As filed with the Securities and Exchange Commission on July 7, 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: 811-21200
NEUBERGER BERMAN REAL ESTATE INCOME 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 Real Estate Income 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, 2004
Date of reporting period: April 30, 2004
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
SEMI-ANNUAL REPORT
APRIL 30, 2004
[NEUBERGER BERMAN LOGO]
A LEHMAN BROTHERS COMPANY
NEUBERGER BERMAN
REAL ESTATE INCOME FUND INC.
<Page>
NEUBERGER BERMAN APRIL 30, 2004 (UNAUDITED)
CHAIRMAN'S LETTER
DEAR FELLOW SHAREHOLDER,
I am pleased to present to you this semi-annual report of the Neuberger Berman
Real Estate Income Fund Inc. for the period ending April 30, 2004. The report
includes a portfolio commentary, 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, and its
secondary objective is to provide capital appreciation. In seeking to accomplish
both, we have assembled a portfolio with a broad mix of equity securities of
real estate investment trusts (REITs) and other real estate companies.
Portfolio Manager Steven Brown's 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. We believe our conservative investing philosophy and
disciplined investment process will benefit you with positive returns 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
REAL ESTATE INCOME FUND INC.
CONTENTS
<Table>
THE FUND
CHAIRMAN'S LETTER 1
PORTFOLIO COMMENTARY/
PERFORMANCE HIGHLIGHTS 2
SCHEDULE OF INVESTMENTS/
TOP TEN EQUITY HOLDINGS 5
FINANCIAL STATEMENTS 8
FINANCIAL HIGHLIGHTS/
PER SHARE DATA 18
DIVIDEND REINVESTMENT PLAN 20
DIRECTORY 22
DIRECTORS AND OFFICERS 23
PROXY VOTING POLICIES AND PROCEDURES 30
</Table>
"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)2004 Neuberger Berman Management Inc. All
rights reserved.
1
<Page>
REAL ESTATE INCOME FUND INC. PORTFOLIO COMMENTARY
We are pleased to report that for the six-month period ending April
30, 2004, on a Net Asset Value (NAV) basis, the Neuberger Berman Real
Estate Income Fund (NYSE: NRL) returned 3.49% versus 3.35% for the
NAREIT Equity REIT Index.
The Fund's holdings are broadly diversified among different segments
of the real estate market. Important positions in the portfolio
include holdings in the Office, Retail, Apartment and Industrial
sectors. Performance for the period benefited most from the Fund's
positions in the Healthcare, Office and Mixed (Office/Industrial)
sectors. As we believe the economy will continue to strengthen, we
continue to be optimistic on the fundamentals for the Office,
Industrial and Mixed sectors.
In general, REITs posted modestly positive performance for the six
months ended April 30, 2004. The route to that performance, however,
was uneven. REITs performed strongly during the five-month period from
October 31st to March 31st, but during the month of April experienced
a decline of nearly 15%. April's weak REIT performance was primarily
due to a strong jobs report released early in the month, which sparked
concern over potentially higher interest rates. The fear of higher
interest rates led to a sell-off in the bond market and subsequently
ignited a sell-off in the REIT market.
In our experience, interest rate changes have not significantly
affected the performance of REITs over long periods of time.
Correlation studies over the last five, ten, and twenty-five years
show a very low correlation between REIT performance and the direction
of interest rates. In addition, during periods when interest rates
rose for twelve consecutive months, REITs have historically generated
positive total returns.
We believe that REIT valuation levels are currently attractive.
Although we expect interest rates and inflation to move higher over
the next twelve months, we also expect GDP growth (Gross Domestic
Product) to remain robust, employment to accelerate and business
spending to pick up. In our view, these conditions would have the
potential to enhance the REIT industry's earnings power. New supply
growth also remains in check and we have been seeing acceleration in
demand. In this environment, we continue to have a positive view of
the potential for REIT stock price performance over the next twelve
months.
Sincerely,
/s/ Steven R. Brown
STEVEN R. BROWN
PORTFOLIO MANAGER
PERFORMANCE HIGHLIGHTS
<Table>
<Caption>
SIX MONTH AVERAGE ANNUAL
PERIOD ENDED TOTAL RETURN
NEUBERGER BERMAN NAV(1) INCEPTION DATE 4/30/2004 1 YEAR SINCE INCEPTION
REAL ESTATE INCOME FUND 11/25/2002 3.49% 32.18% 28.37%
<Caption>
SIX MONTH AVERAGE ANNUAL
PERIOD ENDED TOTAL RETURN
MARKET PRICE(2) INCEPTION DATE 4/30/2004 1 YEAR SINCE INCEPTION
REAL ESTATE INCOME FUND 11/25/2002 (0.97%) 15.04% 15.38%
</Table>
Closed-end funds, unlike open-end funds, are not continually offered. There is
an initial public offering and once issued, common shares of closed-end funds
are sold in the open market through a stock exchange.
The composition, industries and holdings of the fund are subject to change.
Investment return will fluctuate. Past performance is no guarantee of future
results.
2
<Page>
ENDNOTES
(1) Returns based on Net Asset Value ("NAV") of the Fund.
(2) Returns based on price of Fund shares on the New York Stock
Exchange.
3
<Page>
GLOSSARY OF INDICES
NAREIT EQUITY REIT INDEX: Tracks the performance of all Equity
REITs currently listed on the New York
Stock Exchange, the NASDAQ National
Market System and the American Stock
Exchange. REITs are classified as Equity
if 75% or more of their gross invested
book assets are invested directly or
indirectly in equity of commercial
properties.
Please note that the index does not take into account any fees and expenses of
investing in the individual securities that it tracks, and that investors cannot
invest directly in any index or average. Data about the performance of the index
is prepared or obtained by Management and includes reinvestment of all dividends
and capital gain distributions. The Fund may invest in many securities not
included in its index.
4
<Page>
SCHEDULE OF INVESTMENTS REAL ESTATE INCOME FUND
TOP TEN EQUITY HOLDINGS
<Table>
<Caption>
HOLDING %
1 Ventas, Inc. 8.7
2 Mills Corp. 6.7
3 Glimcher
Realty Trust 6.3
4 iStar Financial 5.9
5 Apartment
Investment &
Management 5.4
6 Vornado
Realty Trust 4.7
7 CarrAmerica
Realty 4.6
8 Pennsylvania
REIT 4.4
9 Colonial
Properties Trust 4.4
10 Bedford Property
Investors 4.4
</Table>
<Table>
<Caption>
MARKET VALUE +
NUMBER OF SHARES (000'S OMITTED)
COMMON STOCKS (120.7%)
APARTMENTS (23.3%)
23,200 Amli Residential
Properties Trust $ 587
90,000 Apartment Investment &
Management 2,535
75,000 Archstone-Smith Trust 2,057
43,000 Avalonbay Communities 2,134~
85,700 Camden Property Trust 3,627
114,400 Gables Residential Trust 3,638
47,000 Home Properties 1,755
37,200 Mid-America Apartment
Communities 1,200
33,500 Town & Country Trust 783
72,800 United Dominion Realty Trust 1,307
---------------
19,623
COMMUNITY CENTERS (9.1%)
24,000 Developers Diversified Realty 786
18,400 Federal Realty Investment Trust 682
30,900 Heritage Property
Investment Trust 784
67,000 New Plan Excel Realty Trust 1,503
10,000 Ramco-Gershenson
Properties Trust 237
95,700 Tanger Factory Outlet Centers 3,656
---------------
7,648
DIVERSIFIED (16.2%)
103,900 Colonial Properties Trust 3,666~
139,800 iStar Financial 4,968
56,800 Lexington Corporate
Properties Trust 1,050~
78,000 Vornado Realty Trust 3,935
---------------
13,619
HEALTH CARE (16.2%)
110,000 Health Care Property Investors 2,629~
84,700 Health Care REIT 2,705~
57,000 Nationwide Health Properties 1,034
329,800 Ventas, Inc. 7,285^^
---------------
13,653
INDUSTRIAL (2.3%)
42,800 EastGroup Properties 1,239
22,100 First Industrial Realty Trust 744
---------------
1,983
LODGING (0.5%)
10,000 Hospitality Properties Trust 391
OFFICE (30.3%)
99,700 Arden Realty 2,813
79,800 Brandywine Realty Trust 2,022
134,500 CarrAmerica Realty 3,835
120,100 Equity Office Properties Trust $ 3,023
77,400 Glenborough Realty Trust 1,454
69,800 Highwoods Properties 1,574
107,500 Kilroy Realty 3,370
92,900 Mack-Cali Realty 3,470
30,400 Maguire Properties 693
100,800 Prentiss Properties Trust 3,230
---------------
25,484
OFFICE--INDUSTRIAL (9.0%)
43,600 Bedford Property Investors 1,181~
35,700 Duke Realty 1,041
76,300 Liberty Property Trust 2,789
107,600 Reckson Associates Realty 2,558
---------------
7,569
REGIONAL MALLS (11.3%)
15,000 CBL & Associates Properties 754
195,600 Glimcher Realty Trust 4,137
28,000 Macerich Co. 1,172
67,400 Mills Corp. 2,736
21,100 Pennsylvania REIT 683
---------------
9,482
SELF STORAGE (2.5%)
9,700 Public Storage,
Depositary Shares 271
30,600 Shurgard Storage Centers 1,019~
23,100 Sovran Self Storage 780
---------------
2,070
TOTAL COMMON STOCKS
(COST $81,776) 101,522
---------------
PREFERRED STOCKS (27.7%)
APARTMENTS (2.4%)
2,000 Apartment Investment &
Management, Ser. G 52
18,800 Apartment Investment &
Management, Ser. Q 490
31,800 Apartment Investment &
Management, Ser. R 832
27,000 Apartment Investment &
Management, Ser. T 661
---------------
2,035
COMMERCIAL SERVICES (0.6%)
20,000 Newcastle Investment, Ser. B 525
COMMUNITY CENTERS (1.2%)
10,000 Developers Diversified
Realty, Ser. I 248^
13,100 Ramco-Gershenson
Properties Trust, Ser. B 363
17,000 Saul Centers, Ser. A 440~
---------------
1,051
</Table>
See Notes to Schedule of Investments
5
<Page>
<Table>
<Caption>
MARKET VALUE +
NUMBER OF SHARES (000'S OMITTED)
DIVERSIFIED (1.8%)
45,200 Crescent Real Estate
Equities, Ser. A $ 949
19,500 Crescent Real Estate
Equities, Ser. B 527^^
---------------
1,476
HEALTH CARE (2.4%)
56,000 LTC Properties, Ser. E 1,801
7,800 SNH Capital Trust, Ser. Z 212
---------------
2,013
LODGING (6.9%)
66,300 Boykin Lodging, Ser. A 1,780
18,000 Equity Inns, Ser. B 463
20,400 Felcor Lodging Trust, Ser. A 487
86,500 Felcor Lodging Trust, Ser. B 2,141~
34,000 LaSalle Hotel Properties, Ser. A 910
---------------
5,781
OFFICE (1.0%)
5,100 Corporate Office Properties
Trust, Ser. F 136
2,752 Glenborough Realty Trust, Ser. A 68
25,000 HRPT Properties Trust, Ser. A 661
---------------
865
OFFICE--INDUSTRIAL (3.0%)
50,000 Bedford Property
Investors, Ser. A 2,483**
REGIONAL MALLS (8.4%)
32,000 Glimcher Realty Trust, Ser. F 811
13,500 Glimcher Realty Trust, Ser. G 332
100,000 Mills Corp., Ser. B 2,604
11,400 Mills Corp., Ser. C 294
50,200 Pennsylvania REIT, Ser. A 3,012
---------------
7,053
SELF STORAGE (0.0%)
900 Sovran Self Storage, Ser. B 23
TOTAL PREFERRED STOCKS
(COST $22,089) 23,305
---------------
<Caption>
MARKET VALUE +
PRINCIPAL AMOUNT (000'S OMITTED)
SHORT-TERM INVESTMENTS (12.5%)
$ 9,507,900 N&B Securities Lending
Quality Fund, LLC $ 9,508++
981,835 Neuberger Berman
Institutional Cash Fund
Trust Class 982@
---------------
TOTAL SHORT-TERM INVESTMENTS
(COST $10,490) 10,490#
---------------
TOTAL INVESTMENTS (160.9%)
(COST $114,355) 135,317##
Liabilities, less cash, receivables
and other assets [(10.9%)] (9,238)
Liquidation Value of Auction
Preferred Shares [(50.0%)] (42,000)
---------------
TOTAL NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS (100.0%) $ 84,079
---------------
</Table>
6
<Page>
NOTES TO SCHEDULE OF INVESTMENTS
+ Investments in securities by 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. The Fund values all other securities by a method
the Board of Directors of the Fund (the "Board") believes
accurately reflects fair value. Numerous factors may be
considered when determining the fair value of a security,
including available analyst, media or other reports, trading in
futures or ADRs and whether the issuer of the security being fair
valued has other securities outstanding. Foreign security prices
are furnished by independent quotation services expressed in
local currency values. Foreign security prices are translated
from the local currency into U.S. dollars using the exchange rate
as of 12:00 p.m., Eastern time. The Board has approved the use of
FT Interactive Data Corporation ("FT Interactive") to assist in
determining the fair value of the Fund's foreign equity
securities in the wake of certain significant events.
Specifically, when changes in the value of a certain index
suggest that the closing prices on the foreign exchanges no
longer represent the amount that the Fund could expect to receive
for those securities, FT Interactive will provide adjusted prices
for certain foreign equity securities based on an analysis
showing historical correlations between the prices of those
securities and changes in the index. In the absence of precise
information about the market values of these foreign securities
as of the close of the New York Stock Exchange, the Board has
determined on the basis of available data that prices adjusted in
this way are likely to be closer to the prices the Fund could
realize on a current sale than are the prices of those securities
established at the close of the foreign markets in which the
securities primarily trade. However, fair value prices are
necessarily estimates, and there is no assurance that such a
price will be at or close to the price at which the security next
trades. 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 April 30, 2004, the cost of investments for U.S. Federal
income tax purposes was $114,355,000. Gross unrealized
appreciation of investments was $21,839,000 and gross unrealized
depreciation of investments was $877,000, resulting in net
unrealized appreciation of $20,962,000, based on cost for U.S.
Federal income tax purposes.
** 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 April 30, 2004, these securities amounted to
$2,483,000 or 3.0% of net assets applicable to common
shareholders.
^ Security purchased on a when-issued basis. At April 30, 2004,
these securities amounted to $248,000.
^^ Security is segregated as collateral for when-issued purchase
commitments and as collateral for interest rate swap contracts.
@ Neuberger Berman Institutional Cash Fund is also managed by
Neuberger Berman Management Inc. (see Note A of Notes to
Financial Statements).
~ All or a portion of this security is on loan (see Note A of Notes
to Financial Statements).
++ Affiliated issuer (see Note A of Notes to Financial
Statements).
See Notes to Financial Statements
7
<Page>
STATEMENT OF ASSETS AND LIABILITIES
<Table>
<Caption>
NEUBERGER BERMAN REAL ESTATE
(000'S OMITTED EXCEPT PER SHARE AMOUNTS) INCOME FUND
ASSETS
INVESTMENTS IN SECURITIES, AT MARKET VALUE*+ (NOTE A)--SEE
SCHEDULE OF INVESTMENTS:
Unaffiliated issuers $ 124,827
Non-controlled affiliated issuers 10,490
==================================================================================================
135,317
Interest rate swaps, at market value (Note A) 260
- --------------------------------------------------------------------------------------------------
Dividends and interest receivable 412
Prepaid expenses and other assets 34
==================================================================================================
TOTAL ASSETS 136,023
==================================================================================================
LIABILITIES
Payable for collateral on securities loaned (Note A) 9,508
Dividends payable--preferred shares 3
- --------------------------------------------------------------------------------------------------
Dividends payable--common shares 56
Payable for securities purchased 250
Payable for offering costs (Note A) 6
Payable to investment manager--net (Note B) 21
Payable to administrator (Note B) 26
- --------------------------------------------------------------------------------------------------
Accrued expenses and other payables 74
==================================================================================================
TOTAL LIABILITIES 9,944
==================================================================================================
AUCTION PREFERRED SHARES SERIES A AT LIQUIDATION VALUE
2,000 shares authorized; 1,680 shares issued and outstanding
$.0001 par value; $25,000 liquidation value per share (Note A) 42,000
==================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 84,079
==================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS CONSIST OF:
Paid-in capital--common shares $ 63,955
Distributions in excess of net investment income (1,392)
- --------------------------------------------------------------------------------------------------
Accumulated net realized gains (losses) on investments 294
Net unrealized appreciation (depreciation) in value of investments 21,222
==================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 84,079
==================================================================================================
COMMON SHARES OUTSTANDING ($.0001 par value; 999,998,000 shares authorized) 4,579
==================================================================================================
NET ASSET VALUE PER COMMON SHARE OUTSTANDING $ 18.36
==================================================================================================
+SECURITIES ON LOAN, AT MARKET VALUE $ 9,071
==================================================================================================
*COST OF INVESTMENTS:
Unaffiliated issuers $ 103,865
Non-controlled affiliated issuers 10,490
==================================================================================================
TOTAL COST OF INVESTMENTS $ 114,355
==================================================================================================
</Table>
See Notes to Financial Statements
8
<Page>
NEUBERGER BERMAN FOR THE SIX MONTHS ENDED APRIL 30, 2004 (UNAUDITED)
STATEMENT OF OPERATIONS
<Table>
<Caption>
NEUBERGER BERMAN REAL ESTATE
(000'S OMITTED) INCOME FUND
INVESTMENT INCOME
INCOME:
Dividend income $ 2,580
Income from investments in affiliated issuers (Note A) 5
- ----------------------------------------------------------------------------------------------------------------------
Income from securities loaned--net (Note A) 2
======================================================================================================================
Total income 2,587
======================================================================================================================
EXPENSES:
Investment management fee (Note B) 401
Administration fee (Note B) 167
- ----------------------------------------------------------------------------------------------------------------------
Auction agent fees (Note B) 51
Audit fees 21
- ----------------------------------------------------------------------------------------------------------------------
Basic maintenance expense (Note B) 12
Custodian fees (Note B) 30
- ----------------------------------------------------------------------------------------------------------------------
Directors' fees and expenses 13
Insurance expense 1
- ----------------------------------------------------------------------------------------------------------------------
Legal fees 27
Shareholder reports 15
- ----------------------------------------------------------------------------------------------------------------------
Stock exchange listing fees 8
Stock transfer agent fees 24
- ----------------------------------------------------------------------------------------------------------------------
Miscellaneous 12
======================================================================================================================
Total expenses 782
Investment management fee waived (Note B) (268)
Expenses reduced by custodian fee expense offset and commission recapture arrangements (Note B) (2)
======================================================================================================================
Total net expenses 512
======================================================================================================================
Net investment income 2,075
======================================================================================================================
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE A)
Net realized gain (loss) on:
Investment securities sold in unaffiliated issuers 595
===============================================================================================================
Interest rate swap contracts (301)
---------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) in value of:
- ----------------------------------------------------------------------------------------------------------------------
Investment securities 578
Interest rate swap contracts 268
===============================================================================================================
Net gain (loss) on investments 1,140
======================================================================================================================
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
Net investment income (240)
===============================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS RESULTING FROM OPERATIONS $ 2,975
======================================================================================================================
</Table>
See Notes to Financial Statements
9
<Page>
NEUBERGER BERMAN APRIL 30, 2004 (UNAUDITED)
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
REAL ESTATE INCOME FUND
----------------------------------
PERIOD FROM
SIX MONTHS NOVEMBER 29, 2002
ENDED (COMMENCEMENT
APRIL 30, OF OPERATIONS) TO
NEUBERGER BERMAN 2004 OCTOBER 31,
(000'S OMITTED) (UNAUDITED) 2003
INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
FROM OPERATIONS:
Net investment income (loss) $ 2,075 $ 3,959
Net realized gain (loss) on investments 294 751
- ---------------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) of investments 846 20,376
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
Net investment income (240) (209)
Net realized gain on investments - (39)
- ---------------------------------------------------------------------------------------------------------------------
Tax return of capital - (40)
Total distributions to preferred shareholders (240) (288)
=====================================================================================================================
Net increase (decrease) in net assets applicable to
common shareholders resulting from operations 2,975 24,798
=====================================================================================================================
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (3,159) (3,818)
Net realized gain on investments - (712)
- ---------------------------------------------------------------------------------------------------------------------
Tax return of capital - (728)
=====================================================================================================================
Total distributions to common shareholders (3,159) (5,258)
=====================================================================================================================
FROM CAPITAL SHARE TRANSACTIONS:
Net proceeds from initial capitalization (Note D) - 100
Net proceeds from issuance of common shares - 60,039
- ---------------------------------------------------------------------------------------------------------------------
Net proceeds from underwriters' over-allotment option exercised - 5,003
Proceeds from reinvestment of dividends - 327
- ---------------------------------------------------------------------------------------------------------------------
Preferred shares offering costs (11) (735)
=====================================================================================================================
Total net proceeds from capital share transactions (11) 64,734
=====================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS (195) 84,274
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period 84,274 -
=====================================================================================================================
End of period $ 84,079 $ 84,274
=====================================================================================================================
Distributions in excess of net investment income at end of period $ (1,392) $ (68)
=====================================================================================================================
</Table>
See Notes to Financial Statements
10
<Page>
NOTES TO FINANCIAL STATEMENTS REAL ESTATE INCOME FUND INC.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1 GENERAL: Neuberger Berman Real Estate Income Fund Inc. (the
"Fund") was organized as a Maryland corporation on September 11,
2002 as a non-diversified, closed-end management investment
company under the Investment Company Act of 1940, as amended. The
Fund had no operations until November 29, 2002, other than
matters relating to its organization and the sale on November 20,
2002 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 original issue discount, where applicable, and accretion of
discount on short-term investments, 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 policy of the Fund to continue to
qualify as a regulated investment company by complying with the
provisions available to certain investment companies, as defined
in applicable sections of the Internal Revenue Code, and to make
distributions of investment company taxable income and net
capital gains (after reduction for any amounts available for U.S.
Federal income tax purposes as capital loss carryforwards)
sufficient to relieve 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 monthly
distributions to common shareholders. The Fund has adopted a
policy to pay common shareholders a stable distribution. In an
effort to maintain a stable distribution amount, distributions
may consist of net investment income, realized gains and paid-in
capital. The Fund may pay distributions in excess of those
required by its stable distribution policy to avoid excise tax or
to satisfy the requirements of Subchapter M of the Internal
Revenue Code. Income dividends and capital gain distributions to
common shareholders are recorded on the ex-dividend date. Net
realized capital gains, if any, will be offset by capital loss
carryforwards. Any such offset will not reduce the level of the
stable distribution paid by the Fund. Dividends and distributions
to preferred shareholders are accrued and determined as described
in Note A-7.
11
<Page>
The Fund invests a significant portion of its assets in
securities issued by real estate companies, including real estate
investment trusts. After calendar year-end, real estate companies
often recharacterize the nature of the distributions paid during
that year, frequently with the result that distributions
previously identified as income are recharacterized as return of
capital and/or capital gain. As a result, the composition of the
Fund's distributions as reported herein may differ from the final
composition determined after calendar year-end and reported to
Fund shareholders on Form 1099.
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 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 March 30, 2004, the Fund declared two monthly dividends to
common shareholders from its net investment income in the amount
of $0.115 per share per month, payable after this reporting
period on May 28, 2004 and June 30, 2004, to shareholders of
record on May 14, 2004 and June 14, 2004, respectively, with
ex-dividend dates of May 12, 2004 and June 10, 2004,
respectively.
The tax character of distributions paid during the period ended
October 31, 2003 were as follows:
<Table>
<Caption>
DISTRIBUTIONS PAID FROM:
ORDINARY LONG-TERM TAX RETURN
INCOME CAPITAL GAIN OF CAPITAL TOTAL
$ 4,199,011 $ 579,456 $ 767,955 $ 5,546,422
</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
$ - $ - $ 20,375,826 $ - $ 20,375,826
</Table>
There were no significant differences between book basis and tax
basis.
6 EXPENSE ALLOCATION: Some bills are applicable to multiple funds.
Expenses directly attributable to the Fund are charged to the
Fund. Expenses borne by the complex of related investment
companies, which includes open-end and closed-end investment
companies for which Management serves as investment manager, that
are not directly attributed to the Fund, are allocated among the
Fund and the other investment companies in the complex or series
thereof, on the basis of relative net assets, except where a more
appropriate allocation of expenses to each investment company in
the complex or series thereof can otherwise be made fairly.
7 REDEEMABLE PREFERRED SHARES: On December 12, 2002, the Fund
re-classified 1,500 unissued shares of capital stock as Series A
Auction Preferred Shares ("Preferred Shares"). On February 7,
2003, the Fund issued 1,260 Preferred Shares. On September 10,
2003, the Fund re-classified an additional 500 unissued
12
<Page>
shares of capital stock as Preferred Shares. On October 24, 2003,
the Fund issued an additional 420 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 six months ended April 30, 2004,
dividend rates ranged from 1.04% to 1.45%. The Fund declared
dividends to preferred shareholders for the period May 1, 2004 to
May 31, 2004 of $44,335.
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 fails 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.
As a result of SEC staff guidance relating to the application of
FASB Statement No 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES to registered investment companies, the Fund
has revised its methodology for accounting for interest rate swap
agreements. Previously, the Fund recorded the accrual of the net
interest income or expense expected to be received or paid at
interim settlement dates as a net payable or receivable for swap
contracts and actual amounts paid as net interest income or
expense on swap contracts. Effective November 1, 2003, periodic
expected interim net interest payments or receipts on the
13
<Page>
swaps are recorded as an adjustment to unrealized gains/losses,
along with the fair value of the future periodic payment streams
on the swap. The unrealized gains/losses associated with the
periodic interim net interest payments are reclassified to
realized gains/losses in conjunction with the actual net receipt
or payment of such amounts. Upon adoption of this methodology,
the Fund recorded a cumulative effect adjustment to reflect the
reclassification of such amounts. The cumulative effect resulted
in an increase to distributions in excess of net investment
income of $461,545, and a corresponding decrease to accumulated
net realized gains/losses as of November 1, 2003. The current
year impact increased net investment income by $334,334,
increased net realized losses by $301,061 and decreased
unrealized appreciation (depreciation) in value of investments by
$33,273, and therefore did not impact the Fund's total net assets
or its total net increase (decrease) in net assets applicable to
common shareholders resulting from operations. At April 30, 2004,
the Fund had outstanding interest rate swap contracts as follows:
<Table>
<Caption>
RATE TYPE
--------------------- ACCRUED
PAYMENTS PAYMENTS NET INTEREST UNREALIZED TOTAL
SWAP NOTIONAL MADE BY RECEIVED BY RECEIVABLE APPRECIATION FAIR
COUNTER PARTY AMOUNT TERMINATION DATE THE FUND THE FUND(1) (PAYABLE) (DEPRECIATION) VALUE
Citibank, N.A. $ 13,000,000 February 12, 2008 3.396% 1.10% $ (14,924) $ 91,632 $ 76,708
Citibank, N.A. 13,000,000 February 12, 2010 3.923% 1.10% (18,349) 201,310 182,961
----------- -------------- ---------
(33,273) 292,942 259,669
</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 requires that the securities purchased
in a repurchase agreement be transferred to the custodian in a
manner sufficient to enable the Fund to assert a perfected
security interest in 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 SECURITY LENDING: Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund entered into a
Securities Lending Agreement ("Agreement") with Neuberger on
April 17, 2003. Securities loans involve certain risks in the
event a borrower should fail financially, including delays or
inability to recover the lent securities or foreclose against the
collateral. The investment manager, under the general supervision
of the Fund's Board of Directors, monitors the creditworthiness
of the parties to whom the Fund makes security loans. The Fund
will not lend securities on which covered call options have been
written, or lend securities on terms which would prevent the Fund
from qualifying as a regulated investment company. The Fund
receives cash collateral equal to at least 102% of the current
market value of the loaned securities. The Fund invests the cash
collateral in the N&B Securities Lending Quality Fund, LLC, which
is managed by State Street Bank and Trust Company ("State
Street") pursuant to guidelines approved by the Fund's investment
manager. Neuberger guarantees a minimum revenue to the Fund under
the
14
<Page>
Agreement, and receives a portion of any revenue earned in excess
of the guaranteed amount as a lending agency fee. At April 30,
2004, the Fund paid Neuberger $74 under the Agreement.
Income earned on the securities loaned, if any, is reflected in
the Statement of Operations under the caption Income from
securities loaned--net.
11 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 Board members 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 those assets. For the six months ended April 30,
2004, such waived fees amounted to $592. For the six months ended
April 30, 2004, income earned on this investment amounted to
$4,918 and is reflected in the Statement of Operations under the
caption Income from investments in affiliated issuers.
12 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
$618,961. 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 $136,709.
Additionally, offering costs of $325,300 and a sales load of
$420,000 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 offerings.
As of April 30, 2004, total offering costs of $5,505 remain
payable by the Fund.
13 CONCENTRATION OF RISK: Under normal market conditions, the Fund's
investments will be 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. Values of the securities of such
companies may fluctuate more due to economic, legal, cultural,
geopolitical or technological developments affecting the United
States real estate industry or a segment of the real estate
industry in which the Fund owns a substantial position, than
would the shares of a fund not concentrated in the real estate
industry.
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
15
<Page>
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>
YEAR ENDED % OF AVERAGE
OCTOBER 31, DAILY MANAGED ASSETS
-----------------------------------------------------------------
2004 - 2007 0.40
2008 0.32
2009 0.24
2010 0.16
2011 0.08
</Table>
Management has not agreed to waive any portion of its fees beyond
October 31, 2011.
For the six months ended April 30, 2004, such waived fees
amounted to $267,321.
The Fund retains Management as its administrator under an
Administration Agreement. The Fund pays Management an
administration fee at the annual rate of 0.25% of its average
daily Managed Assets under this agreement. Additionally,
Management retains State Street as its sub-administrator under a
Sub-Administration Agreement. Management pays State Street a fee
for all services received under the agreement.
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-owned holding 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. 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.
On July 1, 2003, 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 agency or
accounting services. For the six months ended April 30, 2004, the
impact of this arrangement was a reduction of $1,818.
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 $46.
16
<Page>
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 the Fund 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 six months ended April 30, 2004, there were purchase
and sale transactions (excluding short-term securities and
interest rate swap contracts) of $5,940,000 and $155,000,
respectively.
During the six months ended April 30, 2004, brokerage commissions
on securities transactions amounted to $9,924, of which Neuberger
received $2,465, Lehman received $674, and other brokers received
$6,785.
NOTE D--CAPITAL:
At April 30, 2004, 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
4,578,983 6,981
</Table>
Transactions in common shares for the six months ended April 30,
2004 and period ended October 31, 2003 were as follows:
<Table>
<Caption>
COMMON SHARES ISSUED IN CONNECTION WITH:
UNDERWRITERS' EXERCISE REINVESTMENT OF
INITIAL OF OVER-ALLOTMENT DIVIDENDS AND NET INCREASE IN COMMON
CAPITALIZATION INITIAL PUBLIC OFFERING OPTION DISTRIBUTIONS SHARES OUTSTANDING
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
- 6,981 - 4,200,000 - 350,000 - 22,002 - 4,578,983
</Table>
NOTE E--UNAUDITED FINANCIAL INFORMATION:
The financial information included in this interim report is
taken from the records of the Fund without audit by independent
auditors. Annual reports contain audited financial statements.
17
<Page>
FINANCIAL HIGHLIGHTS REAL ESTATE INCOME FUND INC.
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the Financial
Statements.
<Table>
<Caption>
SIX MONTHS PERIOD FROM
ENDED NOVEMBER 29, 2002^
APRIL 30, TO OCTOBER 31,
----------- ------------------
2004 2003
(UNAUDITED)
COMMON SHARE NET ASSET VALUE, BEGINNING OF PERIOD $ 18.40 $ 14.33
----------- ------------------
INCOME FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS:
NET INVESTMENT INCOME (LOSS) .45Y .87
NET GAINS OR LOSSES ON SECURITIES (BOTH REALIZED AND UNREALIZED) .25Y 4.60
COMMON SHARE EQUIVALENT OF DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
NET INVESTMENT INCOME (.05) (.05)
NET CAPITAL GAINS - (.00)
TAX RETURN OF CAPITAL - (.01)
----------- ------------------
TOTAL DISTRIBUTIONS TO PREFERRED SHAREHOLDERS (.05) (.06)
----------- ------------------
TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS .65 5.41
----------- ------------------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
NET INVESTMENT INCOME (.69) (.84)
NET CAPITAL GAINS - (.15)
TAX RETURN OF CAPITAL - (.16)
----------- ------------------
TOTAL DISTRIBUTIONS TO COMMON SHAREHOLDERS (.69) (1.15)
----------- ------------------
LESS CAPITAL CHARGES:
ISSUANCE OF COMMON SHARES - (.03)
ISSUANCE OF PREFERRED SHARES (.00) (.16)
----------- ------------------
TOTAL CAPITAL CHARGES (.00) (.19)
----------- ------------------
COMMON SHARE NET ASSET VALUE, END OF PERIOD $ 18.36 $ 18.40
----------- ------------------
COMMON SHARE MARKET VALUE, END OF PERIOD $ 16.50 $ 17.29
----------- ------------------
TOTAL RETURN, COMMON SHARE NET ASSET VALUE+ +3.49%** +38.13%**
TOTAL RETURN, COMMON SHARE MARKET VALUE+ -0.97%** +23.96%**
RATIOS/SUPPLEMENTAL DATA~~
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS, END OF PERIOD (IN MILLIONS) $ 84.1 $ 84.3
PREFERRED STOCK, AT LIQUIDATION VALUE ($25,000 PER SHARE LIQUIDATION PREFERENCE)
(IN MILLIONS) $ 42.0 $ 42.0
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS# 1.12%*Y 1.82%*
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS++ 1.11%*Y 1.82%*
RATIO OF NET INVESTMENT INCOME (LOSS) EXCLUDING PREFERRED STOCK DIVIDENDS TO AVERAGE
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 4.52%*Y 6.00%*
RATIO OF PREFERRED STOCK DIVIDENDS TO AVERAGE NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS .52%* .44%*
RATIO OF NET INVESTMENT INCOME (LOSS) INCLUDING PREFERRED STOCK DIVIDENDS TO AVERAGE
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 4.00%*Y 5.56%*
PORTFOLIO TURNOVER RATE 0% 14%
ASSET COVERAGE PER SHARE OF PREFERRED STOCK, END OF PERIOD@ $ 75,049 $ 75,165
</Table>
See Notes to Financial Highlights
18
<Page>
+ 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 each
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. Current returns may
be lower or higher than the performance data quoted. Total return would
have been lower if Management had not waived a portion of the investment
management fee. Performance data current to the most recent month-end are
available at www.nb.com.
# 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 ratios of net expenses to
average daily net assets applicable to common shareholders would have been:
<Table>
<Caption>
SIX MONTHS ENDED PERIOD ENDED
APRIL 30, OCTOBER 31,
2004 2003(1)
1.70% 2.36%
</Table>
(1) Period from November 29, 2002 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.
Y As a result of SEC staff guidance relating to the application of FASB
Statement No 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES to registered investment companies, the Fund has revised its
methodology for accounting for interest rate swap agreements. Effective
November 1, 2003, the Fund reclassified periodic interim payments on swaps
from net investment income to net gains or losses on securities.
Accordingly, for the six months ended April 30, 2004, the per share amounts
and ratios shown decreased or increased as follows:
<Table>
<Caption>
SIX MONTHS ENDED
APRIL 30,
2004
Net Investment Income .07
Net Gains or Losses in Securities (both realized and unrealized) (.07)
Ratio of Gross Expenses to Average Net Assets Applicable to
Common Shareholders (.65)%
Ratio of Net Expenses to Average Net Assets Applicable to
Common Shareholders (.65)%
Ratio of Net Investment Income (Loss) Excluding Preferred Stock
Dividends to Average Net Assets Applicable to Common Shareholders .73%
Ratio of Net Investment Income (Loss) Including Preferred Stock
Dividends to Average Net Assets Applicable to Common Shareholders .73%
</Table>
19
<Page>
DIVIDEND REINVESTMENT PLAN
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.
20
<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 no certificated 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. Upon any termination, the Plan Agent
will cause a certificate or certificates for the number of Shares held for each
Participant under the Plan to be delivered to the Participant (or if the Shares
are not then in certificated form, will cause the Shares to be transferred to
the Participant without charge.
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.
21
<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 20036-1221
22
<Page>
DIRECTORS AND OFFICERS (UNAUDITED)
The following tables set forth information concerning the directors and officers
of the Fund. 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 38 Director, American Bar Retirement
Director firm) since October 2002; formerly, Attorney Association (ABRA) since 1997
at Law and President, Faith Colish, A (not-for-profit membership
Professional Corporation, 1980 to 2002. association).
C. Anne Harvey (66) Consultant, C. A. Harvey Associates, since 38 Formerly, Member, Individual
Director June 2001; formerly, Director, AARP, 1978 to Investors Advisory Committee to the
December 2001. 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 (72) Founding General Partner, Oxford Partners and 38 Director, Capital Cash Management
Director Oxford Bioscience Partners (venture capital Trust (money market fund), Naragansett
partnerships) and President, Oxford Insured Tax-Free Income Fund, Rocky
Venture Corporation. Mountain Equity Fund, Prime Cash
Fund, several private companies and
QuadraMed Corporation (NASDAQ).
Peter P. Trapp (59) Regional Manager for Atlanta Region, Ford 38 None.
Director Motor Credit Company since August 1997;
formerly, President, Ford Life Insurance
Company, April 1995 until August 1997.
</Table>
23
<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 38 Director, Neuberger Berman Inc.
Chief Executive Officer, Inc. (holding company) since 1999; Head of (holding company) from October 1999
Director and Chairman of Neuberger Berman Inc.'s Mutual Funds and through March 2003; President and
the Board Institutional Business since 1999; Executive Director, NB Management since 1999;
Vice President, Neuberger Berman since 1999; Director and Vice President,
Principal, Neuberger Berman from 1997 until Neuberger & Berman Agency, Inc. since
1999; Senior Vice President, NB Management 2000.
from 1996 until 1999.
CLASS II
INDEPENDENT FUND DIRECTORS*
John Cannon (74) Consultant. Formerly, Chairman and Chief 38 Independent Trustee or Director of
Director Investment Officer, CDC Investment Advisors three series of OppenheimerFunds:
(registered investment adviser), 1993-January Limited Term New York Municipal Fund,
1999; prior thereto, President and Chief Rochester Fund Municipals, and
Executive Officer, AMA Investment Advisors, an Oppenheimer Convertible Securities
affiliate of the American Medical Association. Fund, since 1992.
Barry Hirsch (71) Attorney at Law. Formerly, Senior Counsel, 38 None.
Director Loews Corporation (diversified financial
corporation) May 2002 until April 2003;
formerly, Senior Vice President, Secretary and
General Counsel, Loews Corporation.
</Table>
24
<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 (54) General Partner, Seip Investments LP (a 38 Director, H&R Block, Inc. (financial
Director private investment partnership); formerly, services company) since May 2001;
President and CEO, Westaff, Inc. (temporary Director, Forward Management, Inc.
staffing), May 2001 to January 2002; Senior (asset management) since 2001;
Executive at the Charles Schwab Corporation formerly, Director, General Magic
from 1983 to 1999, including Chief Executive (voice recognition software) November
Officer, Charles Schwab Investment Management, 2001 until 2002; Director, E-Finance
Inc. and Trustee, Schwab Family of Funds and Corporation (credit decisioning
Schwab Investments from 1997 to 1998 and services) 1999-2003; Director,
Executive Vice President-Retail Brokerage, Save-Daily.com (micro investing
Charles Schwab Investment Management from 1994 services) 1999-2003; Director,
to 1997. Offroad Capital Inc. (pre-public
internet commerce company).
DIRECTORS WHO IS AN "INTERESTED PERSON"
Jack L. Rivkin* (63) Executive Vice President and Chief Investment 38 Director, Dale Carnegie and
President and Director Officer, Neuberger Berman Inc. (holding Associates, Inc. (private company)
company) since 2002 and 2003, respectively; since 1998; Director, Emagin Corp.
Executive Vice President and Chief Investment (public company) since 1997;
Officer, Neuberger Berman since 2002 and 2003, Director, Solbright, Inc. (private
respectively; Director and Chairman, NB company) since 1998; Director,
Management since December 2002; formerly, Infogate, Inc. (private company)
Executive Vice President, Citigroup since 1997.
Investments, Inc. from September 1995 to
February 2002; Executive Vice President,
Citigroup Inc. from September 1995 to February
2002.
CLASS III
INDEPENDENT FUND DIRECTORS*
Walter G. Ehlers (71) Consultant; Retired President and Trustee, 38 None.
Director Teachers Insurance & Annuity (TIAA) and
College Retirement Equities Fund (CREF).
Robert A. Kavesh (76) Marcus Nadler Professor of Finance and 38 Director, DEL Laboratories, Inc.
Director Economics Emeritus, New York University Stern (cosmetics and pharmaceuticals) since
School of Business. 1978; Director, The Caring Community
(not-for-profit).
</Table>
25
<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
- ----------------------------------------------------------------------------------------------------------------------------------
Howard A. Mileaf (67) Retired. Formerly, Vice President and Special 38 Director, WHX Corporation (holding
Director Counsel, WHX Corporation (holding company) company) since August 2002; Director,
1993-2001. Webfinancial Corporation (holding
company) since December 2002;
Director, State Theatre of New Jersey
(not-for-profit theater) since 2000;
formerly, Director, Kevlin
Corporation (manufacturer of
microwave and other products).
William E. Rulon (71) Retired. Senior Vice President, Foodmaker, 38 Director, Pro-Kids Golf and Learning
Director Inc. (operator and franchiser of restaurants) Academy (teach golf and computer
until January 1997. usage to "at risk" children) since
1998; formerly, Director, Prandium,
Inc. (restaurants) from March 2001
until July 2002.
Candace L. Straight (56) Private investor and consultant specializing 38 Director, The Proformance Insurance
Director in the insurance industry; formerly, Advisory Company (personal lines property and
Director, Securitas Capital LLC (a global casualty insurance company) since
private equity investment firm dedicated to March 2004; Director, Providence
making investments in the insurance sector) Washington (property and casualty
1998 until December 2002. insurance company) since December
1998; Director, Summit Global
Partners (insurance brokerage firm)
since October 2000.
</Table>
26
<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"
Edward I. O'Brien* (75) Formerly, Member, Investment Policy Committee, 38 Director, Legg Mason, Inc. (financial
Director Edward Jones 1993-2001; President, Securities services holding company) since 1993;
Industry Association ("SIA ") (securities formerly, Director, Boston Financial
industry's representative in government Group (real estate and tax shelters)
relations and regulatory matters at the 1993-1999.
federal and state levels) 1974-1992; Adviser
to SIA, November 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.
27
<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, eleven registered investment companies
for which NB Management acts as investment manager
and administrator (four since 2002, three since
2003, and one since 2004).
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, eleven registered investment
companies for which NB Management acts as
investment manager and administrator (three since
2000, four since 2002, three since 2003, and one
since 2004).
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, eleven registered investment
companies for which NB Management acts as
investment manager and administrator (three since
2000, four since 2002, three since 2003, and one
since 2004).
Sheila R. James (38) Assistant Secretary since 2002 Employee, Neuberger Berman since 1999; Employee,
NB Management from 1991 to 1999; Assistant
Secretary, eleven registered investment companies
for which NB Management acts as investment manager
and administrator (seven since 2002, three since
2003, and one since 2004).
Kevin Lyons (48) Assistant Secretary since 2003 Employee, Neuberger Berman since 1999; Employee,
NB Management from 1993 to 1999; Assistant
Secretary, eleven registered investment companies
for which NB Management acts as investment manager
and administrator (ten since 2003 and one since
2004).
</Table>
28
<Page>
<Table>
<Caption>
POSITION AND
NAME, AGE, AND ADDRESS (1) LENGTH OF TIME SERVED (2) PRINCIPAL OCCUPATION(S)
- ----------------------------------------------------------------------------------------------------------------------------------
John M. McGovern (34) Assistant Treasurer since 2002 Vice President, Neuberger Berman since 2004;
Employee, NB Management since 1993; Assistant
Treasurer, eleven registered investment companies
for which NB Management acts as investment manager
and administrator (seven since 2002, three since
2003, and one since 2004).
Barbara Muinos (45) Treasurer and Principal Financial and Vice President, Neuberger Berman since 1999;
Accounting Officer since 2002 Assistant Vice President, NB Management from 1993
to 1999; Treasurer and Principal Financial and
Accounting Officer, eleven registered investment
companies for which NB Management acts as
investment manager and administrator (seven since
2002, three since 2003, and one since 2004);
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, eleven registered
investment companies for which NB Management acts
as investment manager and administrator (three
since 2000, four since 2002, three since 2003, and
one since 2004).
Trani Jo Wyman (34) Assistant Treasurer since 2002 Employee, NB Management since 1991; Assistant
Treasurer, eleven registered investment companies
for which NB Management acts as investment manager
and administrator (seven since 2002, three since
2003, and one since 2004).
</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.
29
<Page>
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available, without charge,
by calling 1-800-877-9700 (toll-free) and on the website of the Securities and
Exchange Commission, at www.sec.gov.Beginning September 2004, information
regarding how the Fund voted proxies relating to portfolio securities during the
most recent 12-month period ended June 30 will also be available without charge,
by calling 1-800-877-9700 (toll-free), on the website of the Securities and
Exchange Commission, at www.sec.gov, and on the Fund's website at www.nb.com
[http://www.nb.com].
30
<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] D0122 06/04
ITEM 2. CODE OF ETHICS
Not Applicable. Only required in an annual report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
Not Applicable. Only required in an annual report.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not Applicable. Only required in an annual report.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not Applicable. Only required in an annual report.
ITEM 6. SCHEDULE OF INVESTMENTS
Not Yet Applicable. Item applies to periods ending on or after July 9, 2004.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable. Only required in an annual report.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Yet Applicable. Item applies to periods ending on or after June 15, 2004.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 10. 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)(1) Not Applicable. Only required in an annual report.
(a)(2) The certifications required by Rule 30a-2(a) of the Act and Section
302 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") are
attached hereto
(b) The certification required by Rule 30a-2(b) of the Act and Section 906
of the Sarbanes-Oxley Act is attached hereto.
The certification provided pursuant to Section 906 of the Sarbanes-Oxley Act is
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 Real Estate Income Fund Inc.
By: /s/ Peter E. Sundman
--------------------
Peter E. Sundman
Chief Executive Officer
Date: June 28, 2004
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: June 28, 2004
By: /s/ Barbara Muinos
------------------
Barbara Muinos
Treasurer and Principal Financial
and Accounting Officer
Date: June 28, 2004