi-Consolidated, Inc., Notes, 5.25%, due 6/20/08 Ba1 BB+ 2,152
1,000 AES Corp., Senior Notes, 9.38%, due 9/15/10 B3 B- 1,060
1,945 AES Corp., Senior Secured Notes, 10.00%, due 7/15/05 B2 BB 2,004**
3,125 AES Corp., Senior Secured Notes, 8.75%, due 5/15/13 B2 B+ 3,336**
1,000 AGCO Corp., Senior Subordinated Notes, 8.50%, due 3/15/06 B1 BB- 1,000!
100 Airgas, Inc., Senior Subordinated Notes, 9.13%, due 10/1/11 Ba2 B+ 112
2,075 Alliant Techsystems, Inc., Senior Subordinated Notes, 8.50%,
due 5/15/11 B2 B 2,293
2,425 Allied Waste North America, Inc., Guaranteed Senior Notes,
Ser. B, 7.63%, due 1/1/06 Ba3 BB- 2,564
3,125 Allied Waste North America, Inc., Senior Subordinated Notes,
Ser. B, 10.00%, due 8/1/09 B2 B+ 3,399
3,275 American Axle & MFG, Inc., Guaranteed Senior Notes, 9.75%,
due 3/1/09 Ba2 BB- 3,496
2,375 American Media Operations, Guaranteed Notes, Ser. B, 10.25%,
due 5/1/09 B2 B- 2,547
2,425 Amerigas Partners L.P., Senior Notes, Ser. B, 8.88%,
due 5/20/11 B2 BB- 2,631
2,500 Amerigas Partners L.P., Senior Notes, Ser. D, 10.00%,
due 4/15/06 B2 BB- 2,725
2,050 AmerisourceBergen Corp., Guaranteed Senior Notes,
7.25%, due 11/15/12 Ba3 BB 2,112
4,275 AMETEK, Inc., Senior Notes, 7.20%, due 7/15/08 Ba1 BBB 4,638
4,225 Arch Western Finance Corp., Senior Notes, 6.75%, due 7/1/13 Ba2 BB+ 4,373**
3,825 ArvinMeritor, Inc., Notes, 6.63%, due 6/15/07 Baa3 BB+ 3,748
4,500 Availl, Inc., Senior Notes, 7.63%, due 7/1/11 B1 4,691
1,875 Ball Corp., Guaranteed Senior Notes, 7.75%, due 8/1/06 Ba3 BB 2,025
2,000 Bavaria S.A., Senior Notes, 8.88%, due 11/1/10 Ba3 BB 1,960**
500 Bergen Brunswig Corp., Senior Notes, 7.25%, due 6/1/05 BB 522(QQ)
3,125 Boise Cascade Corp., Notes, 7.50%, due 2/1/08 Ba2 BB+ 3,328
1,625 BoWater Canada Finance Corp., Guaranteed Notes, 7.95%,
due 11/15/11 Ba1 BB+ 1,649
1,375 BoWater, Inc., Senior Notes, 6.50%, due 6/15/13 Ba1 BB+ 1,264**
3,750 BRL Universal Equipment, Senior Notes, 8.88%, due 2/15/08 Ba3 BB- 4,050
998 Calpine Corp., Senior Floating Rate Notes, 6.90%, due 7/15/07 B 932**
3,250 Calpine Corp., Senior Secured Notes, 8.50%, due 7/15/10 B 2,974**
1,000 Canandaigua Brands, Inc., Guaranteed Senior Notes, 8.63%,
due 8/1/06 Ba2 BB 1,103
4,125 Case Corp., Notes, 7.25%, due 8/1/05 Ba3 BB- 4,249
2,125 Case New Holland, Inc., Senior Notes, 9.25%, due 8/1/11 Ba3 BB- 2,359**
5,275 Cinemark USA, Inc., Senior Subordinated Notes, Ser. B, 8.50%,
due 8/1/08 B3 B- 5,499
3,425 Citgo Petroleum Corp., Senior Notes, 7.88%, due 5/15/06 Ba3 BB 3,511(QQ)
3,250 CK Witco Corp., Senior Notes, 8.50%, due 3/15/05 Ba2 BB+ 3,396
1,000 CMS Energy Corp., Senior Notes, 7.63%, due 11/15/04 B3 B+ 1,020
3,125 CMS Energy Corp., Senior Notes, 7.75%, due 8/1/10 B3 B+ 3,180**
1,075 Compass Minerals Group, Inc., Senior Subordinated Notes,
10.00%, due 8/15/11 B3 B- 1,199
1,175 Corn Products International, Inc., Senior Notes, 8.45%,
due 8/15/09 Ba1 BBB- 1,319
</Table>
18
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 3,575 Crown, Cork & Seal Co., Guaranteed Notes, 7.00%,
due 12/15/06 B3 B $ 3,593
2,250 Crown, Cork & Seal Co., Notes, 8.38%, due 1/15/05 B3 B 2,340
3,000 CSC Holdings, Inc., Senior Notes, 7.25%, due 7/15/08 B1 BB- 3,000
2,000 CSC Holdings, Inc., Senior Notes, Ser. B, 8.13%, due 7/15/09 B1 BB- 2,080
1,000 Cyprus Amax Minerals Co., Notes, 6.63%, due 10/15/05 Baa3 BBB- 1,060
1,000 D.R. Horton, Inc., Guaranteed Notes, 10.50%, due 4/1/05 Ba1 BB 1,090
1,375 D.R. Horton, Inc., Guaranteed Senior Notes, 8.38%,
due 6/15/04 Ba1 BB 1,416
2,500 D.R. Horton, Inc., Guaranteed Senior Notes, 7.50%,
due 12/1/07 Ba1 BB 2,731
1,825 Dana Corp., Notes, 6.50%, due 3/15/08 Ba3 BB 1,807
3,000 Dayton Superior Corp., Senior Notes, 10.75%, due 9/15/08 B3 B+ 3,127**
3,250 Dean Foods Co., Senior Notes, 6.75%, due 6/15/05 Ba2 BB- 3,380
1,475 Dole Foods Co., Inc., Guaranteed Senior Notes, 7.25%,
due 6/15/10 B2 BB- 1,505
2,875 Dole Foods Co., Inc., Variable Rate Senior Notes, 8.63%,
due 5/1/09 B2 BB- 3,105
2,125 Dresser, Inc., Guaranteed Senior Subordinated Notes, 9.38%,
due 4/15/11 B2 B 2,183
4,525 EchoStar DBS Corp., Senior Notes, 5.75%, due 10/1/08 Ba3 BB- 4,508**
2,125 El Paso Natural Gas, Senior Notes, Ser. A, 7.63%, due 8/1/10 B1 B+ 2,104
3,275 El Paso Production Holdings, Guaranteed Senior Notes, 7.75%,
due 6/1/13 B2 B+ 3,144**
1,625 ENSERCH Corp., Notes, 7.13%, due 6/15/05 Baa3 BBB 1,705
3,875 Entravision Communications Corp., Senior Subordinated
Notes, 8.13%, due 3/15/09 B3 B- 4,098
3,250 Express Scripts, Inc., Guaranteed Senior Notes, 9.63%,
due 6/15/09 Ba1 BBB 3,502
4,325 Felcor Lodging L.P., Guaranteed Senior Notes, 10.00%,
due 9/15/08 B1 B 4,649
5,625 Ferrellgas Partners L.P., Senior Notes, 8.75%, due 6/15/12 B2 B 6,131(QQ)
3,000 Fisher Scientific International, Inc., Senior Subordinated
Notes, 8.00%, due 9/1/13 B2 B+ 3,225**(Q)
3,725 Flowserve Corp., Guaranteed Senior Subordinated Notes,
12.25%, due 8/15/10 B2 B 4,321!
2,125 Food Lion, Inc., Notes, 7.55%, due 4/15/07 Ba1 BB+ 2,279
4,125 Forest Oil Corp., Senior Notes, 8.00%, due 6/15/08 Ba3 BB 4,414
2,000 Friendly Ice Cream Corp., Guaranteed Senior Notes,
10.50%, due 12/1/07 B3 B- 2,073
4,165 Georgia Gulf Corp., Guaranteed Senior Subordinated
Notes, 10.38%, due 11/1/07 B2 BB- 4,384
1,250 Georgia Gulf Corp., Notes, 7.63%, due 11/15/05 Ba2 BBB- 1,294
4,500 Georgia Pacific Corp., Senior Notes, 7.38%, due 7/15/08 Ba2 BB+ 4,792
2,600 Grant Prideco, Inc., Guaranteed Senior Notes,
Ser. B, 9.63%, due 12/1/07 Ba3 BB- 2,860
2,375 Grey Wolf, Inc., Senior Notes, 8.88%, due 7/1/07 B1 BB- 2,440(QQ)
1,250 Gruma S.A., Senior Notes, 7.63%, due 10/15/07 Ba2 BB+ 1,327
2,325 Gulfmark Offshore, Inc., Guaranteed Senior Notes,
8.75%, due 6/1/08 B1 BB- 2,354
2,500 GulfTerra Energy Partners, Senior Notes, 6.25%, due 6/1/10 Ba3 BB 2,512**
1,000 Harrah's Operating Co., Inc., Guaranteed Senior
Subordinated Notes, 7.88%, due 12/15/05 Ba1 BB+ 1,081
</Table>
See Notes to Schedule of Investments
19
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 2,500 Hertz Corp., Notes, 4.70%, due 10/2/06 Baa2 BBB $ 2,470
1,000 Hines Nurseries, Inc., Senior Notes, 10.25%, due 10/1/11 B3 B 1,070**
2,359 HMH Properties, Inc., Guaranteed Senior Notes,
Ser. A, 7.88%, due 8/1/05 Ba3 B+ 2,427
2,000 Host Marriott L.P., Senior Notes, 7.13%, due 11/1/13 Ba3 B+ 1,998**(Q)
2,750 Host Marriott L.P., Senior Notes, Ser. E, 8.38%, due 2/15/06 Ba3 B+ 2,922
1,000 IDEX Corp., Senior Notes, 6.88%, due 2/15/08 Baa3 BBB 1,083
3,000 Illinois Power Co., Mortgage Bonds, 7.50%, due 6/15/09 B3 B 3,255
2,125 Insight Midwest, Senior Notes, 9.75%, due 10/1/09 B2 B+ 2,168
1,825 IOS Capital LLC, Senior Notes, 7.25%, due 6/30/08 Ba1 BBB- 1,811
1,000 Iron Mountain, Inc., Guaranteed Senior Notes, 8.63%,
due 4/1/13 B2 B 1,093
2,250 Iron Mountain, Inc., Guaranteed Senior Subordinated Notes,
8.25%, due 7/1/11 B2 B 2,374
1,000 ITT Corp., Notes, 6.75%, due 11/15/05 Ba1 BB+ 1,055
2,000 Jafra Cosmetics, Senior Subordinated Notes, 10.75%,
due 5/15/11 B3 B- 2,200
3,037 K & F Industries, Inc., Senior Subordinated Notes, 9.25%,
due 10/15/07 B3 B 3,143
2,625 Kansas City Southern Railway Co., Guaranteed Senior Notes,
7.50%, due 6/15/09 Ba3 B+ 2,723
1,525 Kansas Gas & Electric Co., Notes, 7.60%, due 12/15/03 Ba1 BB+ 1,517
3,875 KB Home, Senior Subordinated Notes, 8.63%, due 12/15/08 Ba3 BB- 4,292
2,575 KB Home, Senior Subordinated Notes, 9.50%, due 2/15/11 Ba3 BB- 2,858
500 Kennametal, Inc., Senior Notes, 7.20%, due 6/15/12 Ba1 BBB 528
3,125 Key Energy Services, Inc., Guaranteed Senior Notes,
Ser. C, 8.38%, due 3/1/08 Ba2 BB 3,367!
3,875 L-3 Communications Corp., Guaranteed Senior Subordinated
Notes, Ser. B, 8.00%, due 8/1/08 Ba3 BB- 4,020
1,750 Lamar Media Corp., Guaranteed Senior Subordinated Notes,
8.63%, due 9/15/07 Ba3 B 1,803
1,625 Lamar Media Corp., Guaranteed Notes, 7.25%, due 1/1/13 Ba3 B 1,710
2,000 LIN Television Corp., Senior Subordinated Notes, 6.50%,
due 5/15/13 B2 B 1,945**
1,000 LNR Property Corp., Senior Subordinated Notes, 10.50%,
due 1/15/09 Ba3 B+ 1,069
3,875 LNR Property Corp., Senior Subordinated Notes, 7.63%,
due 7/15/13 Ba3 B+ 3,991**
1,000 Louisiana-Pacific Corp., Senior Subordinated Notes, 10.88%,
due 11/15/08 Ba2 BB- 1,175
1,000 Lyondell Chemical Co., Senior Secured Notes, Ser. A, 9.63%,
due 5/1/07 Ba3 BB- 1,015
4,125 Lyondell Chemical Co., Senior Secured Notes, Ser. B, 9.88%,
due 5/1/07 Ba3 BB- 4,187
2,150 Magnum Hunter Resources, Inc., Guaranteed Senior Notes,
10.00%, due 6/1/07 B2 B+ 2,223!
2,000 MCI Communications Corp., Senior Debentures, 8.25%,
due 1/20/23 1,655(^)^^
2,500 MCI Communications Corp., Senior Debentures, 7.13%,
due 6/15/27 2,069(^)^^
2,000 MCI Communications Corp., Senior Notes, 7.50%,
due 8/20/04 1,655(^)^^
</Table>
20
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 1,000 MGM Mirage, Inc., Guaranteed Senior Notes, 8.50%,
due 9/15/10 Ba1 BB+ $ 1,134
2,000 MGM Mirage, Inc., Guaranteed Senior Subordinated Notes,
9.75%, due 6/1/07 Ba2 BB- 2,268
2,125 MGM Mirage, Inc., Senior Notes, 6.00%, due 10/1/09 Ba1 BB+ 2,152
3,849 Midland Funding II, Debentures, Ser. A, 11.75%, due 7/23/05 Ba3 BB- 4,272
3,925 Millennium America, Inc., Guaranteed Notes, 7.00%,
due 11/15/06 Ba3 BB- 3,856
1,000 Mirage Resorts, Inc., Senior Notes, 7.25%, due 10/15/06 Ba1 BB+ 1,068
1,500 Nalco Co., Senior Notes, 7.75%, due 11/15/11 B2 B 1,560**(Q)
500 Nalco Co., Senior Subordinated Notes, 8.88%, due 11/15/13 Caa1 B 520**(Q)
3,825 Navistar International, Senior Subordinated Notes,
Ser. B, 8.00%, due 2/1/08 B2 B 3,892
1,275 NCI Building Systems, Inc., Senior Subordinated Notes,
9.25%, due 5/1/09 B2 B 1,342
1,000 Newfield Exploration Co., Senior Notes, 7.63%, due 3/1/11 Ba2 BB+ 1,095
1,249 Nextel Communications, Inc., Senior Discount Notes,
9.95%, due 2/15/08 B2 B+ 1,312
2,125 Nextel Communications, Inc., Senior Notes, 6.88%,
due 10/31/13 B2 B+ 2,154
2,275 Norampac, Inc., Senior Notes, 6.75%, due 6/1/13 Ba2 BB+ 2,366**
2,250 Norske Skog Canada Ltd., Guaranteed Senior Notes,
Ser. D, 8.63%, due 6/15/11 Ba2 BB 2,306
1,625 Nortek, Inc., Senior Notes, Ser. B, 9.25%, due 3/15/07 B1 B+ 1,680
2,375 Nortek, Inc., Senior Notes, Ser. B, 9.13%, due 9/1/07 B1 B+ 2,458
1,250 Nortel Networks Corp., Guaranteed Notes, 7.40%, due 6/15/06 B3 B 1,313
1,625 Northwest Pipeline Corp., Debentures, 6.63%, due 12/1/07 B1 B+ 1,698
4,250 NVR, Inc., Senior Notes, 5.00%, due 6/15/10 Ba1 BB+ 4,154
400 Overseas Shipholding Group, Inc., Notes, 8.00%, due 12/1/03 Ba1 BB+ 402
2,250 Owens & Minor, Inc., Senior Subordinated Notes, 8.50%,
due 7/15/11 Ba3 BB- 2,475
4,125 Owens-Brockway Glass Container, Inc., Guaranteed Senior
Notes, 8.88%, due 2/15/09 B1 BB 4,475
1,250 Owens-Brockway Glass Container, Inc., Senior Notes, 8.25%,
due 5/15/13 B2 B+ 1,319
2,000 Pacifica Papers, Inc., Senior Notes, 10.00%, due 3/15/09 Ba2 BB 2,120
2,500 Paramount Resources Ltd., Senior Notes, 7.88%, due 11/1/10 B2 B 2,487
2,500 Park Place Entertainment Corp., Senior Notes, 7.50%,
due 9/1/09 Ba1 BB+ 2,725
2,500 Park Place Entertainment Corp., Senior Subordinated Notes,
7.88%, due 12/15/05 Ba2 BB- 2,653
33 Pennzoil-Quaker State Co., Senior Notes, 10.00%, due 11/1/08 Aa2 39
2,000 PG&E Corp., Senior Secured Notes, 6.88%, due 7/15/08 2,120**
1,000 Phelps Dodge Corp., Notes, 6.38%, due 11/1/04 Baa3 BBB- 1,028
2,250 Pierce Leahy Command Co., Senior Notes, 8.13%, due 5/15/08 B2 B 2,346
1,000 Pilgrim's Pride Corp., Senior Notes, 9.63%, due 9/15/11 B1 BB- 1,094
1,625 Plains All-American Pipeline L.P., Senior Notes, 7.75%,
due 10/15/12 Ba2 BB+ 1,796
1,875 Pogo Producing Co., Senior Subordinated Notes, Ser. B,
10.38%, due 2/15/09 Ba3 BB 2,016
1,250 Pogo Producing Co., Senior Subordinated Notes, Ser. B,
8.25%, due 4/15/11 Ba3 BB 1,381
</Table>
See Notes to Schedule of Investments
21
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 2,750 Potlatch Corp., Guaranteed Senior Subordinated Notes,
10.00%, due 7/15/11 Ba1 BB- $ 3,083
3,425 Pride International, Inc., Senior Notes, 10.00%, due 6/1/09 Ba2 BB 3,690
1,875 Pride Petroleum Services, Inc., Senior Notes, 9.38%, due 5/1/07 Ba2 BB 1,936
3,125 PSE&G Energy Holdings, Inc., Notes, 7.75%, due 4/16/07 3,156^^
2,875 Qwest Corp., Notes, 7.20%, due 11/1/04 Ba3 B- 2,947
3,000 Qwest Corp., Tranche A, 4.75%, due 7/6/30 Ba3 3,083
3,000 Qwest Corp., Tranche B, 6.95%, due 6/30/10 Ba3 3,004
1,875 Radio One, Inc., Guaranteed Senior Notes, 8.88%, due 7/1/11 B2 B- 2,063
1,250 Reddy Ice Group, Inc., Senior Subordinated Notes, 8.88%,
due 8/1/11 B3 B- 1,306**
3,250 Reliant Resources, Inc., Senior Secured Notes, 9.25%,
due 7/15/10 B1 B 2,909**
2,125 Remington Arms Co., Inc., Guaranteed Senior Notes, 10.50%,
due 2/1/11 B2 B- 2,223
3,000 Rent-A-Center, Inc., Guaranteed Senior Notes, Ser. B, 7.50%,
due 5/1/10 B1 B+ 3,180
4,675 Ryland Group, Inc., Senior Notes, 8.00%, due 8/15/06 Ba1 BBB- 5,119
2,425 Salem Communications Holding Corp., Guaranteed Senior
Subordinated Notes, Ser. B, 9.00%, due 7/1/11 B3 B- 2,610
3,850 Scotts Co., Senior Subordinated Notes, 6.63%, due 11/15/13 Ba3 B+ 3,898**
2,175 Seminis Vegetable Seeds, Inc., Senior Subordinated Notes,
10.25%, due 10/1/13 B3 B- 2,327**
3,550 Sequa Corp., Senior Notes, Ser. B, 8.88%, due 4/1/08 B1 BB- 3,874
2,175 Sinclair Broadcast Group, Inc., Guaranteed Senior Subordinated
Notes, 8.00%, due 3/15/12 B2 B 2,295
3,525 Six Flags, Inc., Senior Notes, 8.88%, due 2/1/10 B2 B- 3,349
1,000 Smithfield Foods, Inc., Senior Subordinated Notes, 7.63%,
due 2/15/08 Ba3 BB- 1,050!
3,625 Southern California Edison Co., Senior Mortgage-Secured
Bonds, 8.00%, due 2/15/07 Ba2 BB 4,069
2,425 Southern Natural Gas Co., Notes, 6.70%, due 10/1/07 B1 B+ 2,449
1,325 Southern Natural Gas Co., Notes, 6.13%, due 9/15/08 B1 B+ 1,312
1,000 Southern Star Central Corp., Senior Secured Notes, 8.50%,
due 8/1/10 B1 B+ 1,060**
3,875 Standard Pacific Corp., Senior Notes, 6.50%, due 10/1/08 Ba2 BB 3,914
1,000 Steinway Musical Instruments, Inc., Guaranteed Senior Notes,
8.75%, due 4/15/11 Ba3 B+ 1,038
5,000 Stone Container Corp., Senior Notes, 9.75%, due 2/1/11 B2 B 5,450
750 Stone Container Finance, Guaranteed Senior Notes, 11.50%,
due 8/15/06 B2 B 793**
1,500 Teco Energy, Inc., Senior Notes, 7.50%, due 6/15/10 Ba1 BB+ 1,541
5,425 Tembec Industries, Inc., Guaranteed Senior Notes, 8.63%,
due 6/30/09 Ba3 BB 5,289
5,250 Tenet Healthcare Corp., Senior Notes, 6.38%, due 12/1/11 Ba3 BB- 4,869
3,000 Toll Corp., Guaranteed Senior Subordinated Notes, 8.13%,
due 2/1/09 Ba2 BB+ 3,150
1,875 Toll Corp., Senior Subordinated Notes, 8.25%, due 12/1/11 Ba2 BB+ 2,081
3,025 Transcontinental Gas Pipe Line Corp., Notes, 6.25%,
due 1/15/08 B1 B+ 3,123
2,625 Triad Hospitals, Inc., Guaranteed Senior Notes, Ser. B, 8.75%,
due 5/1/09 B1 B+ 2,842
</Table>
22
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 3,000 Triton PCS, Inc., Guaranteed Senior Subordinated Notes,
9.38%, due 2/1/11 B3 B- $ 2,962
750 Tuboscope, Inc., Guaranteed Senior Notes, 7.50%,
due 2/15/08 Baa2 BBB+ 807
2,675 TXU Corp., Senior Notes, Ser. J, 6.38%, due 6/15/06 Ba1 BBB- 2,835(QQ)
1,375 United Rentals, Inc., Guaranteed Senior Notes, Ser. B, 10.75%,
due 4/15/08 B1 BB- 1,543
1,500 United Rentals, Inc., Guaranteed Senior Subordinated Notes,
Ser. B, 8.80%, due 8/15/08 B2 B+ 1,572
3,000 United Rentals, Inc., Senior Subordinated Notes, 7.75%,
due 11/15/13 B2 B+ 2,992**(Q)
2,000 Universal City Development, Senior Notes, 11.75%,
due 4/1/10 B2 B- 2,313**
500 Vintage Petroleum, Inc., Senior Subordinated Notes,
9.75%, due 6/30/09 B1 B 531
2,000 Vitro S.A. de C.V., Notes, 11.75%, due 11/1/13 B2 B- 1,935**
5,250 Vought Aircraft Industries, Inc., Senior Notes, 8.00%,
due 7/15/11 B2 B 5,276**
2,250 Warnaco, Inc., Senior Notes, 8.88%, due 6/15/13 B2 B 2,407**
1,000 Williams Cos., Inc., Senior Notes, 8.63%, due 6/1/10 B3 B+ 1,095
5,000 World Color Press, Inc., Senior Subordinated Notes, 7.75%,
due 2/15/09 Baa2 BBB- 5,227
-------------
TOTAL CORPORATE DEBT SECURITIES (COST $464,704) 476,135
-------------
CONVERTIBLE BONDS (2.2%)
1,000 CommScope, Inc., Subordinated Notes, 4.00%, due 12/15/06 Ba3 B+ 943
1,250 Fairchild Semiconductor Corp., Senior Subordinated
Notes, 5.00%, due 11/1/08 B 1,308
1,250 Kerr-McGee Corp., Subordinated Debentures, 5.25%,
due 2/15/10 Ba1 BBB- 1,295
1,000 Key Energy Services, Inc., Subordinated Notes, 5.00%,
due 9/15/04 Ba3 989
3,025 LifePoint Hospitals, Inc., Subordinated Notes, 4.50%,
due 6/1/09 B3 B 2,912
4,250 Nortel Networks Corp., Notes, 4.25%, due 9/1/08 B3 B 4,037
-------------
TOTAL CONVERTIBLE BONDS (COST $11,102) 11,484
-------------
REPURCHASE AGREEMENTS (4.8%)
24,745 State Street Bank and Trust Co. Repurchase Agreement, 0.97%,
due 11/3/03, dated 10/31/03, Maturity Value $24,747,000,
Collateralized by $25,230,000 U.S. Treasury Notes, 1.75%,
due 12/31/04 (Collateral Value $25,487,951) (COST $24,745) 24,745#
-------------
SHORT-TERM INVESTMENTS (0.8%)
4,156 N&B Securities Lending Quality Fund, LLC (COST $4,156) 4,156#
-------------
<Caption>
NUMBER OF SHARES
WARRANTS (0.0%)
500 Dayton Superior Corp. --*
625 XM Satellite Radio, Inc. --*
-------------
TOTAL WARRANTS (COST $0) --
-------------
TOTAL INVESTMENTS (99.4%) (COST $504,707) 516,520##
Cash, receivables and other assets, less liabilities (0.6%) 3,131
-------------
TOTAL NET ASSETS (100.0%) $ 519,651
-------------
</Table>
See Notes to Schedule of Investments
23
<Page>
SCHEDULE OF INVESTMENTS Limited Maturity Bond Fund
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
U.S. TREASURY SECURITIES (26.4%)
$ 9,750 U.S. Treasury Bills, 1.02%, due 2/19/04 TSY TSY $ 9,720
170 U.S. Treasury Notes, 3.00%, due 1/31/04 TSY TSY 171
6,650 U.S. Treasury Notes, 3.63%, due 3/31/04 TSY TSY 6,720
12,500 U.S. Treasury Notes, 3.38%, due 4/30/04 TSY TSY 12,643
8,200 U.S. Treasury Notes, 2.88%, due 6/30/04 TSY TSY 8,295
2,500 U.S. Treasury Notes, 2.13%, due 8/31/04 TSY TSY 2,519
7,850 U.S. Treasury Notes, 2.00%, due 11/30/04 TSY TSY 7,909
490 U.S. Treasury Notes, 1.75%, due 12/31/04 TSY TSY 492
10,350 U.S. Treasury Notes, 1.63%, due 3/31/05 TSY TSY 10,369
3,500 U.S. Treasury Notes, 3.00%, due 11/15/07 TSY TSY 3,517
-------------
TOTAL U.S. TREASURY SECURITIES (COST $62,277) 62,355
-------------
U.S. GOVERNMENT AGENCY SECURITIES (9.3%)
22,000 Fannie Mae, Disc. Notes, 1.05%, due 12/3/03 (COST $21,979) AGY AGY 21,979
-------------
MORTGAGE-BACKED SECURITIES (10.8%)
FANNIE MAE
1,100 Collateralized Mortgage Obligations, Ser. 2003-16,
Class PA, 4.50%, due 11/25/09 AGY AGY 1,123
11,381 Pass-Through Certificates, 5.50%, due 9/1/17 AGY AGY 11,723
FREDDIE MAC
37 ARM Certificates, 3.63%, due 1/1/17 AGY AGY 38
1,100 Collateralized Mortgage Obligations, Ser. 2592,
Class PA, 4.50%, due 12/15/07 AGY AGY 1,114
859 Pass-Through Certificates, 5.00%, due 2/1/07 AGY AGY 884
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
56 Pass-Through Certificates, 12.00%, due 12/15/12 - 5/15/14 AGY AGY 63
10,462 Pass-Through Certificates, 5.00%, due 9/15/33 AGY AGY 10,351
246 Pass-Through Certificates, 7.00%, due 4/15/11 AGY AGY 263
18 Pass-Through Certificates, 7.50%, due 10/15/09 - 9/15/10 AGY AGY 20
-------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $25,578) 25,579
-------------
CORPORATE DEBT SECURITIES (53.2%)
1,200 Abitibi-Consolidated, Inc., Bonds, 8.30%, due 8/1/05 Ba1 BB+ 1,265
2,555 Akzo Nobel, Inc., Guaranteed Notes, 6.00%, due 11/15/03 A3 A- 2,558**
840 Allied Waste North America, Inc., Guaranteed Senior Notes,
Ser. B, 7.63%, due 1/1/06 Ba3 BB- 888
2,450 Allstate Corp., Senior Notes, 7.88%, due 5/1/05 A1 A+ 2,664
1,880 American General Finance Corp., Floating Rate Notes,
Ser. G, 1.37%, due 1/9/04 A1 A+ 1,881
970 American General Finance Corp., Floating Rate Notes,
Ser. G, 1.52%, due 12/17/04 A1 A+ 973
1,310 AT&T Wireless Services, Inc., Senior Notes, 7.35%,
due 3/1/06 Baa2 BBB 1,437
1,000 Bausch & Lomb, Inc., Notes, 6.75%, due 12/15/04 Ba1 BBB- 1,035
2,350 Bear Stearns Co., Inc., Floating Rate Notes, 1.42%,
due 12/1/03 A1 A 2,351
2,120 Bear Stearns Co., Inc., Notes, 6.50%, due 5/1/06 A1 A 2,316
1,300 Boeing Capital Corp., Senior Notes, 5.65%, due 5/15/06 A3 A 1,387
2,000 Boeing Co., Notes, 6.63%, due 6/1/05 A2 A 2,132
2,700 British Telecom PLC, Notes, 7.88%, due 12/15/05 Baa1 A- 2,990
1,000 Capital One Bank, Senior Notes, 8.25%, due 6/15/05 Baa2 BBB- 1,087
</Table>
24
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 1,000 Caterpillar Financial Services Corp., Floating Rate Notes,
1.27%, due 2/4/04 A2 A $ 1,000
1,200 Caterpillar Financial Services Corp., Medium-Term Notes,
7.59%, due 12/10/03 A2 A 1,208
2,400 Caterpillar Financial Services Corp., Notes, 6.88%,
due 8/1/04 A2 A 2,495
1,300 CBS Corp., Guaranteed Senior Notes, 7.15%, due 5/20/05 A3 A- 1,402
960 Chase Manhattan Corp., Subordinated Notes,
7.25%, due 6/1/07 A2 A 1,086
1,855 CIT Group, Inc., Notes, 5.50%, due 2/15/04 A2 A 1,877
1,300 Comcast Cable Communications, Senior Notes,
6.38%, due 1/30/06 Baa3 BBB 1,400
1,250 Cox Communications, Inc., Notes, 7.75%, due 8/15/06 Baa2 BBB 1,411
530 Daimler Chrysler N.A. Holdings Corp., Floating Rate Notes,
Ser. C, 1.61%, due 8/2/04 A3 BBB 530
1,500 Daimler Chrysler N.A. Holdings Corp., Guaranteed Notes,
6.40%, due 5/15/06 A3 BBB 1,603
400 Delhaize America, Inc., Guaranteed Notes, 7.38%, due 4/15/06 Ba1 BB+ 427
2,400 Dow Chemical Co., Notes, 5.25%, due 5/14/04 A3 A- 2,436
1,000 EOP Operating Limited Partnership, Notes, 6.50%, due 1/15/04 Baa1 BBB+ 1,009
660 EOP Operating Limited Partnership, Notes, 6.63%, due 2/15/05 Baa1 BBB+ 697
1,300 Everest Reinsurance Holdings, Inc., Senior Notes,
8.50%, due 3/15/05 A3 A- 1,406
3,500 General Electric Capital Corp., Medium-Term Notes,
Ser. A, 4.25%, due 1/28/05 Aaa AAA 3,612
600 General Motors Acceptance Corp., Floating Rate Notes,
1.44%, due 11/7/03 A3 BBB 600
1,000 General Motors Acceptance Corp., Notes, 5.75%, due 11/10/03 A3 BBB 1,000
3,170 General Motors Acceptance Corp., Notes, 6.85%, due 6/17/04 A3 BBB 3,264
800 General Motors Acceptance Corp., Notes, 6.13%, due 9/15/06 A3 BBB 846
540 General Motors Acceptance Corp., Notes, 6.13%, due 2/1/07 A3 BBB 567
815 Hartford Life, Inc., Notes, 6.90%, due 6/15/04 A3 A- 841
1,750 HCA, Inc., Notes, 6.91%, due 6/15/05 Ba1 BBB- 1,838
1,900 HCA, Inc., Notes, 5.25%, due 11/6/08 Ba1 BBB- 1,894
2,000 Heller Financial, Inc., Notes, 6.00%, due 3/19/04 Aaa AAA 2,035
1,440 Hertz Corp., Senior Notes, 8.25%, due 6/1/05 Baa2 1,525
340 IBP, Inc., Senior Notes, 6.13%, due 2/1/06 Baa3 BBB 358
1,365 International Lease Finance Corp., Floating Rate Notes,
2.40%, due 1/13/05 A1 AA- 1,382
2,120 International Lease Finance Corp., Medium-Term Notes,
Ser. M, 5.50%, due 6/7/04 A1 AA- 2,168
1,325 International Paper Co., Notes, 8.13%, due 7/8/05 Baa2 BBB 1,452
1,070 ITT Corp., Notes, 6.75%, due 11/15/05 Ba1 BB+ 1,129
4,190 John Deere Capital Corp., Floating Rate Senior Notes,
1.43%, due 5/20/05 A3 A- 4,192
1,400 Lear Corp., Guaranteed Senior Notes, Ser. B,
7.96%, due 5/15/05 Ba1 BBB- 1,505
635 Lehman Brothers Holdings, Inc., Floating Rate Notes,
Ser. G, 1.55%, due 7/6/04 A1 A 637
1,200 Merrill Lynch & Co., Inc., Floating Rate Medium-Term Notes,
Ser. B, 1.36%, due 2/3/05 Aa3 A+ 1,203
400 Methanex Corp., Notes, 7.75%, due 8/15/05 Ba1 BBB- 421
2,200 Morgan Stanley Dean Witter & Co., Notes,
5.63%, due 1/20/04 Aa3 A+ 2,220
</Table>
See Notes to Schedule of Investments
25
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 2,600 National Rural Utilities Cooperative Finance Corp.,
Collateral Trust, 6.00%, due 5/15/06 A1 A+ $ 2,815
2,450 Nationwide Mutual Insurance Co., Notes, 6.50%, due 2/15/04 A2 A- 2,486**
2,600 Pacific Bell, Notes, 6.25%, due 3/1/05 A1 A+ 2,748
2,900 Paine Webber Group, Inc., Notes, 6.45%, due 12/1/03 Aa2 AA+ 2,911
230 PDVSA Finance Ltd., Notes, 8.75%, due 2/15/04 Caa1 B+ 231
1,000 Pepsi Bottling Holdings, Inc., Guaranteed Notes, 5.38%,
due 2/17/04 A1 A+ 1,012**
1,000 Placer Dome, Inc., Notes, 6.91%, due 11/21/05 1,084^^
1,200 Powergen US Funding LLC, Notes, 4.50%, due 10/15/04 A3 BBB+ 1,225
620 Quest Diagnostics, Inc., Senior Notes, 6.75%, due 7/12/06 Baa3 BBB 680
1,645 Raytheon Co., Notes, 6.50%, due 7/15/05 Baa3 BBB- 1,761
1,340 Reliant Energy Resources Corp., Notes, Ser. B, 8.13%,
due 7/15/05 Ba1 BBB 1,442
1,000 Royal Caribbean Cruises Ltd., Senior Notes, 8.13%,
due 7/28/04 Ba2 BB+ 1,034
1,500 Sara Lee Corp., Medium-Term Notes, Ser. B, 6.40%, due 6/9/05 A3 A+ 1,601
1,500 SCANA Corp., Floating Rate Notes, 1.74%, due 2/1/04 A3 BBB+ 1,500
2,400 Sprint Capital Corp., Guaranteed Notes, 5.70%, due 11/15/03 Baa3 BBB- 2,402
730 TCI Communications, Inc., Medium-Term Notes, 8.35%,
due 2/15/05 Baa3 BBB 786
2,575 Time Warner, Inc., Notes, 5.63%, due 5/1/05 Baa1 BBB+ 2,702
1,250 Tyco International Group S.A., Guaranteed Notes, 5.88%,
due 11/1/04 Ba2 BBB- 1,289
2,550 Tyco International Group S.A., Guaranteed Notes, 6.38%,
due 6/15/05 Ba2 BBB- 2,674
1,675 Tyson Foods, Inc., Notes, 6.63%, due 10/1/04 Baa3 BBB 1,738
2,350 Verizon Wireless, Inc., Floating Rate Notes, 1.54%,
due 12/17/03 A3 A+ 2,351
1,500 Walt Disney Co., Notes, 4.88%, due 7/2/04 Baa1 BBB+ 1,532
2,500 Washington Mutual, Inc., Senior Notes, 5.63%, due 1/15/07 A3 BBB+ 2,693
1,285 Wells Fargo & Co., Notes, 6.63%, due 7/15/04 Aa1 AA- 1,331
2,000 Weyerhaeuser Co., Notes, 5.50%, due 3/15/05 Baa2 BBB 2,084
1,750 Xcel Energy, Inc., Senior Notes, 3.40%, due 7/1/08 Baa3 BBB- 1,698**
-------------
TOTAL CORPORATE DEBT SECURITIES (COST $122,951) 125,450
-------------
TOTAL INVESTMENTS (99.7%) (COST $232,790) 235,363##
Cash, receivables and other assets, less liabilities (0.3%) 593
-------------
TOTAL NET ASSETS (100.0%) $ 235,956
-------------
</Table>
26
<Page>
SCHEDULE OF INVESTMENTS Municipal Money Fund
<Table>
<Caption>
PRINCIPAL AMOUNT SECURITY @ RATING ~@@ VALUE ++
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 5,000 Charleston Co. (SC) Sch. Dist. TANS, Ser. 2003,
1.25%, due 4/14/04 MIG1 $ 5,010
10,000 Davis Co. (UT) Sch. Dist. TANS, Ser. 2003, 1.50%, due 6/30/04 MIG1 10,038
7,260 Grapevine-Colleyville Independent Sch. Dist. TRANS,
Ser. 2003, 2.00%, due 6/30/04 SP-1+ 7,304
10,000 Gwinnett Co. (GA) Sch. Dist. Construction Sales Tax Notes,
Ser. 2003, 2.00%, due 12/29/03 MIG1 10,014
6,500 Minnesota Sch. Dist. Tax & Aid Anticipation Borrowing Prog.
Cert. of Participation, Ser. 2003 A, 1.75%, due 8/27/04 MIG1 6,542
5,000 Oregon St. TANS, Ser. 2003, 2.25%, due 11/15/04 MIG1 SP-1+ 5,060
8,000 Sacramento Co. (CA) TRANS, Ser. 2003 A, 2.00%, due 7/30/04 MIG1 SP-1+ 8,063
2,000 San Francisco (CA) City & Co. Unified Sch. Dist. TRANS,
Ser. 2002, 1.75%, due 12/17/03 MIG1 2,002
1,200 Santa Barbara Co. (CA) TRANS, Ser. 2003 A,
2.00%, due 7/23/04 SP-1+ 1,210
10,000 Texas St. TRANS, Ser. 2003, 2.00%, due 8/31/04 MIG1 SP-1+ 10,072
4,600 Wisconsin St. Operating Notes, Ser. 2003,
2.25%, due 6/15/04 MIG1 SP-1+ 4,631
-------------
69,946
-------------
TAX-EXEMPT SECURITIES--PRE-REFUNDED BACKED BY U.S. GOVERNMENT SECURITIES (0.9%)
3,360 Ohio St. Bldg. Au. Fac. Rev. (Adult Correction), Ser. 1995 A,
5.75%, due 10/1/08 PR 10/1/2004 3,536
-------------
TAX-EXEMPT SECURITIES--BACKED BY LETTERS OF CREDIT (2.9%)
BANK OF AMERICA
1,700 Palm Beach Co. (FL) Rev. (The Norton Gallery and Sch.
of Art, Inc. Proj.), Ser. 2000, 1.05%, VRDN due 5/1/30 A-1+ 1,700!!
BANK OF NOVA SCOTIA
4,300 Harris Co. (TX) G.O., Ser. C, 0.85%, TECP due 12/4/03 P-1 A-1+ 4,300(L)
CHASE MANHATTAN BANK, N.A.
4,900 Miami-Dade Co. (FL) Arpt., 1.00%, TECP due 12/3/03 P-1 A-1+ 4,900(Y)
STATE STREET BANK AND TRUST COMPANY
1,000 Rhode Island Std. Loan Au. Prog. Rev., Ser. 1996-1,
1.05%, due 6/1/26 Putable 6/1/04 A-1+ 1,000
-------------
11,900
-------------
TAX-EXEMPT SECURITIES--BACKED BY INSURANCE (4.2%)
AMERICAN MUNICIPAL BOND ASSURANCE CORP.
4,460 Colorado River (TX) Muni. Wtr. Dist. Wtr. Sys. Ref. Rev.,
Ser. 2003, 3.00%, due 1/1/04 4,473
1,300 Michigan Higher Ed. Std. Loan Au. Rev., Ser. 1991 XII-F,
1.12%, VRDN due 10/1/20 VMIG1 1,300
FINANCIAL SECURITY ASSURANCE INC.
11,600 California Hsg. Fin. Agcy. Home Mtge. Rev., Ser. 2003 U,
1.15%, VRDN due 2/1/31 VMIG1 A-1+ 11,600~~
-------------
17,373
-------------
TAX-EXEMPT SECURITIES--OTHER (2.0%)
3,000 Illinois Hlth. Fac. Au. Rev. (Advocate Hlth. Care Network),
Ser. 2003 A, 1.05%, due 11/15/22 Putable 7/6/04 VMIG1 A-1+ 3,000!!
5,220 King Co. (WA) Lake Washington Sch. Dist. Number 414
Unlimited Tax Ref. G.O., Ser. 2002, 3.00%, due 12/1/03 5,227
-------------
8,227
-------------
</Table>
See Notes to Schedule of Investments
27
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT SECURITY @ RATING ~@@ VALUE ++
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
TAX-EXEMPT CASH EQUIVALENT SECURITIES (22.2%)
$ 1,800 Berkeley Co. (SC) IDR (Nucor Corp. Proj.), Ser. 1995,
1.13%, VRDN due 9/1/28 VMIG1 A-1+ $ 1,800!!
5,000 Berkeley Co. (SC) IDR (Nucor Corp. Proj.), Ser. 1996 A,
1.13%, VRDN due 3/1/29 VMIG1 A-1+ 5,000!!
8,300 Berkeley Co. (SC) IDR (Nucor Corp. Proj.), Ser. 1997,
1.13%, VRDN due 4/1/30 VMIG1 A-1+ 8,300!!
1,800 Berkeley Co. (SC) IDR (Nucor Corp. Proj.), Ser. 1998,
1.13%, VRDN due 4/1/31 VMIG1 A-1+ 1,800!!
2,000 Colorado Hsg. & Fin. Au. Multi-Family Hsg. Ref. Rev.
(Huntersridge Proj.), Ser. 1996 E, 1.05%, VRDN due 10/15/16 A-1+ 2,000
1,000 Comm. Dev. Administration (MD) Multi-Family Dev. Ref. Rev.
(Avalon Ridge Apts. Proj.), Ser. 1997, 1.00%, VRDN
due 6/15/26 VMIG1 1,000!!
200 East Baton Rouge Parish (LA) Ref. PCR (Exxon Proj.),
Ser. 1989, 1.15%, VRDN due 11/1/19 P-1 A-1+ 200!!
200 East Baton Rouge Parish (LA) Ref. PCR (Exxon Proj.),
Ser. 1993, 1.10%, VRDN due 3/1/22 P-1 A-1+ 200!!
1,000 Florida Hsg. Fin. Agcy. Multi-Family Hsg. Rev.
(Beneva Place Proj.), Ser. 1988 C, 0.95%, VRDN due 8/1/06 VMIG1 1,000
2,360 Florida Hsg. Fin. Agcy. Rev. (Heron Park Proj.), Ser. 1996 U,
1.02%, VRDN due 12/1/29 VMIG1 2,360!!
2,500 Gibson Co. (IN) PCR (Toyota Motor Mfg. Proj.), Ser. 1997,
1.10%, VRDN due 10/1/27 A-1+ 2,500!!
6,000 Gibson Co. (IN) PCR (Toyota Motor Mfg. Proj.), Ser. 2001,
1.10%, VRDN due 2/1/31 VMIG1 A-1+ 6,000!!
100 Gulf Coast (TX) Waste Disp. Au. Env. Fac. Rev.
(Amoco Oil Co. Proj.), Ser. 1998, 1.20%, VRDN due 1/1/26 VMIG1 A-1+ 100!!
3,900 Gulf Coast (TX) Waste Disp. Au. Env. Fac. Rev.
(ExxonMobil Proj.), Ser. 2003, 1.13%, VRDN due 9/1/25 P-1 A-1+ 3,900!!
100 Gulf Coast (TX) Waste Disp. Au. PCR (Amoco Oil Co. Proj.),
Ser. 1994, 1.20%, VRDN due 6/1/24 VMIG1 A-1+ 100!!
100 Gulf Coast (TX) Waste Disp. Au. Ref. PCR
(Amoco Oil Co. Proj.), Ser. 1992, 1.15%, VRDN due 10/1/17 VMIG1 100!!
100 Hurley (NM) PCR (Kennecott Sante Fe Corp. Proj.),
Ser. 1985, 1.15%, VRDN due 12/1/15 P-1 A-1+ 100!!
100 Jackson Co. (MS) Port Fac. Ref. Rev. (Chevron U.S.A.,
Inc. Proj.), Ser. 1993, 1.15%, VRDN due 6/1/23 P-1 100!!
100 Lincoln Co. (WY) PCR (Exxon Proj.), Ser. 1984 B,
1.09%, VRDN due 11/1/14 P-1 A-1+ 100!!
10,000 Lincoln Co. (WY) PCR (Exxon Proj.), Ser. 1984 C,
1.09%, VRDN due 11/1/14 P-1 A-1+ 10,000!!
300 Lincoln Co. (WY) PCR (Exxon Proj.), Ser. 1985,
1.12%, VRDN due 8/1/15 P-1 A-1+ 300!!
200 Lincoln Co. (WY) PCR (Exxon Proj.), Ser. 1987 C,
1.15%, VRDN due 7/1/17 P-1 A-1+ 200!!
300 Louisville & Jefferson Co. (KY) Reg. Arpt. Au. Spec. Fac.
Rev. (UPS Worldwide Forwarding, Inc. Proj.), Ser. 1999 B,
1.15%, VRDN due 1/1/29 VMIG1 A-1+ 300!!
11,700 New York City (NY) Hsg. Dev. Corp. Multi-Family Rental Hsg.
Rev. (James Tower Dev.), Ser. 2002 A, 1.00%, VRDN
due 6/15/32 P-1 A-1 11,700!!
1,500 New York City (NY) Hsg. Dev. Corp. Multi-Family Rental Hsg.
Rev. (Parkgate Dev.), Ser. 1998, 1.00%, VRDN due 10/15/28 A-1+ 1,500
2,200 New York City (NY) Hsg. Dev. Corp. Multi-Family Rental Hsg.
Rev. (The Foundry), Ser. 2002 A, 1.08%, VRDN due 8/15/32 A-1+ 2,200!!
</Table>
28
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT SECURITY @ RATING ~@@ VALUE ++
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 7,900 New York St. Hsg. Fin. Agcy. Rev. (101 West End Avenue Hsg.),
Ser. 1999 A, 1.12%, VRDN due 5/1/31 VMIG1 $ 7,900!!
1,100 Ohio St. Solid Waste Ref. Rev. (BP Prod. North America, Inc.
Proj. - BP p.l.c.), Ser. 2002, 1.20%, VRDN due 8/1/34 VMIG1 A-1+ 1,100!!
3,400 Pinellas Co. (FL) Hsg. Fin. Au. Multi-Family Hsg. Ref. Rev.
(Foxbridge Apts. Proj.), Ser. 1995 A, 1.02%, VRDN due 6/15/25 A-1+ 3,400!!
11,000 Port of Port Arthur (TX) Navigation Dist. Rev.
(BASF Corp. Proj.), Ser. 2000 A, 0.90%, TECP due 11/10/03 P-1 11,000
1,125 Salt Lake Co. (UT) Ref. PCR (Svc. Sta. Holdings, Inc.
Proj.-The British Petroleum Co. p.l.c.), Ser. 1994,
1.15%, VRDN due 2/1/08 P-1 A-1+ 1,125!!
2,200 Stanton Co. (NE) IDR (Nucor Corp. Proj.), Ser. 1996,
1.13%, VRDN due 11/1/26 VMIG1 A-1+ 2,200!!
300 Uinta Co. (WY) Ref. PCR (Chevron U.S.A., Inc. Proj.),
Ser. 1992, 1.15%, VRDN due 12/1/22 VMIG1 300!!
100 Valdez (AK) Marine Term. Ref. Rev. (ExxonMobil Proj.),
Ser. 2001, 1.15%, VRDN due 1/1/31 VMIG1 100!!
100 West Side Calhoun Co. (TX) Nav. Dist. Sewage & Solid Waste
Disp. Rev. (BP Chemicals, Inc. Proj.), Ser. 1996,
1.20%, VRDN due 4/1/31 P-1 100!!
500 Whiting (IN) Env. Fac. Rev. (Amoco Oil Co. Proj.), Ser. 2000,
1.20%, VRDN due 7/1/31 VMIG1 A-1+ 500!!
400 Whiting (IN) Swr. & Solid Waste Disp. Ref. Rev. (Amoco Oil
Co. Proj.), Ser. 1999, 1.20%, VRDN due 1/1/26 VMIG1 A-1+ 400!!
-------------
90,985
-------------
TAX-EXEMPT CASH EQUIVALENT SECURITIES--BACKED BY LETTERS OF CREDIT (38.6%)
ABN AMRO BANK NV
1,000 Clark Co. (NV) IDR (Nevada Cogeneration Assoc. 2 Proj.),
Ser. 1992, 1.20%, VRDN due 12/1/22 VMIG1 A-1+ 1,000!!
150 Grand Forks (ND) Hlth. Care Fac. Rev. (United Hosp. Oblig.
Group Proj.), Ser. 1992, 1.15%, VRDN due 12/1/16 VMIG1 150!!
BANK OF AMERICA
1,200 Calhoun Co. (TX) Navigation IDA Port Rev. (Formosa Plastics
Corp., Texas Proj.), Ser. 1994, 1.17%, VRDN due 11/1/15 VMIG1 1,200!!
2,400 Florida Hsg. Fin. Corp. Rev. (The Club at Vero Arpt. Proj.),
Ser. 1998 E, 0.99%, VRDN due 6/1/17 A-1+ 2,400!!
1,825 Hillsborough Co. (FL) Hsg. Fin. Au. Multi-Family Hsg. Rev.
(Lakewood Shores Apts. Proj.), Ser. 2000 A,
1.10%, VRDN due 4/1/33 A-1+ 1,825!!
300 Louisiana Pub. Fac. Au. IDR (Kenner Hotel L.P. Proj.),
Ser. 1985, 1.15%, VRDN due 12/1/15 P-1 300!!
2,800 Nashville & Davidson Co. (TN) Metro Gov't. IDB Multi-Family
Hsg. Rev., Ser. 1996 A, 1.05%, VRDN due 9/1/06 VMIG1 2,800
700 Port of Portland (OR) Spec. Oblig. Rev. (Horizon Air Ind.,
Inc. Proj.), Ser. 1997, 1.20%, VRDN due 6/15/27 A-1+ 700!!
BANK OF NEW YORK
10,000 New York City (NY) G.O., Sub. Ser. 2002 C-5,
1.10%, VRDN due 8/1/20 VMIG1 A-1+ 10,000
BANK OF NOVA SCOTIA
200 California Hsg. Fin. Agcy. Home Mtge. Rev., Ser. 2000 M,
1.20%, VRDN due 8/1/33 VMIG1 A-1 200
3,510 Sunshine St. (FL) Gov't. Fin. Comm. Rev., Ser. A,
0.85%, TECP due 2/3/04 P-1 A-1 3,510
</Table>
See Notes to Schedule of Investments
29
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT SECURITY @ RATING #@@ VALUE ++
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 2,331 Sunshine St. (FL) Gov't. Fin. Comm. Rev., Ser. A,
0.90%, TECP due 2/3/04 P-1 A-1 $ 2,331
2,000 Wisconsin St. G.O., Ser. A, 0.85%, TECP due 1/8/04 P-1 A-1 2,000(L)
BANK ONE
2,000 Colorado Hlth. Fac. Au. Hosp. Rev. (Boulder Comm.
Hosp. Proj.), Ser. 2000, 1.20%, VRDN due 10/1/30 VMIG1 A-1 2,000!!
1,100 Emery Co. (UT) Ref. PCR (PacifiCorp Proj.), Ser. 1991,
1.10%, VRDN due 7/1/15 VMIG1 A-1+ 1,100!!
1,200 Galveston (TX) Ind. Dev. Corp. Ref. Rev. (Mitchell
Interests Proj.), Ser. 1993 A, 1.25%, VRDN due 9/1/13 A-1 1,200
2,000 Lake Charles (LA) Harbor & Rev. Dist. Ref. Rev.
(Conoco, Inc. Proj.), Ser. 1999 A, 1.05%, VRDN due 9/1/29 VMIG1 A-1+ 2,000!!
4,000 Midlothian (TX) IDC Env. Fac. Rev. (Holnam TX L.P. Proj.),
Ser. 1999, 1.07%, VRDN due 9/1/31 A-1 4,000!!
BANQUE NATIONALE DE PARIS
2,500 Pinal Co. (AZ) Ind. Dev. Au. Ref. PCR (Magma Copper
Co. Proj.), Ser. 1992, 1.05%, VRDN due 12/1/11 VMIG1 A-1+ 2,500!!
BARCLAYS BANK INT'L., LTD.
9,536 Michigan Strategic Fund Solid Waste Disp. Rev. (Grayling
Generating Proj.), Ser. 1990, 1.10%, VRDN due 1/1/14 VMIG1 9,536!!
1,400 Ohio St. Wtr. Dev. Au. PCR (Ohio Edison Co. Proj.),
Ser. 1988, 1.20%, VRDN due 9/1/18 P-1 1,400!!
BAYERISCHE LANDESBANK GIROZENTRALE
300 Chicago (IL) O'Hare Int'l. Arpt. Rev. (Gen. Arpt.
Second Lien), Ser. 1988 B, 1.02%, VRDN due 1/1/18 VMIG1 300
100 Idaho Hlth. Fac. Au. Rev. (St. Luke's Reg. Med. Ctr. Proj.),
Ser. 2000, 1.15%, VRDN due 7/1/30 VMIG1 A-1+ 100(YY)!!
875 New York St. Job Dev. Au. Spec. Purp. Rev., Ser. 1989 A-1
through A-42, 1.13%, VRDN due 3/1/05 VMIG1 875(e)
CHASE MANHATTAN BANK, N.A.
2,000 Brazoria Co. (TX) Hlth. Fac. Dev. Corp. Hosp. Rev.
(Brazosport Mem. Hosp.), Ser. 1999, 1.10%, VRDN due 7/1/13 VMIG1 2,000!!
1,455 Douglas Co. (GA) Dev. Au. IDR (Whirlwind Steel Bldg.,
Inc. Proj.), Ser. 1997, 1.10%, VRDN due 12/1/12 VMIG1 A-1 1,455!!
400 Lawrence Co. (SD) Solid Waste Disp. Rev. (Homestake
Mining Co. Proj.), Ser. 1997 A, 1.25%, VRDN due 7/1/32 P-1 400!!
CITIBANK, N.A.
1,100 Austin Co. (TX) Ind. Dev. Corp. IDR (Justin Ind., Inc. Proj.),
Ser. 1984, 1.12%, VRDN due 12/1/14 P-1 1,100!!
CREDIT SUISSE
1,000 Texas Capital Hlth. Fac. Dev. Corp. (Island on Lake
Travis Ltd. Proj.), Ser. 1986, 1.12%, VRDN due 12/1/16 A-1+ 1,000
DEUTSCHE BANK AG
2,000 Elk Co. (PA) IDA Solid Waste Disp. Rev. (Willamette Ind.,
Inc. Proj.), Ser. 1992, 1.10%, VRDN due 8/1/10 A-1+ 2,000!!
1,900 Lincoln Parish (LA) Exempt Fac. Rev. (Willamette Ind.,
Inc. Proj.), Ser. 1996, 1.10%, VRDN due 4/1/26 A-1+ 1,900!!
FIRST UNION NATIONAL BANK
1,385 Philadelphia (PA) Hosp. & Higher Ed. Fac. Au. Rev.
(Temple East, Inc.), Ser. 1999 B, 1.10%, VRDN due 6/1/14 A-1+ 1,385!!
3,100 Washington Co. (PA) Au. Lease Rev. (Higher Ed. Pooled
Equip. Leasing Prog.), Ser. 1985 A, 1.15%, VRDN due 11/1/05 VMIG1 3,100
1,340 Whitfield Co. (GA) Residential Care Fac. Rev. (Royal Oaks
Sr. Living Comm.), Ser. 1992, 1.05%, VRDN due 11/1/25 A-1 1,340
</Table>
30
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT SECURITY @ RATING ~@@ VALUE ++
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
FLEET BANK, N.A.
$ 600 New Hampshire Hlth. & Ed. Fac. Au. Rev. (St. Anselm College),
Ser. 2002, 1.15%, VRDN due 7/1/32 VMIG1 $ 600!!
GENERAL ELECTRIC CAPITAL CORP.
1,000 Delaware Co. (PA) IDA Res. Rec. Fac. Ref. Rev. (Gen. Elec.
Cap. Corp.), Ser. 1997 G, 1.01%, VRDN due 12/1/31 P-1 A-1+ 1,000!!
HARRIS TRUST AND SAVINGS BANK
200 Illinois Dev. Fin. Au. IDR (Grayhill, Inc. Proj.), Ser. 1995 C,
1.20%, VRDN due 2/1/05 A-1+ 200
400 Illinois Dev. Fin. Au. IDR (Overton Gear & Tool Corp. Proj.),
Ser. 1994, 1.11%, VRDN due 10/1/08 A-1+ 400
KBC BANK
1,800 Emmaus (PA) Gen. Au. Local Gov't. Rev. (Bond Pool Prog.),
Ser. 1989 H, 1.07%, VRDN due 3/1/24 A-1 1,800
LANDESBANK HESSEN-THUERINGEN GIROZENTRALE
100 Jay Street (NY) Dev. Corp. Courts Fac. Lease Rev.
(New York City - Jay Street Proj.), Ser. 2001 A-2, 1.11%,
VRDN due 5/1/20 VMIG1 A-1+ 100
300 New York City (NY) Transitional Fin. Au. Rev. (NYC Rec.),
Ser. 2002 Sub. Ser. 1D, 1.12%, VRDN due 11/1/22 VMIG1 300
4,000 North Carolina St. Pub. Imp. G.O., Ser. 2002 F, 1.00%,
VRDN due 5/1/21 MIG1 A-1+ 4,000
4,700 Northampton Co. (PA) Higher Ed. Au. College Funding Oblig. Rev.
(Lafayette College), Ser. 1998 A, 1.00%, VRDN due 11/1/28 A-1+ 4,700
LASALLE NATIONAL BANK
1,900 Elmhurst City, DuPage & Cook Cos. (IL) IDR (Randall
Manufactured Prod., Inc. Proj.), Ser. 2002, 1.25%,
VRDN due 2/1/27 A-1+ 1,900!!
MORGAN GUARANTY TRUST CO.
2,800 Austin (TX) Arpt. Sys. Prior Lien Rev., Ser. 1995 A,
1.12%, VRDN due 11/15/17 P-1 2,800
300 New York City (NY) G.O., Sub. Ser. 1993 A-10,
1.15%, VRDN due 8/1/17 VMIG1 A-1+ 300
100 New York City (NY) G.O., Sub. Ser. 1994 E-2,
1.13%, VRDN due 8/1/20 VMIG1 A-1+ 100
5,200 Rochester (MN) Hlth. Care Fac. Rev. (Mayo Clinic),
Ser. 2000 A, 0.93%, TECP due 1/22/04 A-1+ 5,200
NATIONAL WESTMINSTER BANK PLC
300 Marion Co. (WV) Comm. Solid Waste Disp. Fac. Rev. (Grant Town
Cogeneration Proj.), Ser. 1990 A, 1.12%, VRDN due 10/1/17 VMIG1 A-1+ 300!!
300 Marion Co. (WV) Comm. Solid Waste Disp. Fac. Rev. (Grant Town
Cogeneration Proj.), Ser. 1990 D, 1.15%, VRDN due 10/1/17 VMIG1 A-1+ 300!!
NORTHERN TRUST CO.
200 Iowa Higher Ed. Loan Au. Rev. (Private College - St. Ambrose),
Ser. 2003, 1.15%, VRDN due 4/1/33 A-1+ 200!!
200 St. Joseph Co. (IN) Ed. Fac. Rev. (Univ. of Notre Dame
du Lac Proj.), Ser. 2002, 0.95%, VRDN due 3/1/37 VMIG1 200(MM)!!
SOCIETE GENERALE
2,865 Chicago (IL) O'Hare Int'l. Arpt. Gen. Arpt. 2nd Lien Rev.,
Ser. 1984 B, 0.95%, VRDN due 1/1/15 VMIG1 A-1+ 2,865
1,800 Chicago (IL) O'Hare Int'l. Arpt. Spec. Fac. Rev.
(Compagnie Nationale Air France Proj.), Ser. 1990,
1.17%, VRDN due 5/1/18 A-1+ 1,800!!
</Table>
See Notes to Schedule of Investments
31
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT SECURITY @ RATING ~@@ VALUE ++
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 3,400 Los Angeles (CA) Reg. Arpt. Imp. Corp. Fac. Sublease Rev.
(Los Angeles Int'l. Arpt.), Ser. 1985, 1.15%,
VRDN due 12/1/25 A-1+ $ 3,400!!
3,500 Ohio St. Air Quality Dev. Au. Rev. (JMG Funding L.P. Proj.),
Ser. 1994 B, 1.10%, VRDN due 4/1/28 VMIG1 A-1+ 3,500
2,900 Ohio St. Air Quality Dev. Au. Rev. (JMG Funding L.P. Proj.),
Ser. 1995 A, 1.02%, VRDN due 4/1/29 A-1+ 2,900
5,000 Riverside-San Bernardino (CA) Hsg. & Fin. Agcy. Lease Rev.
Pass-Through Oblig., Ser. 2001 A, 1.05%, VRDN due 7/1/06 A-1+ 5,000!!
STATE STREET BANK AND TRUST COMPANY
3,000 Arizona Ed. Loan Mktg. Corp. Ed. Loan Rev., Ser. 1991 A,
1.10%, VRDN due 12/1/20 VMIG1 3,000
700 Rhode Island Std. Loan Au. Prog. Rev., Ser. 1995-1,
1.17%, VRDN due 7/1/19 A-1+ 700
2,000 Rhode Island Std. Loan Au. Prog. Rev., Ser. 1996-3,
1.17%, VRDN due 6/1/26 A-1+ 2,000
SUNTRUST BANK
600 DeKalb (GA) Private Hosp. Au. Anticipation Cert. Rev.
(Egleston Children's Hosp.), Ser. 1994 A, 1.12%, VRDN
due 3/1/24 VMIG1 A-1+ 600!!
700 Mayfield (KY) IDR (Seaboard Farms of Kentucky, Inc. Proj.),
Ser. 1989, 1.15%, VRDN due 8/1/19 VMIG1 700!!
TORONTO DOMINION BANK
2,500 Indiana Muni. Pwr. Agcy. Pwr. Supply Sys. Ref. Rev.,
Ser. 1998 A, 1.12%, VRDN due 1/1/18 VMIG1 A-1+ 2,500
3,300 Montgomery Co. (MD), 0.85%, TECP due 1/8/04 P-1 3,300
UNION BANK OF SWITZERLAND
300 Alaska Ind. Dev. & Export Au. Fac. Rev. (Fairbanks Gold
Mining, Inc. Proj.), Ser. 1997, 1.07%, VRDN due 5/1/09 VMIG1 A-1+ 300!!
300 Clark Co. (NV) Arpt. Sys. Sub. Lien Rev., Ser. 1995 A-2,
1.02%, VRDN due 7/1/25 VMIG1 A-1+ 300
760 Pennsylvania Energy Dev. Au. Rev. (B & W Ebensburg Proj.),
Ser. 1986, 1.12%, VRDN due 12/1/11 VMIG1 760!!
WACHOVIA BANK & TRUST CO.
500 Fulco (GA) Hosp. Au. Anticipation Cert. Rev.
(Shepherd Ctr., Inc. Proj.), Ser. 1997, 1.12%, VRDN
due 9/1/17 A-1+ 500!!
4,300 Jackson-Union Cos. (IL) Reg. Port Dist. Port Fac. Ref. Rev.
(Enron Trans. Svc., L.P. Proj.), Ser. 1994, 1.01%, VRDN
due 4/1/24 VMIG1 A-1+ 4,300!!
500 Morgan Co. (UT) Solid Waste Disp. Rev. (Holnam, Inc. Proj.),
Ser. 1996, 1.10%, VRDN due 8/1/31 VMIG1 A-1+ 500!!
9,000 North Carolina Med. Care Commission Hlth. Care Fac. Rev.,
(FirstHealth of the Carolinas Proj.), Ser. 2002,
1.12%, VRDN due 10/1/32 VMIG1 A-1 9,000!!
1,200 South Carolina Jobs Econ. Dev. Au. Hosp. Rev. (Tuomey Reg.
Med. Ctr.), Ser. 1995 B, 1.05%, VRDN due 11/1/25 VMIG1 A-1+ 1,200!!
1,850 South Carolina Jobs Econ. Dev. Au. Rev. (Florence RHF
Hsg., Inc. Proj.), Ser. 1987 A, 1.70%, VRDN due 11/1/07 P-1 1,850!!
WELLS FARGO & CO.
800 New Ulm (MN) Hosp. Ref. Rev. (Hlth. Central Sys. Proj.),
Ser. 1985, 0.95%, VRDN due 8/1/14 A-1+ 800
WESTDEUTSCHE LANDESBANK GIROZENTRALE
5,400 California Hsg. Fin. Agcy. Home Mtge. Rev.,
Ser. 1999 J-2, 1.02%, VRDN due 8/1/20 VMIG1 A-1+ 5,400(E)
1,825 Clark Co. (NV) Arpt. Sys. Sub. Lien Rev.,
Ser. 1995 A-1, 1.07%, VRDN due 7/1/25 VMIG1 A-1+ 1,825
</Table>
32
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT SECURITY @ RATING ~@@ VALUE ++
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 2,000 Nueces Co. (TX) Port of Corpus Christi Au. Marine Term. Rev.
(Reynolds Metal Co.), Ser. 1984, 0.95%, VRDN due 9/1/14 A-1+ $ 2,000!!
4,000 Pennsylvania Econ. Dev. Fin. Au. Exempt Fac. Rev.
(Reliant Energy Seward, LLC Proj.), Ser. 2001 A,
1.17%, VRDN due 12/1/36 VMIG1 4,000!!
200 Southern (CA) Metro. Wtr. Dist. Wtr. Au. Rev.,
Ser. 2000 B-3, 1.15%, VRDN due 7/1/35 VMIG1 A-1+ 200
-------------
158,707
-------------
TAX-EXEMPT CASH EQUIVALENT SECURITIES--BACKED BY INSURANCE (13.8%)
AMERICAN MUNICIPAL BOND ASSURANCE CORP.
1,500 Coastal Bend (TX) Hlth. Fac. Dev. Corp. Rev.
(Incarnate Word Hlth. Sys.), Ser. 1998 B,
1.04%, VRDN due 8/15/28 VMIG1 SP-1+ 1,500!!
2,600 Indiana Secondary Mkt. for Ed. Loans, Inc. Rev.,
Ser. 1988 B, 1.10%, VRDN due 12/1/13 VMIG1 A-1+ 2,600
1,160 Michigan Higher Ed. Std. Loan Au. Ref. Rev.,
Ser. 1988 XII-B, 1.12%, VRDN due 10/1/13 VMIG1 A-1 1,160
2,000 Pennsylvania St. Higher Ed. Assist. Agcy. Std.
Loan Rev., Ser. 1995 A, 1.05%, VRDN due 12/1/25 VMIG1 A-1+ 2,000(M)
2,000 Utah St. Board of Regents Std. Loan Rev.,
Ser. 1995 L, 1.10%, VRDN due 11/1/25 A-1+ 2,000
FINANCIAL GUARANTY INSURANCE CO.
3,300 Arizona Hlth. Fac. Au. Rev. (Pooled Loan Prog.),
Ser. 1985, 1.04%, VRDN due 10/1/15 VMIG1 A-1 3,300
1,340 Central Bucks (PA) Sch. Dist., Ser. 2000 A,
1.10%, VRDN due 2/1/20 VMIG1 1,340
4,000 Detroit (MI) Wtr. Supply Sys. Second Lien Ref. Rev.,
Ser. 2001-C, 1.05%, VRDN due 7/1/29 VMIG1 4,000
680 Eastern Michigan Univ. Board of Regents Gen. Ref. Rev.,
Ser. 2001, 1.15%, VRDN due 6/1/27 A-1+ 680
9,485 Massachusetts Wtr. Res. Au. Multi-Modal
Subordinated Gen. Rev., Ser. 2001 A, 1.10%, VRDN due 8/1/23 A-1+ 9,485
700 New York City (NY) Muni. Wtr. Fin. Au. Wtr. & Swr. Sys. Rev.,
Ser. 1992 C, 1.15%, VRDN due 6/15/22 VMIG1 A-1+ 700
FINANCIAL SECURITY ASSURANCE INC.
300 California Hsg. Fin. Agcy. Home Mtge. Rev.,
Ser. 2003 U, 1.15%, VRDN due 2/1/32 VMIG1 A-1+ 300~~
7,600 Long Island (NY) Pwr. Au. Elec. Sys. Gen. Rev.,
Ser. 2003 E, 1.05%, VRDN due 12/1/29 VMIG1 A-1+ 7,600~~
MUNICIPAL BOND INVESTORS ASSURANCE CORP.
14,000 California Hsg. Fin. Agcy. Home Mtge. Rev., Ser. 2002 J,
1.15%, VRDN due 2/1/33 VMIG1 A-1+ 14,000(ee)
1,485 Charlotte (NC) Arpt. Ref. Rev., Ser. 1997 A,
1.12%, VRDN due 7/1/17 VMIG1 A-1 1,485
325 Clark Co. (NV) Arpt. Sub. Lien Rev., Ser. 1998 B,
1.02%, VRDN due 7/1/28 VMIG1 A-1+ 325
410 Harris Co. (TX) Hlth. Fac. Dev. Corp. Hosp. Rev.
(Texas Children's Hosp. Proj.), Ser. 1999 B-1,
1.15%, VRDN due 10/1/29 VMIG1 A-1+ 410!!
900 Kentucky Higher Ed. Std. Loan Corp. Rev., Ser. 1996 A,
1.10%, VRDN due 6/1/26 VMIG1 A-1+ 900
200 Massachusetts St. Hlth. & Ed. Fac. Au. Rev. (Cap. Asset Prog.),
Ser. 1985 D, 1.15%, VRDN due 1/1/35 VMIG1 200
</Table>
See Notes to Schedule of Investments
33
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT SECURITY @ RATING ~@@ VALUE ++
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 2,625 Michigan St. Hsg. Dev. Au. Rental Hsg. Rev.,
Ser. 2002 C, 1.07%, VRDN due 4/1/21 A-1+ $ 2,625(LL)
85 New York City (NY) G.O., Sub. Ser. 1995 B-3,
1.15%, VRDN due 8/15/04 VMIG1 A-1+ 85
-------------
56,695
-------------
TOTAL INVESTMENTS (101.6%) 417,369
Liabilities, less cash, receivables and other assets [(1.6%)] (6,445)
-------------
TOTAL NET ASSETS (100.0%) $ 410,924
-------------
</Table>
34
<Page>
NEUBERGER BERMAN OCTOBER 31, 2003
SCHEDULE OF INVESTMENTS Municipal Securities Trust
<Table>
<Caption>
PRINCIPAL AMOUNT SECURITY @ RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
TAX-EXEMPT SECURITIES--PRE-REFUNDED BACKED BY U.S. GOVERNMENT SECURITIES (5.0%)
$ 1,000 Clark Co. (NV) Sch. Dist. Imp. G.O., Ser. 1995 A,
5.60%, due 6/15/08 P/R 6/15/05 Aaa AAA $ 1,080
875 New York City (NY) Transitional Fin. Au. Future Tax Secured Rev.,
Ser. 2000 B, 6.00%, due 11/15/19 P/R 5/15/10 AAA 1,040
-------------
2,120
-------------
TAX-EXEMPT SECURITIES-BACKED BY INSURANCE (40.6%)
AMERICAN MUNICIPAL BOND ASSURANCE CORP.
1,000 Atlanta (GA) Arpt. Fac. Ref. Rev., Ser. 1996,
6.50%, due 1/1/06 Aaa AAA 1,102
1,000 Larimer Co. (CO) Sales & Use Tax Rev., Ser. 2000,
5.75%, due 12/15/15 Aaa AAA 1,134
FINANCIAL GUARANTY INSURANCE CO.
1,000 Dade Co. (FL) Wtr. & Swr. Sys. Rev., Ser. 1995,
6.25%, due 10/1/06 Aaa AAA 1,127
750 Detroit (MI) Wayne Co. Sch. Dist. Sch. Bldg. &
Site Imp. Ref. G.O., Ser. 1998 C, 5.25%, due 5/1/13 Aaa AAA 834
1,000 Grapevine (TX) Combination Tax & Tax Increment Reinvestment
Zone Rev., Ser. 2000, 5.63%, due 8/15/15 Aaa AAA 1,116
1,000 Phoenix (AZ) Civic Imp. Corp. Jr. Lien Wastewater Sys. Rev.,
Ser. 2000, 6.00%, due 7/1/12 P/R 7/1/10 Aaa AAA 1,190
1,205 Salinas (CA) Union High Sch. Dist. G.O., Ser. 2003 A,
5.25%, due 10/1/14 Aaa AAA 1,342
500 Scottsdale (AZ) Excise Tax Rev., Ser. 1998, 6.00%, due 7/1/07 Aaa AAA 568
1,000 Tampa Bay (FL) Wtr. Util. Sys. Rev., Ser. 1998 B,
5.13%, due 10/1/09 Aaa AAA 1,117
FINANCIAL SECURITY ASSURANCE INC.
1,150 Puerto Rico Muni. Fin. Agcy. Rev., Ser. 2002 A,
4.50%, due 8/1/12 Aaa AAA 1,232
800 Will & Kendall Cos. (IL) Plainfield Comm. Cons. Sch.
Dist. Number 202 Sch. Bldg. G.O., Ser. 2001,
5.38%, due 1/1/13 AAA 885
MUNICIPAL BOND INVESTORS ASSURANCE CORP.
1,395 Florida Muni. Loan Council Rev., Ser. 2002 C,
5.25%, due 11/1/15 AAA 1,538
500 Metro. (IL) Pier & Exposition Au. Dedicated St. Tax Rev.
(McCormick Place Expansion), Ser. 2002 A,
5.25%, due 6/15/08 Aaa AAA 560
1,000 Mississippi Dev. Bank Spec. Oblig. Rev. (Muni. Gas Au.
Natural Gas Supply Proj.), Ser. 1998, 5.00%, due 1/1/08 Aaa AAA 1,104
1,100 Orange Co. (CA) Local Trans. Au. Measure M Sales Tax
(Limited Tax) Second Sr. Rev., Ser. 1998 A, 5.50%, due 2/15/10 Aaa AAA 1,260
1,000 Wisconsin St. G.O., Ser. 2002 C, 5.25%, due 5/1/14 Aaa AAA 1,094
-------------
17,203
-------------
TAX-EXEMPT SECURITIES--OTHER (50.7%)
1,000 Board of Regents of the Texas A&M Univ. Sys. Perm. Univ.
Fund Rev., Ser. 1998, 5.00%, due 7/1/08 Aaa AAA 1,111
1,000 Columbus (OH) Var. Purp. Ltd. Tax G.O., Ser. 1998-1,
5.00%, due 6/15/08 Aaa AAA 1,114
400 Denver (CO) City & Co. Sch. Dist. No. 1 Ref. G.O.,
Ser. 1994 A, 6.50%, due 6/1/10 Aa3 AA- 479
</Table>
See Notes to Schedule of Investments
35
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT SECURITY @ RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 500 Florida St. Board of Ed. Cap. Outlay Ref. G.O.,
Ser. 1998 B, 5.25%, due 6/1/09 Aa2 AA+ $ 564
1,000 Illinois St. Sales Tax Rev., Ser. 1997 Y, 5.25%, due 6/15/10 Aa2 AAA 1,126
1,000 Indiana St. Office Bldg. Commission Fac. Ref. Rev.,
Ser. 1998 A, 5.13%, due 7/1/14 Aa2 1,080
1,000 Lake Co. (IL) Forest Preserve Dist. Ref. G.O.,
Ser. 1997, 5.50%, due 2/1/09 Aa1 AAA 1,131
1,000 Lake Co. (IL) Sch. Dist. No. 109 Deerfield Ref. G.O.,
Ser. 1999 C, 5.00%, due 12/15/14 Aa2 AA+ 1,090
1,000 Minnesota St. Var. Purp. G.O., 5.25%, due 8/1/13 Aaa AAA 1,093
45 Mississippi Higher Ed. Assist. Corp. Std. Loan Sub. Rev.,
Ser. 1993 C, 6.05%, due 9/1/07 A 45
1,000 Missouri St. Env. Imp. & Energy Res. Au. Wtr. Ref. PCR
(St. Revolving Fund Prog.-Master Trust), Ser. 2001 B,
5.50%, due 1/1/11 Aaa AAA 1,136
1,000 Nevada Ref. Ltd. Tax G.O., Ser. 1997 A-2, 6.00%, due 5/15/06 Aa2 AA 1,106
575 New Jersey Trans. Trust Fund Au. Trans. Sys. Rev.,
Ser. 1999 A, 5.63%, due 6/15/13 Aa3 AA 654
1,000 New York St. Thruway Au. Local Hwy. & Bridge Svc. Contract
Rev., Ser. 1997, 5.25%, due 4/1/10 A3 AA- 1,108
500 New York Tobacco Settlement Fin. Corp. Asset-Backed Rev.,
Ser. 2003 A-1, 5.25%, due 6/1/12 AA- 525
1,000 Northside (TX) Independent Sch. Dist. Unlimited Tax
Sch. Bldg. G.O., Ser. 1999 A, 6.38%, due 8/15/09 Aaa AAA 1,184
500 Oklahoma City (OK) Ref. G.O., Ser. 1993, 5.55%, due 8/1/11 Aa2 AA 575
735 Ramsey Co. (MN) Cap. Imp. Plan G.O., Ser. 2000 A,
5.80%, due 2/1/16 Aaa AAA 819
1,000 South Carolina St. Budget & Ctrl. Board St. Fac. Installment
Purchase Rev. (Dept. of Pub. Safety Proj.), Ser. 2003,
4.50%, due 1/1/11 Aa2 AA+ 1,073
500 South Carolina St. Cap. Imp. G.O., Ser. 2001 B,
5.38%, due 4/1/13 AAA 559
1,000 Texas Pub. Fin. Au. Ref. G.O., Ser. 1998 B, 5.13%, due 10/1/09 Aa1 AA 1,114
1,000 Texas Wtr. Dev. Board St. Revolving Fund Sr. Lien Rev.,
Ser. 1996 B, 5.25%, due 7/15/13 AAA 1,093
1,000 Utah St. G.O., Ser. 2002 A, 5.00%, due 7/1/08 Aaa AAA 1,115
500 Wyoming St. Loan & Investment Board Cap. Fac. Ref. Rev.,
Ser. 2002, 5.00%, due 10/1/10 AA- 554
-------------
21,448
-------------
TAX-EXEMPT CASH EQUIVALENT SECURITIES--BACKED BY LETTERS OF CREDIT (1.2%)
SOCIETE GENERALE
100 Los Angeles (CA) Reg. Arpt. Imp. Corp. Fac. Sublease Rev.
(Los Angeles Int'l. Arpt.), Ser. 1985, 1.15%, VRDN VMIG1 A-1+ 100!!
due 12/1/25
400 Los Angeles (CA) Reg. Arpt. Imp. Corp. Term. Fac.
Completion Rev. (Los Angeles Int'l. Arpt.), Ser. 1989,
1.20%, VRDN due 12/1/25 VMIG1 A-1+ 400!!
-------------
500
-------------
TAX-EXEMPT CASH EQUIVALENT SECURITIES--BACKED BY INSURANCE (1.0%)
FINANCIAL SECURITY ASSURANCE INC.
100 California Hsg. Fin. Agcy. Home Mtge. Rev.,
Ser. 2003 U, 1.15%, VRDN due 2/1/31 VMIG1 A-1+ 100
</Table>
36
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT SECURITY @ RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
MUNICIPAL BOND INVESTORS ASSURANCE CORP.
$ 300 California Hsg. Fin. Agcy. Rev. Home Mtge. Rev.,
Ser. 2001 U, 1.15%, VRDN due 8/1/32 VMIG1 A-1+ $ 300
-------------
400
-------------
TOTAL INVESTMENTS (98.5%) (COST $39,494) 41,671##
Cash, receivables and other assets, less liabilities (1.5%) 656
-------------
TOTAL NET ASSETS (100.0%) $ 42,327
-------------
</Table>
See Notes to Schedule of Investments
37
<Page>
NOTES TO SCHEDULE OF INVESTMENTS
+ Investment securities of the Fund are valued daily by obtaining bid price
quotations from independent pricing services on all securities available in
each service's data base. For all other securities requiring daily
quotations, bid prices are obtained from principal market makers in those
securities or, if quotations are not available, by a method the trustees of
Neuberger Berman Income Funds (the "Trust") believe accurately reflects
fair value. Numerous factors may be considered when determining the fair
value of a security, including available analyst, media or other reports,
trading in futures or ADRs and whether the issuer of the security being
fair valued has other securities outstanding. Foreign security prices are
furnished by independent quotation services expressed in local currency
values. Foreign security prices are translated from the local currency into
U.S. dollars using current exchange rates. Short-term debt securities with
less than 60 days until maturity may be valued at cost which, when combined
with interest earned, approximates market value.
++ Investment securities of the Fund are valued at amortized cost, which
approximates U.S. Federal income tax cost.
# At cost, which approximates market value.
## At October 31, 2003, selected Fund information on a U.S. Federal income tax
basis was as follows:
<Table>
<Caption>
GROSS GROSS NET
(000'S OMITTED) UNREALIZED UNREALIZED UNREALIZED
NEUBERGER BERMAN COST APPRECIATION DEPRECIATION APPRECIATION
HIGH INCOME BOND FUND $ 504,735 $ 13,704 $ 1,919 $ 11,785
LIMITED MATURITY BOND FUND 234,441 1,906 984 922
MUNICIPAL SECURITIES TRUST 39,494 2,180 3 2,177
</Table>
@ Municipal securities held by Neuberger Berman Municipal Money Fund
("Municipal Money") and Neuberger Berman Municipal Securities Trust
("Municipal Securities Trust") are within the two and four highest rating
categories, respectively, assigned by a nationally recognized statistical
rating organization ("NRSRO") such as Moody's Investors Service, Inc. or
Standard & Poor's or, where not rated, are determined by the Fund's
investment manager to be of comparable quality. Approximately 78% and 49%
of the municipal securities held by Municipal Money and Municipal
Securities Trust, respectively, have credit enhancement features backing
them, which the Funds may rely on, such as letters of credit, insurance, or
guarantees. Without these credit enhancement features the securities may or
may not meet the quality standards of the Funds. Pre-refunded bonds are
supported by securities in escrow issued or guaranteed by the U.S.
Government, its agencies, or instrumentalities. The amount escrowed is
sufficient to pay the periodic interest due and the principal of these
bonds. Putable bonds give the Funds the right to sell back the issue on the
date specified.
@@ Where no rating appears from any NRSRO, the security is deemed unrated for
purposes of Rule 2a-7 under the Investment Company Act of 1940, as amended.
Each of these securities is an eligible security based on a comparable
quality analysis performed by the Fund's investment manager.
~ Credit ratings are unaudited.
* Non-income producing security.
** Security exempt from registration under the Securities Act of 1933. These
securities may be resold in transactions exempt from registration, normally
to qualified institutional buyers under Rule 144A. At October 31, 2003,
these securities amounted to $81,684,000 or 15.7% of net assets for
Neuberger Berman High Income Bond Fund ("High Income") and $7,754,000 or
3.3% of net assets for Neuberger Berman Limited Maturity Bond Fund.
See Notes to Financial Statements
38
<Page>
! All or a portion of this security is on loan (see Note A of Notes to
Financial Statements).
!! Security is guaranteed by the corporate or non-profit obligor.
(L) Security is subject to a fractional guarantee provided by Bank of Nova
Scotia and Lloyds Bank, p.l.c., each backing 50% of the total principal.
(LL) Security is subject to a guarantee provided by Landesbank Hessen-Thueringen
Girozentrale, backing 100% of the total principal.
(M) Security is subject to a fractional guarantee provided by Credit Suisse
First Boston, Inc. and American Municipal Bond Assurance Corp., each
backing 50% of the total principal.
(MM) Security is subject to a fractional guarantee provided by Northern Trust
Co. and Fifth Third Bank, each backing 50% of the total principal.
(e) Security is subject to a fractional guarantee provided by Bayerische
Landesbank Girozentrale and Chase Manhattan Bank, N.A., each backing 45%
and 55%, respectively, of the total principal.
(ee) Security is subject to a guarantee provided by Lloyds Bank, p.l.c., backing
100% of the total principal.
(Y) Security is subject to a fractional guarantee provided by Bayerische
Landesbank Girozentrale, Chase Manhattan Bank, N.A., and State Street Bank
and Trust Company, each backing 25%, 37.5%, and 37.5%, respectively, of the
total principal.
(YY) Security is subject to a fractional guarantee provided by Bayerische
Landesbank Girozentrale and Chase Manhattan Bank, N.A., each backing 65%
and 35%, respectively, of the total principal.
~~ Security is subject to a guarantee provided by Dexia, Inc., backing 100% of
the total principal.
(E) Security is subject to a guarantee provided by Municipal Bond Investors
Assurance Corp., backing 100% of the total principal.
(Q) Security purchased on a when-issued basis. At October 31, 2003, these
securities amounted to $10,295,000 for High Income.
(QQ) Security is segregated as collateral for when-issued purchase commitments.
(^) Non-income producing security - in default.
^^ Not rated by a nationally recognized statistical rating organization.
See Notes to Financial Statements
39
<Page>
STATEMENTS OF ASSETS AND LIABILITIES
<Table>
<Caption>
NEUBERGER BERMAN INCOME FUNDS CASH GOVERNMENT
(000'S OMITTED EXCEPT PER SHARE AMOUNTS) RESERVES MONEY FUND
ASSETS
INVESTMENTS IN SECURITIES, AT VALUE*+ (NOTE A)--SEE
SCHEDULE OF INVESTMENTS $ 622,870 $ 1,125,950
Cash -- 1
Interest receivable 101 116
Receivable for securities sold -- --
Receivable for Fund shares sold 146 9,856
Receivable from administrator--net (Note B) -- --
Prepaid expenses and other assets 9 8
- --------------------------------------------------------------------------------------
TOTAL ASSETS 623,126 1,135,931
- --------------------------------------------------------------------------------------
LIABILITIES
Dividends payable 173 550
Payable for collateral on securities loaned (Note A) -- --
Payable for securities purchased -- --
Payable for Fund shares redeemed 4,824 56,497
Payable to investment manager (Note B) 137 241
Payable to administrator--net (Note B) 151 164
Accrued expenses and other payables 141 134
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,426 57,586
- --------------------------------------------------------------------------------------
NET ASSETS AT VALUE $ 617,700 $ 1,078,345
- --------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 617,690 $ 1,078,326
Undistributed (distributions in excess of)
net investment income -- --
Accumulated net realized gains (losses) on investments 10 19
Net unrealized appreciation (depreciation) in
value of investments -- --
- --------------------------------------------------------------------------------------
NET ASSETS AT VALUE $ 617,700 $ 1,078,345
- --------------------------------------------------------------------------------------
NET ASSETS
Investor Class $ 617,700 $ 1,078,345
Trust Class -- --
SHARES OUTSTANDING ($.001 PAR VALUE; UNLIMITED SHARES
AUTHORIZED)
Investor Class 617,690 1,078,326
Trust Class -- --
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Investor Class $ 1.00 $ 1.00
Trust Class -- --
+Securities on loan, at market value $ -- $ --
- --------------------------------------------------------------------------------------
*COST OF INVESTMENTS $ 622,870 $ 1,125,950
- --------------------------------------------------------------------------------------
</Table>
See Notes to Financial Statements
40
<Page>
<Table>
<Caption>
NEUBERGER BERMAN INCOME FUNDS HIGH INCOME LIMITED MATURITY MUNICIPAL MONEY MUNICIPAL SECURITIES
(000'S OMITTED EXCEPT PER SHARE AMOUNTS) BOND FUND BOND FUND FUND TRUST
ASSETS
INVESTMENTS IN SECURITIES, AT VALUE*+ (NOTE A)--SEE
SCHEDULE OF INVESTMENTS $ 516,520 $ 235,363 $ 417,369 $ 41,671
Cash 1,220 17 44 29
Interest receivable 10,520 2,456 949 625
Receivable for securities sold 12,892 -- 5 --
Receivable for Fund shares sold 2,876 489 270 107
Receivable from administrator--net (Note B) -- -- -- 2
Prepaid expenses and other assets 5 3 3 --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 544,033 238,328 418,640 42,434
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Dividends payable 309 35 129 15
Payable for collateral on securities loaned (Note A) 4,156 -- -- --
Payable for securities purchased 18,624 1,894 -- --
Payable for Fund shares redeemed 931 210 7,275 26
Payable to investment manager (Note B) 198 49 98 9
Payable to administrator--net (Note B) 111 44 104 --
Accrued expenses and other payables 53 140 110 57
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 24,382 2,372 7,716 107
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT VALUE $ 519,651 $ 235,956 $ 410,924 $ 42,327
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 522,384 $ 254,181 $ 410,930 $ 39,992
Undistributed (distributions in excess of)
net investment income 25 (1,224) 1 --
Accumulated net realized gains (losses) on investments (14,571) (19,574) (7) 158
Net unrealized appreciation (depreciation) in
value of investments 11,813 2,573 -- 2,177
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT VALUE $ 519,651 $ 235,956 $ 410,924 $ 42,327
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Investor Class $ 519,651 $ 199,414 $ 410,924 $ 42,327
Trust Class -- 36,542 -- --
SHARES OUTSTANDING ($.001 PAR VALUE; UNLIMITED SHARES
AUTHORIZED)
Investor Class 56,153 20,760 411,004 3,569
Trust Class -- 3,992 -- --
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
Investor Class $ 9.25 $ 9.61 $ 1.00 $ 11.86
Trust Class -- 9.15 -- --
+Securities on loan, at market value $ 3,602 $ -- $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------------------
*COST OF INVESTMENTS $ 504,707 $ 232,790 $ 417,369 $ 39,494
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
41
<Page>
STATEMENTS OF OPERATIONS
<Table>
<Caption>
GOVERNMENT
NEUBERGER BERMAN INCOME FUNDS CASH MONEY
(000'S OMITTED) RESERVES FUND
INVESTMENT INCOME
Interest income (Note A) $ 9,283 $ 14,173
Income from securities loaned-net -- --
- --------------------------------------------------------------------------------------
Total income 9,283 14,173
- --------------------------------------------------------------------------------------
EXPENSES:
Investment management fee (Note B) 1,777 2,693
Administration fee (Note B):
Investor Class 1,981 3,126
Trust Class -- --
Shareholder servicing agent fees:
Investor Class 235 79
Trust Class -- --
Auditing fees 31 31
Custodian fees (Note B) 183 222
Insurance expense 17 25
Legal fees 29 26
Registration and filing fees 30 87
Reimbursement of expenses previously assumed by
administrator (Note B) -- --
Shareholder reports 9 18
Trustees' fees and expenses 30 31
Miscellaneous -- 217
- --------------------------------------------------------------------------------------
Total expenses 4,322 6,555
Expenses reimbursed by administrator (Note B) -- (1,345)
Expenses reduced by custodian fee expense offset
arrangement (Note B) -- --
- --------------------------------------------------------------------------------------
Total net expenses 4,322 5,210
- --------------------------------------------------------------------------------------
Net investment income (loss) 4,961 8,963
- --------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investment securities sold 11 19
Net realized gain (loss) on financial futures contracts
(Note A) -- --
Net realized gain (loss) on foreign currency (Note A) -- --
Change in net unrealized appreciation (depreciation)
in value of:
Investment securities (Note A) -- --
Foreign currency (Note A) -- --
-------------------------------------------------------------------------------
Net gain (loss) on investments 11 19
- --------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 4,972 $ 8,982
- --------------------------------------------------------------------------------------
</Table>
See Notes to Financial Statements
42
<Page>
<Table>
<Caption>
HIGH INCOME LIMITED MUNICIPAL MUNICIPAL
NEUBERGER BERMAN INCOME FUNDS BOND MATURITY MONEY SECURITIES
(000'S OMITTED) FUND BOND FUND FUND TRUST
INVESTMENT INCOME
Interest income (Note A) $ 25,120 $ 9,274 $ 5,553 $ 1,716
Income from securities loaned-net 39 -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total income 25,159 9,274 5,553 1,716
- -------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment management fee (Note B) 1,623 647 1,258 107
Administration fee (Note B):
Investor Class 913 588 1,359 115
Trust Class -- 206 -- --
Shareholder servicing agent fees:
Investor Class 154 173 24 33
Trust Class -- 22 -- --
Auditing fees 35 37 31 35
Custodian fees (Note B) 149 157 211 40
Insurance expense 1 5 9 1
Legal fees 56 26 26 26
Registration and filing fees 29 47 35 26
Reimbursement of expenses previously assumed by
administrator (Note B) 2 -- -- --
Shareholder reports 7 14 10 2
Trustees' fees and expenses 29 32 30 28
Miscellaneous 33 36 58 6
- -------------------------------------------------------------------------------------------------------------------
Total expenses 3,031 1,990 3,051 419
Expenses reimbursed by administrator (Note B) -- (135) -- (140)
Expenses reduced by custodian fee expense offset
arrangement (Note B) (2) -- (1) (1)
- -------------------------------------------------------------------------------------------------------------------
Total net expenses 3,029 1,855 3,050 278
- -------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 22,130 7,419 2,503 1,438
- -------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investment securities sold 4,436 2,389 -- 158
Net realized gain (loss) on financial futures contracts
(Note A) -- (5) -- --
Net realized gain (loss) on foreign currency (Note A) -- 182 -- --
Change in net unrealized appreciation (depreciation)
in value of:
Investment securities (Note A) 11,135 (1,934) -- 251
Foreign currency (Note A) -- (1) -- --
------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments 15,571 631 -- 409
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 37,701 $ 8,050 $ 2,503 $ 1,847
- -------------------------------------------------------------------------------------------------------------------
</Table>
43
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
CASH RESERVES GOVERNMENT MONEY FUND
------------------------- -------------------------
NEUBERGER BERMAN INCOME FUNDS YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
(000'S OMITTED) 2003 2002 2003 2002
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) $ 4,961 $ 13,552 $ 8,963 $ 17,332
Net realized gain (loss) on investments 11 (1) 19 6
Change in net unrealized appreciation
(depreciation) of investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 4,972 13,551 8,982 17,338
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE E):
NET INVESTMENT INCOME:
Investor Class (4,961) (13,552) (8,963) (17,332)
Trust Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
Group Retirement Plan Shares -- -- -- --
NET REALIZED GAIN ON INVESTMENTS:
Investor Class -- (103) (6) (4)
- ------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (4,961) (13,655) (8,969) (17,336)
- ------------------------------------------------------------------------------------------------------------
FROM FUND SHARE TRANSACTIONS (NOTE E):
PROCEEDS FROM SHARES SOLD:
Investor Class 673,876 994,396 1,592,662 1,764,813
Trust Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
Group Retirement Plan Shares -- -- -- --
PROCEEDS FROM REINVESTMENT OF DIVIDENDS
AND DISTRIBUTIONS:
Investor Class 1,517 8,442 631 7,488
Trust Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
Group Retirement Plan Shares -- -- -- --
PAYMENTS FOR SHARES REDEEMED:
Investor Class (899,709) (1,276,724) (1,860,116) (999,040)
Trust Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
Group Retirement Plan Shares -- -- -- --
VALUE OF SHARES ISSUED (REDEEMED) IN CONNECTION
WITH REORGANIZATIONS:
Investor Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) from Fund share transactions (224,316) (273,886) (266,823) 773,261
- ------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS (224,305) (273,990) (266,810) 773,263
NET ASSETS:
Beginning of period 842,005 1,115,995 1,345,155 571,892
- ------------------------------------------------------------------------------------------------------------
End of period $ 617,700 $ 842,005 $ 1,078,345 $ 1,345,155
- ------------------------------------------------------------------------------------------------------------
Undistributed (distributions in excess of)
net investment income at end of period $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------
</Table>
See Notes to Financial Statements
44
<Page>
<Table>
<Caption>
HIGH INCOME BOND FUND LIMITED MATURITY BOND FUND
--------------------------------------- --------------------------
NEUBERGER BERMAN INCOME FUNDS YEAR TEN MONTHS YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31, OCTOBER 31, OCTOBER 31,
(000'S OMITTED) 2003 2002 2001 2003 2002
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) $ 22,130 $ 6,735 $ 6,654 $ 7,419 $ 10,838
Net realized gain (loss) on investments 4,436 (3,296) (655) 2,566 1,415
Change in net unrealized appreciation
(depreciation) of investments 11,135 735 1,362 (1,935) (3,921)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 37,701 4,174 7,361 8,050 8,332
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE E):
NET INVESTMENT INCOME:
Investor Class (22,130) (1,399) -- (7,850) (9,622)
Trust Class -- -- -- (1,444) (1,853)
Premier Shares -- (3,800) (5,505) -- --
Retail Shares -- (1,653) (816) -- --
Group Retirement Plan Shares -- (10) (348) -- --
NET REALIZED GAIN ON INVESTMENTS:
Investor Class -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (22,130) (6,862) (6,669) (9,294) (11,475)
- ---------------------------------------------------------------------------------------------------------------------------
FROM FUND SHARE TRANSACTIONS (NOTE E):
PROCEEDS FROM SHARES SOLD:
Investor Class 531,470 31,636 -- 470,006 255,373
Trust Class -- -- -- 34,721 68,740
Premier Shares -- 29,531 32,338 -- --
Retail Shares -- 36,907 20,652 -- --
Group Retirement Plan Shares -- 732 1,851 -- --
PROCEEDS FROM REINVESTMENT OF DIVIDENDS
AND DISTRIBUTIONS:
Investor Class 19,570 1,267 -- 7,192 8,890
Trust Class -- -- -- 1,422 1,811
Premier Shares -- 3,033 4,219 -- --
Retail Shares -- 1,587 782 -- --
Group Retirement Plan Shares -- 9 347 -- --
PAYMENTS FOR SHARES REDEEMED:
Investor Class (195,576) (14,968) -- (496,981) (246,170)
Trust Class -- -- -- (42,372) (65,231)
Premier Shares -- (63,221) (4,693) -- --
Retail Shares -- (15,350) (4,627) -- --
Group Retirement Plan Shares -- (6,777) (364) -- --
VALUE OF SHARES ISSUED (REDEEMED) IN CONNECTION
WITH REORGANIZATIONS:
Investor Class -- 140,460 -- -- --
Premier Shares -- (67,762) -- -- --
Retail Shares -- (46,776) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from Fund share transactions 355,464 30,308 50,505 (26,012) 23,413
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS 371,035 27,620 51,197 (27,256) 20,270
NET ASSETS:
Beginning of period 148,616 120,996 69,799 263,212 242,942
- ---------------------------------------------------------------------------------------------------------------------------
End of period $ 519,651 $ 148,616 $ 120,996 $ 235,956 $ 263,212
- ---------------------------------------------------------------------------------------------------------------------------
Undistributed (distributions in excess of)
net investment income at end of period $ 25 $ 24 $ -- $ (1,224) $ (304)
- ---------------------------------------------------------------------------------------------------------------------------
<Caption>
MUNICIPAL MONEY FUND MUNICIPAL SECURITIES TRUST
------------------------- --------------------------
NEUBERGER BERMAN INCOME FUNDS YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
(000'S OMITTED) 2003 2002 2003 2002
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) $ 2,503 $ 4,213 $ 1,438 $ 1,227
Net realized gain (loss) on investments -- -- 158 293
Change in net unrealized appreciation
(depreciation) of investments -- -- 251 254
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 2,503 4,213 1,847 1,774
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE E):
NET INVESTMENT INCOME:
Investor Class (2,503) (4,213) (1,438) (1,227)
Trust Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
Group Retirement Plan Shares -- -- -- --
NET REALIZED GAIN ON INVESTMENTS:
Investor Class -- -- (200) --
- -------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (2,503) (4,213) (1,638) (1,227)
- -------------------------------------------------------------------------------------------------------------
FROM FUND SHARE TRANSACTIONS (NOTE E):
PROCEEDS FROM SHARES SOLD:
Investor Class 496,599 557,232 26,568 17,512
Trust Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
Group Retirement Plan Shares -- -- -- --
PROCEEDS FROM REINVESTMENT OF DIVIDENDS
AND DISTRIBUTIONS:
Investor Class 78 1,807 1,447 1,070
Trust Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
Group Retirement Plan Shares -- -- -- --
PAYMENTS FOR SHARES REDEEMED:
Investor Class (619,029) (480,980) (23,783) (14,044)
Trust Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
Group Retirement Plan Shares -- -- -- --
VALUE OF SHARES ISSUED (REDEEMED) IN CONNECTION
WITH REORGANIZATIONS:
Investor Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) from Fund share transactions (122,352) 78,059 4,232 4,538
- -------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS (122,352) 78,059 4,441 5,085
NET ASSETS:
Beginning of period 533,276 455,217 37,886 32,801
- -------------------------------------------------------------------------------------------------------------
End of period $ 410,924 $ 533,276 $ 42,327 $ 37,886
- -------------------------------------------------------------------------------------------------------------
Undistributed (distributions in excess of)
net investment income at end of period $ 1 $ 1 $ -- $ --
- -------------------------------------------------------------------------------------------------------------
</Table>
45
<Page>
<Table>
<Caption>
CASH RESERVES GOVERNMENT MONEY FUND
------------------------- -------------------------
NEUBERGER BERMAN INCOME FUNDS YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
(000'S OMITTED) 2003 2002 2003 2002
NUMBER OF FUND SHARES (NOTE E):
SOLD:
Investor Class 673,876 994,396 1,592,662 1,764,813
Trust Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
Group Retirement Plan Shares -- -- -- --
ISSUED ON REINVESTMENT OF DIVIDENDS
AND DISTRIBUTIONS:
Investor Class 1,517 8,442 631 7,488
Trust Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
Group Retirement Plan Shares -- -- -- --
REDEEMED:
Investor Class (899,709) (1,276,724) (1,860,116) (999,040)
Trust Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
Group Retirement Plan Shares -- -- -- --
NUMBER OF SHARES ISSUED (REDEEMED) IN CONNECTION
WITH REORGANIZATIONS:
Investor Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
- ------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN SHARES OUTSTANDING (224,316) (273,886) (266,823) 773,261
- ------------------------------------------------------------------------------------------------------------
</Table>
See Notes to Financial Statements
46
<Page>
<Table>
<Caption>
HIGH INCOME BOND FUND LIMITED MATURITY BOND FUND
--------------------------------------- --------------------------
NEUBERGER BERMAN INCOME FUNDS YEAR TEN MONTHS YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31, OCTOBER 31, OCTOBER 31,
(000'S OMITTED) 2003 2002 2001 2003 2002
NUMBER OF FUND SHARES (NOTE E):
SOLD:
Investor Class 58,726 3,600 -- 48,587 26,526
Trust Class -- -- -- 3,768 7,499
Premier Shares -- 3,335 3,568 -- --
Retail Shares -- 4,087 2,295 -- --
Group Retirement Plan Shares -- 81 204 -- --
ISSUED ON REINVESTMENT OF DIVIDENDS
AND DISTRIBUTIONS:
Investor Class 2,153 143 -- 744 923
Trust Class -- -- -- 154 197
Premier Shares -- 337 465 -- --
Retail Shares -- 179 87 -- --
Group Retirement Plan Shares -- 1 39 -- --
REDEEMED:
Investor Class (21,592) (1,700) -- (51,398) (25,575)
Trust Class -- -- -- (4,600) (7,115)
Premier Shares -- (7,080) (520) -- --
Retail Shares -- (1,725) (513) -- --
Group Retirement Plan Shares -- (695) (41) -- --
NUMBER OF SHARES ISSUED (REDEEMED) IN CONNECTION
WITH REORGANIZATIONS:
Investor Class -- 14,822 -- -- --
Premier Shares -- (6,879) -- -- --
Retail Shares -- (5,075) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN SHARES OUTSTANDING 39,287 3,431 5,584 (2,745) 2,455
- ---------------------------------------------------------------------------------------------------------------------------
<Caption>
MUNICIPAL MONEY FUND MUNICIPAL SECURITIES TRUST
------------------------- --------------------------
NEUBERGER BERMAN INCOME FUNDS YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
(000'S OMITTED) 2003 2002 2003 2002
NUMBER OF FUND SHARES (NOTE E):
SOLD:
Investor Class 496,599 557,232 2,246 1,513
Trust Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
Group Retirement Plan Shares -- -- -- --
ISSUED ON REINVESTMENT OF DIVIDENDS
AND DISTRIBUTIONS:
Investor Class 78 1,807 122 92
Trust Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
Group Retirement Plan Shares -- -- -- --
REDEEMED:
Investor Class (619,029) (480,980) (2,010) (1,216)
Trust Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
Group Retirement Plan Shares -- -- -- --
NUMBER OF SHARES ISSUED (REDEEMED) IN CONNECTION
WITH REORGANIZATIONS:
Investor Class -- -- -- --
Premier Shares -- -- -- --
Retail Shares -- -- -- --
- -------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN SHARES OUTSTANDING (122,352) 78,059 358 389
- -------------------------------------------------------------------------------------------------------------
</Table>
47
<Page>
NOTES TO FINANCIAL STATEMENTS Income Funds
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1 GENERAL: Neuberger Berman Cash Reserves ("Cash Reserves"), Neuberger Berman
Government Money Fund ("Government Money"), Neuberger Berman High Income
Bond Fund ("High Income"), Neuberger Berman Limited Maturity Bond Fund
("Limited Maturity"), Neuberger Berman Municipal Money Fund ("Municipal
Money"), and Neuberger Berman Municipal Securities Trust ("Municipal
Securities Trust") (individually a "Fund", collectively, the "Funds") are
separate operating series of Neuberger Berman Income Funds (the "Trust"), a
Delaware statutory trust organized pursuant to a Trust Instrument dated
December 23, 1992. The Trust is registered as a diversified, open-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and its shares are registered under the
Securities Act of 1933, as amended (the "1933 Act"). All of the Funds offer
Investor Class shares and Limited Maturity also offers Trust Class shares.
The Investor Class of High Income had no operations until September 7, 2002
other than matters relating to its organization and registration of its
shares under the 1933 Act. On September 6, 2002 the Lipper High Income Bond
Fund ("Lipper High Income") and Neuberger Berman High Yield Bond Fund ("NB
High Yield") merged with High Income (see Note E). The Trustees of the
Trust may establish additional series or classes of shares without the
approval of shareholders.
The assets of each Fund belong only to that Fund, and the liabilities of
each Fund are borne solely by that Fund and no other.
It is the policy of Cash Reserves, Government Money, and Municipal Money to
maintain a continuous net asset value per share of $1.00; each of these
Funds has adopted certain investment, valuation, and dividend and
distribution policies, which conform to general industry practice, to
enable it to do so. However, there is no assurance the Funds will be able
to maintain a stable net asset value per share.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires Neuberger
Berman Management Inc. ("Management") to make estimates and assumptions at
the date of the financial statements. Actual results could differ from
those estimates.
2 PORTFOLIO VALUATION: Investment securities are valued as indicated in the
notes following the Funds' Schedule of Investments.
3 FOREIGN CURRENCY TRANSLATION: High Income and Limited Maturity may invest
in foreign securities denominated in foreign currency. The accounting
records of the Funds are maintained in U.S. dollars. Foreign currency
amounts are translated into U.S. dollars at the current rate of exchange of
such currency against the U.S. dollar to determine the value of
investments, other assets and liabilities. Purchase and sale prices of
securities, and income and expenses are translated into U.S. dollars at the
prevailing rate of exchange on the respective dates of such transactions.
4 SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on a trade date basis. Interest income, including accretion of
discount (adjusted for original issue discount, where applicable) and
amortization of premium, where applicable, is recorded on the accrual
basis. Realized gains and
48
<Page>
losses from securities transactions and foreign currency transactions are
recorded on the basis of identified cost and stated separately in the
Statements of Operations.
5 FEDERAL INCOME TAXES: The Funds are treated as separate entities for U.S.
Federal income tax purposes. It is the policy of each Fund to continue to
qualify as a regulated investment company by complying with the provisions
available to certain investment companies, as defined in applicable
sections of the Internal Revenue Code, and to make distributions of
investment company taxable income and net capital gains (after reduction
for any amounts available for U.S. Federal income tax purposes as capital
loss carryforwards) sufficient to relieve them from all, or substantially
all, U.S. Federal income taxes. Accordingly, each Fund paid no U.S. Federal
income taxes and no provision for U.S. Federal income taxes was required.
6 DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Each Fund earns income, net of
expenses, daily on its investments. It is the policy of each Fund to
declare dividends from net investment income on each business day; such
dividends are paid monthly. Distributions from net realized capital gains,
if any, are normally distributed in December. Income dividends and capital
gain distributions to shareholders are recorded on the ex-dividend date. To
the extent each Fund's net realized capital gains, if any, can be offset by
capital loss carryforwards, it is the policy of each Fund not to distribute
such gains. At October 31, 2003, the capital loss carryforwards for each
Fund were as follows:
<Table>
<Caption>
EXPIRING IN:
2004 2005 2006 2007 2008 2009 2010 2011
HIGH INCOME(1) $ -- $ -- $ -- $ 4,117,873 $ 4,635,521 $ 2,182,233 $ 3,608,017 $ --
LIMITED MATURITY(2) 1,656,586 1,100,286 4,035,877 5,146,514 7,177,986 456,883 -- --
MUNICIPAL MONEY -- -- -- -- 6,744 -- -- 54
</Table>
(1) The capital loss carryforwards shown above for High Income include
$4,117,873, $2,021,774, and $923,187, expiring in 2007, 2008, and
2009, respectively, which were acquired on September 6, 2002 in the
High Income Merger (See Note E). The use of these losses to offset
future gains may be limited in a given year.
(2) Of the total capital loss carryforwards shown for Limited Maturity,
$2,909,146 was acquired on February 9, 2001 in a tax-free
reorganization. The use of these losses to offset future gains may be
limited in a given year.
Prior to September 6, 2002, Lipper High Income distributed substantially
all of its net investment income monthly and net realized capital gains, if
any, annually.
Each Fund distinguishes between dividends on a tax basis and a financial
reporting basis and only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between
the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes are
classified as distributions in excess of net investment income or
accumulated net realized gains in the components of net assets on the
Statements of Assets and Liabilities.
49
<Page>
The tax character of distributions paid during the periods ended October
31, 2003 and 2002 were as follows:
DISTRIBUTIONS PAID FROM:
<Table>
<Caption>
TAXABLE INCOME TAX-EXEMPT INCOME
2003 2002 2003 2002
CASH RESERVES $ 4,960,914 $ 13,654,658 $ -- $ --
GOVERNMENT MONEY 8,969,360 17,335,773 -- --
HIGH INCOME 22,129,548 6,861,462 -- --
LIMITED MATURITY 9,294,630 11,475,249 -- --
MUNICIPAL MONEY -- -- 2,502,940 4,213,462
MUNICIPAL SECURITIES TRUST 601 3,663 1,437,169 1,223,734
<Caption>
LONG-TERM CAPITAL GAIN TOTAL
2003 2002 2003 2002
CASH RESERVES $ -- $ -- $ 4,960,914 $ 13,654,658
GOVERNMENT MONEY -- -- 8,969,360 17,335,773
HIGH INCOME -- -- 22,129,548 6,861,462
LIMITED MATURITY -- -- 9,294,630 11,475,249
MUNICIPAL MONEY -- -- 2,502,940 4,213,462
MUNICIPAL SECURITIES TRUST 199,702 -- 1,637,472 1,227,397
</Table>
As of October 31, 2003, the components of distributable earnings
(accumulated losses) on a U.S. Federal income tax basis were as follows:
<Table>
<Caption>
UNDISTRIBUTED UNDISTRIBUTED UNDISTRIBUTED UNREALIZED LOSS
ORDINARY TAX-EXEMPT LONG-TERM APPRECIATION CARRYFORWARDS
INCOME INCOME GAIN (DEPRECIATION) AND DEFERRALS TOTAL
CASH RESERVES $ 183,040 $ -- $ -- $ -- $ -- $ 183,040
GOVERNMENT MONEY 568,742 -- -- -- -- 568,742
HIGH INCOME 334,865 -- -- 11,785,106 (14,543,644) (2,423,673)
LIMITED MATURITY 462,654 -- -- 922,021 (19,574,132) (18,189,457)
MUNICIPAL MONEY -- 130,086 -- -- (6,798) 123,288
MUNICIPAL SECURITIES TRUST 55,510 15,417 102,895 2,176,957 -- 2,350,779
</Table>
The difference between book basis and tax basis is attributable primarily
to the tax deferral of losses on wash sales, foreign bond bifurcation,
timing differences of dividend payments, and amortization of bond premium.
7 EXPENSE ALLOCATION: Expenses directly attributable to a Fund are charged to
that Fund. Expenses not directly attributed to a Fund are allocated, on the
basis of relative net assets, except where a more appropriate allocation of
expenses to each of the Funds can otherwise be made fairly. Each Fund's
expenses (other than those specific to each class) are allocated
proportionally each day between the classes based upon the relative net
assets of each class.
8 FINANCIAL FUTURES CONTRACTS: High Income, Limited Maturity, and Municipal
Securities Trust may each buy and sell financial futures contracts to hedge
against changes in securities prices resulting from changes in prevailing
interest rates. At the time a Fund enters into a financial futures
contract, it is required to deposit with its custodian a specified amount
of cash or liquid securities, known as "initial margin," ranging upward
from 1.1% of the value of the financial futures contract being traded. Each
day, the futures contract is valued at the official settlement price of the
board of trade or U.S. commodity exchange on which such futures contract is
traded. Subsequent payments, known as "variation margin," to and from the
broker are made on a daily basis as the market price of the financial
futures contract fluctuates. Daily variation margin adjustments, arising
from this "mark to market," are recorded by the Funds as unrealized gains
or losses.
Although some financial futures contracts by their terms call for actual
delivery or acceptance of financial instruments, in most cases the
contracts are closed out prior to delivery by offsetting purchases or sales
of matching financial futures contracts. When the contracts are closed, a
Fund recognizes a gain or loss. Risks
50
<Page>
of entering into futures contracts include the possibility there may be an
illiquid market and/or a change in the value of the contract may not
correlate with changes in the value of the underlying securities.
For U.S. Federal income tax purposes, the futures transactions undertaken
by a Fund may cause that Fund to recognize gains or losses from marking to
market even though its positions have not been sold or terminated, may
affect the character of the gains or losses recognized as long-term or
short-term, and may affect the timing of some capital gains and losses
realized by the Fund. Also, a Fund's losses on transactions involving
futures contracts may be deferred rather than being taken into account
currently in calculating such Fund's taxable income.
During the year ended October 31, 2003, High Income and Municipal
Securities Trust did not enter into any financial futures contracts. During
the year ended October 31, 2003, Limited Maturity entered into various
financial futures contracts. At October 31, 2003, there were no open
positions.
9 FORWARD FOREIGN CURRENCY CONTRACTS: High Income and Limited Maturity may
each enter into forward foreign currency contracts ("contracts") in
connection with planned purchases or sales of securities to hedge the U.S.
dollar value of portfolio securities denominated in a foreign currency. The
gain or loss arising from the difference between the original contract
price and the closing price of such contract is included in net realized
gains or losses on foreign currency transactions. Fluctuations in the value
of forward foreign currency contracts are recorded for financial reporting
purposes as unrealized gains or losses by each Fund. Neither Fund has a
specific limitation on the percentage of assets which may be committed to
these types of contracts, but neither Fund may invest more than 25% of its
net assets in foreign securities denominated in or indexed to foreign
currencies. The Funds could be exposed to risks if a counter party to a
contract were unable to meet the terms of its contract or if the value of
the foreign currency changes unfavorably. The U.S. dollar value of foreign
currency underlying all contractual commitments held by each Fund is
determined using forward foreign currency exchange rates supplied by an
independent pricing service.
10 SECURITY LENDING: High Income entered into a securities lending agreement
with Bear Stearns Securities Corp. ("Bear Stearns") on December 26, 2002.
Securities loans involve certain risks in the event Bear Stearns should
default or fail financially, including delays or inability to recover the
loaned securities or foreclose against the collateral. The investment
manager, under the general supervision of the Trust's Board of Trustees,
monitors the creditworthiness of the parties to whom High Income makes
security loans. High Income receives cash collateral equal to at least 102%
of the current market value of the loaned securities. High Income invests
the cash collateral in the N&B Securities Lending Quality Fund, LLC
("investment vehicle"), which is managed by State Street Bank and Trust
Company ("State Street") pursuant to guidelines approved by the Trust's
investment manager. High Income pays a fee to Bear Stearns with respect to
the cash collateral that it receives and retains the income earned on the
reinvestment of that cash collateral. High Income also receives payments
from Bear Stearns equal to income earned on loaned securities during the
time that they are on loan. Income earned on the securities loans is
reflected in the Statements of Operations.
51
<Page>
11 REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements with
institutions that the Fund's investment manager has determined are
creditworthy. Each repurchase agreement is recorded at cost. Each Fund
requires that the securities purchased in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the Fund to
obtain those securities in the event of a default under the repurchase
agreement. Each Fund monitors, on a daily basis, the value of the
securities transferred to ensure that their value, including accrued
interest, is greater than amounts owed to the Fund under each such
repurchase agreement.
12 OTHER: All net investment income and realized and unrealized capital gains
and losses of each Fund are allocated, on the basis of relative net assets,
pro rata among its respective classes.
NOTE B--MANAGEMENT FEES, ADMINISTRATION FEES, DISTRIBUTION ARRANGEMENTS,
AND OTHER TRANSACTIONS WITH AFFILIATES:
Each Fund retains Management as its investment manager under a Management
Agreement. For such investment management services, each Fund (except High
Income) pays Management a fee at the annual rate of 0.25% of the first $500
million of that Fund's average daily net assets, 0.225% of the next $500
million, 0.20% of the next $500 million, 0.175% of the next $500 million,
and 0.15% of average daily net assets in excess of $2 billion. High Income
pays Management a fee for investment management services at the annual rate
of 0.48% of the Fund's average daily net assets.
Lipper & Company, L.L.C. ("Lipper") acted as the investment adviser to
Lipper High Income from its inception through September 6, 2002, when it
merged into High Income, and was paid a management fee at the annual rate
of 0.75% of its average daily net assets.
Each Fund retains Management as its administrator under an Administration
Agreement ("Agreement"). Pursuant to this Agreement each Fund's Investor
Class pays Management an administration fee at the annual rate of 0.27% of
its average daily net assets and the Trust Class of Limited Maturity pays
Management an administration fee at the annual rate of 0.50% of its average
daily net assets. Additionally, Management retains State Street as its
sub-administrator under a Sub-Administration Agreement. Management pays
State Street a fee for all services received under the agreement.
ALPS Mutual Funds Services, Inc. served as the administrator to Lipper High
Income from April 27, 2002 through September 6, 2002, and was paid an
administration fee at the monthly rate of $28,000 allocated on the basis of
relative net assets among the three funds comprising The Lipper Funds, Inc.
J.P. Morgan Investor Services Co. served as the administrator to Lipper
High Income from its inception through April 26, 2002, and was paid an
administration fee at the annual rate of 0.20% of the first $200 million of
the fund's average daily net assets, 0.10% of the next $200 million, and
0.05% of average daily net assets in excess of $400 million, subject to a
minimum annual fee of $70,000.
Lipper & Company, L.P. served as Lipper High Income Retail Shares'
distributor from its inception through September 6, 2002, and was paid a
fee at the annual rate of 0.25% of the average daily net assets of the
Lipper High Income's Retail Shares for distribution services rendered.
52
<Page>
Lipper & Company, L.P. served as Lipper High Income Group Retirement Plan
Shares' shareholder servicing agent from its inception through the class'
discontinuation on March 1, 2002 (see Note E), and was paid a fee at the
annual rate of 0.25% of the average daily net assets of the Lipper High
Income's Group Retirement Plan Shares for shareholder support services
rendered.
Management has undertaken to reimburse operating expenses (including fees
payable to Management but excluding interest, taxes, brokerage commissions,
and extraordinary expenses) ("Operating Expenses") which exceed the expense
limitation as detailed in the following table:
<Table>
<Caption>
REIMBURSEMENT FROM
MANAGEMENT FOR THE
EXPENSE CONTRACTUAL/ YEAR ENDED
CLASS LIMITATION(1) VOLUNTARY EXPIRATION(2) OCTOBER 31, 2003
CASH RESERVES INVESTOR CLASS 0.65% Contractual 10/31/06 $ --
GOVERNMENT MONEY FUND INVESTOR CLASS 0.45% Voluntary -- 1,344,675
HIGH INCOME BOND FUND INVESTOR CLASS 1.00% Contractual 10/31/06 --
LIMITED MATURITY BOND FUND INVESTOR CLASS 0.70% Contractual 10/31/06 81,375
LIMITED MATURITY BOND FUND TRUST CLASS 0.80% Contractual 10/31/06 53,395
MUNICIPAL SECURITIES TRUST INVESTOR CLASS 0.65% Contractual 10/31/06 140,242
</Table>
(1) Expense limitation per annum of the respective class' average daily
net assets.
(2) For Government Money, this undertaking is subject to termination by
Management without written notice to the Fund.
Through September 6, 2002, Lipper agreed to voluntarily waive fees and
reimburse expenses of Lipper High Income to the extent necessary to
maintain an annual operating expense ratio to net assets of not more than
1.00% for the Lipper High Income Premier Shares, and 1.25% for the Lipper
High Income Retail Shares and Group Retirement Plan Shares.
The Investor Classes of Cash Reserves, High Income, Limited Maturity and
Municipal Securities Trust and the Trust Class of Limited Maturity have
agreed to repay Management for their excess Operating Expenses previously
reimbursed by Management, so long as their annual Operating Expenses during
that period do not exceed their Expense Limitations, and the repayments are
made within three years after the year in which Management issued the
reimbursement. During the year ended October 31, 2003, High Income
reimbursed Management $1,904 under this agreement. At October 31, 2003,
contingent liabilities to Management under the agreement were as follows:
<Table>
CASH RESERVES INVESTOR CLASS $ --
HIGH INCOME BOND FUND INVESTOR CLASS --
LIMITED MATURITY BOND FUND INVESTOR CLASS 119,008
LIMITED MATURITY BOND FUND TRUST CLASS 88,098
MUNICIPAL SECURITIES TRUST INVESTOR CLASS 250,178
</Table>
On October 31, 2003, Management and Neuberger Berman, LLC ("Neuberger"), a
member firm of The New York Stock Exchange and sub-adviser to each Fund,
became indirect wholly owned subsidiaries of Lehman Brothers Holdings Inc.,
a publicly held company ("the Transaction"). Upon completion of the
53
<Page>
Transaction, each Fund's management and sub-advisory agreements
automatically terminated. To provide for continuity of management, the
shareholders of each Fund voted on September 23, 2003, to approve new
management and sub-advisory agreements, which took effect upon closing of
the Transaction (see Report of Votes of Shareholders). Neuberger is
retained by Management to furnish it with investment recommendations and
research information without added cost to each Fund. Several individuals
who are officers and/or Trustees of the Trust are also employees of
Neuberger and/or Management.
Each class of shares also has a distribution agreement with Management.
Management receives no compensation therefor and no commissions for sales
or redemptions of shares of beneficial interest of each share class.
Each Fund has an expense offset arrangement in connection with its
custodian contract. The impact of this arrangement, reflected in the
Statements of Operations under the caption Custodian fees, was a reduction
of $531, $4, $2,164, $108, $1,420 and $525 for Cash Reserves, Government
Money, High Income, Limited Maturity, Municipal Money, and Municipal
Securities Trust, respectively.
NOTE C--SECURITIES TRANSACTIONS:
During the year ended October 31, 2003, there were purchase and sale
transactions (excluding short-term securities, financial futures contracts,
and foreign currency contracts) as follows:
<Table>
<Caption>
(000'S OMITTED) PURCHASES SALES
HIGH INCOME $ 803,839,000 $ 467,892,000
LIMITED MATURITY 304,376,000 340,895,000
MUNICIPAL SECURITIES TRUST 10,433,000 4,952,000
</Table>
All securities transactions for Cash Reserves, Government Money, and
Municipal Money were short-term.
NOTE D--LINE OF CREDIT:
At October 31, 2003, High Income and Limited Maturity were two participants
in a single committed, unsecured $150,000,000 ($200,000,000 prior to
September 26, 2003) line of credit with State Street, to be used only for
temporary or emergency purposes. Interest is charged on borrowings under
this agreement at the overnight Federal Funds Rate plus 0.50% per annum. A
facility fee of 0.10% per annum of the available line of credit is charged,
of which each Fund has agreed to pay its pro rata share, based on the ratio
of its individual net assets to the net assets of all participants at the
time the fee is due and payable. The fee is paid quarterly in arrears. No
compensating balance is required. Other investment companies managed by
Management also participate in this line of credit on the same terms.
Because several investment companies participate, there is no assurance
that an individual Fund will have access to the entire $150,000,000 at any
particular time. High Income and Limited Maturity had no loans outstanding
pursuant to this line of credit at October 31, 2003. During the year ended
October 31, 2003, High Income and Limited Maturity did not utilize this
line of credit.
54
<Page>
NOTE E--MERGERS AND REORGANIZATIONS:
After the close of business on September 6, 2002, High Income acquired all
of the assets and assumed all of the liabilities of Lipper High Income, a
multi class Maryland corporation which commenced operations on April 1,
1996, as a diversified, open-end management investment company and NB High
Yield, another series of the Trust which commenced operations on March 3,
1998 as a diversified, open-end management investment company. The
reorganizations were accomplished by a tax-free exchange of 14,821,844
shares of High Income (valued at $131,737,824) for the assets and
liabilities of Lipper High Income Bond Fund Premier Shares, the assets and
liabilities of Lipper High Income Bond Fund Retail Shares, and the assets
and liabilities of NB High Yield. The aggregate net assets of Lipper High
Income Bond Fund Premier Shares, Lipper High Income Bond Fund Retail
Shares, and NB High Yield immediately before the reorganizations were
$61,142,779, $44,672,815, and $25,922,230, respectively, resulting in
aggregate net assets of $131,737,824 immediately after the reorganizations.
The acquisitions were treated as tax-free reorganizations and accordingly,
any unrealized appreciation or depreciation on the securities on the date
of the acquisitions was treated as non-taxable by Lipper High Income and NB
High Yield. As such, High Income's basis in the securities acquired
reflected their historical cost basis as of the date of transfer. The net
unrealized appreciation (depreciation) as of September 6, 2002, was
$904,655 and ($190,463), for Lipper High Income and NB High Yield,
respectively. Based upon the relevant factors, the Premier Share class of
Lipper High Income was determined to be the accounting survivor following
the mergers. As such, the financial results of Lipper High Income and the
financial highlights of Lipper High Income Premier Shares prior to the
merger date are presented in the statements of operations, changes in net
assets and financial highlights of High Income. Effective with the mergers,
the Retail Share class of Lipper High Income and the Investor Class of NB
High Yield ceased to exist and therefore the financial highlights of the
Lipper High Income Retail Shares and NB High Yield Investor Class prior to
the merger date are no longer presented. Certain prior year financial
statement items have been reclassified to conform to the current period
presentation.
Effective March 1, 2002, Lipper High Income discontinued the Group
Retirement Plan shares. Group Retirement Plan shareholders were asked to
redeem their shares and purchase either Premier Shares or Retail Shares, as
applicable.
55
<Page>
FINANCIAL HIGHLIGHTS Cash Reserves
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the Financial
Statements.
<Table>
<Caption>
INVESTOR CLASS+ YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------------
2003 2002 2001 2000 1999
NET ASSET VALUE, BEGINNING OF YEAR $ 1.0000 $ 1.0001 $ 1.0000 $ 1.0000 $ 1.0000
------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME (LOSS) .0066 .0154 .0440 .0562 .0453
NET GAINS OR LOSSES ON SECURITIES .0000 (.0000) .0001 -- --
------------- ------------- ------------- ------------- -------------
TOTAL FROM INVESTMENT OPERATIONS .0066 .0154 .0441 .0562 .0453
------------- ------------- ------------- ------------- -------------
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.0066) (.0154) (.0440) (.0562) (.0453)
FROM NET CAPITAL GAINS -- (.0001) -- -- --
------------- ------------- ------------- ------------- -------------
TOTAL DISTRIBUTIONS (.0066) (.0155) (.0440) (.0562) (.0453)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF YEAR $ 1.0000 $ 1.0000 $ 1.0001 $ 1.0000 $ 1.0000
------------- ------------- ------------- ------------- -------------
TOTAL RETURN++ +.66% +1.56% +4.49% +5.76% +4.63%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF YEAR (IN MILLIONS) $ 617.7 $ 842.0 $ 1,116.0 $ 1,324.8 $ 1,104.2
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS# .59% .60% .55% .60% .61%
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS .59% .60% .55% .60% .61%
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS .68% 1.54% 4.59% 5.61% 4.55%
</Table>
See Notes to Financial Highlights
56
<Page>
FINANCIAL HIGHLIGHTS Government Money Fund
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the Financial
Statements.
<Table>
<Caption>
INVESTOR CLASS+ YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------------
2003 2002 2001 2000 1999
NET ASSET VALUE, BEGINNING OF YEAR $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0001
------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME (LOSS) .0078 .0149 .0423 .0509 .0406
NET GAINS OR LOSSES ON SECURITIES .0000 .0000 -- -- --
------------- ------------- ------------- ------------- -------------
TOTAL FROM INVESTMENT OPERATIONS .0078 .0149 .0423 .0509 .0406
------------- ------------- ------------- ------------- -------------
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.0078) (.0149) (.0423) (.0509) (.0406)
FROM NET CAPITAL GAINS (.0000) (.0000) -- -- (.0001)
------------- ------------- ------------- ------------- -------------
TOTAL DISTRIBUTIONS (.0078) (.0149) (.0423) (.0509) (.0407)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF YEAR $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
------------- ------------- ------------- ------------- -------------
TOTAL RETURN++ +.78% +1.50% +4.31% +5.22% +4.14%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF YEAR (IN MILLIONS) $ 1,078.3 $ 1,345.2 $ 571.9 $ 303.8 $ 653.4
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS# .45% .47% .59% .67% .60%
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS .45%! .47%! .59% .67% .60%
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS .78% 1.45% 3.92% 4.99% 4.08%
</Table>
See Notes to Financial Highlights
57
<Page>
FINANCIAL HIGHLIGHTS High Income Bond Fund
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the Financial
Statements.@
<Table>
<Caption>
TEN MONTHS
YEAR ENDED ENDED
INVESTOR CLASS (M) OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
----------- ----------- -----------------------------------------------
2003 2002 (L) 2001 2000 1999 1998
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.81 $ 9.03 $ 8.90 $ 9.22 $ 9.57 $ 10.11
----------- ----------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME (LOSS) .60 .52(Y) .69 .75 .74 .84
NET GAINS OR LOSSES ON SECURITIES
(BOTH REALIZED AND UNREALIZED) .44 (.21)(Y) .12 (.33) (.35) (.48)
----------- ----------- -------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS 1.04 .31 .81 .42 .39 .36
----------- ----------- -------- -------- -------- --------
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.60) (.53) (.68) (.74) (.74) (.86)
IN EXCESS OF NET INVESTMENT INCOME -- -- -- -- -- (.00)
FROM NET CAPITAL GAINS -- -- -- -- -- (.04)
----------- ----------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (.60) (.53) (.68) (.74) (.74) (.90)
----------- ----------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.25 $ 8.81 $ 9.03 $ 8.90 $ 9.22 $ 9.57
----------- ----------- -------- -------- -------- --------
TOTAL RETURN++ +12.14% +3.52%** +9.27% +4.81% +4.20% +3.61%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (IN MILLIONS) $ 519.7 $ 148.6 $ 92.8 $ 60.3 $ 66.2 $ 85.7
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS# .90% 1.00%* 1.00% 1.00% 1.00% 1.00%
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS .90%~ 1.00%*! 1.00%! 1.00%! 1.00%! 1.00%!
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS 6.54% 6.96%*(Y) 7.54% 8.15% 7.72% 8.50%
PORTFOLIO TURNOVER RATE 148% 95%!! 85% 63% 103% 110%
</Table>
See Notes to Financial Highlights
58
<Page>
FINANCIAL HIGHLIGHTS Limited Maturity Bond Fund
The following tables include selected data for a share outstanding throughout
each year and other performance information derived from the Financial
Statements.@
INVESTOR CLASS+
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------------
2003 2002 2001 2000 1999
NET ASSET VALUE, BEGINNING OF YEAR $ 9.65 $ 9.78 $ 9.31 $ 9.51 $ 9.91
------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME (LOSS) .28 .43(Y) .58 .61 .59
NET GAINS OR LOSSES ON SECURITIES
(BOTH REALIZED AND UNREALIZED) .03 (.11)##(Y) .47 (.20) (.40)
------------- ------------- ------------- ------------- -------------
TOTAL FROM INVESTMENT OPERATIONS .31 .32 1.05 .41 .19
------------- ------------- ------------- ------------- -------------
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.35) (.45) (.58) (.58) (.59)
TAX RETURN OF CAPITAL -- -- -- (.03) --
------------- ------------- ------------- ------------- -------------
TOTAL DISTRIBUTIONS (.35) (.45) (.58) (.61) (.59)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF YEAR $ 9.61 $ 9.65 $ 9.78 $ 9.31 $ 9.51
------------- ------------- ------------- ------------- -------------
TOTAL RETURN++ +3.23% +3.42% +11.62% +4.47% +1.98%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF YEAR (IN MILLIONS) $ 199.4 $ 220.3 $ 204.8 $ 167.9 $ 227.0
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS# .70% .70% .70% .70% .70%
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS! .70% .70% .70% .70% .70%
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS 2.88% 4.44%(Y) 6.05% 6.43% 5.98%
PORTFOLIO TURNOVER RATE 129% 140% 147% 105% 102%
</Table>
TRUST CLASS+
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------------
2003 2002 2001 2000 1999
NET ASSET VALUE, BEGINNING OF YEAR $ 9.20 $ 9.32 $ 8.88 $ 9.06 $ 9.45
------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME (LOSS) .26 .40(Y) .55 .57 .56
NET GAINS OR LOSSES ON SECURITIES
(BOTH REALIZED AND UNREALIZED) .01 (.10)##(Y) .44 (.18) (.39)
------------- ------------- ------------- ------------- -------------
TOTAL FROM INVESTMENT OPERATIONS .27 .30 .99 .39 .17
------------- ------------- ------------- ------------- -------------
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.32) (.42) (.55) (.54) (.55)
IN EXCESS OF NET INVESTMENT INCOME -- -- -- -- (.01)
TAX RETURN OF CAPITAL -- -- -- (.03) --
------------- ------------- ------------- ------------- -------------
TOTAL DISTRIBUTIONS (.32) (.42) (.55) (.57) (.56)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF YEAR $ 9.15 $ 9.20 $ 9.32 $ 8.88 $ 9.06
------------- ------------- ------------- ------------- -------------
TOTAL RETURN++ +3.00% +3.35% +11.41% +4.50% +1.86%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF YEAR (IN MILLIONS) $ 36.5 $ 42.9 $ 38.1 $ 26.9 $ 41.5
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS# .80% .80% .80% .80% .81%
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS! .80% .80% .80% .80% .80%
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS 2.80% 4.31%(Y) 5.95% 6.34% 5.87%
PORTFOLIO TURNOVER RATE 129% 140% 147% 105% 102%
</Table>
See Notes to Financial Highlights
59
<Page>
FINANCIAL HIGHLIGHTS Municipal Money Fund
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the Financial
Statements.
INVESTOR CLASS+
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------------
2003 2002 2001 2000 1999
NET ASSET VALUE, BEGINNING OF YEAR $ .9998 $ .9998 $ .9997 $ .9998 $ .9997
------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME (LOSS) .0050 .0092 .0269 .0336 .0256
NET GAINS OR LOSSES ON SECURITIES -- -- .0001## -- .0001
------------- ------------- ------------- ------------- -------------
TOTAL FROM INVESTMENT OPERATIONS .0050 .0092 .0270 .0336 .0257
------------- ------------- ------------- ------------- -------------
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.0050) (.0092) (.0269) (.0336) (.0256)
FROM NET CAPITAL GAINS -- -- -- (.0001) --
------------- ------------- ------------- ------------- -------------
TOTAL DISTRIBUTIONS (.0050) (.0092) (.0269) (.0337) (.0256)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF YEAR $ .9998 $ .9998 $ .9998 $ .9997 $ .9998
------------- ------------- ------------- ------------- -------------
TOTAL RETURN++ +0.50% +0.93% +2.72% +3.41% +2.59%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF YEAR (IN MILLIONS) $ 410.9 $ 533.3 $ 455.2 $ 255.5 $ 293.8
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS# .61% .62% .61% .68% .68%
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS .61% .62% .60% .67% .67%
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS .50% .92% 2.60% 3.33% 2.58%
</Table>
See Notes to Financial Highlights
60
<Page>
FINANCIAL HIGHLIGHTS Municipal Securities Trust
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the Financial
Statements.@
INVESTOR CLASS+
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------------
2003 2002 2001 2000 1999
NET ASSET VALUE, BEGINNING OF YEAR $ 11.80 $ 11.62 $ 11.00 $ 10.78 $ 11.34
------------- ------------- ------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME (LOSS) .40 .43 .45 .46 .45
NET GAINS OR LOSSES ON SECURITIES
(BOTH REALIZED AND UNREALIZED) .12 .18 .62 .22 (.56)
------------- ------------- ------------- ------------- -------------
TOTAL FROM INVESTMENT OPERATIONS .52 .61 1.07 .68 (.11)
------------- ------------- ------------- ------------- -------------
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.40) (.43) (.45) (.46) (.45)
FROM NET CAPITAL GAINS (.06) -- -- -- --
------------- ------------- ------------- ------------- -------------
TOTAL DISTRIBUTIONS (.46) (.43) (.45) (.46) (.45)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, END OF YEAR $ 11.86 $ 11.80 $ 11.62 $ 11.00 $ 10.78
------------- ------------- ------------- ------------- -------------
TOTAL RETURN++ +4.50% +5.35% +9.89% +6.46% -1.03%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF YEAR (IN MILLIONS) $ 42.3 $ 37.9 $ 32.8 $ 28.7 $ 35.0
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS# .65% .65% .66% .66% .66%
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS! .65% .65% .65% .65% .65%
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS 3.37% 3.67% 3.96% 4.22% 4.03%
PORTFOLIO TURNOVER RATE 12% 17% 26% 37% 17%
</Table>
See Notes to Financial Highlights
61
<Page>
NOTES TO FINANCIAL HIGHLIGHTS Income Funds
+ The per share amounts and ratios which are shown reflect income and
expenses, including each Fund's proportionate share of its corresponding
Portfolio's income and expenses through February 9, 2001 under the prior
master-feeder fund structure.
++ Total return based on per share net asset value reflects the effects of
changes in net asset value on the performance of each Fund during each
fiscal period and assumes dividends and other distributions, if any, were
reinvested. Results represent past performance and do not guarantee future
results. Investment returns and principal may fluctuate and shares when
redeemed may be worth more or less than original cost. For each Fund
(excluding Cash Reserves and Municipal Money), total return would have been
lower if Management had not reimbursed certain expenses.
# The Fund is required to calculate an expense ratio without taking into
consideration any expense reductions related to expense offset
arrangements.
## The amounts shown at this caption for a share outstanding may not accord
with the change in aggregate gains and losses in securities for the year
because of the timing of sales and repurchases of Fund shares.
! After reimbursement of expenses by Management. Had Management not
undertaken such action the annualized ratios of net expenses to average
daily net assets would have been:
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
2003 2002 2001 2000 1999
GOVERNMENT MONEY FUND INVESTOR CLASS .57% .55% - - -
LIMITED MATURITY BOND FUND INVESTOR CLASS .74% .73% .74% .76% .72%
LIMITED MATURITY BOND FUND TRUST CLASS .93% .92% 1.01% 1.26% 1.12%
MUNICIPAL SECURITIES TRUST INVESTOR CLASS .98% 1.10% 1.07% 1.22% 1.07%
</Table>
<Table>
<Caption>
TEN MONTHS ENDED
OCTOBER 31, YEAR ENDED DECEMBER 31,
2002 2001 2000 1999 1998
HIGH INCOME BOND FUND INVESTOR CLASS 1.31% 1.15% 1.18% 1.15% 1.15%
</Table>
~ After reimbursement of expenses previously paid by Management. Had
Management not been reimbursed, the annualized ratio of net expenses to
average daily net assets would have been:
<Table>
<Caption>
YEAR ENDED
OCTOBER 31,
2003
HIGH INCOME BOND FUND INVESTOR CLASS .90%
</Table>
!! Portfolio turnover excludes purchases and sales of securities by NB High
Yield prior to the merger date (see Note E of Notes to Financial
Statements).
* Annualized.
** Not annualized.
@ The per share amounts which are shown for the periods ended October 31,
2001 (October 31, 2002 for High Income) and thereafter, have been computed
based on the average number of shares outstanding during each fiscal
period.
(L) Effective after the close of business on September 6, 2002, Neuberger
Berman Management Inc. succeeded Lipper & Company, L.L.C., as the Fund's
investment manager.
62
<Page>
(Y) For fiscal years ended after October 31, 2001, funds are required by the
American Institute of Certified Public Accountants to amortize premiums and
discounts on fixed income securities. Accordingly, for the year ended
October 31, 2002, the per share amounts and ratios shown decreased or
increased as follows:
<Table>
<Caption>
TEN MONTHS
ENDED
OCTOBER 31,
HIGH INCOME BOND FUND INVESTOR CLASS 2002
NET INVESTMENT INCOME (.01)
NET GAINS OR LOSSES ON SECURITIES .01
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (.19%)
</Table>
<Table>
<Caption>
YEAR ENDED
OCTOBER 31,
LIMITED MATURITY BOND FUND INVESTOR CLASS 2002
NET INVESTMENT INCOME (.02)
NET GAINS OR LOSSES ON SECURITIES .02
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (.26%)
</Table>
<Table>
<Caption>
YEAR ENDED
OCTOBER 31,
LIMITED MATURITY BOND FUND TRUST CLASS 2002
NET INVESTMENT INCOME (.02)
NET GAINS OR LOSSES ON SECURITIES .02
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (.26%)
</Table>
(M) The financial highlights for the periods ended December 31, 2001 and prior
are those of the Premier Shares of Lipper High Income, and have been
audited by other auditors whose report dated February 25, 2002 expressed an
unqualified opinion. The financial highlights for the ten-month period
ended October 31, 2002 include the income and expenses attributable to the
Lipper High Income Premier Shares for the period from January 1, 2002
through September 6, 2002 and the income and expenses of High Income,
thereafter.
63
<Page>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees of Neuberger Berman Income Funds and Shareholders of
Neuberger Berman Cash Reserves
Neuberger Berman Government Money Fund
Neuberger Berman High Income Bond Fund
Neuberger Berman Limited Maturity Bond Fund
Neuberger Berman Municipal Money Fund
Neuberger Berman Municipal Securities Trust
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Neuberger Berman Cash Reserves ("Cash
Reserves"), Neuberger Berman Government Money Fund ("Government Money"),
Neuberger Berman High Income Bond Fund ("High Income"), Neuberger Berman Limited
Maturity Bond Fund ("Limited Maturity"), Neuberger Berman Municipal Money Fund
("Municipal Money") and Neuberger Berman Municipal Securities Trust ("Municipal
Securities"), six of the series constituting the Neuberger Berman Income Funds
(the "Trust"), as of October 31, 2003, and the related statements of operations
for the year then ended, the statements of changes in net assets for each of the
two years in the period ended October 31, 2003 for Cash Reserves, Government
Money, Limited Maturity, Municipal Money and Municipal Securities, and for the
year ended October 31, 2003 and the ten months ended October 31, 2002 for High
Income, and the financial highlights for each of the periods indicated therein.
These financial statements and financial highlights are the responsibility of
the Trust'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 four years in the period ended December 31, 2001 for
the Lipper High Income Bond Fund were audited by other auditors whose report,
dated February 25, 2002, expressed an unqualified opinion on those financial
statements and financial highlights.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of October 31, 2003, by correspondence with
the custodian and brokers or other appropriate auditing procedures where replies
from brokers were not received. 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 each
of the above mentioned series of Neuberger Berman Income Funds at October 31,
2003, the results of their operations for the year then ended, the changes in
their net assets for each of the two years in the period ended October 31, 2003
for Cash Reserves, Government Money, Limited Maturity, Municipal Money and
Municipal Securities and for the year ended October 31, 2003 and ten months
ended October 31, 2002 for High Income, and their financial highlights for each
of the periods indicated therein, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
December 5, 2003
64
<Page>
DIRECTORY
INVESTMENT MANAGER, ADMINISTRATOR AND DISTRIBUTOR
Neuberger Berman Management Inc.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
800.877.9700 or 212.476.8800
Institutional Services 800.366.6264
SUB-ADVISER
Neuberger Berman, LLC
605 Third Avenue
New York, NY 10158-3698
CUSTODIAN AND SHAREHOLDER SERVICING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
FOR INVESTOR CLASS SHAREHOLDERS
ADDRESS CORRESPONDENCE TO:
Neuberger Berman Funds
Boston Service Center
P.O. Box 8403
Boston, MA 02266-8403
800.877.9700 or 212.476.8800
FOR TRUST CLASS SHAREHOLDERS
ADDRESS CORRESPONDENCE TO:
Neuberger Berman Management Inc.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
Attn: Institutional Services
800.366.6264
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
2nd Floor
Washington, DC 20036-1800
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
65
<Page>
TRUSTEES AND OFFICERS (Unaudited)
The following tables set forth information concerning the trustees and officers
of the Trust. All persons named as trustees and officers also serve in similar
capacities for other funds administered or managed by NB Management and
Neuberger Berman. The Statement of Additional Information includes additional
information about fund trustees and is available upon request, without charge,
by calling (800) 877-9700.
INFORMATION ABOUT THE BOARD OF TRUSTEES
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION AND FUND COMPLEX
LENGTH OF TIME OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
NAME, AGE, AND ADDRESS (1) SERVED (2) PRINCIPAL OCCUPATION(S) (3) TRUSTEE FUND COMPLEX BY TRUSTEE
- ----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
John Cannon (73) Trustee since Consultant. Formerly, Chairman 37 Independent Trustee or Director
1994 and Chief Investment Officer, of three series of
CDC Capital Management OppenheimerFunds: Limited Term
(registered investment adviser) New York Municipal Fund,
(1993-January 1999); prior Rochester Fund Municipals, and
thereto, President and Chief Oppenheimer Convertible
Executive Officer, AMA Securities Fund since 1992.
Investment Advisors, an
affiliate of the American
Medical Association.
Faith Colish (68) Trustee since Counsel, Carter Ledyard & 37 Director, American Bar Retirement
2000 Milburn LLP (law firm) since Association (ABRA) since 1997
October 2002; Formerly, (not-for-profit membership
Attorney at Law and President, association).
Faith Colish, A Professional
Corporation, 1980 to 2002.
Walter G. Ehlers (70) Trustee since Consultant; Retired President 37
2000 and Trustee, Teachers Insurance
& Annuity (TIAA) and College
Retirement Equities Fund
(CREF).
</Table>
66
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION AND FUND COMPLEX
LENGTH OF TIME OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
NAME, AGE, AND ADDRESS (1) SERVED (2) PRINCIPAL OCCUPATION(S) (3) TRUSTEE FUND COMPLEX BY TRUSTEE
- ----------------------------------------------------------------------------------------------------------------------------------
C. Anne Harvey (66) Trustee since Consultant, C.A. Harvey 37 Member, Individual Investors
2000 Associates since June 2001; Advisory Committee to the New
Director, AARP, 1978 to York Stock Exchange Board of
December 2000. Directors, 1998 to June 2002;
President, Board of Associates to
The National Rehabilitation
Hospital's Board of Directors
since 2002; Member, American
Savings Education Council's
Policy Board (ASEC), 1998-2000;
Member, Executive Committee,
Crime Prevention Coalition of
America, 1997-2000.
Barry Hirsch (70) Trustee since Attorney at Law. Senior 37
1993 Counsel, Loews Corporation
(diversified financial
corporation) May 2002 until
April 2003; prior thereto,
Senior Vice President,
Secretary and General Counsel,
Loews Corporation.
Robert A. Kavesh (76) Trustee since Marcus Nadler Professor of 37 Director, DEL Laboratories, Inc.
1993 Finance and Economics Emeritus, (cosmetics and pharmaceuticals)
New York University Stern since 1978; The Caring Community
School of Business. (not-for-profit).
</Table>
67
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION AND FUND COMPLEX
LENGTH OF TIME OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
NAME, AGE, AND ADDRESS (1) SERVED (2) PRINCIPAL OCCUPATION(S) (3) TRUSTEE FUND COMPLEX BY TRUSTEE
- ----------------------------------------------------------------------------------------------------------------------------------
Howard A. Mileaf (66) Trustee since Retired. Formerly, Vice 37 Director, WHX Corporation
2000 President and Special Counsel, (holding company) since August
WHX Corporation (holding 2002; Director, Webfinancial
company) 1993 - 2001. Corporation (holding company)
since December 2002; Director,
State Theatre of New Jersey
(not-for-profit theater) since
2000; Formerly, Director, Kevlin
Corporation (manufacturer of
microwave and other products).
John P. Rosenthal (70) Trustee since Senior Vice President, Burnham 37 Director, 92nd Street Y
2000 Securities Inc. (a registered (non-profit) since 1967;
broker-dealer) since 1991. Formerly, Director, Cancer
Treatment Holdings, Inc.
William E. Rulon (71) Trustee since Retired. Senior Vice President, 37 Director, Pro-Kids Golf and
1993 Foodmaker, Inc. (operator and Learning Academy (teach golf and
franchiser of restaurants) computer usage to "at risk"
until January 1997. children) since 1998; Director,
Prandium, Inc. (restaurants)
from March 2001 until July 2002.
Cornelius T. Ryan (71) Trustee since Founding General Partner, 37 Director, Capital Cash
2000 Oxford Partners and Oxford Management Trust (money market
Bioscience Partners (venture fund), Narragansett Insured
capital partnerships) and Tax-Free Income Fund, Rocky
President, Oxford Venture Mountain Equity Fund, Prime
Corporation. Cash Fund, several private
companies and QuadraMed
Corporation (NASDAQ).
</Table>
68
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION AND FUND COMPLEX
LENGTH OF TIME OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
NAME, AGE, AND ADDRESS (1) SERVED (2) PRINCIPAL OCCUPATION(S) (3) TRUSTEE FUND COMPLEX BY TRUSTEE
- ----------------------------------------------------------------------------------------------------------------------------------
Tom Decker Seip (53) Trustee since General Partner, Seip 37 Director, H&R Block, Inc.
2000 Investments LP (a private (financial services company)
investment partnership); since May 2001; Director,
President and CEO, Westaff, General Magic (voice
Inc. (temporary staffing), May recognition software) since
2001 to January 2002; Senior November 2001; Director,
Executive at the Charles Schwab Forward Management, Inc. (asset
Corporation from 1983 to 1999; management) since 2001;
including Chief Executive Director, E-Finance Corporation
Officer, Charles Schwab (credit decisioning services)
Investment Management, Inc. and since 1999; Director,
Trustee, Schwab Family of Funds Save-Daily.com (micro investing
and Schwab Investments from services) since 1999; Formerly,
1997 to 1998 and Executive Vice Director, Offroad Capital Inc.
President-Retail Brokerage, (pre-public internet commerce
Charles Schwab Investment company).
Management from 1994 to 1997.
Candace L. Straight (56) Trustee since Private investor and consultant 37 Director, Providence Washington
1993 specializing in the insurance (property and casualty
industry; Advisory Director, insurance company) since
Securitas Capital LLC (a global December 1998; Director, Summit
private equity investment firm Global Partners (insurance
dedicated to making investments brokerage firm) since October
in the insurance sector). 2000.
Peter P. Trapp (58) Trustee since Regional Manager for Atlanta 37
2000 Region, Ford Motor Credit
Company since August 1997;
prior thereto, President, Ford
Life Insurance Company, April
1995 until August 1997.
</Table>
69
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION AND FUND COMPLEX
LENGTH OF TIME OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
NAME, AGE, AND ADDRESS (1) SERVED (2) PRINCIPAL OCCUPATION(S) (3) TRUSTEE FUND COMPLEX BY TRUSTEE
- ----------------------------------------------------------------------------------------------------------------------------------
TRUSTEES WHO ARE "INTERESTED PERSONS"
Edward I. O'Brien* (75) Trustee since Member, Investment Policy 37 Director, Legg Mason, Inc.
2000 Committee, Edward Jones, (financial services holding
1993-2001; President, company) since 1993; Director,
Securities Industry Association Boston Financial Group (real
("SIA") (securities industry's estate and tax shelters)
representative in government 1993-1999.
relations and regulatory
matters at the federal and
state levels) from 1974-1992;
Adviser to SIA, November
1992-November 1993.
Jack L. Rivkin* (63) President and Executive Vice President and 37 Director, Dale Carnegie and
Trustee since Chief Investment Officer, Associates, Inc. (private
December Neuberger Berman since 2002 and company) since 1998; Director,
2002 2003, respectively; Director Emagin Corp. (public company)
and Chairman, NB Management since 1997; Director,
since December 2002; Executive Solbright, Inc. (private
Vice President, Citigroup company) since 1998; Director,
Investments, Inc. from Infogate, Inc. (private
September 1995 to February company) since 1997.
2002; Executive Vice President,
Citigroup Inc. from September
1995 to February 2002.
Peter E. Sundman* (44) Chairman of Executive Vice President, 37 Executive Vice President,
the Board, Neuberger Berman since 1999; Neuberger Berman Inc. (holding
Chief Principal, Neuberger Berman company) since 1999 and
Executive from 1997 until 1999; Senior Director from October 1999
Officer and Vice President, NB Management through March 2003; President
Trustee since from 1996 until 1999. and Director, NB Management
2000 President since 1999; Head of Neuberger
and Chief Berman Inc.'s Mutual Funds and
Executive Institutional Business since
Officer from 1999; Director and Vice
1999 to 2000 President, Neuberger & Berman
Agency, Inc. since 2000.
</Table>
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Pursuant to the Trust's Trust Instrument, each Trustee shall hold office
for life or until his or her successor is elected or the Trust terminates;
except that (a) any Trustee may resign by delivering a written resignation;
(b) any Trustee may be removed with or without cause at any time by a
written instrument signed by at least two-thirds of the other Trustees; (c)
any Trustee who requests to be retired, or who has become unable to serve,
may be retired by a written instrument signed by a majority of the other
Trustees; and (d) any Trustee may be removed at any shareholder meeting by
a vote of at least two-thirds of the outstanding shares.
(3) Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
* Indicates a Trustee who is an "interested person" within the meaning of the
1940 Act. Mr. Sundman and Mr. Rivkin are interested persons of the Trust by
virtue of the fact that they are officers and/or directors of NB Management
and Executive Vice Presidents of Neuberger Berman. Mr. O'Brien is an
interested person of the Trust by virtue of the fact that he is a director
of Legg Mason, Inc., a wholly owned subsidiary of which, from time to time,
serves as a broker or dealer to the Fund and other funds for which NB
Management serves as investment manager.
70
<Page>
INFORMATION ABOUT THE OFFICERS OF THE TRUST
<Table>
<Caption>
POSITION AND
NAME, AGE, AND ADDRESS (1) LENGTH OF TIME SERVED (2) PRINCIPAL OCCUPATION(S) (3)
- ---------------------------------------------------------------------------------------------------------------------------------
Claudia A. Brandon (47) Secretary since 1985 Vice President-Mutual Fund Board
Relations, NB Management since 2000; Vice
President, Neuberger Berman since 2002 and
employee since 1999; Vice President, NB
Management from 1986 to 1999; Secretary,
ten registered investment companies for
which NB Management acts as investment
manager and administrator (four since 2002
and three since 2003).
Robert Conti (47) Vice President since 2000 Senior Vice President, Neuberger Berman
since 2003; Vice President, Neuberger
Berman from 1999 until 2003; Senior Vice
President, NB Management since 2000;
Controller, NB Management until 1996;
Treasurer, NB Management from 1996 until
1999; Vice President, ten registered
investment companies for which NB
Management acts as investment manager and
administrator (three since 2000, four
since 2002 and three since 2003).
Brian P. Gaffney (50) Vice President since 2000 Managing Director, Neuberger Berman since
1999; Senior Vice President, NB Management
since 2000; Vice President, NB Management
from 1997 until 1999; Vice President, ten
registered investment companies for which
NB Management acts as investment manager
and administrator (three since 2000, four
since 2002 and three since 2003).
Sheila R. James (38) Assistant Secretary since 2002 Employee, Neuberger Berman since 1999;
Employee, NB Management from 1991 to 1999;
Assistant Secretary, ten registered
investment companies for which NB
Management acts as investment manager and
administrator (seven since 2002 and three
since 2003).
Kevin Lyons (48) Assistant Secretary since 2003 Employee, Neuberger Berman since 1999;
Employee, NB Management from 1993 to 1999;
Assistant Secretary, ten registered
investment companies for which NB
Management acts as investment manager and
administrator (since 2003).
</Table>
71
<Page>
<Table>
<Caption>
POSITION AND
NAME, AGE, AND ADDRESS (1) LENGTH OF TIME SERVED (2) PRINCIPAL OCCUPATION(S) (3)
- ---------------------------------------------------------------------------------------------------------------------------------
John M. McGovern (33) Assistant Treasurer since 2002 Employee, NB Management since 1993;
Assistant Treasurer, ten registered
investment companies for which NB
Management acts as investment manager and
administrator (seven since 2002 and three
since 2003).
Barbara Muinos (44) Treasurer and Principal Financial and Vice President, Neuberger Berman since
Accounting Officer since 2002 1999; Assistant Vice President, NB
Management from 1993 to 1999; Treasurer
and Principal Financial and Accounting
Officer, ten registered investment
companies for which NB Management acts as
investment manager and administrator
(seven since 2002 and three since 2003);
Assistant Treasurer, three registered
investment companies for which NB
Management acts as investment manager and
administrator from 1996 until 2002.
Frederic B. Soule (57) Vice President since 2000 Senior Vice President, Neuberger Berman
since 2003; Vice President, Neuberger
Berman from 1999 until 2003; Vice
President, NB Management from 1995 until
1999; Vice President, ten registered
investment companies for which NB
Management acts as investment manager and
administrator (three since 2000, four
since 2002 and three since 2003).
Trani Jo Wyman (34) Assistant Treasurer since 2002 Employee, NB Management since 1991;
Assistant Treasurer, ten registered
investment companies for which NB
Management acts as investment manager and
administrator (seven since 2002 and three
since 2003).
</Table>
- ----------
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Pursuant to the By-Laws of the Trust, each officer elected by the Trustees
shall hold office until his or her successor shall have been elected and
qualified or until his or her earlier death, inability to serve, or
resignation. Officers serve at the pleasure of the Trustees and may be
removed at any time with or without cause.
(3) Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
72
<Page>
REPORT OF VOTES OF SHAREHOLDERS (UNAUDITED)
A special meeting of shareholders of Neuberger Berman Income Funds (the "Trust")
was held on September 23, 2003. Upon completion of the acquisition of Neuberger
Berman Inc. by Lehman Brothers Holdings Inc. (the "Transaction"), the Trust's
management and sub-advisory agreements, on behalf of each Fund, with NB
Management and Neuberger Berman LLC, respectively, automatically terminated. To
provide for continuity of management, the shareholders of each Fund voted on the
following matters which became effective upon completion of the Transaction on
October 31, 2003:
PROPOSAL 1--TO APPROVE A NEW MANAGEMENT AGREEMENT BETWEEN THE TRUST AND NB
MANAGEMENT, WITH RESPECT TO EACH FUND
<Table>
<Caption>
NEUBERGER BERMAN INCOME FUNDS VOTES FOR VOTES AGAINST ABSTENTIONS*
Cash Reserves 596,707,419.069 8,317,828.455 5,938,956.973
Government Money Fund 1,030,679,626.825 5,217,193.656 2,461,234.352
High Income Bond Fund 34,825,921.522 402,396.561 296,629.649
Limited Maturity Bond Fund 20,292,228.205 458,861.813 584,652.453
Municipal Money Fund 460,577,413.060 602,818.900 2,303,438.810
Municipal Securities Trust 2,031,077.246 59,274.082 80,161.534
</Table>
PROPOSAL 2--TO APPROVE A NEW SUB-ADVISORY AGREEMENT WITH RESPECT TO THE TRUST
AND EACH FUND, BETWEEN NB MANAGEMENT AND NEUBERGER BERMAN LLC
<Table>
<Caption>
NEUBERGER BERMAN INCOME FUNDS VOTES FOR VOTES AGAINST ABSTENTIONS*
Cash Reserves 596,613,791.639 8,360,015.992 5,990,396.866
Government Money Fund 1,030,336,409.031 5,531,162.043 2,490,483.759
High Income Bond Fund 34,804,081.486 409,974.351 310,891.895
Limited Maturity Bond Fund 20,280,603.071 464,508.872 590,630.528
Municipal Money Fund 460,615,479.860 564,355.340 2,303,835.570
Municipal Securities Trust 2,056,318.756 65,253.253 48,940.853
</Table>
* Abstentions were counted as shares that were present and entitled to vote
for purposes of determining a quorum and had a negative effect on the
proposals.
73
<Page>
NOTICE TO SHAREHOLDERS (UNAUDITED)
Under most state tax laws, mutual fund dividends which are derived from direct
investments in U.S. Government obligations are not taxable, as long as a Fund
meets certain requirements. Some states require that a Fund must provide
shareholders with a written notice, within 60 days of the close of a Fund's
taxable year, designating the portion of the dividends which represents interest
which those states consider to have been earned on U.S. Government obligations.
The chart below shows the percentage of income derived from such investments for
the twelve months ended October 31, 2003. This information should not be used to
complete your tax returns.
<Table>
<Caption>
CALIFORNIA,
CONNECTICUT, ALL OTHER
NEUBERGER BERMAN AND NEW YORK MAINE STATES
- ----------------------------------------------------------------------------------------------
GOVERNMENT MONEY FUND 93.0% 43.8% 93.0%
CASH RESERVES 0.0 26.3 26.3
LIMITED MATURITY BOND FUND 0.0 0.2 0.2
HIGH INCOME BOND FUND 0.0 0.0 0.0
</Table>
In January 2004 you will receive information to be used in filing your 2003 tax
returns, which will include a notice of the exact tax status of all dividends
paid to you by each Fund during calendar 2003. Please consult your own tax
advisor for details as to how this information should be reflected on your tax
returns.
Neuberger Berman Municipal Securities Trust hereby designates $199,702 as a
capital gain distribution.
74
<Page>
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<Page>
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<Page>
[NEUBERGER BERMAN LOGO]
A LEHMAN BROTHERS COMPANY
NEUBERGER BERMAN MANAGEMENT INC.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
SHAREHOLDER SERVICES
800.877.9700
INSTITUTIONAL SERVICES
800.366.6264
www.nb.com
Statistics and projections in this report are derived from sources deemed to be
reliable but cannot be regarded as a representation of future results of the
Funds. This report is prepared for the general information of shareholders and
is not an offer of shares of the Funds. Shares are sold only through the
currently effective prospectus, which must precede or accompany this report.
[RECYCLED SYMBOL] B0778 12/03
<Page>
[NEUBERGER BERMAN LOGO]
A LEHMAN BROTHERS COMPANY
ANNUAL REPORT
OCTOBER 31, 2003
NEUBERGER BERMAN
INCOME FUNDS(R)
TRUST CLASS SHARES
INSTITUTIONAL CLASS SHARES
INSTITUTIONAL CASH FUND
STRATEGIC INCOME FUND
<Page>
CONTENTS
<Table>
THE FUNDS
CHAIRMAN'S LETTER 2
PORTFOLIO COMMENTARY
Institutional Cash Fund 3
Strategic Income Fund 4
SCHEDULE OF INVESTMENTS
Institutional Cash Fund 6
Strategic Income Fund 8
FINANCIAL STATEMENTS 16
FINANCIAL HIGHLIGHTS
PER SHARE DATA
Institutional Cash Fund 25
Strategic Income Fund 26
REPORT OF INDEPENDENT AUDITORS 28
DIRECTORY 29
TRUSTEES AND OFFICERS 30
</Table>
"NEUBERGER BERMAN" AND THE NEUBERGER BERMAN LOGO ARE SERVICE MARKS OF NEUBERGER
BERMAN, LLC. "NEUBERGER BERMAN MANAGEMENT INC." AND THE INDIVIDUAL FUND NAMES IN
THIS SHAREHOLDER REPORT ARE EITHER SERVICE MARKS OR REGISTERED SERVICE MARKS OF
NEUBERGER BERMAN MANAGEMENT INC. (C)2003 NEUBERGER BERMAN MANAGEMENT INC. ALL
RIGHTS RESERVED.
1
<Page>
CHAIRMAN'S LETTER
[PHOTO OF PETER SUNDMAN]
Dear Fellow Shareholder,
I am pleased to present to you this annual report for the Neuberger Berman
Institutional Cash Fund and the Neuberger Berman Strategic Income Fund, for the
period ending October 31, 2003. The report includes a listing of the Funds'
investments and their financial statements for the reporting period.
After a three-year bull market in bonds, we entered fiscal 2003 in a somewhat
cautious frame of mind. The economy appeared to have bottomed, and although
leading economic indices were mixed, we recognized the potential for an economic
recovery vigorous enough to put upward pressure on interest rates and downward
pressure on bond prices.
Looking back, our caution was clearly warranted. The conservative strategies we
employed helped preserve shareholder capital during the summer months when bond
market volatility punished more aggressive investors.
We understand that the financial markets are largely unpredictable, and
therefore, with an eye toward safety of principal, we strive to build
fixed-income portfolios with the most favorable risk/reward characteristics. Put
another way, we always look both ways, down and up, before we make investment
decisions. Whether it be adjusting our portfolios' duration in an effort to stay
on the right side of interest rate trends, altering sector allocation as
fundamentals shift, or evaluating individual securities, our goal is protect our
shareholders' hard earned money.
Thank you for your confidence in Neuberger Berman. We will continue to do our
best to keep earning it.
Sincerely,
/s/ Peter Sundman
PETER SUNDMAN
CHAIRMAN OF THE BOARD
NEUBERGER BERMAN INCOME FUNDS
2
<Page>
INSTITUTIONAL CASH FUND PORTFOLIO COMMENTARY
For the six months ended October 31, 2003, the Neuberger Berman Institutional
Cash Fund returned 0.41% compared to the Money Fund Report Taxable First Tier
Institutional Average's 0.39%. For the twelve months ended on the same date, the
Fund returned 0.97% versus the benchmark's 0.92%. The Fund closed fiscal 2003
with a 7-day current yield of 0.78% and a 7-day effective yield of 0.78%.
The continued record new issuance of short-term Treasury securities, along with
growing evidence that the economy was gaining momentum, were the primary factors
influencing the money markets in fiscal 2003. The large supply of Treasuries
being issued to finance the increasing federal budget deficit wasn't problematic
until the surging stock market began siphoning money from the money markets and
reduced demand put pressure on short-term Treasuries prices. Agency issues also
came under pressure following this summer's negative publicity regarding Freddie
Mac and Fannie Mae's accounting practices.
After a dearth of commercial paper issuance we are now beginning to see
high-quality issuers in the market place. This issuance has given us an
opportunity to diversify from governments and pick up some incremental yield
while maintaining our high credit quality standards. We want to stress to our
shareholders that we consider diversification to be our first line of defense,
and we do not concentrate in any one sector or industry.
With rates still hovering at 40-year lows, and with interest rates unlikely to
fall significantly from here, we have chosen to reduce the weighted average
maturity of the portfolio from 60.0 days at the end of fiscal 2002 to 52.7 days
at the end of fiscal 2003. It is our opinion that as investor expectations
normalize, rates may begin an upward march -- perhaps in the near future.
This is not an environment where one can be careless. As we have stated in past
reports, our challenge is to deliver competitive returns with safety of
principal as our most important objective. We will strive to continue along this
path.
Sincerely,
/s/ Ted Giuliano
/s/ Catherine Waterworth
TED GIULIANO
AND
CATHERINE WATERWORTH
PORTFOLIO CO-MANAGERS
/s/ Cynthia Damian
/s/ Alyssa Juros
CYNTHIA DAMIAN
AND
ALYSSA JUROS
PORTFOLIO ASSOCIATE MANAGERS
The composition, industries and holdings of the fund are subject to change.
Investment return will fluctuate. Past performance is no guarantee of future
results.
3
<Page>
STRATEGIC INCOME FUND PORTFOLIO COMMENTARY
We are pleased to present the first report of the Neuberger Berman Strategic
Income Fund, which commenced operations on July 11, 2003. We are honored that
you have entrusted us with your hard-earned assets, and we will strive to
achieve a high level of income without undue risk to principal.
The Fund seeks to invest in a diversified portfolio of income-producing
securities. Through diversification among market sectors, the Fund's strategy is
to reduce the downside potential of price declines associated with investing in
a single sector. We believe that our ability to strategically and tactically
adjust our mix of investments provides the flexibility to pursue the long-term
return potential of better performing income-producing market sectors.
The Fund's investment strategy is to hold a core position in investment-grade
securities, which may include U.S. Treasury issues, agency obligations, and
mortgage-backed securities. Around this core allocation, we add strategic
positions in investment-grade corporate bonds, high-yield bonds, foreign bonds
and dividend-paying equity securities, such as real estate investment trusts
(REITs) or utility stocks. We also consider positions in emerging market bonds
and hybrid securities such as convertibles. We intend to increase or decrease
our exposure to the portfolio's various income-producing segments as we see
opportunities in the market.
In the Fund's first months of operation, the bond market was turbulent.
Increasingly good economic news and a growing federal budget deficit caused
interest rates to spike and bond prices to drop. In fact, July was the worst
single month for bonds since 1981. Although bonds rebounded in August and
September, they fell again in October. In this environment, corporate bonds,
especially high-yield corporates, outperformed all other sectors. Although
credit spreads (the spread between higher and lower rated bonds) have narrowed
considerably in 2003, corporate bonds maintained a meaningful yield advantage
over Treasuries.
At the end of this reporting period, we had invested 19.4% of the Fund's total
net assets in the core area of U.S. Treasury issues, agency obligations, and
mortgage-backed securities. Our largest holding outside of this area was in
corporate bonds, which accounted for 31.3% of net assets. The Fund held 13.0% of
its net assets in REITs and 15.3% in foreign bonds -- primarily government bonds
issued by Western European countries.
In terms of credit quality, we maintained a core of the highest-quality triple-A
or government bonds, representing 43.8% of the fixed income portion of the
portfolio, while higher-yielding non-investment-grade bonds represented 32.9% of
the fixed income portion. We believe this represents moderate, but not excessive
risk, which should enable the portfolio to achieve its high-income goal.
We hope that the Neuberger Berman Strategic Income Fund will become a core
holding of your portfolio. We believe our conservative investing philosophy and
disciplined investment process will benefit you with superior income without
undue risk to principal, in both the near and long term.
Sincerely,
NEUBERGER BERMAN STRATEGIC INCOME
FUND ASSET ALLOCATION COMMITTEE
The composition, industries and holdings of the fund are subject to change.
Investment return will fluctuate. Past performance is no guarantee of future
results.
4
<Page>
ENDNOTES
1. Neuberger Berman Management Inc. ("Management") has contractually
undertaken to reimburse the fund so that total operating expenses exclusive
of taxes, interest, brokerage commissions and extraordinary expenses of the
fund are limited to 0.41% Of average daily net assets. This undertaking
lasts until October 31, 2006. The Fund has contractually undertaken to
reimburse Management for the excess expenses paid by Management, provided
the reimbursements do not cause operating expenses (exclusive of taxes,
interest, brokerage commissions, and extraordinary expenses) to exceed an
annual rate of 0.41%, And the reimbursements are made within three years
after the year that Management incurred the expense. If this reimbursement
was not made, performance would be lower.
2. "Current yield" of a money market fund refers to the income generated by an
investment in the Fund over a recent 7-day period. This income is then
"annualized." The "effective yield" is calculated similarly but, when
annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "current
yield" because of the compounding effect of this assumed reinvestment.
Yields of a money market fund will fluctuate and past performance is no
guarantee of future results.
3. An investment in a money market fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. There
can be no assurance that a money market fund will be able to maintain a
stable net asset value of $1.00 Per share. The return on an investment in
the Fund will fluctuate.
4. The Money Fund Report Taxable First Tier Institutional Average measures the
performance of institutional money market mutual funds which invest in
anything allowable, except Second Tier Commercial Paper. Investors cannot
invest directly in the Average.
5
<Page>
SCHEDULE OF INVESTMENTS INSTITUTIONAL CASH FUND
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ^ VALUE ++
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
U.S. TREASURY SECURITIES-BACKED BY THE FULL FAITH AND CREDIT
OF THE U.S. GOVERNMENT (10.8%)
$ 50,000 U.S. Treasury Bills, 1.11%, due 11/6/03 TSY TSY $ 49,995
50,000 U.S. Treasury Bills, 0.92%, due 11/20/03 TSY TSY 49,979
50,000 U.S. Treasury Bills, 0.94%, due 11/28/03 TSY TSY 49,967
60,000 U.S. Treasury Bills, 0.92%, due 1/2/04 TSY TSY 59,908
50,000 U.S. Treasury Bills, 0.93%, due 1/15/04 TSY TSY 49,906
30,000 U.S. Treasury Bills, 0.94%, due 2/5/04 TSY TSY 29,926
-------------
TOTAL U.S. TREASURY SECURITIES-BACKED BY THE FULL 289,681
FAITH AND CREDIT OF THE U.S. GOVERNMENT -------------
U.S. GOVERNMENT AGENCY SECURITIES (24.0%)
22,000 Federal Farm Credit Bank, Disc. Notes, 1.12%, due 12/19/03 AGY AGY 21,969
17,500 Federal Farm Credit Bank, Disc. Notes, 1.17%, due 5/28/04 AGY AGY 17,382
23,000 Federal Farm Credit Bank, Disc. Notes, 1.14%, due 7/23/04 AGY AGY 22,808
30,000 Federal Home Loan Bank, Bonds, 1.20%, due 8/20/04 AGY AGY 30,000
60,000 Federal Home Loan Bank, Disc. Notes, 1.02%, due 11/7/03 AGY AGY 59,993
25,000 Federal Home Loan Bank, Disc. Notes, 1.02%, due 11/12/03 AGY AGY 24,994
122,743 Federal Home Loan Bank, Disc. Notes, 1.02% & 1.10%,
due 11/19/03 AGY AGY 122,686
50,000 Federal Home Loan Bank, Disc. Notes, 1.11%, due 11/28/03 AGY AGY 49,961
30,000 Federal Home Loan Bank, Disc. Notes, 1.10%, due 2/27/04 AGY AGY 29,894
50,000 Federal Home Loan Bank, Disc. Notes, 1.07%, due 3/5/04 AGY AGY 49,817
50,000 Sallie Mae, Disc. Notes, 0.95%, due 11/3/03 AGY AGY 50,000
100,000 Sallie Mae, Disc. Notes, 0.96%, due 11/14/03 AGY AGY 99,971
25,000 Tennessee Valley Authority, Disc. Notes, 0.91%, due 11/20/03 AGY AGY 24,989
20,000 Tennessee Valley Authority, Disc. Notes, 0.95%, due 12/4/03 AGY AGY 19,984
20,000 Tennessee Valley Authority, Disc. Notes, 0.96%, due 12/11/03 AGY AGY 19,980
-------------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES 644,428
-------------
CERTIFICATES OF DEPOSIT (15.8%)
30,000 American Express Centurion Bank, Domestic CD, 1.04%,
due 11/28/03 P-1 A-1 30,000
30,000 Canadian Imperial Bank, Yankee CD, 1.07%, due 1/7/04 P-1 A-1 30,000
23,000 Citigroup NA, Domestic CD, 1.06%, due 12/15/03 P-1 A-1+ 23,000
50,000 Deutsche Bank AG, Yankee CD, 1.05%, due 12/19/03 P-1 A-1+ 50,000
40,000 Dexia Bank NY, Yankee CD, 1.08%, due 1/23/04 P-1 A-1+ 40,001
51,000 Lloyd's TSB Bank PLC, Yankee CD, 1.08%,
due 1/30/04 & 4/30/04 P-1 A-1+ 51,001
40,000 Rabobank Nederland, Yankee CD, 1.08%, due 12/29/03 P-1 A-1+ 40,001
50,000 Royal Bank of Scotland NY, Yankee CD, 1.07%,
due 12/10/03 & 12/17/03 P-1 A-1+ 50,000
10,000 Societe Generale, Yankee CD, 1.06%, due 12/2/03 P-1 A-1+ 10,000
50,000 Svenska Handelsbanken AB, Yankee CD, 1.10%, due 1/20/04 P-1 A-1 50,001
50,000 Wells Fargo Bank NA, Domestic CD, 1.04%, due 12/4/03 P-1 A-1+ 50,000
-------------
TOTAL CERTIFICATES OF DEPOSIT 424,004
-------------
COMMERCIAL PAPER (43.2%)
50,000 ABN AMRO North America Finance, Inc., 1.02%, due 11/17/03 P-1 A-1+ 49,980
30,000 Alcon Capital Corp., 1.03% & 1.04%, due 11/18/03 P-1 A-1+ 29,987
20,000 American Express Credit Corp., 1.03%, due 11/3/03 P-1 A-1 20,000
60,108 ANZ (Delaware), Inc., 1.03% - 1.07%, due 11/13/03 - 1/9/04 P-1 A-1+ 60,073
45,000 Aventis SA, 1.03% & 1.05%, due 12/9/03 & 12/12/03 P-1 A-1 44,952
65,000 Banc One Corp., 1.02% & 1.04%, due 11/24/03 & 12/22/03 P-1 A-1 64,941
</Table>
6
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ^ VALUE ++
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 50,000 Barclays U.S. Funding Corp., 1.03%, due 11/3/03 & 11/19/03 P-1 A-1+ $ 49,986
39,900 BASF AG, 1.04% & 1.07%, due 11/24/03 & 12/19/03 P-1 A-1+ 39,857
40,000 Bear Stearns Co., Inc., 1.07%, due 12/22/03 P-1 A-1 39,942
55,000 BNP Paribas Finance, 1.02% - 1.18%, due 12/3/03 - 5/14/04 P-1 A-1+ 54,812
50,000 Citigroup Global Markets, Inc., 1.05% - 1.08%,
due 11/19/03 - 1/8/04 P-1 A-1+ 49,939
15,000 Dexia Delaware LLC, 1.04%, due 11/26/03 P-1 A-1+ 14,990
20,490 Diageo Capital PLC, 1.03%, due 11/6/03 P-1 A-1 20,488
25,000 Eksportfinans ASA, 1.03%, due 11/17/03 P-1 A-1+ 24,990
50,000 General Electric Capital Corp., 1.08% & 1.11%,
due 1/5/04 & 1/14/04 P-1 A-1+ 49,899
25,000 Goldman Sachs Group, Inc., 1.13%, due 4/19/04 P-1 A-1 24,868
20,000 J.P. Morgan Chase & Co., 1.08%, due 2/20/04 P-1 A-1+ 19,935
25,000 Kimberly-Clark Corp., 1.00%, due 11/6/03 P-1 A-1+ 24,998
30,000 Merrill Lynch & Co., 1.03%, due 11/6/03 P-1 A-1 29,997
50,000 Novartis Finance Corp., 1.02%, due 11/7/03 P-1 A-1+ 49,994
60,000 Pfizer, Inc., 1.02%, due 11/24/03 & 12/22/03 P-1 A-1+ 59,937
29,750 Private Export Funding Corp., 1.08%, due 4/20/04 P-1 A-1+ 29,600
20,000 Procter & Gamble, Inc., 1.02%, due 11/7/03 P-1 A-1+ 19,998
50,000 Shell Finance UK PLC, 1.02%, due 12/10/03 P-1 A-1+ 49,948
58,910 Societe Generale NA, Inc., 1.03% - 1.14%,
due 11/6/03 - 5/28/04 P-1 A-1+ 58,648
54,815 Toyota Motor Credit Corp., 1.03% - 1.06%,
due 11/5/03 - 1/27/04 P-1 A-1+ 54,741
60,000 UBS Finance (Delaware), Inc., 1.03% & 1.17%,
due 11/3/03 & 4/30/04 P-1 A-1+ 59,767
62,000 Westpac Capital Corp., 1.07% - 1.08%, due 1/5/04 - 2/6/04 P-1 A-1+ 61,858
-------------
TOTAL COMMERCIAL PAPER 1,159,125
-------------
TIME DEPOSITS (6.5%)
33,436 Chase Manhattan Bank, Grand Cayman, 1.03%, due 11/3/03 P-1 A-1+ 33,436
40,000 Danske Bank A/S Copenhagen, 1.02%, due 11/3/03 P-1 A-1+ 40,000
50,000 National City Bank, Grand Cayman, 1.03%, due 11/3/03 P-1 A-1 50,000
50,000 SunTrust Banks, Inc., 1.03%, due 11/3/03 P-1 A-1+ 50,000
-------------
TOTAL TIME DEPOSITS 173,436
-------------
TOTAL INVESTMENTS (100.3%) 2,690,674
Liabilities, less cash, receivables and other assets [(0.3%)] (8,540)
-------------
TOTAL NET ASSETS (100.0%) $ 2,682,134
-------------
</Table>
See Notes to Schedule of Investments
7
<Page>
SCHEDULE OF INVESTMENTS STRATEGIC INCOME FUND
<Table>
<Caption>
NUMBER OF SHARES VALUE +
(000'S OMITTED)
COMMON STOCKS (21.1%)
APARTMENTS (1.8%)
4,100 Archstone-Smith Trust $ 109
3,500 BRE Properties 113
2,800 Home Properties 108
5,600 United Dominion Realty Trust 98
--------
428
BANKING & FINANCIAL (0.3%)
1,500 Wachovia Corp. 69++++
BUILDING, CONSTRUCTION & Furnishing (0.3%)
2,000 Home Depot 74++++
COMMUNICATIONS (0.2%)
2,500 Vodafone Group ADR 53++++
COMMUNITY CENTERS (0.6%)
4,000 Federal Realty Investment Trust 152
CONSUMER CYCLICALS (0.4%)
1,500 Clear Channel Communications 61++++
4,000 Fleetwood Enterprises 40*++++
--------
101
CONSUMER STAPLES (0.5%)
1,500 Diageo PLC ADR 72++++
1,500 Gillette Co. 48++++
--------
120
DEFENSE (0.2%)
1,000 L-3 Communications Holdings 47*++++
DIVERSIFIED (1.5%)
3,700 Colonial Properties Trust 137
3,100 Pennsylvania REIT 104
2,300 Vornado Realty Trust 116
--------
357
ENERGY (0.5%)
1,551 Kinder Morgan Management 59
1,100 Royal Dutch Petroleum -
NY Shares 49
--------
108
FOOD & BEVERAGE (0.3%)
1,500 Pepsico, Inc. 72++++
FOREST PRODUCTS & PAPER (0.3%)
1,500 Rayonier Inc. 63
HEALTH CARE (1.0%)
8,400 Ventas, Inc. 157
1,000 Wellpoint Health Networks 89*++++
--------
246
INDUSTRIAL (0.8%)
3,600 AMB Property 108
2,000 Dover Corp. 78++++
--------
186
INSURANCE (0.3%)
1,000 American International Group $ 61++++
LODGING (0.5%)
6,400 LaSalle Hotel Properties 108
MANUFACTURED HOMES (0.4%)
2,500 Sun Communities 91
OFFICE (2.7%)
2,200 Alexandria Real Estate Equities 112
3,000 Boston Properties 133
3,400 Carramerica Realty 102
4,400 Prentiss Properties Trust 133
11,300 Trizec Properties 151
--------
631
OFFICE - INDUSTRIAL (1.3%)
3,300 Kilroy Realty 95
2,900 Liberty Property Trust 106
4,600 Reckson Associates Realty 102
--------
303
OIL & GAS (0.8%)
1,500 Anadarko Petroleum 65++++
1,500 Exxon Mobil 55++++
1,500 Schlumberger Ltd. 71++++
--------
191
PHARMACEUTICAL (0.5%)
1,500 Johnson & Johnson 76++++
1,500 Pfizer Inc. 47++++
--------
123
REGIONAL MALLS (2.5%)
2,200 CBL & Associates Properties 117
2,800 Macerich Co. 113
2,800 Mills Corp. 114
2,400 Simon Property Group 108
6,900 Taubman Centers 139
--------
591
RETAIL STORES (0.3%)
3,000 Pier 1 Imports 69++++
SELF STORAGE (0.6%)
4,300 Sovran Self Storage 145
TECHNOLOGY (0.9%)
3,000 Nokia Corp. ADR 51++++
1,500 Pitney Bowes 61++++
3,000 Texas Instruments 87++++
--------
199
UTILITIES (1.6%)
2,500 Cinergy Corp. 91
1,400 Dominion Resources 86
1,200 Exelon Corp. 76
</Table>
8
<Page>
<Table>
<Caption>
NUMBER OF SHARES VALUE +
(000'S OMITTED)
2,000 Keyspan Corp. $ 70
3,000 ONEOK, Inc. 60
--------
383
TOTAL COMMON STOCKS
(COST $4,680) 4,971
--------
CONVERTIBLE PREFERRED STOCKS (1.9%)
1,500 CNF.T Trust I, Ser. T 76
1,500 Comcast Corp. 50
2,000 General Motors 50
1,500 International Paper Capital Trust 73
1,000 New York Community
Capital Trust V 72
1,500 Union Pacific Capital Trust 77
1,000 Unocal Corp. 52
--------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $434) 450
--------
PREFERRED STOCKS (1.0%)
BANKING (0.3%)
2,000 ABN AMRO Capital Fund Trust II 51
800 HSBC USA, Ser. D 20
--------
71
BANKING & FINANCIAL (0.2%)
2,000 Chase Capital VII 51
FINANCE (0.3%)
2,500 Bank One Capital Trust VI 66
FINANCIAL SERVICES (0.2%)
2,000 Citigroup Capital VI 51
--------
TOTAL PREFERRED STOCKS
(COST $241) 239
--------
</Table>
See Notes to Schedule of Investments
9
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ^ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
U.S. TREASURY SECURITIES (6.4%)
$ 265 U.S. Treasury Bonds, 6.00%, due 2/15/26 TSY TSY $ 291
575 U.S. Treasury Notes, 1.25%, due 5/31/05 TSY TSY 572
350 U.S. Treasury Notes, 3.00%, due 11/15/07 TSY TSY 352
110 U.S. Treasury Notes, 5.75%, due 8/15/10 TSY TSY 123
180 U.S. Treasury Notes, 3.63%, due 5/15/13 TSY TSY 172
-------------
TOTAL U.S. TREASURY SECURITIES (COST $1,546) 1,510
-------------
U.S. GOVERNMENT AGENCY SECURITIES (3.6%)
60 Fannie Mae, Notes, 5.63%, due 5/14/04 AGY AGY 61
235 Fannie Mae, Notes, 3.25%, due 11/15/07 AGY AGY 236
120 Fannie Mae, Notes, 6.63%, due 11/15/10 AGY AGY 137
45 Fannie Mae, Notes, 4.38%, due 3/15/13 AGY AGY 44
60 Fannie Mae, Notes, 6.63%, due 11/15/30 AGY AGY 68
300 Freddie Mac, Notes, 4.25%, due 6/15/05 AGY AGY 311
-------------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES (COST $873) 857
-------------
MORTGAGE-BACKED SECURITIES (9.4%)
FANNIE MAE
69 Pass-Through Certificates, 4.50%, due 8/1/18 & 10/1/18 AGY AGY 69
154 Pass-Through Certificates, 5.00%, due 12/1/17 - 8/1/33 AGY AGY 156
420 Pass-Through Certificates, 5.50%, due 11/1/16 & 7/1/33 AGY AGY 428
251 Pass-Through Certificates, 6.00%, due 3/1/18 - 2/1/33 AGY AGY 257
238 Pass-Through Certificates, 6.50%, due 11/1/13 - 9/1/32 AGY AGY 247
74 Pass-Through Certificates, 7.00%, due 7/1/17 & 7/1/29 AGY AGY 79
24 Pass-Through Certificates, 7.50%, due 12/1/32 AGY AGY 25
FREDDIE MAC
30 Pass-Through Certificates, 4.50%, due 8/1/18 AGY AGY 30
103 Pass-Through Certificates, 5.00%, due 5/1/18 & 8/1/33 AGY AGY 102
192 Pass-Through Certificates, 5.50%, due 9/1/17 - 8/1/33 AGY AGY 193
154 Pass-Through Certificates, 6.00%, due 4/1/17 & 11/1/32 AGY AGY 158
121 Pass-Through Certificates, 6.50%, due 3/1/16 & 1/1/32 AGY AGY 126
37 Pass-Through Certificates, 7.00%, due 6/1/32 AGY AGY 39
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
25 Pass-Through Certificates, 5.00%, due 7/15/33 AGY AGY 24
74 Pass-Through Certificates, 5.50%, due 6/15/33 AGY AGY 75
65 Pass-Through Certificates, 6.00%, due 4/15/33 AGY AGY 67
61 Pass-Through Certificates, 6.50%, due 7/15/32 AGY AGY 64
42 Pass-Through Certificates, 7.00%, due 8/15/32 AGY AGY 44
22 Pass-Through Certificates, 7.50%, due 7/15/32 AGY AGY 24
-------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $2,228) 2,207
-------------
CORPORATE DEBT SECURITIES (31.3%)
125 AES Corp., Senior Secured Notes, 8.75%, due 5/15/13 B2 B+ 133**
30 American Electric Power Co., Senior Notes, Ser. D,
5.25%, due 6/1/15 Baa3 BBB 29
125 American Media Operations, Guaranteed Notes, Ser. B,
10.25%, due 5/1/09 B2 B- 134
75 Associates Corp. NA, Senior Notes, 6.25%, due 11/1/08 Aa1 AA- 84
40 Bank of America Corp., Subordinated Notes,
6.80%, due 3/15/28 Aa3 A 44
20 Bank One Corp., Subordinated Notes, 7.88%, due 8/1/10 A1 A- 24
</Table>
10
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ^ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 20 Boeing Capital Corp., Senior Notes, 6.13%, due 2/15/33 A2 A $ 19
175 BRL Universal Equipment, Senior Notes, 8.88%, due 2/15/08 Ba3 BB- 189
250 Calpine Corp., Senior Secured Notes, 8.50%, due 7/15/10 B 229**
125 Case New Holland, Inc., Senior Notes, 9.25%, due 8/1/11 Ba3 BB- 139**
15 Champion International Corp., Debentures, 7.35%, due 11/1/25 Baa2 BBB 16
25 ChevronTexaco Corp., Debentures, 8.00%, due 8/1/32 Aa3 AA 32
250 Citgo Petroleum Corp., Senior Notes, 7.88%, due 5/15/06 Ba3 BB 256
125 CMS Energy Corp., Senior Notes, 7.75%, due 8/1/10 B3 B+ 127**
45 Coca-Cola Enterprises, Inc., Debentures, 6.95%, due 11/15/26 A2 A 50
40 Comcast Corp., Notes, 5.30%, due 1/15/14 Baa3 BBB 39
40 ConocoPhillips Corp., Notes, 8.75%, due 5/25/10 A3 A- 50
25 Constellation Energy Group, Inc., Notes, 6.35%, due 4/1/07 Baa1 BBB+ 27
175 Crown, Cork & Seal Co., Guaranteed Notes,
7.00%, due 12/15/06 B3 B 176
125 CSC Holdings, Inc., Senior Notes, Ser. B, 8.13%, due 7/15/09 B1 BB- 130
25 CSX Corp., Senior Notes, 4.88%, due 11/1/09 Baa2 BBB 26
150 Dole Foods Co., Inc., Guaranteed Senior Notes,
7.25%, due 6/15/10 B2 BB- 153
30 Duke Capital Corp., Senior Notes, 6.75%, due 2/15/32 Baa3 BBB 29
125 EchoStar DBS Corp., Senior Notes, 5.75%, due 10/1/08 Ba3 BB- 125**
250 El Paso Natural Gas, Senior Notes, Ser. A, 7.63%, due 8/1/10 B1 B+ 247
110 Ferrellgas Partners L.P., Senior Notes, 8.75%, due 6/15/12 B2 B 120
50 FleetBoston Financial Corp., Senior Notes, 7.25%, due 9/15/05 A1 A 55
70 Ford Motor Credit Co., Senior Notes, 5.80%, due 1/12/09 A3 BBB 68
125 Fort James Corp., Senior Notes, 6.88%, due 9/15/07 Ba2 BB+ 132
20 France Telecom SA, Notes, 7.75%, due 3/1/11 Baa3 BBB 24
45 General Electric Capital Corp., Medium-Term Notes, Ser. A,
6.00%, due 6/15/12 Aaa AAA 48
65 General Motors Acceptance Corp., Notes, 6.88%, due 8/28/12 A3 BBB 67
215 Georgia Gulf Corp., Guaranteed Senior Subordinated Notes,
10.38%, due 11/1/07 B2 BB- 226
65 Goldman Sachs Group, Inc., Notes, 4.13%, due 1/15/08 Aa3 A+ 66
125 Grey Wolf, Inc., Senior Notes, 8.88%, due 7/1/07 B1 BB- 128
125 HMH Properties, Inc., Guaranteed Senior Notes, Ser. A,
7.88%, due 8/1/05 Ba3 B+ 129
80 Household Finance Corp., Notes, 4.63%, due 1/15/08 A1 A 83
125 Insight Midwest, Senior Notes, 9.75%, due 10/1/09 B2 B+ 128
35 International Bank for Reconstruction & Development, Notes,
3.63%, due 5/21/13 Aaa AAA 33
55 International Lease Finance Corp., Notes, 2.95%, due 5/23/06 A1 55
75 J.P. Morgan Chase & Co., Senior Notes, 3.63%, due 5/1/08 A1 A+ 75
125 L-3 Communications Corp., Guaranteed Senior Subordinated
Notes, Ser. B, 8.00%, due 8/1/08 Ba3 BB- 130
100 LNR Property Corp., Senior Subordinated Notes,
7.63%, due 7/15/13 Ba3 B+ 103**
125 Lyondell Chemical Co., Senior Secured Notes, Ser. A,
9.63%, due 5/1/07 Ba3 BB- 127
125 Millennium America, Inc., Guaranteed Notes,
7.00%, due 11/15/06 Ba3 BB- 123
50 Morgan Stanley Dean Witter & Co., Senior Notes,
5.30%, due 3/1/13 Aa3 A+ 51
</Table>
See Notes to Schedule of Investments
11
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ^ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 55 News America Holdings, Senior Debentures,
8.88%, due 4/26/23 Baa3 BBB- $ 70
125 Nextel Communications, Inc., Senior Notes,
6.88%, due 10/31/13 B2 B+ 127
15 Norfolk Southern Corp., Bonds, 7.80%, due 5/15/27 Baa1 BBB 18
125 Norske Skog Canada Ltd., Guaranteed Senior Notes, Ser. D,
8.63%, due 6/15/11 Ba2 BB 128
50 Occidental Petroleum Corp., Senior Notes, 6.50%, due 4/1/05 Baa1 BBB+ 53
125 Owens-Brockway Glass Container, Inc., Guaranteed Senior
Notes, 8.88%, due 2/15/09 B1 BB 136
125 Park Place Entertainment Corp., Senior Notes,
7.50%, due 9/1/09 Ba1 BB+ 136
20 Petroleos Mexicanos, Guaranteed Notes, 6.50%, due 2/1/05 Baa1 BBB- 21
125 Pride Petroleum Services, Inc., Senior Notes, 9.38%, due 5/1/07 Ba2 BB 129
50 Province of Ontario, Senior Unsubordinated Notes,
5.50%, due 10/1/08 Aa2 AA 54
25 Quebec Province, Debentures, 7.50%, due 9/15/29 A1 A+ 31
125 Qwest Corp., Notes, 5.63%, due 11/15/08 Ba3 B- 123
154 Remington Arms Co., Inc., Guaranteed Senior Notes,
10.50%, due 2/1/11 B2 B- 161
80 Republic of Italy, Senior Unsubordinated Notes,
5.25%, due 4/5/06 Aa2 AA 85
125 Sequa Corp., Senior Notes, Ser. B, 8.88%, due 4/1/08 B1 BB- 136
125 Six Flags, Inc., Senior Notes, 8.88%, due 2/1/10 B2 B- 119
30 Southern Power Co., Senior Notes, Ser. B, 6.25%, due 7/15/12 Baa1 BBB+ 32
50 Sprint Capital Corp., Guaranteed Notes, 6.00%, due 1/15/07 Baa3 BBB- 53
125 Standard Pacific Corp., Senior Notes, 6.50%, due 10/1/08 Ba2 BB 126
120 Stone Container Corp., Senior Notes, 9.75%, due 2/1/11 B2 B 131
55 Target Corp., Senior Notes, 7.50%, due 8/15/10 A2 A+ 65
125 Teco Energy, Inc., Senior Notes, 7.50%, due 6/15/10 Ba1 BB+ 128
150 Tembec Industries, Inc., Guaranteed Senior Notes,
8.63%, due 6/30/09 Ba3 BB 146
125 Tenet Healthcare Corp., Senior Notes, 6.38%, due 12/1/11 Ba3 BB- 116
55 Time Warner Co., Inc., Notes, 7.75%, due 6/15/05 Baa1 BBB+ 60
40 Tyson Foods, Inc., Notes, 8.25%, due 10/1/11 Baa3 BBB 47
40 United Mexican States, Notes, 8.38%, due 1/14/11 Baa2 BBB- 47
30 Verizon Global Funding Corp., Senior Notes, 7.38%, due 9/1/12 A2 A+ 34
125 Warnaco, Inc., Senior Notes, 8.88%, due 6/15/13 B2 B 134**
125 Williams Cos., Inc., Senior Notes, 8.63%, due 6/1/10 B3 B+ 137
125 World Color Press, Inc., Senior Subordinated Notes,
7.75%, due 2/15/09 Baa2 BBB- 131
-------------
TOTAL CORPORATE DEBT SECURITIES (COST $7,345) 7,392
-------------
FOREIGN GOVERNMENT SECURITIES^^ (15.3%)
CAD 150 Canadian Government, Bonds, 7.25%, due 6/1/07 Aaa AAA 127
CAD 40 Canadian Government, Bonds, 8.00%, due 6/1/27 Aaa AAA 41
EUR 495 Government of France, Bonds, 7.75%, due 10/25/05 Aaa AAA 628
JPY 27,000 Inter-American Development Bank, 1.90%, due 7/8/09 Aaa AAA 259
JPY 18,000 Japan Development Bank, Bonds, 1.40%, due 6/20/12 Aa1 AA- 164
JPY 20,000 Japan Financial Corp., Global Notes, 1.55%, due 2/21/12 Aa1 AA- 186
EUR 400 Netherlands Government, Bonds, 5.25%, due 7/15/08 Aaa AAA 497
DKK 535 Nykredit, Mortgage-Backed Securities, Ser. 02A,
5.00%, due 10/1/22 Aa2 AA- 84
JPY 17,000 Quebec Province, Bonds, 1.60%, due 5/9/13 A+ 155
</Table>
12
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ^ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
AUD 70 Queensland Treasury, Bonds, 8.00%, due 9/14/07 Aaa AAA $ 53
EUR 420 Republic of Germany, Bonds, 5.00%, due 7/4/12 Aaa AAA 515
EUR 260 Republic of Germany, Bonds, 5.50%, due 1/4/31 Aaa AAA 325
JPY 24,000 Republic of Italy, Bonds, 1.80%, due 2/23/10 Aa2 AA 229
SEK 400 Swedish Government, Bonds, 5.50%, due 10/8/12 Aaa AAA 54
GBP 65 U K Treasury, Bonds, 8.50%, due 12/7/05 Aaa AAA 119
GBP 40 U K Treasury, Bonds, 5.75%, due 12/7/09 Aaa AAA 70
GBP 50 U K Treasury, Bonds, 8.00%, due 6/7/21 Aaa AAA 115
--------------
TOTAL FOREIGN GOVERNMENT SECURITIES (COST $3,528) 3,621
--------------
CONVERTIBLE BONDS (2.2%)
$ 75 Devon Energy Corp., Senior Notes, 4.95%, due 8/15/08 Baa2 BBB 76
75 Goldman Sachs Group, Inc., Medium-Term Notes,
2.50%, due 5/9/10 Aa3 A+ 73
50 Hilton Hotels Corp., Notes, 3.38%, due 4/15/23 Ba1 BBB- 52
65 Lamar Advertising Co., Notes, 2.88%, due 12/31/10 B2 B 62
100 Level 3 Communications, Inc., Subordinated Debentures,
6.00%, due 9/15/09 Ca CC 67
125 Nortel Networks Corp., Notes, 4.25%, due 9/1/08 B3 B 119
75 SCI Systems, Inc., Notes, 3.00%, due 3/15/07 B1 B 69
--------------
TOTAL CONVERTIBLE BONDS (COST $510) 518
--------------
REPURCHASE AGREEMENTS (5.7%)
1,340 State Street Bank and Trust Co. Repurchase Agreement,
0.97%, due 11/3/03, dated 10/31/03, Maturity
Value $1,340,108, Collateralized by $1,365,000
U.S. Treasury Notes, 1.63%, due 1/31/05
(Collateral Value $1,373,957) (COST $1,340) 1,340#
--------------
SHORT-TERM INVESTMENTS (0.4%)
109 Neuberger Berman Institutional Cash Fund Trust Class (COST $109) 109@#
--------------
TOTAL INVESTMENTS (98.3%) (COST $22,834) 23,214##
Cash, receivables and other assets, less liabilities (1.7%) 399
--------------
TOTAL NET ASSETS (100.0%) $ 23,613
--------------
</Table>
See Notes to Schedule of Investments
13
<Page>
NOTES TO SCHEDULE OF INVESTMENTS
+ Equity investment securities of the Fund are valued at the latest sales
price where that price is readily available; equity securities for which no
sales were reported, unless otherwise noted, are valued at the mean between
the closing bid and asked prices. Securities traded primarily on the NASDAQ
Stock Market are normally valued by the Fund, at the NASDAQ Official
Closing Price ("NOCP") provided by NASDAQ each business day. The NOCP is
the most recently reported price as of 4:00:02 p.m., Eastern time, unless
that price is outside the range of the "inside" bid and asked prices (i.e.,
the bid and asked prices that dealers quote to each other when trading for
their own accounts); in that case, NASDAQ will adjust the price to equal
the inside bid or asked price, whichever is closer. Because of delays in
reporting trades, the NOCP may not be based on the price of the last trade
to occur before the market closes. Fixed income securities of the Fund are
valued daily by obtaining bid price quotations from independent pricing
services on all securities available in each service's data base. For all
other fixed income securities requiring daily quotations, bid prices are
obtained from principal market makers in those securities. The Fund values
all other securities by a method the Board of Trustees of Neuberger Berman
Income Funds believes accurately reflects fair value. Numerous factors may
be considered when determining the fair value of a security, including
available analyst, media or other reports, trading in futures or ADRs and
whether the issuer of the security being fair valued has other securities
outstanding. Foreign security prices are furnished by independent quotation
services expressed in local currency values. Foreign security prices are
translated from the local currency into U.S. dollars using current exchange
rates. Short-term debt securities with less than 60 days until maturity may
be valued at cost which, when combined with interest earned, approximates
market value.
++ Investment securities of the Fund are valued at amortized cost, which
approximates U.S. Federal income tax cost.
# At cost, which approximates market value.
## At October 31, 2003, the cost of investments for U.S. Federal income tax
purposes was $22,866,000. Gross unrealized appreciation of investments was
$510,000 and gross unrealized depreciation of investments was $162,000,
resulting in net unrealized appreciation of $348,000, based on cost for
U.S. Federal income tax purposes.
* Non-income producing security.
** Security exempt from registration under the Securities Act of 1933. These
securities may be resold in transactions exempt from registration, normally
to qualified institutional buyers under Rule 144A. At October 31, 2003,
these securities amounted to $990,000 or 4.2% of net assets for Neuberger
Berman Strategic Income Fund.
@ Neuberger Berman Institutional Cash Fund is also managed by Neuberger
Berman Management Inc. (see Note A of Notes to Financial Statements).
^ Credit ratings are unaudited.
See Notes to Financial Statements
14
<Page>
++++ The following securities were held in escrow at October 31, 2003, to cover
outstanding call options written:
<Table>
<Caption>
NEUBERGER BERMAN SHARES SECURITIES AND OPTIONS MARKET VALUE PREMIUM MARKET VALUE
OF SECURITIES ON OPTIONS OF OPTIONS
Strategic Income 1,000 American International Group
May 2004 @ 65 $ 61,000 $ 3,000 $ 3,000
1,500 Anadarko Petroleum
May 2004 @ 50 65,000 1,000 1,000
1,500 Clear Channel Communications
April 2004 @ 50 61,000 2,000 1,000
1,500 Diageo PLC ADR
January 2004 @ 45 72,000 1,000 5,000
2,000 Dover Corp. March 2004 @ 40 78,000 2,000 4,000
1,500 Exxon Mobil
January 2004 @ 37.5 55,000 1,000 1,000
4,000 Fleetwood Enterprises
February 2004 @ 12.5 40,000 2,000 2,000
1,500 Gillette Co. January 2004 @ 35 48,000 1,000 0
2,000 Home Depot
February 2004 @ 35 74,000 3,000 7,000
1,500 Johnson & Johnson
April 2004 @ 55 76,000 2,000 1,000
1,000 L-3 Communications Holdings
April 2004 @ 50 47,000 2,000 2,000
3,000 Nokia Corp. ADR
April 2004 @ 17.5 51,000 3,000 4,000
1,500 PepsiCo, Inc. April 2004 @ 50 72,000 2,000 2,000
1,500 Pfizer Inc. January 2004 @ 37.5 47,000 1,000 0
3,000 Pier 1 Imports
March 2004 @ 25 69,000 2,000 3,000
1,500 Pitney Bowes
January 2004 @ 40 61,000 1,000 3,000
1,500 Schlumberger Ltd.
January 2004 @ 50 71,000 2,000 1,000
3,000 Texas Instruments
January 2004 @ 22.5 87,000 2,000 20,000
2,500 Vodafone Group Adr
April 2004 @ 22.5 53,000 2,000 3,000
1,500 Wachovia Corp.
April 2004 @ 47.5 69,000 2,000 2,000
1,000 Wellpoint Health Networks
January 2004 @ 85 89,000 3,000 6,000
</Table>
^^ Principal amount is stated in the currency in which the security is
denominated.
AUD = Australian Dollar
CAD = Canadian Dollar
DKK = Danish Krone
EUR = Euro Currency
GBP = Great Britain Pound
JPY = Japanese Yen
SEK = Swedish Krona
See Notes to Financial Statements
15
<Page>
STATEMENTS OF ASSETS AND LIABILITIES
<Table>
<Caption>
NEUBERGER BERMAN INCOME FUNDS INSTITUTIONAL STRATEGIC
(000'S OMITTED EXCEPT PER SHARE AMOUNTS) CASH FUND(1) INCOME FUND(2)
ASSETS
INVESTMENTS IN SECURITIES, AT VALUE* (NOTE A)-SEE
SCHEDULE OF INVESTMENTS $ 2,690,674 $ 23,214
Cash 1 199
Dividends and interest receivable 473 277
Receivable for securities sold -- 113
Receivable for Fund shares sold 11,238 --
Receivable from administrator-net (Note B) -- 95
Prepaid expenses and other assets 12 --
================================================================================================================
TOTAL ASSETS 2,702,398 23,898
================================================================================================================
LIABILITIES
Dividends payable 1,492 --
Option contracts written, at market value (Note A) -- 71
Net payable for forward foreign currency exchange contracts sold (Note C) -- 8
Payable for securities purchased -- 110
Payable for Fund shares redeemed 17,954 --
Payable to investment manager (Note B) 235 11
Payable to administrator-net (Note B) 352 --
Accrued expenses and other payables 231 85
================================================================================================================
TOTAL LIABILITIES 20,264 285
================================================================================================================
NET ASSETS AT VALUE $ 2,682,134 $ 23,613
================================================================================================================
NET ASSETS CONSIST OF:
Paid-in capital $ 2,682,074 $ 23,366
Undistributed (distributions in excess of) net investment income -- 65
Accumulated net realized gains (losses) on investments 60 (160)
Net unrealized appreciation (depreciation) in value of investments -- 342
================================================================================================================
NET ASSETS AT VALUE $ 2,682,134 $ 23,613
================================================================================================================
SHARES OUTSTANDING ($.001 PAR VALUE; UNLIMITED SHARES AUTHORIZED) 2,682,074 2,336
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 1.00 $ 10.11
================================================================================================================
*COST OF INVESTMENTS $ 2,690,674 $ 22,834
================================================================================================================
</Table>
(1) Institutional Cash Fund currently offers Trust Class Shares.
(2) Strategic Income Fund currently offers Institutional Class Shares.
See Notes to Financial Statements
16
<Page>
STATEMENTS OF OPERATIONS
<Table>
<Caption>
INSTITUTIONAL STRATEGIC
CASH FUND(1) INCOME FUND(2)
PERIOD FROM
JULY 11, 2003
FOR THE (COMMENCEMENT
NEUBERGER BERMAN INCOME FUNDS YEAR ENDED OF OPERATIONS) TO
(000'S OMITTED) OCTOBER 31, OCTOBER 31,
2003 2003
INVESTMENT INCOME
Interest income $ 36,253 $ 231
Income from investments in affiliated issuers (Note A) -- 2
Dividend income -- 72
Foreign taxes withheld (Note A) -- (0)
================================================================================================================
Total income 36,253 305
================================================================================================================
EXPENSES:
Investment management fee (Note B) 2,921 42
Administration fee (Note B) 4,381 10
Auditing fees 35 22
Custodian fees (Note B) 513 40
Insurance expense 61 --
Legal fees 26 87
Registration and filing fees 115 39
Shareholder reports 15 13
Shareholder servicing agent fees 10 --
Trustees' fees and expenses 38 11
Miscellaneous 81 1
================================================================================================================
Total expenses 8,196 265
Expenses reimbursed by administrator (Note B) -- (205)
Expenses reduced by custodian fee expense offset and
commission recapture arrangements (Note B) (2) (1)
================================================================================================================
Total net expenses 8,194 59
================================================================================================================
Net investment income (loss) 28,059 246
================================================================================================================
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investment securities sold 61 24
Net realized gain (loss) on option contracts written (Note A) -- 6
Net realized gain (loss) on foreign currency (Note A) -- (181)
Change in net unrealized appreciation (depreciation) in value of:
Investment securities (Note A) -- 380
Option contracts (Note A) -- (31)
Foreign currency (Note A) -- (7)
=========================================================================================================
Net gain (loss) on investments 61 191
================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 28,120 $ 437
================================================================================================================
</Table>
(1) Institutional Cash Fund currently offers Trust Class Shares.
(2) Strategic Income Fund currently offers Institutional Class Shares.
See Notes to Financial Statements
17
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
INSTITUTIONAL CASH FUND(1) STRATEGIC INCOME FUND(2)
--------------------------------------------------------
NEUBERGER BERMAN INCOME FUNDS PERIOD FROM
(000'S OMITTED) JULY 11, 2003
YEAR YEAR (COMMENCEMENT
ENDED ENDED OF OPERATIONS) TO
OCTOBER 31, OCTOBER 31, OCTOBER 31,
2003 2002 2003
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) $ 28,059 $ 47,786 $ 246
Net realized gain (loss) on investments 61 (1) (151)
Change in net unrealized appreciation (depreciation) of investments -- -- 342
===========================================================================================================================
Net increase (decrease) in net assets resulting from operations 28,120 47,785 437
===========================================================================================================================
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (28,059) (47,786) (190)
Net realized gain on investments -- (45) --
===========================================================================================================================
Total distributions to shareholders (28,059) (47,831) (190)
===========================================================================================================================
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 12,498,219 14,366,543 24,659
Proceeds from reinvestment of dividends and distributions 4,312 24,324 143
Payments for shares redeemed (12,976,936) (13,359,481) (1,436)
===========================================================================================================================
Net increase (decrease) from Fund share transactions (474,405) 1,031,386 23,366
===========================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS (474,344) 1,031,340 23,613
NET ASSETS:
Beginning of period 3,156,478 2,125,138 --
===========================================================================================================================
End of period $ 2,682,134 $ 3,156,478 $ 23,613
===========================================================================================================================
Undistributed (distributions in excess of) net investment
income at end of period $ -- $ -- $ 65
===========================================================================================================================
NUMBER OF FUND SHARES:
Sold 12,498,219 14,366,543 2,466
Issued on reinvestment of dividends and distributions 4,312 24,324 14
Redeemed (12,976,936) (13,359,481) (144)
===========================================================================================================================
NET INCREASE (DECREASE) IN SHARES OUTSTANDING (474,405) 1,031,386 2,336
===========================================================================================================================
</Table>
(1) Institutional Cash Fund currently offers Trust Class Shares.
(2) Strategic Income Fund currently offers Institutional Class Shares.
See Notes to Financial Statements
18
<Page>
NOTES TO FINANCIAL STATEMENTS INCOME FUNDS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1 GENERAL: Neuberger Berman Institutional Cash Fund ("Institutional Cash")
and Neuberger Berman Strategic Income Fund ("Strategic Income")
(individually a "Fund", collectively, the "Funds") are separate operating
series of Neuberger Berman Income Funds (the "Trust"), a Delaware statutory
trust organized pursuant to a Trust Instrument dated December 23, 1992. The
Trust is registered as a diversified, open-end management investment
company under the Investment Company Act of 1940, as amended, and its
shares are registered under the Securities Act of 1933, as amended (the
"1933 Act"). Institutional Cash offers Trust Class shares and Strategic
Income offers Institutional Class shares. The Institutional Class of
Strategic Income had no operations until July 11, 2003 other than matters
relating to its organization and registration of its shares under the 1933
Act. The trustees of the Trust may establish additional series or classes
of shares without the approval of shareholders.
The assets of each Fund belong only to that Fund, and the liabilities of
each Fund are borne solely by that Fund and no other.
It is the policy of Institutional Cash to maintain a continuous net asset
value per share of $1.00; the Fund has adopted certain investment,
valuation, and dividend and distribution policies, which conform to general
industry practice, to enable it to do so. However, there is no assurance
the Fund will be able to maintain a stable net asset value per share.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires Neuberger
Berman Management Inc. ("Management") to make estimates and assumptions at
the date of the financial statements. Actual results could differ from
those estimates.
2 PORTFOLIO VALUATION: Investment securities are valued as indicated in the
notes following the Funds' Schedule of Investments.
3 FOREIGN CURRENCY TRANSLATION: Strategic Income may invest in foreign
securities denominated in foreign currency. The accounting records of the
Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the current rate of exchange of such
currency against the U.S. dollar to determine the value of investments,
other assets and liabilities. Purchase and sale prices of securities, and
income and expenses are translated into U.S. dollars at the prevailing rate
of exchange on the respective dates of such transactions.
4 SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on a trade date basis. Dividend income is recorded on the
ex-dividend date or, for certain foreign dividends, as soon as the Fund
becomes aware of the dividends. Non-cash dividends included in dividend
income, if any, are recorded at the fair market value of the securities
received. Interest income, including accretion of discount (adjusted for
original issue discount, where applicable), and amortization of premium,
where applicable, is recorded on the accrual basis. Realized gains and
losses from securities transactions and foreign currency transactions are
recorded on the basis of identified cost and stated separately in the
Statements of Operations.
19
<Page>
5 FEDERAL INCOME TAXES: The Funds are treated as separate entities for U.S.
Federal income tax purposes. It is the policy of Institutional Cash to
continue to and the intention of Strategic Income to qualify as regulated
investment companies by complying with the provisions available to certain
investment companies, as defined in applicable sections of the Internal
Revenue Code, and to make distributions of investment company taxable
income and net capital gains (after reduction for any amounts available for
U.S. Federal income tax purposes as capital loss carryforwards) sufficient
to relieve them from all, or substantially all, U.S. Federal income taxes.
Accordingly, each Fund paid no U.S. Federal income taxes and no provision
for U.S. Federal income taxes was required.
6 FOREIGN TAXES: Foreign taxes withheld represent amounts withheld by foreign
tax authorities, net of refunds recoverable.
7 DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Each Fund earns income, net of
expenses, daily on its investments. It is the policy of Institutional Cash
to declare dividends from net investment income on each business day; such
dividends are paid monthly. Strategic Income generally distributes
substantially all of its net investment income, if any, at the end of each
calendar quarter. Distributions from net realized capital gains, if any,
are normally distributed in December. Income dividends and capital gain
distributions to shareholders are recorded on the ex-dividend date. To the
extent each Fund's net realized capital gains, if any, can be offset by
capital loss carryforwards ($168,103 expiring in 2011, determined as of
October 31, 2003 for Strategic Income), it is the policy of each Fund not
to distribute such gains.
Each Fund distinguishes between dividends on a tax basis and a financial
reporting basis and only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between
the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes are
classified as distributions in excess of net investment income or
accumulated net realized gains in the components of net assets on the
Statements of Assets and Liabilities.
The tax character of distributions paid during the periods ended October
31, 2003 and 2002 were as follows:
DISTRIBUTIONS PAID FROM:
<Table>
<Caption>
LONG-TERM TAX RETURN
ORDINARY INCOME CAPITAL GAIN OF CAPITAL TOTAL
2003 2002 2003 2002 2003 2002 2003 2002
INSTITUTIONAL CASH $ 28,059,371 $ 47,830,521 $ -- $ -- $ -- $ -- $ 28,059,371 $ 47,830,521
STRATEGIC INCOME 189,760 -- -- -- -- -- 189,760 --
</Table>
As of October 31, 2003, the components of distributable earnings
(accumulated losses) on a U.S. Federal income tax basis were as follows:
<Table>
<Caption>
UNDISTRIBUTED UNDISTRIBUTED UNREALIZED LOSS
ORDINARY LONG-TERM APPRECIATION CARRYFORWARDS
INCOME GAIN (DEPRECIATION) AND DEFERRALS TOTAL
INSTITUTIONAL CASH $ 1,551,933 $ -- $ -- $ -- $ 1,551,933
STRATEGIC INCOME 97,152 -- 317,966 (168,103) 247,015
</Table>
20
<Page>
The difference between book basis and tax basis for Institutional Cash is
attributable primarily to timing differences of dividend payments. The
difference between book basis and tax basis for Strategic Income is
attributable primarily to the amortization of bond premium and the
reclassification for tax purposes of realized foreign currency gain or loss
to ordinary income.
8 EXPENSE ALLOCATION: Expenses directly attributable to a Fund are charged to
that Fund. Expenses not directly attributed to a Fund are allocated, on the
basis of relative net assets, except where a more appropriate allocation of
expenses to each of the Funds can otherwise be made fairly.
9 CALL OPTIONS: Premiums received by Strategic Income upon writing a covered
call option are recorded in the liability section of the Fund's Statement
of Assets and Liabilities and are subsequently adjusted to the current
market value. When an option is exercised, closed, or expired, the Fund
realizes a gain or loss and the liability is eliminated. The Fund bears the
risk of a decline in the price of the security during the period, although
any potential loss during the period would be reduced by the amount of the
option premium received. In general, written covered call options may serve
as a partial hedge against decreases in value in the underlying securities
to the extent of the premium received. All securities covering outstanding
options are held in escrow by the custodian bank.
Summary of option transactions for the period ended October 31, 2003:
<Table>
<Caption>
VALUE WHEN
STRATEGIC INCOME NUMBER WRITTEN
CONTRACTS WRITTEN 57,500 $ 58,000
CONTRACTS EXPIRED 0 0
CONTRACTS EXERCISED 0 0
CONTRACTS CLOSED (18,500) (18,000)
------- --------
CONTRACTS OUTSTANDING 10/31/03 39,000 $ 40,000
------- --------
</Table>
10 FORWARD FOREIGN CURRENCY CONTRACTS: Strategic Income may enter into forward
foreign currency contracts ("contracts") in connection with planned
purchases or sales of securities to hedge the U.S. dollar value of
portfolio securities denominated in a foreign currency. The gain or loss
arising from the difference between the original contract price and the
closing price of such contract is included in net realized gains or losses
on foreign currency transactions. Fluctuations in the value of forward
foreign currency contracts are recorded for financial reporting purposes as
unrealized gains or losses by the Fund. The Fund has no specific limitation
on the percentage of assets which may be committed to these types of
contracts, but the Fund may not invest more than 20% of its net assets in
foreign securities denominated in or indexed to foreign currencies. The
Fund could be exposed to risks if a counter party to a contract were unable
to meet the terms of its contract or if the value of the foreign currency
changes unfavorably. The U.S. dollar value of foreign currency underlying
all contractual commitments held by the Fund is determined using forward
foreign currency exchange rates supplied by an independent pricing service.
11 REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements with
institutions that the Fund's investment manager has determined are
creditworthy. Each repurchase agreement is recorded at cost. Each Fund
requires that the securities purchased in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the Fund to
obtain those securities in the event of a default
21
<Page>
under the repurchase agreement. Each Fund monitors, on a daily basis, the
value of the securities transferred to ensure that their value, including
accrued interest, is greater than amounts owed to the Fund under each such
repurchase agreement.
12 Transactions with other funds managed by Neuberger Berman Management Inc.:
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, Strategic Income may invest in Institutional Cash.
Institutional Cash seeks to provide as high a level of current income as is
consistent with the preservation of capital and the maintenance of
liquidity. For any cash that the Fund invests in Institutional Cash,
Management waives a portion of its management fee equal to the management
fee it receives from Institutional Cash on those assets. For the period
ended October 31, 2003, income earned on this investment amounted to $1,597
for Strategic Income and is reflected in the Statements of Operations under
the caption Income from investments in affiliated issuers.
NOTE B--MANAGEMENT FEES, ADMINISTRATION FEES, DISTRIBUTION ARRANGEMENTS,
AND OTHER TRANSACTIONS WITH AFFILIATES:
Each Fund retains Management as its investment manager under a Management
Agreement. For such investment management services, each Fund pays
Management a fee at the annual rate of 0.10% and 0.60%, for Institutional
Cash and Strategic Income, respectively, of its average daily net assets.
Each Fund retains Management as its administrator under an Administration
Agreement ("Agreement"). Pursuant to this Agreement each Fund pays
Management an administration fee at the annual rate of 0.15% of its average
daily net assets.
Additionally, Management retains State Street Bank and Trust Company
("State Street") as its sub-administrator under a Sub-Administration
Agreement. Management pays State Street a fee for all services received
under the agreement.
Management has contractually undertaken to reimburse operating expenses
(including the fees payable to Management but excluding interest, taxes,
brokerage commissions, and extraordinary expenses) ("Operating Expenses")
which exceed the expense limitation as detailed in the following table:
<Table>
<Caption>
REIMBURSEMENT FROM
MANAGEMENT FOR THE
EXPENSE PERIOD ENDED
CLASS LIMITATION(1) EXPIRATION OCTOBER 31, 2003
INSTITUTIONAL CASH FUND TRUST CLASS 0.41% 10/31/06 $ --
STRATEGIC INCOME FUND INSTITUTIONAL CLASS 0.85% 12/31/13 204,845
</Table>
(1) Expense limitation per annum of the respective class' average daily
net assets.
The Trust Class of Institutional Cash and the Institutional Class of
Strategic Income have agreed to repay Management for their excess Operating
Expenses previously reimbursed by Management, so long as their annual
Operating Expenses during that period do not exceed their Expense
Limitations, and the repayments are made within three years after the year
in which Management issued the reimbursement.
22
<Page>
During the period ended October 31, 2003, there was no reimbursement to
Management. At October 31, 2003, Strategic Income had a contingent
liability to Management under the agreement of $204,845.
On October 31, 2003, Management and Neuberger Berman, LLC ("Neuberger"), a
member firm of The New York Stock Exchange and sub-adviser to each Fund,
became indirect wholly owned subsidiaries of Lehman Brothers Holdings Inc.
("Lehman"), a publicly held company ("the Transaction"). Upon completion of
the Transaction, each Fund's management and sub-advisory agreements
automatically terminated. To provide for continuity of management, the
shareholders of each Fund voted on September 23, 2003, to approve new
management and sub-advisory agreements, which took effect upon closing of
the Transaction (see Report of Votes of Shareholders). Neuberger is
retained by Management to furnish it with investment recommendations and
research information without added cost to each Fund. Several individuals
who are officers and/or Trustees of the Trust are also employees of
Neuberger and/or Management.
Each class of shares also has a distribution agreement with Management.
Management receives no compensation therefor and no commissions for sales
or redemptions of shares of beneficial interest of each share class.
Each Fund has an expense offset arrangement in connection with its
custodian contract. The impact of this arrangement reflected in the
Statements of Operations under the caption Custodian fees, was a reduction
of $2,622 and $187, for Institutional Cash and Strategic Income,
respectively.
Strategic Income has entered into a commission recapture program, which
enables it to pay some of its operational expenses by recouping a portion
of the commissions it pays to a broker that is not a related party of the
Fund. Expenses paid through this program may include costs of custodial,
transfer agency or accounting services. The impact of this arrangement was
a reduction of $539.
NOTE C--SECURITIES TRANSACTIONS:
During the period ended October 31, 2003, there were purchase and sale
transactions (excluding short-term securities, foreign currency contracts,
and option contracts) for Strategic Income of $27,002,469 and $5,608,375,
respectively.
All securities transactions for Institutional Cash were short-term.
During the period ended October 31, 2003, Strategic Income had entered into
various contracts to deliver currencies at specified future dates. At
October 31, 2003, open contracts were as follows:
<Table>
<Caption>
NET UNREALIZED
IN EXCHANGE SETTLEMENT APPRECIATION
SALE CONTRACTS FOR DATE VALUE (DEPRECIATION)
CANADIAN DOLLAR 170,000 $ 128,983 12/22/03 $ 128,570 $ 413
EURO DOLLAR 1,890,000 2,184,462 12/22/03 2,191,112 (6,650)
JAPANESE YEN 114,216,000 1,042,117 12/22/03 1,039,092 3,025
POUND STERLING 189,000 314,307 12/22/03 319,288 (4,981)
</Table>
23
<Page>
During the period ended October 31, 2003, brokerage commissions on
securities transactions for Strategic Income amounted to $12,645, of which
Neuberger received $7,695, Lehman received $0, and other brokers received
$4,950.
NOTE D--LINE OF CREDIT:
At October 31, 2003, each Fund was a participant in a single committed,
unsecured $150,000,000 ($200,000,000 prior to September 26, 2003) line of
credit with State Street, to be used only for temporary or emergency
purposes. Interest is charged on borrowings under this agreement at the
overnight Federal Funds Rate plus 0.50% per annum. A facility fee of 0.10%
per annum of the available line of credit is charged, of which each Fund
has agreed to pay its pro rata share, based on the ratio of its individual
net assets to the net assets of all participants at the time the fee is due
and payable. The fee is paid quarterly in arrears. No compensating balance
is required. Other investment companies managed by Management also
participate in this line of credit on the same terms. Because several
investment companies participate, there is no assurance that an individual
Fund will have access to the entire $150,000,000 at any particular time.
There were no loans outstanding pursuant to this line of credit at October
31, 2003. During the period ended October 31, 2003, neither Fund utilized
this line of credit.
24
<Page>
FINANCIAL HIGHLIGHTS INSTITUTIONAL CASH FUND
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the Financial
Statements.
<Table>
<Caption>
PERIOD FROM
MAY 8, 2000^
TRUST CLASS+ YEAR ENDED OCTOBER 31, TO OCTOBER 31,
------------------------------------------- --------------
2003 2002 2001 2000
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
----------- ----------- ----------- ------------
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME (LOSS) .0096 .0176 .0466 .0307
----------- ----------- ----------- ------------
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.0096) (.0176) (.0466) (.0307)
FROM NET CAPITAL GAINS -- (.0000) -- --
----------- ----------- ----------- ------------
TOTAL DISTRIBUTIONS (.0096) (.0176) (.0466) (.0307)
----------- ----------- ----------- ------------
NET ASSET VALUE, END OF PERIOD $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
----------- ----------- ----------- ------------
TOTAL RETURN++ +0.97% +1.77% +4.76% +3.11%**
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (IN MILLIONS) $ 2,682.1 $ 3,156.5 $ 2,125.1 $ 635.4
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS# .28% .28% .29% .36%*
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS .28% .28% .29% .35%*
RATIO OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS .97% 1.74% 4.52% 6.45%*
</Table>
See Notes to Financial Highlights
25
<Page>
FINANCIAL HIGHLIGHTS STRATEGIC INCOME FUND
The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the Financial
Statements.
<Table>
<Caption>
PERIOD FROM
JULY 11, 2003^
INSTITUTIONAL CLASS TO OCTOBER 31,
---------------
2003
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
---------------
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME (LOSS) .10
NET GAINS OR LOSSES ON SECURITIES (BOTH REALIZED AND UNREALIZED) .09
---------------
TOTAL FROM INVESTMENT OPERATIONS .19
---------------
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.08)
---------------
NET ASSET VALUE, END OF PERIOD $ 10.11
---------------
TOTAL RETURN++ +1.95%**
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (IN MILLIONS) $ 23.6
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS# .85%*
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS## .84%*
RATIO OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS 3.51%*
PORTFOLIO TURNOVER RATE 34%
</Table>
See Notes to Financial Highlights
26
<Page>
NOTES TO FINANCIAL HIGHLIGHTS
+ The per share amounts and ratios which are shown reflect income and
expenses, including the Fund's proportionate share of the Portfolio's
income and expenses through February 9, 2001 under the prior master-feeder
fund structure.
++ Total return based on per share net asset value reflects the effects of
changes in net asset value on the performance of each Fund during each
fiscal period and assumes dividends and other distributions, if any, were
reinvested. Results represent past performance and do not guarantee future
results. Investment returns and principal may fluctuate and shares when
redeemed may be worth more or less than original cost. For Strategic
Income, total return would have been lower if Management had not reimbursed
certain expenses.
# The Fund is required to calculate an expense ratio without taking into
consideration any expense reductions related to expense offset
arrangements.
## After reimbursement of expenses by Management. Had Management not
undertaken such action the annualized ratio of net expenses to average
daily net assets would have been:
<Table>
<Caption>
PERIOD ENDED
OCTOBER 31,
2003(1)
STRATEGIC INCOME INSTITUTIONAL CLASS 3.77%
</Table>
(1) Period from July 11, 2003 to October 31, 2003.
^ The date investment operations commenced.
* Annualized.
** Not annualized.
27
<Page>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees Neuberger Berman Income Funds and Shareholders of
Neuberger Berman Institutional Cash Fund
Neuberger Berman Strategic Income Fund
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Neuberger Berman Institutional Cash Fund and
Neuberger Berman Strategic Income Fund, two of the series constituting the
Neuberger Berman Income Funds (the "Trust") as of October 31, 2003, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
financial highlights for Neuberger Berman Institutional Cash Fund and the
related statements of operations and changes in net assets and financial
highlights for the period from July 11, 2003 (commencement of operations) to
October 31, 2003, for Neuberger Berman Strategic Income Fund. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 and financial highlights. Our procedures
included confirmation of securities owned as of October 31, 2003, by
correspondence with the custodian and brokers. 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 each
of the above mentioned series of Neuberger Berman Income Funds at October 31,
2003, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated therein for Neuberger Berman
Institutional Cash Fund and the results of operations and changes in net assets
and financial highlights for the period from July 11, 2003 (commencement of
operations) to October 31, 2003, for Neuberger Berman Strategic Income Fund, in
conformity with accounting principles generally accepted in the United States of
America.
/s/Ernst & Young LLP,
Boston, Massachusetts
December 5, 2003
28
<Page>
DIRECTORY
INVESTMENT MANAGER, ADMINISTRATOR AND DISTRIBUTOR
Neuberger Berman Management Inc.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
800.877.9700 or 212.476.8800
Institutional Services 800.366.6264
SUB-ADVISER
Neuberger Berman, LLC
605 Third Avenue
New York, NY 10158-3698
CUSTODIAN AND SHAREHOLDER SERVICING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
ADDRESS CORRESPONDENCE TO:
Neuberger Berman Funds
Institutional Services
605 Third Avenue 2nd Floor
New York, NY 10158-0180
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
2nd Floor
Washington, DC 20036-1800
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
29
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables set forth information concerning the trustees and officers
of the Trust. All persons named as trustees and officers also serve in similar
capacities for other funds administered or managed by NB Management and
Neuberger Berman. The Statement of Additional Information includes additional
information about fund trustees and is available upon request, without charge,
by calling (800) 877-9700.
INFORMATION ABOUT THE BOARD OF TRUSTEES
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION AND FUND COMPLEX
LENGTH OF TIME OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
NAME, AGE, AND ADDRESS (1) SERVED (2) PRINCIPAL OCCUPATION(S) (3) TRUSTEE FUND COMPLEX BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
John Cannon (73) Trustee since Consultant. Formerly, Chairman 37 Independent Trustee or
1994 and Chief Investment Officer, Director of three series of
CDC Capital Management OppenheimerFunds:
(registered investment adviser) Limited Term New York
(1993-January 1999); prior Municipal Fund, Rochester
thereto, President and Chief Fund Municipals, and
Executive Officer, AMA Oppenheimer Convertible
Investment Advisors, an affiliate Securities Fund since 1992.
of the American Medical
Association.
Faith Colish (68) Trustee since Counsel, Carter Ledyard & 37 Director, American Bar
2000 Milburn LLP (law firm) since Retirement Association
October 2002; Formerly, (ABRA) since 1997 (not-for-
Attorney at Law and President, profit membership
Faith Colish, A Professional association).
Corporation, 1980 to 2002.
Walter G. Ehlers (70) Trustee since Consultant; Retired President 37
2000 and Trustee, Teachers Insurance
& Annuity (TIAA) and College
Retirement Equities Fund
(CREF).
</Table>
30
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION AND FUND COMPLEX
LENGTH OF TIME OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
NAME, AGE, AND ADDRESS (1) SERVED (2) PRINCIPAL OCCUPATION(S) (3) TRUSTEE FUND COMPLEX BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
C. Anne Harvey (66) Trustee since Consultant, C.A. Harvey 37 Member, Individual Investors
2000 Associates since June 2001; Advisory Committee to the
Director, AARP, 1978 to New York Stock Exchange
December 2000. Board of Directors, 1998 to
June 2002; President, Board
of Associates to The
National Rehabilitation
Hospital's Board of Directors
since 2002; Member,
American Savings Education
Council's Policy Board
(ASEC), 1998-2000;
Member, Executive
Committee, Crime
Prevention Coalition of
America, 1997-2000.
Barry Hirsch (70) Trustee since Attorney at Law. Senior 37
1993 Counsel, Loews Corporation
(diversified financial
corporation) May 2002 until
April 2003; prior thereto, Senior
Vice President, Secretary and
General Counsel, Loews
Corporation.
Robert A. Kavesh (76) Trustee since Marcus Nadler Professor of 37 Director, DEL Laboratories,
1993 Finance and Economics Inc. (cosmetics and
Emeritus, New York University pharmaceuticals) since 1978;
Stern School of Business. The Caring Community
(not-for-profit).
</Table>
31
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION AND FUND COMPLEX
LENGTH OF TIME OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
NAME, AGE, AND ADDRESS (1) SERVED (2) PRINCIPAL OCCUPATION(S) (3) TRUSTEE FUND COMPLEX BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
Howard A. Mileaf (66) Trustee since Retired. Formerly, Vice 37 Director, WHX Corporation
2000 President and Special Counsel, (holding company) since
WHX Corporation (holding August 2002; Director,
company) 1993 - 2001. Webfinancial Corporation
(holding company) since
December 2002; Director,
State Theatre of New Jersey
(not-for-profit theater) since
2000; Formerly, Director,
Kevlin Corporation
(manufacturer of microwave
and other products).
John P. Rosenthal (70) Trustee since Senior Vice President, Burnham 37 Director, 92nd Street Y
2000 Securities Inc. (a registered (non-profit) since 1967;
broker-dealer) since 1991. Formerly, Director, Cancer
Treatment Holdings, Inc.
William E. Rulon (71) Trustee since Retired. Senior Vice President, 37 Director, Pro-Kids Golf and
1993 Foodmaker, Inc. (operator and Learning Academy (teach
franchiser of restaurants) until golf and computer usage to
January 1997. "at risk" children) since 1998;
Director, Prandium, Inc.
(restaurants) from
March 2001 until July 2002.
Cornelius T. Ryan (71) Trustee since Founding General Partner, 37 Director, Capital Cash
2000 Oxford Partners and Oxford Management Trust (money
Bioscience Partners (venture market fund), Narragansett
capital partnerships) and Insured Tax-Free Income
President, Oxford Venture Fund, Rocky Mountain
Corporation. Equity Fund, Prime Cash
Fund, several private
companies and QuadraMed
Corporation (NASDAQ).
</Table>
32
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION AND FUND COMPLEX
LENGTH OF TIME OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
NAME, AGE, AND ADDRESS (1) SERVED (2) PRINCIPAL OCCUPATION(S) (3) TRUSTEE FUND COMPLEX BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
Tom Decker Seip (53) Trustee since General Partner, Seip 37 Director, H&R Block, Inc.
2000 Investments LP (a private (financial services company)
investment partnership); since May 2001; Director,
President and CEO, Westaff, Inc. General Magic (voice
(temporary staffing), May 2001 recognition software) since
to January 2002; Senior November 2001; Director,
Executive at the Charles Schwab Forward Management, Inc.
Corporation from 1983 to 1999; (asset management) since
including Chief Executive 2001; Director, E-Finance
Officer, Charles Schwab Corporation (credit decisioning
Investment Management, Inc. services) since 1999; Director,
and Trustee, Schwab Family of Save-Daily.com (micro
Funds and Schwab Investments investing services) since 1999;
from 1997 to 1998 and Executive Formerly, Director, Offroad
Vice President-Retail Brokerage, Capital Inc. (pre-public
Charles Schwab Investment internet commerce company).
Management from 1994 to 1997.
Candace L. Straight (56) Trustee since Private investor and consultant 37 Director, Providence
1993 specializing in the insurance Washington (property and
industry; Advisory Director, casualty insurance company)
Securitas Capital LLC (a global since December 1998;
private equity investment firm Director, Summit Global
dedicated to making investments Partners (insurance brokerage
in the insurance sector). firm) since October 2000.
Peter P. Trapp (58) Trustee since Regional Manager for Atlanta 37
2000 Region, Ford Motor Credit
Company since August 1997;
prior thereto, President, Ford
Life Insurance Company, April
1995 until August 1997.
</Table>
33
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION AND FUND COMPLEX
LENGTH OF TIME OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
NAME, AGE, AND ADDRESS (1) SERVED (2) PRINCIPAL OCCUPATION(S) (3) TRUSTEE FUND COMPLEX BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
TRUSTEES WHO ARE "INTERESTED PERSONS"
Edward I. O'Brien* (75) Trustee since Member, Investment Policy 37 Director, Legg Mason, Inc.
2000 Committee, Edward Jones, (financial services holding
1993-2001; President, Securities company) since 1993;
Industry Association ("SIA") Director, Boston Financial
(securities industry's Group (real estate and tax
representative shelters) 1993-1999.
in government relations and
regulatory matters at the federal
and state levels) from 1974-1992;
Adviser to SIA, November 1992-
November 1993.
Jack L. Rivkin* (63) President and Executive Vice President and 37 Director, Dale Carnegie and
Trustee since Chief Investment Officer, Associates, Inc. (private
December Neutered Berman since 2002 and company) since 1998;
2002 2003,respectively; Director and Director, Emagin Corp.
Chairman, NB Management since (public company) since 1997;
December 2002; Executive Vice Director, Solbright, Inc.
President, Citigroup Investments, (private company) since 1998;
Inc. from September 1995 to Director, Infogate, Inc.
February 2002; Executive Vice (private company) since 1997.
President, Citigroup Inc. from
September 1995 to February 2002.
Peter E. Sundman* (44) Chairman of Executive Vice President, 37 Executive Vice President,
the Board, Neuberger Berman since 1999; Neuberger Berman Inc.
Chief Principal, Neuberger Berman (holding company) since 1999
Executive from 1997 until 1999; Senior and Director from October
Officer and Vice President, NB Management 1999 through March 2003;
Trustee since from 1996 until 1999. President and Director, NB
2000 Management since 1999;
President and Head of Neuberger Berman
Chief Inc.'s Mutual Funds and
Executive Institutional Business since
Officer from 1999; Director and Vice
1999 to 2000 President, Neuberger &
Berman Agency, Inc. since
2000.
</Table>
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Pursuant to the Trust's Trust Instrument, each Trustee shall hold office
for life or until his or her successor is elected or the Trust terminates;
except that (a) any Trustee may resign by delivering a written resignation;
(b) any Trustee may be removed with or without cause at any time by a
written instrument signed by at least two-thirds of the other Trustees; (c)
any Trustee who requests to be retired, or who has become unable to serve,
may be retired by a written instrument signed by a majority of the other
Trustees; and (d) any Trustee may be removed at any shareholder meeting by
a vote of at least two-thirds of the outstanding shares.
(3) Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
* Indicates a Trustee who is an "interested person" within the meaning of the
1940 Act. Mr. Sundman and Mr. Rivkin are interested persons of the Trust by
virtue of the fact that they are officers and/or directors of NB Management
and Executive Vice Presidents of Neuberger Berman. Mr. O'Brien is an
interested person of the Trust by virtue of the fact that he is a director
of Legg Mason, Inc., a wholly owned subsidiary of which, from time to time,
serves as a broker or dealer to the Fund and other funds for which NB
Management serves as investment manager.
34
<Page>
INFORMATION ABOUT THE OFFICERS OF THE TRUST
<Table>
<Caption>
POSITION AND
NAME, AGE, AND ADDRESS (1) LENGTH OF TIME SERVED (2) PRINCIPAL OCCUPATION(S) (3)
- ---------------------------------------------------------------------------------------------------------------------------
Claudia A. Brandon (47) Secretary since 1985 Vice President-Mutual Fund Board
Relations, NB Management since 2000;
Vice President, Neuberger Berman since
2002 and employee since 1999; Vice
President, NB Management from 1986 to
1999; Secretary, ten registered
investment companies for which NB
Management acts as investment manager
and administrator (four since 2002 and
three since 2003).
Robert Conti (47) Vice President since 2000 Senior Vice President, Neuberger Berman
since 2003; Vice President, Neuberger
Berman from 1999 until 2003; Senior Vice
President, NB Management since 2000;
Controller, NB Management until 1996;
Treasurer, NB Management from 1996 until
1999; Vice President, ten registered
investment companies for which NB
Management acts as investment manager
and administrator (three since 2000,
four since 2002 and three since 2003).
Brian P. Gaffney (50) Vice President since 2000 Managing Director, Neuberger Berman
since 1999; Senior Vice President, NB
Management since 2000; Vice President,
NB Management from 1997 until 1999; Vice
President, ten registered investment
companies for which NB Management acts
as investment manager and administrator
(three since 2000, four since 2002 and
three since 2003).
Sheila R. James (38) Assistant Secretary since 2002 Employee, Neuberger Berman since 1999;
Employee, NB Management from 1991 to
1999; Assistant Secretary, ten
registered investment companies for
which NB Management acts as investment
manager and administrator (seven since
2002 and three since 2003).
Kevin Lyons (48) Assistant Secretary since 2003 Employee, Neuberger Berman since 1999;
Employee, NB Management from 1993 to
1999; Assistant Secretary, ten
registered investment companies for
which NB Management acts as investment
manager and administrator (since 2003).
</Table>
35
<Page>
<Table>
<Caption>
POSITION AND
NAME, AGE, AND ADDRESS (1) LENGTH OF TIME SERVED (2) PRINCIPAL OCCUPATION(S) (3)
- ---------------------------------------------------------------------------------------------------------------------------
John M. McGovern (33) Assistant Treasurer since 2002 Employee, NB Management since 1993;
Assistant Treasurer, ten registered
investment companies for which NB
Management acts as investment
manager and administrator (seven
since 2002 and three since 2003).
Barbara Muinos (44) Treasurer and Principal Financial Vice President, Neuberger Berman
and Accounting Officer since 2002 since 1999; Assistant Vice
President, NB Management from 1993
to 1999; Treasurer and Principal
Financial and Accounting Officer,
ten registered investment companies
for which NB Management acts as
investment manager and
administrator (seven since 2002 and
three since 2003); Assistant
Treasurer, three registered
investment companies for which NB
Management acts as investment
manager and administrator from 1996
until 2002.
Frederic B. Soule (57) Vice President since 2000 Senior Vice President, Neuberger
Berman since 2003; Vice President,
Neuberger Berman from 1999 until
2003; Vice President, NB Management
from 1995 until 1999; Vice
President, ten registered
investment companies for which NB
Management acts as investment
manager and administrator (three
since 2000, four since 2002 and
three since 2003).
Trani Jo Wyman (34) Assistant Treasurer since 2002 Employee, NB Management since 1991;
Assistant Treasurer, ten registered
investment companies for which NB
Management acts as investment
manager and administrator (seven
since 2002 and three since 2003).
</Table>
- ----------
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Pursuant to the By-Laws of the Trust, each officer elected by the Trustees
shall hold office until his or her successor shall have been elected and
qualified or until his or her earlier death, inability to serve, or
resignation. Officers serve at the pleasure of the Trustees and may be
removed at any time with or without cause.
(3) Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
36
<Page>
REPORT OF VOTES OF SHAREHOLDERS (UNAUDITED)
A special meeting of shareholders of Neuberger Berman Income Funds (the "Trust")
was held on September 23, 2003. Upon completion of the acquisition of Neuberger
Berman Inc. by Lehman Brothers Holdings Inc. (the "Transaction"), the Trust's
management and sub-advisory agreements, on behalf of each Fund, with NB
Management and Neuberger Berman LLC, respectively, automatically terminated. To
provide for continuity of management, the shareholders of each Fund voted on the
following matters which became effective upon completion of the Transaction on
October 31, 2003:
PROPOSAL 1--TO APPROVE A NEW MANAGEMENT AGREEMENT BETWEEN THE TRUST AND NB
MANAGEMENT, WITH RESPECT TO EACH FUND
<Table>
<Caption>
NEUBERGER BERMAN INCOME FUNDS VOTES FOR VOTES AGAINST ABSTENTIONS*
Institutional Cash Fund 2,872,545,519.210 1,122,585.000 674,561.000
Strategic Income Fund 2,258,122.507 0 0
</Table>
PROPOSAL 2--TO APPROVE A NEW SUB-ADVISORY AGREEMENT WITH RESPECT TO THE TRUST
AND EACH FUND, BETWEEN NB MANAGEMENT AND NEUBERGER BERMAN LLC
<Table>
<Caption>
NEUBERGER BERMAN INCOME FUNDS VOTES FOR VOTES AGAINST ABSTENTIONS*
Institutional Cash Fund 2,872,740,199.210 1,130,116.000 472,350.000
Strategic Income Fund 2,258,122.507 0 0
</Table>
* Abstentions were counted as shares that were present and entitled to vote
for purposes of determining a quorum and had a negative effect on the
proposals.
37
<Page>
NOTICE TO SHAREHOLDERS (UNAUDITED)
For Neuberger Berman Strategic Income Fund 7% of the dividends distributed
during the fiscal year ended October 31, 2003 qualifies for the dividends
received deduction for corporate shareholders.
Under most state tax laws, mutual fund dividends which are derived from direct
investments in U.S. Government obligations are not taxable, as long as a Fund
meets certain requirements. Some states require that a Fund must provide
shareholders with a written notice, within 60 days of the close of a Fund's
taxable year, designating the portion of the dividends which represents interest
which those states consider to have been earned on U.S. Government obligations.
The chart below shows the percentage of income derived from such investments for
the twelve months ended October 31, 2003. This information should not be used to
complete your tax returns.
<Table>
<Caption>
NEUBERGER BERMAN CALIFORNIA, CONNECTICUT, AND NEW YORK MAINE ALL OTHER STATES
Institutional Cash Fund 0.0% 24.7% 48.0%
Strategic Income Fund 0.0 5.7 5.7
</Table>
For the fiscal year ended October 31, 2003 certain dividends paid by Neuberger
Berman Strategic Income Fund may be subject to a maximum tax rate of 15%, as
provided by the Jobs and Growth Tax Relief Reconciliation Act of 2003 ("the
Act"). The Fund intends to designate up to the maximum amount of such dividends
as allowable under the Act. Complete information will be reported in conjunction
with your 2003 Form 1099-DIV.
You will receive information to be used in filing your 2003 tax returns, which
will include a notice of the exact tax status of all dividends paid to you by
each Fund during calendar year 2003. Please consult your own tax advisor for
details as to how this information should be reflected on your tax returns.
38
<Page>
[NEUBERGER BERMAN LOGO]
A Lehman Brothers Company
NEUBERGER BERMAN MANAGEMENT INC.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
SHAREHOLDER SERVICES
800.877.9700
INSTITUTIONAL SERVICES
800.366.6264
www.nb.com
Statistics and projections in this report are derived from sources deemed to be
reliable but cannot be regarded as a representation of future results of the
Funds. This report is prepared for the general information of shareholders and
is not an offer of shares of the Funds. Shares are sold only through the
currently effective prospectus, which must precede or accompany this report.
[RECYCLE LOGO] B0909 12/03
ITEM 2. CODE OF ETHICS
At a meeting on September 10, 2003, the Board of Trustees ("Board") of Neuberger
Berman Income Funds ("Registrant") adopted a code of ethics that applies to the
Registrant's principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions ("Code
of Ethics"). A copy of the Code of Ethics is filed as Exhibit 10(a)(1) to this
Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
The Board has determined that the Registrant has two audit committee financial
experts serving on its audit committee. The Registrant's audit committee
financial experts are John Cannon and Walter G. Ehlers. Mr. Cannon and Mr.
Ehlers are both independent trustees as defined by Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Form N-CSR disclosure requirement not yet effective with respect to the
Registrant.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable to the Registrant.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES
(a) Based on an evaluation of the disclosure controls and procedures (as
defined in rule 30a-2(c) under the Act) as of a date within 90 days of
the filing date of this document, the Chief Executive Officer and
Treasurer of the Registrant have concluded that such disclosure
controls and procedures are effectively designed to ensure that
information required to be disclosed by the Registrant is accumulated
and communicated to the Registrant's management to allow timely
decisions regarding required disclosure.
(b) There were no significant changes in the Registrant's internal controls
over financial reporting (as defined in rule 30a-3(d) under the Act)
that occurred during the Registrant's second fiscal half-year that have
materially affected, or are reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 10. EXHIBITS
(a) A copy of the Code of Ethics is filed as Exhibit 10(a)(1).
(b) The certifications required by Rule 30a-2 of the Investment Company Act
of 1940, as amended, and Sections 302 and 906 of the Sarbanes-Oxley Act
of 2002 are attached hereto.
The certifications provided pursuant to Section 906 of the Sarbanes-Oxley Act
are not deemed "filed" for purposes of Section 18 of the Securities Exchange Act
of 1934 ("Exchange Act"), or otherwise subject to the liability of that section.
Such certifications will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Exchange Act, except to the
extent that the Registrant specifically incorporates them by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Neuberger Berman Income Funds
By: /s/ Peter E. Sundman
----------------------------------
Peter E. Sundman
Chairman and Chief Executive Officer
Date: December 31, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /s/ Peter E. Sundman
-----------------------------------
Peter E. Sundman
Chairman and Chief Executive Officer
Date: December 31, 2003
By: /s/ Barbara Muinos
-----------------------------------
Barbara Muinos
Treasurer and Principal Financial
and Accounting Officer
Date: January 8, 2004