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: 811-21334
NEUBERGER BERMAN INCOME OPPORTUNITY FUND INC.
(Exact Name of the Registrant as Specified in Charter)
c/o Neuberger Berman Management Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Registrant's Telephone Number, including area code: (212) 476-8800
Peter E. Sundman, Chief Executive Officer
c/o Neuberger Berman Management Inc.
Neuberger Berman Income Opportunity Fund Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Arthur C. Delibert, Esq. Ellen Metzger, Esq.
Kirkpatrick & Lockhart LLP Neuberger Berman, LLC
1800 Massachusetts Avenue, N.W. 2nd Floor 605 Third Avenue
Washington, DC 20036-1800 New York, New York 10158-3698
(Names 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 STOCKHOLDERS
[NEUBERGER BERMAN LOGO]
A LEHMAN BROTHERS COMPANY
ANNUAL REPORT
OCTOBER 31, 2003
NEUBERGER BERMAN
INCOME OPPORTUNITY FUND INC.
<Page>
NEUBERGER BERMAN OCTOBER 31, 2003
CONTENTS
THE FUND
<Table>
CHAIRMAN'S LETTER 1
PORTFOLIO COMMENTARY/ PERFORMANCE HIGHLIGHTS 2
SCHEDULE OF INVESTMENTS/ TOP TEN EQUITY HOLDINGS 5
FINANCIAL STATEMENTS 12
FINANCIAL HIGHLIGHTS/ PER SHARE DATA 21
REPORT OF INDEPENDENT AUDITORS 23
DIVIDEND REINVESTMENT PLAN 24
DIRECTORY 27
DIRECTORS AND OFFICERS 28
</Table>
CHAIRMAN'S LETTER
Dear Fellow Shareholder,
I am pleased to present to you this annual report of the Neuberger Berman Income
Opportunity Fund, for the period ending October 31, 2003. The report includes a
listing of the Fund's investments and its financial statements for the reporting
period.
The Fund's investment objective is to provide high current income through a
diversified portfolio of both real estate securities and high-yield bonds.
Portfolio Co-Manager Steven Brown manages the real estate portion of the Fund.
His investment approach combines analysis of security fundamentals and real
estate with property sector diversification. His disciplined valuation
methodology seeks out real estate securities that are attractively priced
relative to their historical growth rates and the valuation of other property
sectors.
Portfolio Co-Manager Wayne Plewniak manages the high-yield bond portion of the
Fund. His investment approach focuses on preserving capital, generating income,
and managing risk. He seeks to avoid the default and volatility risk associated
with high-yield bonds by applying rigorous credit analysis to higher quality
issues, and by emphasizing the intermediate range of the yield curve.
We believe our conservative investing philosophy and disciplined investment
process will benefit you with superior current income over the long term.
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 OPPORTUNITY FUND INC.
CLOSED-END FUNDS
"Neuberger Berman" and the Neuberger Berman logo are service marks of Neuberger
Berman, LLC. "Neuberger Berman Management Inc." and the individual fund name 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>
INCOME OPPORTUNITY FUND INC. PORTFOLIO COMMENTARY
We are pleased to present our first report to shareholders of the Neuberger
Berman Income Opportunity Fund (AMEX: NOX), which had its inception on June 24,
2003. Although it is a short reporting period, the Fund's performance is off to
a very good start.
The Fund's primary objective is high current income. To pursue this goal, the
fund has invested approximately 50% of its assets in intermediate-term
high-yield corporate bonds with maturities of ten years or less at the time of
initial investment and 50% in real estate investment trust (REIT) securities,
divided evenly between REIT common stocks and REIT preferred shares.
We believe that a well-managed portfolio of high-yield bonds and real estate
securities can provide well-diversified investors with a solid income-producing
investment for their portfolios. We believe that our conservative approach to
investing will be gratifying for investors in the near and long term. We are
optimistic about the prospects for the Fund.
REAL ESTATE INVESTMENT TRUST HOLDINGS
The combination of investors' strong appetite for yield, and confidence that
commercial real estate fundamentals would improve along with the economy helped
propel Real Estate Investment Trusts (REITs) to strong gains in the second half
of fiscal 2003.
We believe the U.S. economy is in the early stages of an economic recovery that
will extend through 2004 and into 2005. Consumer spending, which has supported
the economy over the last several years, remains strong. Capital spending
appears to be recovering as the capacity glut recedes. Perhaps most importantly,
corporate America is finally hiring again. More Americans going back to work has
positive implications for consumer confidence and consumer spending. It should
also revive demand in the office sector, fundamentally the weakest property
category. We doubt 2004 Gross Domestic Product Growth (GDP) growth will match
the calendar third quarter's impressive 8.2% growth rate, but expect growth in
the healthy 4% plus range.
We also expect commercial real estate fundamentals to improve significantly over
the next 12 months. Supply growth, as measured by new permits and construction
starts as a percentage of existing supply, is decelerating and we expect the
level of supply growth for most property sectors will be below long-term
averages for the next 12-18 months. Demand should improve substantially as the
economy expands. Increasing demand should translate into accelerating earnings
growth for REITs.
After REITs' exceptional absolute and relative performance in recent years,
valuations are in the mid-to upper-end of historical ranges. While REITs no
longer appear "cheap," we think they are reasonably priced relative to asset
values and improving earnings prospects.
CUMULATIVE TOTAL RETURN (Life of Fund as of October 31, 2003)
<Table>
<Caption>
INCOME OPPORTUNITY FUND
AMEX TICKER SYMBOL NOX
NAV 5.11%
MARKET PRICE (4.67%)
INCEPTION DATE 06/24/2003
</Table>
2
<Page>
HIGH-YIELD SECURITIES HOLDINGS
The high-yield securities market has performed very strongly in 2003, as
investors reacted positively to the historically wide yield spread opportunities
available through much of the year. 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.
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 high-yield
bond 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.
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 enhancing our clients' assets. Through disciplined
portfolio management, rigorous fundamental analysis, in-depth market knowledge,
and a 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/ Steven R Brown
/s/ Wayne C. Plewniak
STEVEN BROWN AND WAYNE PLEWNIAK
PORTFOLIO CO-MANAGERS
3
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4
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NEUBERGER BERMAN OCTOBER 31, 2003
SCHEDULE OF INVESTMENTS INCOME OPPORTUNITY FUND INC.
TOP TEN EQUITY HOLDINGS
<Table>
<Caption>
HOLDING %
1 iStar Financial 5.0
2 Health Care REIT 4.2
3 Apartment Investment & Management 3.8
4 Mid-America Apartment Communities 3.8
5 Mills Corp. 3.1
6 Kilroy Realty 3.0
7 Bedford Property Investors 2.9
8 Glimcher Realty Trust 2.7
9 Brandywine Realty Trust 2.5
10 Gables Residential Trust 2.4
</Table>
<Table>
<Caption>
MARKET VALUE +
NUMBER OF SHARES (000'S OMITTED)
COMMON STOCKS (62.9%)
APARTMENTS (9.4%)
78,000 Amli Residential
Properties Trust $ 1,984
34,600 Apartment Investment &
Management 1,415
100,000 Archstone-Smith Trust 2,670
20,000 Avalonbay Communities 913
96,100 Camden Property Trust 3,806
190,300 Gables Residential Trust 6,124
34,400 Home Properties 1,325
66,500 Mid-America Apartment
Communities 2,088
79,300 Post Properties 2,094
94,500 Town & Country Trust 2,195
----------
24,614
COMMUNITY CENTERS (4.8%)
1,400 Agree Realty 36
83,600 Cedar Shopping Centers 963*
168,900 Heritage Property
Investment Trust 4,763
10,600 Kramont Realty Trust 182
156,000 New Plan Excel Realty Trust 3,541
23,000 Ramco-Gershenson
Properties Trust 556
61,000 Tanger Factory Outlet Centers 2,463
----------
12,504
DIVERSIFIED (5.6%)
136,300 Colonial Properties Trust 5,043
10,000 Commercial Net Lease Realty 172
94,200 iStar Financial 3,585
156,000 Pennsylvania REIT 5,210
10,000 Vornado Realty Trust 506
----------
14,516
HEALTH CARE (8.0%)
69,000 Health Care Property Investors 3,218
307,302 Health Care REIT 10,187
80,600 Healthcare Realty Trust 2,720
109,000 Nationwide Health Properties 1,995
11,500 Universal Health Realty
Income Trust 322
133,000 Ventas, Inc. 2,487
----------
20,929
INDUSTRIAL (2.5%)
90,200 EastGroup Properties 2,629@@
105,100 First Industrial Realty Trust 3,395
26,800 Keystone Property Trust 536
----------
6,560
LODGING (1.2%)
82,000 Hospitality Properties Trust $ 3,007
MANUFACTURED HOMES (0.1%)
10,000 Sun Communities 364
OFFICE (17.9%)
54,000 American Financial Realty Trust 821
169,200 Arden Realty 4,732
259,900 Brandywine Realty Trust 6,586
130,300 CarrAmerica Realty 3,918
142,800 Equity Office Properties Trust 4,000
83,400 Glenborough Realty Trust 1,626
148,900 Highwoods Properties 3,693
270,000 HRPT Properties Trust 2,527
41,500 Koger Equity 804
120,000 Mack-Cali Realty 4,523
261,500 Maguire Properties 5,700
191,000 Prentiss Properties Trust 5,776
157,000 Trizec Properties 2,096
----------
46,802
OFFICE-INDUSTRIAL (7.6%)
192,500 Bedford Property Investors 5,055
221,800 Kilroy Realty 6,410
125,000 Liberty Property Trust 4,548
169,000 Reckson Associates Realty 3,755
----------
19,768
REGIONAL MALLS (3.9%)
257,000 Glimcher Realty Trust 5,443
45,000 Macerich Co. 1,809
58,700 Mills Corp. 2,395
10,000 Simon Property Group 451
----------
10,098
SELF STORAGE (1.9%)
2,700 Public Storage,
Depositary Shares 78
143,500 Sovran Self Storage 4,857
----------
4,935
TOTAL COMMON STOCKS
(COST $158,499) $ 164,097
----------
</Table>
See Notes to Schedule of Investments
5
<Page>
<Table>
<Caption>
MARKET VALUE +
NUMBER OF SHARES (000'S OMITTED)
PREFERRED STOCKS (20.3%)
APARTMENTS (6.3%)
300,000 Apartment Investment &
Management, Ser. R $ 8,220
12,400 Apartment Investment &
Management, Ser. T 309
302,200 Mid-America Apartment
Communities, Ser. H 7,838
----------
16,367
COMMERCIAL FINANCING (0.4%)
20,000 Anthracite Capital, Ser. C 525
20,000 Newcastle Investment, Ser. B 540
----------
1,065
DIVERSIFIED (3.8%)
18,400 Crescent Real Estate
Equities, Ser. B 494
200,000 iStar Financial, Ser. E 5,230
160,000 iStar Financial, Ser. F 4,160
----------
9,884
HEALTH CARE (0.9%)
25,000 Health Care REIT, Ser. D 648
58,000 LTC Properties, Ser. E 1,609
----------
2,257
LODGING (2.6%)
182,000 Equity Inns, Ser. B 4,732
77,500 LaSalle Hotel Properties, Ser. B 2,016
----------
6,748
OFFICE (1.2%)
62,600 Glenborough Realty Trust, Ser. A 1,522
60,000 Koger Equity, Ser. A 1,584
----------
3,106
OFFICE-INDUSTRIAL (1.5%)
50,000 Bedford Properties
Investors, Ser. A 2,500**
60,000 Kilroy Realty, Ser. E 1,524@
----------
4,024
REGIONAL MALLS (3.2%)
19,800 Crown American Realty
Trust, Ser. A 1,163
60,000 Glimcher Realty Trust, Ser. F 1,554
80,000 Mills Corp., Ser. B 2,158
131,400 Mills Corp., Ser. E 3,482
----------
8,357
SPECIALTY (0.4%)
40,000 Entertainment Properties
Trust, Ser. A 1,090
TOTAL PREFERRED STOCKS
(COST $51,434) $ 52,898
----------
</Table>
6
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000's OMITTED)
CORPORATE DEBT SECURITIES (62.4%)
$ 1,000 Accuride Corp., Senior Subordinated Notes, Ser. B,
9.25%, due 2/1/08 Caa1 CCC+ $ 998
1,000 AES Corp., Senior Notes, 9.38%, due 9/15/10 B3 B- 1,060
2,875 AES Corp., Senior Secured Notes, 8.75%, due 5/15/13 B2 B+ 3,069**
3,000 Allied Waste North America, Inc., Guaranteed Notes,
10.00%, due 8/1/09 B2 B+ 3,262
1,500 AMC Entertainment, Inc., Senior Subordinated Notes,
9.50%, due 2/1/11 Caa1 CCC+ 1,577
2,000 American Tower Corp., Notes,
9.38%, due 2/1/09 Caa1 CCC 2,100
1,250 Armor Holdings, Inc., Senior Subordinated Notes,
8.25%, due 8/15/13 B1 B+ 1,341**
2,250 ArvinMeritor, Inc., Notes, 8.75%, due 3/1/12 Baa3 BB+ 2,362@@
1,500 Availl, Inc., Senior Notes, 7.63%, due 7/1/11 B1 1,564
2,000 Bavaria S.A., Senior Notes, 8.88%, due 11/1/10 Ba3 BB 1,960**
1,000 Bowater, Inc., Senior Notes, 6.50%, due 6/15/13 Ba1 BB+ 919**
1,000 Buckeye Technologies, Inc., Senior Subordinated Notes,
8.00%, due 10/15/10 Caa1 B 945
1,000 Buckeye Technologies, Inc., Senior Notes,
8.50%, due 10/1/13 B3 B+ 1,045**
2,875 Calpine Corp., Secured Notes,
8.50%, due 7/15/10 B 2,631**
1,431 Calpoint Receivables Structured Trust 2001, Notes, 7.44%,
due 12/10/06 Caa1 1,413**
2,125 Case New Holland, Inc., Senior Notes, 9.25%, due 8/1/11 Ba3 BB- 2,359**@@
2,500 Charter Communications Holdings II, Senior Notes,
10.25%, due 9/15/10 Caa1 CCC- 2,544**
1,750 Cinemark USA, Inc., Senior Subordinated Notes, Ser. B,
8.50%, due 8/1/08 B3 B- 1,824
2,250 CMS Energy Corp., Senior Notes, 7.75%, due 8/1/10 B3 B+ 2,289**
1,000 Crown Castle International Corp., Senior Notes, 9.00%, due
5/15/11 B3 CCC 1,058
2,500 Crown, Cork & Seal Co., Guaranteed Notes, 7.00%, due
12/15/06 B3 B 2,512
1,500 CSC Holdings, Inc., Senior Notes, Ser. B,
8.13%, due 7/15/09 B1 BB- 1,560
1,000 Dayton Superior Corp., Secured Notes,
10.75%, due 9/15/08 B3 B+ 1,043**
1,000 Delta Air Lines, Inc., Medium-Term Notes, Ser. C,
6.65%, due 3/15/04 B3 998
2,000 Dole Foods Co., Inc., Senior Notes, 7.25%, due 6/15/10 B2 BB- 2,040
1,500 Dresser, Inc., Guaranteed Notes, 9.38%, due 4/15/11 B2 B 1,541
2,500 El Paso Natural Gas, Senior Notes, Ser. A, 7.63%, due 8/1/10 B1 B+ 2,475
2,775 El Paso Production Holdings, Guaranteed Notes,
7.75%, due 6/1/13 B2 B+ 2,664**
1,000 Entravision Communications Corp., Guaranteed Notes,
8.13%, due 3/15/09 B3 B- 1,058
1,500 Felcor Lodging L.P., Guaranteed Notes, 10.00%, due 9/15/08 B1 B 1,612
1,000 Ferrellgas Partners L.P., Senior Notes, 8.75%, due 6/15/12 B2 B 1,090
1,000 Forest Oil Corp., Senior Notes, 8.00%, due 6/15/08 Ba3 BB 1,070
1,000 Friendly Ice Cream Corp., Guaranteed Notes,
10.50%, due 12/1/07 B3 B- 1,036
</Table>
See Notes to Schedule of Investments
7
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 1,000 Gaylord Entertainment Co., Senior Notes,
8.00%, due 11/15/13 B3 B- $ 1,029**@
500 Georgia-Pacific Corp., Senior Notes,
7.38%, due 7/15/08 Ba2 BB+ 533
2,000 Grant Prideco Escrow, Guaranteed Notes,
9.00%, due 12/15/09 Ba3 BB- 2,160
1,500 Gulfmark Offshore, Inc., Guaranteed Notes,
8.75%, due 6/1/08 B1 BB- 1,519
1,000 Hines Nurseries, Inc., Senior Notes,
10.25%, due 10/1/11 B3 B 1,070**
2,750 HMH Properties, Inc., Guaranteed Senior Notes, Ser. B,
7.88%, due 8/1/08 Ba3 B+ 2,839
2,000 Inn of the Mountain Gods, Senior Notes,
12.00%, due 11/15/10 Caa1 B 2,090**@
2,000 Insight Midwest, Senior Notes,
9.75%, due 10/1/09 B2 B+ 2,040
1,000 Interface, Inc., Senior Subordinated Notes, Ser. B,
9.50%, due 11/15/05 B3 CCC+ 965
1,250 IOS Capital LLC, Senior Notes,
7.25%, due 6/30/08 Ba1 BBB- 1,241
1,000 Jafra Cosmetics, Senior Subordinated Notes,
10.75%, due 5/15/11 B3 B- 1,100
4,907 JP Morgan HYDIB, Notes,
9.00%, due 6/20/08 B3 5,048**
1,000 Kappa Beheer BV, Guaranteed Notes,
10.63%, due 7/15/09 B2 B 1,075
1,500 KB Home, Senior Subordinated Notes,
9.50%, due 2/15/11 Ba3 BB- 1,665
1,000 Level 3 Communications, Senior Discount Notes,
10.50%, due 12/1/08 Caa2 CC 920
2,000 Level 3 Communications, Senior Notes,
9.13%, due 5/1/08 Caa2 CC 1,815
1,000 Levi Strauss & Co., Notes,
7.00%, due 11/1/06 Ca B 780
1,500 LNR Property Corp., Senior Subordinated Notes,
7.63%, due 7/15/13 Ba3 B+ 1,545**
2,500 Lyondell Chemical Co., Secured Notes, Ser. B,
9.88%, due 5/1/07 Ba3 BB- 2,537
1,500 MCI Communications Corp., Senior Debentures,
7.13%, due 6/15/27 1,241^ ^^
1,000 MCI Communications Corp., Senior Notes,
7.50%, due 8/20/04 828^ ^^
1,500 MGM Mirage, Inc., Guaranteed Notes,
6.00%, due 10/1/09 Ba1 BB+ 1,519
2,000 Millennium America, Inc., Guaranteed Notes,
7.00%, due 11/15/06 Ba3 BB- 1,965
1,500 Nalco Co., Senior Subordinated Notes,
8.88%, due 11/15/13 Caa1 B 1,560**@
1,000 Navistar International, Senior Subordinated Notes, Ser. B,
8.00%, due 2/1/08 B2 B 1,018
1,625 Nevada Power Co., Notes, Ser. E,
10.88%, due 10/15/09 Ba2 1,808
2,500 Nextel Communications, Inc., Senior Notes,
7.38%, due 8/1/15 B2 B+ 2,600
</Table>
8
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000's OMITTED)
$ 1,000 Norske Skog Canada Ltd., Guaranteed Senior Notes, Ser. D,
8.63%, due 6/15/11 Ba2 BB $ 1,025
1,500 Nortek, Inc., Senior Subordinated Notes, Ser. B,
9.88%, due 6/15/11 B3 B- 1,616
1,000 Northwest Airlines, Inc., Guaranteed Notes,
8.38%, due 3/15/04 Caa1 B- 1,000
1,834 Northwest Airlines, Inc., Pass-Through Certificates, Ser. 2001-1,
Class B, 7.69%, due 4/1/17 Ba2 BB+ 1,524
1,000 OM Group, Inc., Guaranteed Notes,
9.25%, due 12/15/11 Caa1 B- 1,010
1,500 Owens-Brockway Glass Container, Inc., Senior Notes,
8.25%, due 5/15/13 B2 B+ 1,582
1,000 Paramount Resources Ltd., Senior Notes,
7.88%, due 11/1/10 B2 B 995
1,000 Perry Ellis International, Inc., Senior Subordinated Notes,
8.88%, due 9/15/13 B3 B- 1,038**
2,000 PSE&G Energy Holdings, Notes,
7.75%, due 4/16/07 2,020^^
2,000 Qwest Capital Funding, Guaranteed Notes,
5.88%, due 8/3/04 Caa2 CCC+ 1,992
1,500 Qwest Capital Funding, Guaranteed Notes,
7.25%, due 2/15/11 Caa2 CCC+ 1,395
1,250 Reddy Ice Group, Inc., Senior Subordinated Notes,
8.88%, due 8/1/11 B3 B- 1,306**
2,500 Reliant Resources, Inc., Secured Notes,
9.25%, due 7/15/10 B1 B 2,237**
2,000 Remington Arms Co., Inc., Guaranteed Notes,
10.50%, due 2/1/11 B2 B- 2,092
1,500 Resolution Performance, Senior Subordinated Notes,
13.50%, due 11/15/10 Caa1 B- 1,418
1,000 Salem Communications, Guaranteed Notes,
7.75%, due 12/15/10 B3 B- 1,030
1,500 Sequa Corp., Senior Notes, Ser. B,
8.88%, due 4/1/08 B1 BB- 1,637
1,250 Six Flags, Inc., Senior Notes,
8.88%, due 2/1/10 B2 B- 1,188
1,500 Smithfield Foods, Inc., Senior Subordinated Notes,
7.63%, due 2/15/08 Ba3 BB- 1,575
1,000 Southern Star Central Corp., Secured Notes,
8.50%, due 8/1/10 B1 B+ 1,060**
2,000 Spanish Broadcasting System, Inc., Guaranteed Senior Notes,
9.63%, due 11/1/09 Caa1 CCC+ 2,075
1,500 Stena AB, Senior Notes,
9.63%, due 12/1/12 Ba3 BB 1,635
1,550 Stone Container Corp., Senior Notes,
9.75%, due 2/1/11 B2 B 1,689
1,250 Teco Energy, Inc., Senior Notes,
7.50%, due 6/15/10 Ba1 BB+ 1,284
2,875 Tembec Industries, Inc., Guaranteed Senior Notes,
8.63%, due 6/30/09 Ba3 BB 2,803
2,500 Tenet Healthcare Corp., Senior Notes,
6.38%, due 12/1/11 Ba3 BB- 2,319
1,500 TFM S.A. de C.V., Guaranteed Notes,
11.75%, due 6/15/09 B1 B+ 1,511
</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)
$ 2,000 Triton PCS, Inc., Guaranteed Notes,
9.38%, due 2/1/11 B3 B- $ 1,975
2,000 United Rentals, Inc., Guaranteed Notes, Ser. B,
9.25%, due 1/15/09 B2 B+ 2,105
1,000 United Rentals, Inc., Senior Subordinated Notes,
7.75%, due 11/15/13 B2 B+ 998**@
2,175 United States Steel LLC, Senior Notes,
10.75%, due 8/1/08 B1 BB- 2,387
1,500 Utilicorp United, Inc., Senior Notes,
7.00%, due 7/15/04 Caa1 B 1,502
1,250 Vitro S.A. de C.V., Notes,
11.75%, due 11/1/13 B2 B- 1,209**@@
2,000 Vought Aircraft Industries, Inc., Senior Notes,
8.00%, due 7/15/11 B2 B 2,010**
1,250 Warnaco, Inc., Senior Notes,
8.88%, due 6/15/13 B2 B 1,338**
1,500 Williams Cos., Inc., Senior Notes,
8.63%, due 6/1/10 B3 B+ 1,642
2,000 Williams Cos., Inc., Notes,
7.63%, due 7/15/19 B3 B+ 1,960
2,000 Williams Scotsman, Inc., Guaranteed Senior Notes,
9.88%, due 6/1/07 B3 B 2,030
---------
TOTAL CORPORATE DEBT SECURITIES (COST $160,245) 162,741
---------
REPURCHASE AGREEMENTS (2.8%)
7,205 State Street Bank and Trust Co. Repurchase Agreement, 0.97%,
due 11/3/03, dated 10/31/03, Maturity Value $7,205,582,
Collateralized by $7,350,000 U.S. Treasury Notes, 1.75%, due
12/31/04 (Collateral Value $7,425,146) (COST $7,205) 7,205#
---------
SHORT-TERM INVESTMENTS (1.5%)
3,991 Neuberger Berman Institutional Cash Fund Trust Class
(COST $3,991) 3,991#!
---------
TOTAL INVESTMENTS (149.9%) (COST $381,374) 390,932##
Liabilities, less cash, receivables and other assets [(1.8%)] (4,614)
Liquidation Value of Auction Preferred Shares [(48.1%)] (125,500)
---------
TOTAL NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS (100.0%) $ 260,818
---------
</Table>
10
<Page>
NOTES TO SCHEDULE OF INVESTMENTS
+ Investments in equity securities of the Fund are valued at the latest sales
price where that price is readily available; securities for which no sales
were reported, unless otherwise noted, are valued at the last available bid
price on that day. 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. Investments in debt 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. The Fund values
all other securities by a method the directors of Neuberger Berman Income
Opportunity Fund Inc. 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.
# At cost, which approximates market value.
## At October 31, 2003, the cost of investments for U.S. Federal income tax
purposes was $381,422,000. Gross unrealized appreciation of investments was
$11,220,000 and gross unrealized depreciation of investments was
$1,710,000, resulting in net unrealized appreciation of $9,510,000, based
on cost for U.S. Federal income tax purposes.
! Neuberger Berman Institutional Cash Fund is also managed by Neuberger
Berman Management Inc. (see Note A of Notes to Financial Statements).
* 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 $49,315,000 or 18.9% of net assets applicable
to common shareholders.
@ Security purchased on a when-issued basis. At October 31, 2003, these
securities amounted to $7,201,000.
@@ Security is segregated as collateral for when-issued purchase commitments
and as collateral for interest rate swap contracts.
^ Non-income producing security - in default.
^^ Not rated by a nationally recognized statistical rating organization.
~ Credit ratings are unaudited.
See Notes to Financial Statements
11
<Page>
NEUBERGER BERMAN OCTOBER 31, 2003
STATEMENT OF ASSETS AND LIABILITIES
<Table>
<Caption>
NEUBERGER BERMAN INCOME OPPORTUNITY
(000'S OMITTED EXCEPT PER SHARE AMOUNTS) FUND
ASSETS
INVESTMENTS IN SECURITIES, AT MARKET VALUE* (NOTE A)--SEE
SCHEDULE OF INVESTMENTS $ 390,932
Cash 7
- -------------------------------------------------------------------------------------------------------------
Dividends and interest receivable 4,571
Receivable for securities sold 3,078
=============================================================================================================
TOTAL ASSETS 398,588
=============================================================================================================
LIABILITIES
Dividends payable--preferred shares 8
Dividends payable--common shares 292
- -------------------------------------------------------------------------------------------------------------
Payable for securities purchased 10,921
Interest rate swaps, at market value (Note A) 49
- -------------------------------------------------------------------------------------------------------------
Net payable for swap contracts (Note A) 41
Payable for offering costs (Note A) 219
- -------------------------------------------------------------------------------------------------------------
Payable to investment manager-net (Note B) 108
Payable to administrator (Note B) 79
- -------------------------------------------------------------------------------------------------------------
Due to custodian 463
Accrued expenses and other payables 90
=============================================================================================================
TOTAL LIABILITIES 12,270
=============================================================================================================
AUCTION PREFERRED SHARES SERIES A & B AT LIQUIDATION VALUE
6,000 shares authorized; 5,020 shares issued and outstanding;
$.0001 par value; $25,000 liquidation value per share (Note A) 125,500
=============================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 260,818
=============================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS CONSIST OF:
Paid-in capital--common shares $ 251,656
Undistributed (dividends in excess of) net investment income (347)
- -------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) in value of investments 9,509
=============================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 260,818
=============================================================================================================
COMMON SHARES OUTSTANDING ($.0001 par value; 999,994,000 shares authorized) 17,724
NET ASSET VALUE PER COMMON SHARE OUTSTANDING $ 14.72
=============================================================================================================
*COST OF INVESTMENTS $ 381,374
=============================================================================================================
</Table>
See Notes to Financial Statements
12
<Page>
NEUBERGER BERMAN FOR THE PERIOD FROM JULY 2, 2003 (COMMENCEMENT OF OPERATIONS)
TO OCTOBER 31, 2003
STATEMENT OF OPERATIONS
<Table>
<Caption>
NEUBERGER BERMAN INCOME OPPORTUNITY
(000'S OMITTED) FUND
INVESTMENT INCOME
Dividend income $ 2,313
Interest income 2,765
- -------------------------------------------------------------------------------------------------------------
Income from investments in affiliated issuers (Note A) 67
=============================================================================================================
Total income 5,145
=============================================================================================================
EXPENSES:
Investment management fee (Note B) 565
Administration fee (Note B) 239
- -------------------------------------------------------------------------------------------------------------
Auction agent fees (Note B) 23
Auditing fees 22
- -------------------------------------------------------------------------------------------------------------
Basic maintenance expense (Note B) 3
Custodian fees (Note B) 38
- -------------------------------------------------------------------------------------------------------------
Directors' fees and expenses 9
Legal fees 12
- -------------------------------------------------------------------------------------------------------------
Net interest expense on interest rate swap contracts (Note A) 41
Shareholder reports 11
- -------------------------------------------------------------------------------------------------------------
Stock transfer agent fees 14
Miscellaneous 6
=============================================================================================================
Total expenses 983
Investment management fee waived (Note B) (239)
=============================================================================================================
Expenses reduced by custodian fee expense offset and commission
recapture arrangements (Note B) (9)
=============================================================================================================
Total net expenses 735
=============================================================================================================
Net investment income 4,410
=============================================================================================================
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investment securities sold 931
Change in net unrealized appreciation (depreciation) in value of:
- -------------------------------------------------------------------------------------------------------------
Investment securities (Note A) 9,558
======================================================================================================
Interest rate swap contracts (Note A) (49)
------------------------------------------------------------------------------------------------------
Net gain (loss) on investments 10,440
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
Net investment income (142)
======================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
RESULTING FROM OPERATIONS $ 14,708
=============================================================================================================
</Table>
See Notes to Financial Statements
13
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
INCOME OPPORTUNITY FUND
PERIOD FROM
JULY 2, 2003
(COMMENCEMENT
OF OPERATIONS) TO
NEUBERGER BERMAN OCTOBER 31,
(000'S OMITTED) 2003
INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
FROM OPERATIONS:
Net investment income (loss) $ 4,410
Net realized gain (loss) on investments 931
- -------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) of investments 9,509
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
Net investment income (117)
Net realized gain on investments (23)
Tax return of capital (2)
- -------------------------------------------------------------------------------------------------------------
Total distributions to preferred shareholders (142)
=============================================================================================================
Net increase (decrease) in net assets applicable to common shareholders
resulting from operations 14,708
=============================================================================================================
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (4,645)
Net realized gain on investments (903)
- -------------------------------------------------------------------------------------------------------------
Tax return of capital (101)
=============================================================================================================
Total distributions to common shareholders (5,649)
=============================================================================================================
FROM CAPITAL SHARE TRANSACTIONS:
Net proceeds from initial capitalization (Note D) 100
Net proceeds from issuance of common shares 238,249
Net proceeds from underwriters' over-allotment option exercised 15,010
- -------------------------------------------------------------------------------------------------------------
Payments for preferred shares offering costs (1,600)
=============================================================================================================
Total net proceeds from capital share transactions 251,759
=============================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 260,818
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period --
=============================================================================================================
End of period $ 260,818
=============================================================================================================
Accumulated undistributed (distributions in excess of) net investment
income at end of period $ (347)
=============================================================================================================
</Table>
See Notes to Financial Statements
14
<Page>
NOTES TO FINANCIAL STATEMENTS INCOME OPPORTUNITY FUND INC.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1 GENERAL: Neuberger Berman Income Opportunity Fund Inc. (the "Fund") was
organized as a Maryland corporation on April 17, 2003 as a non-diversified,
closed-end management investment company under the Investment Company Act
of 1940, as amended (the "1940 Act"). The Fund had no operations until July
2, 2003, other than matters relating to its organization and the sale on
June 18, 2003 of 6,981 shares of common stock for $100,003 ($14.325 per
share) to Neuberger Berman, LLC ("Neuberger"), the Fund's sub-adviser. The
Board of Directors of the Fund may classify or re-classify any unissued
shares of capital stock into one or more classes of preferred stock without
the approval of shareholders.
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 Schedule of Investments.
3 SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on a trade date basis. Dividend income is recorded on the
ex-dividend date. 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 Statement of Operations.
4 FEDERAL INCOME TAXES: It is the intention of the Fund 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 it from all, or substantially all,
U.S. Federal income taxes. Accordingly, the Fund paid no U.S. Federal
income taxes and no provision for U.S. Federal income taxes was required.
5 DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund earns income, net of
expenses, daily on its investments. It is the policy of the Fund to declare
quarterly and pay dividends to common shareholders from net investment
income on a monthly basis. Distributions from net realized capital gains,
if any, are normally distributed in December. Income dividends and capital
gain distributions to common shareholders are recorded on the ex-dividend
date. To the extent the Fund's net realized capital gains, if any, can be
offset by capital loss carryforwards, it is the policy of the Fund not to
distribute such gains. Dividends and distributions to preferred
shareholders are accrued and determined as described in Note A-7.
The 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
15
<Page>
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
Statement of Assets and Liabilities.
On September 29, 2003 the Fund declared two monthly dividends to common
shareholders from its net investment income in the amount of $0.10625 per
share per month, payable after the fiscal year end, on November 28, 2003
and December 30, 2003, to shareholders of record on November 14, 2003 and
December 12, 2003, respectively, with ex-dividend dates of November 12,
2003 and December 10, 2003, respectively.
The tax character of distributions paid during the period ended October 31,
2003 was as follows:
<Table>
<Caption>
DISTRIBUTIONS PAID FROM:
ORDINARY LONG-TERM TAX RETURN
INCOME GAIN OF CAPITAL TOTAL
2003 2003 2003 2003
$ 5,506,297 $ 182,404 $ 102,939 $ 5,791,640
</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
$ -- $ -- $ 9,461,070 $ -- $ 9,461,070
</Table>
The difference between book basis and tax basis is attributable to the
timing differences of dividend payments and the amortization of bond
premium.
6 EXPENSE ALLOCATION: Some bills are applicable to multiple funds. 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 can
otherwise be made fairly.
7 REDEEMABLE PREFERRED SHARES: On June 5, 2003, the Fund re-classified 6,000
unissued shares of capital stock as Series A Auction Preferred Shares and
Series B Auction Preferred Shares ("Preferred Shares"). On September 26,
2003, the Fund issued 2,510 Series A Auction Preferred Shares and 2,510
Series B Auction Preferred Shares. All Preferred Shares have a liquidation
preference of $25,000 per share plus any accumulated unpaid dividends,
whether or not earned or declared by the Fund, but excluding interest
thereon ("Liquidation Value").
Except when the Fund has declared a special rate period, dividends to
preferred shareholders, which are cumulative, are accrued daily and paid
every 7 days. Dividend rates are reset every 7 days based on the results of
an auction, except during special rate periods. For the period from
September 26, 2003 to October 31, 2003, dividend rates ranged from 1.13% to
1.20% for Series A and 1.10% to 1.17% for Series B Auction Preferred
Shares. The Fund declared dividends to preferred shareholders for the
16
<Page>
period November 1, 2003 to November 30, 2003 of $60,391 and $61,445 for
Series A and Series B Auction Preferred Shares, respectively.
The Fund may redeem Preferred Shares, in whole or in part, on the second
business day preceding any dividend payment date at Liquidation Value. The
Fund is also subject to certain restrictions relating to the Preferred
Shares. Failure to comply with these restrictions could preclude the Fund
from declaring any distributions to common shareholders or repurchasing
common shares and/or could trigger the mandatory redemption of Preferred
Shares at Liquidation Value. The holders of Preferred Shares are entitled
to one vote per share and, unless otherwise required by law, will vote with
holders of common stock as a single class, except that the Preferred Shares
will vote separately as a class on certain matters, as required by law. The
holders of the Preferred Shares, voting as a separate class, are entitled
at all times to elect two Directors of the Fund, and to elect a majority of
the Directors of the Fund if the Fund failed to pay dividends on Preferred
Shares for two consecutive years.
8 INTEREST RATE SWAPS: The Fund may enter into interest rate swap
transactions, with institutions that the Fund's investment manager has
determined are creditworthy, to reduce the risk that an increase in
short-term interest rates could reduce common share net earnings as a
result of leverage. The Fund agrees to pay the swap counter party a
fixed-rate payment in exchange for the counter party's paying the Fund a
variable-rate payment that is intended to approximate all or a portion of
the Fund's variable-rate payment obligation on the Fund's Preferred Shares.
The payment flows are netted against each other, with the difference being
paid by one party to the other. The Fund will segregate cash or liquid
securities having a value at least equal to the Fund's net payment
obligations under any swap transaction, marked to market daily.
Risks may arise if the counter party to a swap contract fails to comply
with the terms of its contract. The loss incurred by the failure of a
counter party is generally limited to the net interest payment to be
received by the Fund, and/or the termination value at the end of the
contract. Additionally, risks may arise from movements in interest rates
unanticipated by Management.
The Fund records a net receivable or payable on a daily basis for the net
interest income or expense expected to be received or paid in the interest
period. Net interest received or paid on these contracts is recorded as net
interest income or net interest expense on interest rate swap contracts.
Realized gains and losses from terminated swaps are included in net
realized gains or losses in the Statement of Operations. At October 31,
2003, the Fund had outstanding interest rate swap contracts as follows:
<Table>
<Caption>
RATE TYPE
-----------------------------------
PAYMENTS MADE PAYMENTS RECEIVED UNREALIZED
SWAP COUNTER PARTY NOTIONAL AMOUNT TERMINATION DATE BY THE FUND BY THE FUND(1) DEPRECIATION
Citibank, N.A. $ 70,000,000 October 24, 2008 3.63% 1.12% $ 49,131
</Table>
(1) 30 day LIBOR (London Interbank Offered Rate)
9 REPURCHASE AGREEMENTS: The 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. The Fund
17
<Page>
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. The 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.
10 TRANSACTIONS WITH OTHER FUNDS MANAGED BY NEUBERGER BERMAN MANAGEMENT INC.:
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, the Fund may invest in the Neuberger Berman Institutional Cash
Fund (the "Cash Fund"), a fund managed by Management and having the same
directors and trustees as the Fund. The Cash Fund 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 the
Cash Fund, Management waives a portion of its management fee equal to the
management fee it receives from the Cash Fund on these assets. For the
period ended October 31, 2003, income earned on this investment amounted to
$67,153 and is reflected in the Statement of Operations under the caption
Income from investments in affiliated issuers.
11 ORGANIZATION EXPENSES AND OFFERING COSTS: Management has agreed to pay all
organizational expenses and the amount by which the Fund's offering costs
for common stock (other than sales load) exceed $0.03 per share. The costs
incurred by Management were approximately $342,034. Offering costs for
common stock paid by the Fund were charged as a reduction of common stock
paid-in-capital at the completion of the Fund's offerings and amounted to
$531,709.
Additionally, estimated offering costs of $345,000 and a sales load of
$1,255,000 incurred through the issuance of Preferred Shares were charged
as a reduction of common stock paid-in-capital at the completion of the
Fund's Preferred Shares offering.
12 CONCENTRATION OF RISK: The Fund may, for cash management purposes, during a
reasonable start-up period following the initial offering, or for defensive
purposes, temporarily hold all or a substantial portion of its assets in
cash, high-quality, short-term money market instruments, including shares
of money market funds that are managed by Management, or in high-quality
debt securities. The ability of the issuers of the money market instruments
and debt securities held by the Fund to meet their obligations may be
affected by economic developments, including those particular to a specific
industry or region. Following the start-up period, under normal market
conditions, the Fund's equity investments will be primarily concentrated in
income-producing common equity securities, preferred securities,
convertible securities and non-convertible debt securities issued by
companies deriving the majority of their revenue from the ownership,
construction, financing, management and/or sale of commercial, industrial,
and/or residential real estate. The value of the Fund shares may fluctuate
more due to economic, legal, cultural or technological developments
affecting the United States real estate industry than would the shares of a
fund not concentrated in the real estate industry. The Fund's debt
investments will be primarily concentrated in high-yield corporate debt
securities rated, at the time of investment, Ba or lower by Moody's
Investors Service, Inc. or BB or lower by Standard & Poor's Corp, or if
unrated by either of those entities, determined by Management to be of
comparable quality. Due to the inherent volatility and illiquidity of the
18
<Page>
high yield securities in which the Fund invests and the real or perceived
difficulty of issuers of those high yield securities to meet their payment
obligations during economic downturns or because of negative business
developments relating to the issuer or its industry in general, the value
of the Fund shares may fluctuate more than would be the case if the Fund
did not concentrate in high yield securities.
NOTE B--MANAGEMENT FEES, ADMINISTRATION FEES, AND OTHER TRANSACTIONS WITH
AFFILIATES:
The Fund retains Management as its investment manager under a Management
Agreement. For such investment management services, the Fund pays
Management a fee at the annual rate of 0.60% of its average daily Managed
Assets. Managed Assets equal the total assets of the Fund, less liabilities
other than the aggregate indebtedness entered into for purposes of
leverage. For purposes of calculating Managed Assets, the Liquidation Value
of any Preferred Shares outstanding is not considered a liability.
Management has contractually agreed to waive a portion of the management
fees it is entitled to receive from the Fund at the following annual rates:
<Table>
<Caption>
FISCAL PERIOD OR YEAR ENDED % OF AVERAGE
OCTOBER 31, DAILY MANAGED ASSETS
-------------------------------------------------------------------
2003 - 2008 0.25
2009 0.19
2010 0.13
2011 0.07
</Table>
Management has not agreed to waive any portion of its fees beyond October
31, 2011.
For the period ended October 31, 2003, such waived fees amounted to
$238,842.
The Fund retains Management as its administrator under an Administration
Agreement ("Agreement"). Pursuant to this Agreement the Fund pays
Management an administration fee at the annual rate of 0.25% of its average
daily Managed 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.
On October 31, 2003, Management and Neuberger, a member firm of The New
York Stock Exchange and sub-adviser to the Fund, became indirect wholly
owned subsidiaries of Lehman Brothers Holdings Inc., ("Lehman"), a publicly
held company ("the Transaction"). Upon completion of the Transaction, the
Fund's management and sub-advisory agreements automatically terminated. To
provide for continuity of management, the shareholders of the 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
the Fund. Several individuals who are officers and/or Directors of the Fund
are also employees of Neuberger and/or Management.
The Fund 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
19
<Page>
agency or accounting services. The impact of this arrangement was a
reduction of $7,536.
The Fund has an expense offset arrangement in connection with its custodian
contract. The impact of this arrangement, reflected in the Statement of
Operations under the caption Custodian fees, was a reduction of $1,635.
In connection with the settlement of each Preferred Share auction, the Fund
pays, through the auction agent, a service fee to each participating
broker-dealer based upon the aggregate liquidation preference of the
Preferred Shares held by the broker-dealer's customers. For any auction
preceding a rate period of less than one year, the service fee is paid at
the annual rate of 1/4 of 1%; for any auction preceding a rate period of
one year or more, the service fee is paid at a rate agreed to by the Fund
and the broker-dealer.
In order to satisfy ratings agency requirements, the Fund is required to
provide each rating agency a report on a monthly basis verifying that it is
maintaining eligible assets having a discounted value equal to or greater
than the Preferred Shares Basic Maintenance Amount, which is a minimum
level set by each rating agency as one of the conditions to maintain the
AAA rating on the Preferred Shares. 'Discounted value' refers to the fact
that the rating agencies require the Fund, in performing this calculation,
to discount portfolio securities below their face value, at a rate
depending on their rating. The Fund pays a fee to State Street, as Fund
sub-administrator, for the preparation of this report.
NOTE C--SECURITIES TRANSACTIONS:
During the period ended October 31, 2003, there were purchase and sale
transactions (excluding short-term securities and interest rate swap
contracts) of $414,655,000 and $44,661,000, respectively.
During the period ended October 31, 2003, brokerage commissions on
securities transactions amounted to $272,034, of which Neuberger received
$174,819, Lehman received $0, and other brokers received $97,215.
NOTE D--CAPITAL:
At October 31, 2003, the common shares outstanding and the common shares
owned by Neuberger for the Fund were as follows:
<Table>
<Caption>
COMMON SHARES COMMON SHARES
OUTSTANDING OWNED BY NEUBERGER
17,723,648 6,981
</Table>
Transactions in common shares of capital stock for the period ended October
31, 2003 were as follows:
<Table>
<Caption>
COMMON SHARES ISSUED IN CONNECTION WITH:
UNDERWRITERS' REINVESTMENT OF NET INCREASE IN
INITIAL INITIAL PUBLIC EXERCISE OF OVER- DIVIDENDS AND COMMON SHARES
CAPITALIZATION OFFERING ALLOTMENT OPTION DISTRIBUTIONS OUTSTANDING
6,981 16,666,667 1,050,000 -- 17,723,648
</Table>
20
<Page>
NEUBERGER BERMAN OCTOBER 31, 2003
FINANCIAL HIGHLIGHTS INCOME OPPORTUNITY FUND INC.
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 2, 2003^
TO OCTOBER 31,
---------------
2003
COMMON SHARE NET ASSET VALUE, BEGINNING OF PERIOD $ 14.33
---------------
INCOME FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS:
NET INVESTMENT INCOME (LOSS) .25
NET GAINS OR LOSSES ON SECURITIES (BOTH REALIZED AND UNREALIZED) .59
COMMON SHARE EQUIVALENT OF DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
NET INVESTMENT INCOME (.01)
NET CAPITAL GAINS (.00)
TAX RETURN OF CAPITAL (.00)
---------------
TOTAL DISTRIBUTIONS TO PREFERRED SHAREHOLDERS (.01)
---------------
TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS .83
---------------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
NET INVESTMENT INCOME (.27)
NET CAPITAL GAINS (.05)
TAX RETURN OF CAPITAL (.00)
---------------
TOTAL DISTRIBUTIONS TO COMMON SHAREHOLDERS (.32)
---------------
LESS CAPITAL CHARGES:
ISSUANCE OF COMMON SHARES (.03)
ISSUANCE OF PREFERRED SHARES (.09)
---------------
TOTAL CAPITAL CHARGES (.12)
---------------
COMMON SHARE NET ASSET VALUE, END OF PERIOD $ 14.72
---------------
COMMON SHARE MARKET VALUE, END OF PERIOD $ 13.98
---------------
TOTAL RETURN, COMMON SHARE NET ASSET VALUE+ +5.11%**
TOTAL RETURN, COMMON SHARE MARKET VALUE+ -4.67%**
RATIOS/SUPPLEMENTAL DATA++
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS, END OF PERIOD (IN MILLIONS) $ 260.8
PREFERRED STOCK, AT LIQUIDATION VALUE ($25,000 PER SHARE LIQUIDATION PREFERENCE) (IN MILLIONS) $ 125.5
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS# .88%*
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS~ .87%*
RATIO OF NET INVESTMENT INCOME (LOSS) EXCLUDING PREFERRED STOCK DIVIDENDS TO AVERAGE
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 5.24%*
RATIO OF PREFERRED STOCK DIVIDENDS TO AVERAGE NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS .17%*
RATIO OF NET INVESTMENT INCOME (LOSS) INCLUDING PREFERRED STOCK DIVIDENDS TO AVERAGE NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS 5.07%*
PORTFOLIO TURNOVER RATE 21%
ASSET COVERAGE PER SHARE OF PREFERRED STOCK, END OF PERIOD@ $ 76,957
</Table>
See Notes to Financial Highlights
21
<Page>
NOTES TO FINANCIAL HIGHLIGHTS INCOME OPPORTUNITY FUND INC.
+ Total return based on per share net asset value reflects the effects of
changes in net asset value on the performance of the Fund during the fiscal
period. Total return based on per share market value assumes the purchase
of common shares at the market price on the first day and sales of common
shares at the market price on the last day of the period indicated.
Dividends and distributions, if any, are assumed to be reinvested at prices
obtained under the Fund's dividend reinvestment plan. Results represent
past performance and do not guarantee future results. Total return would
have been lower if Management had not waived a portion of the investment
management fee.
# The Fund is required to calculate an expense ratio without taking into
consideration any expense reductions related to expense offset
arrangements.
~ After waiver of a portion of the investment management fee. Had Management
not undertaken such action the annualized ratio of net expenses to average
daily net assets applicable to common shareholders would have been:
<Table>
<Caption>
PERIOD ENDED
OCTOBER 31,
2003(1)
1.16%
</Table>
(1) Period from July 2, 2003 to October 31, 2003.
^ The date investment operations commenced.
* Annualized.
** Not annualized.
@ Calculated by subtracting the Fund's total liabilities (excluding
accumulated unpaid dividends on Preferred Shares) from the Fund's total
assets and dividing by the number of Preferred Shares outstanding.
++ Expense ratios do not include the effect of dividend payments to preferred
shareholders. Income ratios include income earned on assets attributable to
Preferred Shares. Each ratio of expenses to average net assets applicable
to common shareholders and each ratio of net investment income (loss) to
average net assets applicable to common shareholders includes the effect of
the net interest expense paid on interest rate swap contracts of 0.05%.
22
<Page>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Neuberger Berman Income Opportunity Fund Inc.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Neuberger Berman Income Opportunity Fund Inc.,
(the "Fund") as of October 31, 2003, and the related statement of operations,
statement of changes in net assets and financial highlights for the period from
July 2, 2003 (commencement of operations) to October 31, 2003. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit 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
audit provides 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
Neuberger Berman Income Opportunity Fund Inc. at October 31, 2003, the results
of its operations, changes in its net assets, and its financial highlights for
the period from July 2, 2003 (commencement of operations) to October 31, 2003,
in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Boston, Massachusetts
December 5, 2003
23
<Page>
DIVIDEND REINVESTMENT PLAN (UNAUDITED)
The Bank of New York ("Plan Agent") will act as Plan Agent for shareholders who
have not elected in writing to receive dividends and distributions in cash (each
a "Participant"), will open an account for each Participant under the Dividend
Reinvestment Plan ("Plan") in the same name as their then current Shares are
registered, and will put the Plan into effect for each Participant as of the
first record date for a dividend or capital gains distribution.
Whenever the Fund declares a dividend or distribution with respect to the common
stock of the Fund ("Shares"), each Participant will receive such dividends and
distributions in additional Shares, including fractional Shares acquired by the
Plan Agent and credited to each Participant's account. If on the payment date
for a cash dividend or distribution, the net asset value is equal to or less
than the market price per Share plus estimated brokerage commissions, the Plan
Agent shall automatically receive such Shares, including fractions, for each
Participant's account. Except in the circumstances described in the next
paragraph, the number of additional Shares to be credited to each Participant's
account shall be determined by dividing the dollar amount of the dividend or
distribution payable on their Shares by the greater of the net asset value per
Share determined as of the date of purchase or 95% of the then current market
price per Share on the payment date.
Should the net asset value per Share exceed the market price per Share plus
estimated brokerage commissions on the payment date for a cash dividend or
distribution, the Plan Agent or a broker-dealer selected by the Plan Agent shall
endeavor, for a purchase period lasting until the last business day before the
next date on which the Shares trade on an "ex-dividend" basis, but in no event,
except as provided below, more than 30 days after the dividend payment date, to
apply the amount of such dividend or distribution on each Participant's Shares
(less their PRO RATA share of brokerage commissions incurred with respect to the
Plan Agent's open-market purchases in connection with the reinvestment of such
dividend or distribution) to purchase Shares on the open market for each
Participant's account. No such purchases may be made more than 30 days after the
payment date for such dividend except where temporary curtailment or suspension
of purchase is necessary to comply with applicable provisions of federal
securities laws. If, at the close of business on any day during the purchase
period the net asset value per Share equals or is less than the market price per
Share plus estimated brokerage commissions, the Plan Agent will not make any
further open-market purchases in connection with the reinvestment of such
dividend or distribution. If the Plan Agent is unable to invest the full
dividend or distribution amount through open-market purchases during the
purchase period, the Plan Agent shall request that, with respect to the
uninvested portion of such dividend or distribution amount, the Fund issue new
Shares at the close of business on the earlier of the last day of the purchase
period or the first day during the purchase period on which the net asset value
per Share equals or is less than the market price per Share, plus estimated
brokerage commissions, such Shares to be issued in accordance with the terms
specified in the third paragraph hereof. These newly issued Shares will be
valued at the then-current market price per Share at the time such Shares are to
be issued.
For purposes of making the dividend reinvestment purchase comparison under the
Plan, (a) the market price of the Shares on a particular date shall be the last
sales price on the New York Stock Exchange (or if the Shares are not listed on
the New York Stock Exchange, such other exchange on which the Shares are
principally traded) on that date, or, if there is no sale on such Exchange (or
if not so listed, in the over-the-counter market) on that date, then the mean
between the closing bid and asked quotations for such Shares on such Exchange on
such date and (b) the net asset value per Share on a particular date shall be
the net asset value per Share most recently calculated by or on behalf of the
Fund. All dividends, distributions and other payments (whether made in cash or
Shares) shall be made net of any applicable withholding tax.
Open-market purchases provided for above may be made on any securities exchange
where the Fund's Shares are traded, in the over-the-counter market or in
negotiated transactions and may be on such terms as to price, delivery and
otherwise as the Plan Agent shall determine. Each Participant's uninvested funds
held by the Plan Agent will not bear interest, and it is understood that, in any
event, the Plan Agent shall have no liability in connection with any inability
to purchase Shares within 30 days after the initial date of such purchase as
herein provided, or with the timing of any purchases effected. The Plan Agent
shall have no responsibility as to the value of the Shares acquired for each
Participant's account. For the purpose of cash investments, the Plan Agent may
commingle each Participant's funds with those of other shareholders of the Fund
for whom the Plan Agent similarly acts as agent, and the average price
(including brokerage commissions) of all Shares purchased by the Plan Agent as
Plan Agent shall be the price per Share allocable to each Participant in
connection therewith.
24
<Page>
The Plan Agent may hold each Participant's Shares acquired pursuant to the Plan
together with the Shares of other shareholders of the Fund acquired pursuant to
the Plan in noncertificated form in the Plan Agent's name or that of the Plan
Agent's nominee. The Plan Agent will forward to each Participant any proxy
solicitation material and will vote any Shares so held for each Participant only
in accordance with the instructions set forth on proxies returned by the
participant to the Fund.
The Plan Agent will confirm to each Participant each acquisition made for their
account as soon as practicable but not later than 60 days after the date
thereof. Although each Participant may from time to time have an undivided
fractional interest (computed to three decimal places) in a Share, no
certificates for a fractional Share will be issued. However, dividends and
distributions on fractional Shares will be credited to each Participant's
account. In the event of termination of a Participant's account under the Plan,
the Plan Agent will adjust for any such undivided fractional interest in cash at
the market value of the Shares at the time of termination, less the PRO RATA
expense of any sale required to make such an adjustment.
Any Share dividends or split Shares distributed by the Fund on Shares held by
the Plan Agent for Participants will be credited to their accounts. In the event
that the Fund makes available to its shareholders rights to purchase additional
Shares or other securities, the Shares held for each Participant under the Plan
will be added to other Shares held by the Participant in calculating the number
of rights to be issued to each Participant.
The Plan Agent's service fee for handling capital gains distributions or income
dividends will be paid by the Fund. Participants will be charged their PRO RATA
share of brokerage commissions on all open-market purchases.
Each Participant may terminate their account under the Plan by notifying the
Plan Agent in writing. Such termination will be effective immediately if the
Participant's notice is received by the Plan Agent not less than ten days prior
to any dividend or distribution record date, otherwise such termination will be
effective the first trading day after the payment date for such dividend or
distribution with respect to any subsequent dividend or distribution. The Plan
may be terminated by the Plan Agent or the Fund upon notice in writing mailed to
each Participant at least 30 days prior to any record date for the payment of
any dividend or distribution by the Fund.
These terms and conditions may be amended or supplemented by the Plan Agent or
the Fund at any time or times but, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to each
Participant appropriate written notice at least 30 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by each
Participant unless, prior to the effective date thereof, the Plan Agent receives
written notice of the termination of their account under the Plan. Any such
amendment may include an appointment by the Plan Agent in its place and stead of
a successor Plan Agent under these terms and conditions, with full power and
authority to perform all or any of the acts to be performed by the Plan Agent
under these terms and conditions. Upon any such appointment of any Plan Agent
for the purpose of receiving dividends and distributions, the Fund will be
authorized to pay to such successor Plan Agent, for each Participant's account,
all dividends and distributions payable on Shares held in their name or under
the Plan for retention or application by such successor Plan Agent as provided
in these terms and conditions.
The Plan Agent shall at all times act in good faith and agrees to use its best
efforts within reasonable limits to ensure the accuracy of all services
performed under this Agreement and to comply with applicable law, but assumes no
responsibility and shall not be liable for loss or damage due to errors unless
such error is caused by the Plan Agent's negligence, bad faith, or willful
misconduct or that of its employees.
These terms and conditions shall be governed by the laws of the State of
Maryland.
25
<Page>
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26
<Page>
DIRECTORY
INVESTMENT MANAGER AND ADMINISTRATOR
Neuberger Berman Management Inc.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
877.461.1899 or 212.476.8800
SUB-ADVISER
Neuberger Berman, LLC
605 Third Avenue
New York, NY 10158-3698
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
STOCK TRANSFER AGENT
Bank of New York
101 Barclay Street, 11-E
New York, NY 10286
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
27
<Page>
DIRECTORS AND OFFICERS (UNAUDITED)
The following tables set forth information concerning the directors and officers
of the Funds. All persons named as directors and officers also serve in similar
capacities for other funds administered or managed by NB Management and
Neuberger Berman, LLC. The Statement of Additional Information for each Fund
includes additional information about fund directors and is available upon
request, without charge, by calling (877) 461-1899.
THE BOARD OF DIRECTORS
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS I
INDEPENDENT FUND DIRECTORS*
Faith Colish (68) Counsel, Carter Ledyard & Milburn LLP (law firm) 37 Director, American Bar Retirement
Director since October 2002; Formerly, Attorney at Law and Association (ABRA) since 1997
Corporation, 1980 to 2002. (not-for-profit membership
association).
C. Anne Harvey (66) Consultant, C. A. Harvey Associates, since June 37 Member, Individual Investors
Director 2001; Director, AARP, 1978 to December 2000. Advisory Committee to the New York
Stock Exchange 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.
Cornelius T. Ryan (71) Founding General Partner, Oxford Partners and 37 Director, Capital Cash Management
Director Oxford Bioscience Partners (venture capital Trust (money market fund),
partnerships) and President, Oxford Venture Naragansett Insured Tax-Free
Corporation. Income Fund, Rocky Mountain Equity
Fund, Prime Cash Fund, several
private companies and QuadraMed
Corporation (NASDAQ).
Peter P. Trapp (58) Regional Manager for Atlanta Region, Ford Motor 37
Director Credit Company since August 1997; prior thereto,
President, Ford Life Insurance Company, April
1995 until August 1997.
</Table>
28
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- ------------------------------------------------------------------------------------------------------------------------------------
DIRECTOR WHO IS AN "INTERESTED PERSON"
Peter E. Sundman* (44) Executive Vice President, Neuberger Berman since 37 Executive Vice President,
Chief Executive Officer, 1999; Principal, Neuberger Berman from 1997 until Neuberger Berman Inc. (holding
Director and Chairman 1999; Senior Vice President, NB Management from company) since 1999 and Director
of the Board 1996 until 1999. from October 1999 through March
2003; President and Director, NB
Management since 1999; Head of
Neuberger Berman Inc.'s Mutual
Funds and Institutional Business
since 1999; Director and Vice
President, Neuberger & Berman
Agency, Inc. since 2000.
CLASS II
INDEPENDENT FUND DIRECTORS*
John Cannon (73) Consultant. Formerly, Chairman and Chief 37 Independent Trustee or Director of
Director Investment Officer, CDC Capital Management three series of OppenheimerFunds:
(registered investment adviser), 1993-January Limited Term New York Municipal
1999; prior thereto, President and Chief Executive Fund, Rochester Fund Municipals,
Officer, AMA Investment Advisors, an affiliate and Oppenheimer Convertible
of the American Medical Association. Securities Fund, since 1992.
Barry Hirsch (70) Attorney at Law. Senior Counsel, Loews Corporation 37
Director (diversified financial corporation) May 2002 until
April 2003; prior thereto, Senior Vice President,
Secretary and General Counsel, Loews Corporation.
John P. Rosenthal (70) Senior Vice President of Burnham Securities Inc. 37 Director, 92nd Street Y (non-
Director (a registered broker-dealer) since 1991. profit) since 1967; Formerly,
Director, Cancer Treatment
Holdings, Inc.
</Table>
29
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- ------------------------------------------------------------------------------------------------------------------------------------
Tom Decker Seip (53) General Partner, Seip Investments LP (a private 37 Director, H&R Block, Inc.
Director investment partnership); President and CEO, (financial services company) since
Westaff, Inc. (temporary staffing), May 2001 to May 2001; Director, General Magic
January 2002; Senior Executive at the Charles (voice recognition software) since
Schwab Corporation from 1983 to 1999, including November 2001; Director, Forward
Chief Executive Officer, Charles Schwab Investment Management, Inc. (asset
Management, Inc. and Trustee, Schwab Family of management), since 2001; Director,
Funds and Schwab Investments from 1997 to 1998 and E-Finance Corporation (credit
Executive Vice President-Retail Brokerage, decisioning services) since 1999;
Charles Schwab Investment Management from 1994 to Director, Save-Daily.com (micro
1997. investing services) since 1999;
Formerly, Director, Offroad
Capital Inc. (pre-public internet
commerce company).
DIRECTOR WHO IS AN "INTERESTED PERSON"
Jack L. Rivkin* (63) Executive Vice President and Chief Investment 37 Director, Dale Carnegie and
President and Director Officer, Neuberger Berman since 2002 and 2003, Associates, Inc. (private company)
respectively; Director and Chairman, NB Management since 1998; Director, Emagin Corp.
since December 2002; Executive Vice President, (public company) since 1997;
Citigroup Investments, Inc. from September 1995 to Director, Solbright, Inc. (private
February 2002; Executive Vice President, Citigroup company) since 1998; Director,
Inc. from September 1995 to February 2002. Infogate, Inc. (private company)
since 1997.
CLASS III
INDEPENDENT FUND DIRECTORS*
Walter G. Ehlers (70) Consultant; Retired President and Director, 37
Director Teachers Insurance & Annuity (TIAA) and College
Retirement Equities Fund (CREF).
Robert A. Kavesh (76) Marcus Nadler Professor of Finance and Economics 37 Director, DEL Laboratories, Inc.
Director Emeritus, New York University Stern School of (cosmetics and pharmaceuticals)
Business. since 1978; The Caring Community
(not-for-profit).
Howard A. Mileaf (66) Retired. Formerly, Vice President and Special 37 Director, WHX Corporation (holding
Director Counsel, WHX Corporation (holding company) company) since August 2002;
1993-2001. Director, 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).
</Table>
30
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT FUND DIRECTORS*
William E. Rulon (71) Retired. Senior Vice President, Foodmaker, Inc. 37 Director, Pro-Kids Golf and
Director (operator and franchiser of restaurants) until Learning Academy (teach golf and
January 1997. computer usage to "at risk"
children) since 1998; Director,
Prandium, Inc. (restaurants) from
March 2001 until July 2002.
Candace L. Straight (56) Private investor and consultant specializing in 37 Director, Providence Washington
Director the insurance industry; Advisory Director, (property and casualty insurance
Securitas Capital LLC (a global private equity company) since December 1998;
investment firm dedicated to making investments in Director, Summit Global Partners
the insurance sector). (insurance brokerage firm) since
October 2000.
DIRECTOR WHO IS AN "INTERESTED PERSON"
Edward I. O'Brien* (75) Member, Investment Policy Committee, Edward Jones, 37 Director, Legg Mason, Inc.
Director 1993-2001; President, Securities Industry (financial services holding
Association ("SIA") (securities industry's company) since 1993; Director,
representative in government relations and Boston Financial Group (real
regulatory matters at the federal and state estate and tax shelters)
levels) 1974-1992; Adviser to SIA, November 1993-1999.
1992-November 1993.
</Table>
* Indicates a director who is an "interested person" within the meaning of
the 1940 Act. Mr. Sundman and Mr. Rivkin are interested persons of the Fund
by virtue of the fact that each is an officer and/or director of NB
Management and Executive Vice President of Neuberger Berman. Mr. O'Brien is
an interested person of the Fund 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 or
accounts for which NB Management serves as investment manager.
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Except as otherwise indicated, each person has held the positions shown for
at least the last five years. The Board of Directors shall at all times be
divided as equally as possible into three classes of Directors designated
Class I, Class II, and Class III. The terms of office of Class I, Class II,
and Class III Directors shall expire at the annual meetings of stockholders
held in 2006, 2004, and 2005 respectively, and at each third annual meeting
of stockholders thereafter.
31
<Page>
INFORMATION ABOUT THE OFFICERS OF THE FUND (OTHER THAN THOSE LISTED ABOVE)
<Table>
<Caption>
POSITION AND
NAME, AGE, AND ADDRESS (1) LENGTH OF TIME SERVED (2) PRINCIPAL OCCUPATION(S)
- -----------------------------------------------------------------------------------------------------------------------
Claudia A. Brandon (47) Secretary since 2002 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 2002 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 2002 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>
32
<Page>
<Table>
<Caption>
POSITION AND
NAME, AGE, AND ADDRESS (1) LENGTH OF TIME SERVED (2) PRINCIPAL OCCUPATION(S)
- -----------------------------------------------------------------------------------------------------------------------
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 since 1999;
and Accounting Officer since 2002 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 2002 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) Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
33
<Page>
REPORT OF VOTES OF SHAREHOLDERS (UNAUDITED)
A special meeting of shareholders of the Neuberger Berman Income Opportunity
Fund Inc. (the "Fund") was held on September 23, 2003. Upon completion of the
acquisition of Neuberger Berman Inc. by Lehman Brothers Holdings Inc. (the
"Transaction"), the management agreement between the Fund and NB Management, and
the sub-advisory agreement between NB Management and Neuberger Berman LLC
automatically terminated. To provide for continuity of management, the
shareholders of the 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 FUND AND NB
MANAGEMENT
<Table>
<Caption>
VOTES FOR VOTES AGAINST VOTES WITHHELD ABSTENTIONS*
14,402,131.000 134,024.000 -- 167,281.000
</Table>
PROPOSAL 2--TO APPROVE A NEW SUB-ADVISORY AGREEMENT BETWEEN NB MANAGEMENT AND
NEUBERGER BERMAN LLC
<Table>
<Caption>
VOTES FOR VOTES AGAINST VOTES WITHHELD ABSTENTIONS*
14,388,893.000 150,352.000 -- 164,191.000
</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.
34
<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
INTERNAL SALES & SERVICES
877.461.1899
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
Fund. This report is prepared for the general information of shareholders and is
not an offer of shares of the Fund.
[RECYCLED SYMBOL]
DO502 12/03
THE FOLLOWING INFORMATION WILL BE INCLUDED WITH THE REGISTRANT'S PROXY STATEMENT
TO SHAREHOLDERS DATED JANUARY 12, 2004:
The following information supplements the Annual Report to Shareholders for the
fiscal period ended October 31, 2003:
A DESCRIPTION OF THE POLICIES AND PROCEDURES THAT THE FUND USES TO DETERMINE HOW
TO VOTE PROXIES RELATING TO PORTFOLIO SECURITIES IS AVAILABLE (1) WITHOUT
CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 877-461-1899; OR (2) ON THE WEBSITE
OF THE U.S. SECURITIES AND EXCHANGE COMMISSION AT www.sec.gov.
ITEM 2. CODE OF ETHICS
At a meeting on September 10, 2003, the Board of Directors ("Board") of
Neuberger Berman Income Opportunity Fund Inc. ("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 directors 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
The Board has established an Audit Committee to oversee particular aspects of
the Registrant's management. The Audit Committee's purposes are (a) to oversee
the accounting and financial reporting processes of the Registrant and their
internal controls and, as the Committee deems appropriate, to inquire into the
internal controls of certain service providers; (b) to oversee the quality and
objectivity of the Registrant's financial statements and the independent audit
thereof; (c) to oversee, or, as appropriate, assist Board oversight of, the
Registrant's compliance with legal and regulatory requirements that relate to
the Portfolios' accounting and financial reporting, internal controls and
independent audits; (d) to approve prior to appointment the engagement of the
Registrant's independent auditors and, in connection therewith, to review and
evaluate the qualifications, independence and performance of the Registrant's
independent auditors; and (e) to act as a liaison between the Registrant's
independent auditors and the full Board. The Audit Committee is composed
entirely of Independent Fund Directors; its members are John Cannon, Walter G.
Ehlers, Cornelius T. Ryan (Chairman), Tom D. Seip (appointed 12/10/03), and
Peter P. Trapp.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Board has delegated to Neuberger Berman, LLC ("Neuberger Berman") the
responsibility to vote proxies related to the securities held in the Fund's
portfolios. Under this authority, Neuberger Berman is required by the Board to
vote proxies related to portfolio securities in the best interests of the Fund
and its stockholders. The Board permits Neuberger Berman to contract with a
third party to obtain proxy voting and related services, including research of
current issues.
Neuberger Berman has implemented written Proxy Voting Policies and Procedures
("Proxy Voting Policy") that are designed to reasonably ensure that Neuberger
Berman votes proxies prudently and in the best interest of its advisory clients
for whom Neuberger Berman has voting authority, including the Fund. The Proxy
Voting Policy also describes how Neuberger Berman addresses any conflicts that
may arise between its interests and those of its clients with respect to proxy
voting.
Neuberger Berman's Proxy Committee is responsible for developing, authorizing,
implementing and updating the Proxy Voting Policy, overseeing the proxy voting
process and engaging and overseeing any independent third-party vendors as
voting delegate to review, monitor and/or vote proxies. In order to apply the
Proxy Voting Policy noted above in a timely and consistent manner, Neuberger
Berman utilizes Institutional Shareholder Services Inc. ("ISS") to vote proxies
in accordance with Neuberger Berman's voting guidelines.
Neuberger Berman's guidelines adopt the voting recommendations of ISS. Neuberger
Berman retains final authority and fiduciary responsibility for proxy voting.
Neuberger Berman believes that this process is reasonably designed to address
material conflicts of interest that may arise between Neuberger Berman and a
client as to how proxies are voted.
In the event that an investment professional at Neuberger Berman believes that
it is in the best interests of a client or clients to vote proxies in a manner
inconsistent with Neuberger Berman's proxy voting guidelines or in a manner
inconsistent with ISS recommendations, the Proxy Committee will review
information submitted by the investment professional to determine that there is
no material conflict of interest between Neuberger Berman and the client with
respect to the voting of the proxy in that manner.
If the Proxy Committee determines that the voting of a proxy as recommended by
the investment professional presents a material conflict of interest between
Neuberger Berman and the client or clients with respect to the voting of the
proxy, the Proxy Committee shall: (i) take no further action, in which case ISS
shall vote such proxy in accordance with the proxy voting guidelines or as ISS
recommends; (ii) disclose such conflict to the client or clients and obtain
written direction from the client as to how to vote the proxy; (iii) suggest
that the client or clients engage another party to determine how to vote the
proxy; or (iv) engage another independent third party to determine how to vote
the proxy.
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
and Principal Financial and Accounting Officer 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 Opportunity Fund Inc.
By: /s/ Peter E. Sundman
-----------------------
Peter E. Sundman
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
Chief Executive Officer
Date: December 31, 2003
By: /s/ Barbara Muinos
---------------------------------
Barbara Muinos
Treasurer and Principal Financial
and Accounting Officer
Date: January 8, 2004