As filed with the Securities and Exchange Commission on December 23, 2004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-3802
NEUBERGER BERMAN INCOME FUNDS
-----------------------------
(Exact Name of the Registrant as Specified in Charter)
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
(Address of Principal Executive Offices - Zip Code)
Registrant's Telephone Number, including area code: (212) 476-8800
Peter E. Sundman, Chief Executive Officer
Neuberger Berman Income Funds
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Arthur Delibert, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
(Names and Addresses of agents for service)
Date of fiscal year end: October 31, 2004
Date of reporting period: October 31, 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. Section 3507.
ITEM 1. REPORTS TO SHAREHOLDERS
<Page>
[NEUBERGER BERMAN LOGO]
A LEHMAN BROTHERS COMPANY
ANNUAL REPORT
OCTOBER 31, 2004
NEUBERGER BERMAN
INCOME FUNDS(R)
TRUST CLASS SHARES
INSTITUTIONAL CLASS SHARES
INSTITUTIONAL CASH FUND
STRATEGIC INCOME FUND
<Page>
CONTENTS
<Table>
THE FUNDS
CHAIRMAN'S LETTER 2
PORTFOLIO COMMENTARY
Institutional Cash Fund 3
Strategic Income Fund 5
FUND EXPENSE INFORMATION 9
SCHEDULE OF INVESTMENTS
Institutional Cash Fund 11
Strategic Income Fund 14
FINANCIAL STATEMENTS 24
FINANCIAL HIGHLIGHTS
PER SHARE DATA
Institutional Cash Fund 37
Strategic Income Fund 38
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 40
DIRECTORY 41
TRUSTEES AND OFFICERS 42
PROXY VOTING POLICIES AND PROCEDURES 49
</Table>
"Neuberger Berman" and the Neuberger Berman logo are service marks of Neuberger
Berman, LLC. "Neuberger Berman Management Inc." and the individual fund names in
this shareholder report are either service marks or registered service marks of
Neuberger Berman Management Inc.(C)2004 Neuberger Berman Management Inc. All
rights reserved.
1
<Page>
CHAIRMAN'S LETTER
[PHOTO OF PETER SUNDMAN]
Dear Fellow Shareholder,
I am pleased to present to you this annual report for the Neuberger Berman
Institutional Cash Fund and the Neuberger Berman Strategic Income Fund for the
period ending October 31, 2004. The report includes portfolio commentary, a
listing of the Funds' investments, and their audited financial statements for
the reporting period.
During fiscal 2004, the bond market generated positive returns, despite the
Federal Reserve Board's doubling of the Federal Funds Rate from 1% to 2% in a
series of quarter-point increases starting in June. Interest rates remain low by
historical standards, and since inflation is expected to remain moderate, the
Fed has indicated that it can afford to raise interest rates gradually going
forward.
That said, bond returns have been positive for several years, and the strong
gains generated over that period are unlikely to be repeated soon. Our job is to
guard against potential losses if conditions reverse. Therefore, we intend to
proceed with caution, patience and vigilance to protect clients' principal. If
we're wrong, our returns may not be as high as funds that take on greater risk,
but we prefer to err on the side of safety with our clients' hard-earned assets.
Thank you for your confidence in Neuberger Berman. We will continue to do our
best to keep earning it.
Sincerely,
/s/ Peter Sundman
PETER SUNDMAN
CHAIRMAN OF THE BOARD
NEUBERGER BERMAN INCOME FUNDS
2
<Page>
INSTITUTIONAL CASH FUND Portfolio Commentary
For the six months ending October 31, 2004, Neuberger Berman Institutional Cash
Fund returned 0.53% compared to the iMoneyNet Money Fund Report Taxable First
Tier Institutional Average's 0.52%. For the past 12 months, the Fund returned
0.93% versus the benchmark's 0.88%. The Fund closed fiscal 2004 with a 1.47%
7-day current yield and a 1.48% 7-day effective yield; this more closely
reflects current earnings than the 6-month or one-year figures.
Through the first five months of this 12-month reporting period, the money
markets remained largely unchanged, with rates near 45-year lows and a
relatively stable yield curve. Then, on April 2, 2004, a surprisingly strong
March jobs report was released and many investors became convinced that the
Federal Reserve would begin tightening well ahead of the November elections.
They were right. The Fed hiked the Fed Funds Rate by 25 basis points on June 30,
another 25 basis points on August 10, and 25 basis points again on September 21.
In view of the economy's increasing momentum, we reduced the portfolio's
weighted average maturity starting at about the middle of the fiscal year, and
ultimately limiting it to a range of 40-50 days over the last few months of the
reporting period.
Over the course of the year, we reduced our allocation to U.S. Government Agency
securities -- due to the fear of some market fallout surrounding the controversy
at Fannie Mae and Freddie Mac -- and increased our allocation to Treasuries.
Otherwise, sector allocation remained relatively stable.
Shortly after the end of the 12-month reporting period, the Fed implemented its
fourth 25-basis-point interest rate hike of 2004, lifting the Fed Funds Rate to
2%, and announced that it would likely continue to raise rates at a "measured
pace" until the Fed Funds Rate reached "normalized" levels. We don't know what
the Fed's target is, but historically, the Fed Funds Rate has provided a "real"
rate of return -- that is, a return higher than inflation. Currently, the Fed
Funds Rate is about equal to the rate of inflation, suggesting that the Fed will
raise short-term interest rates at least several more times over the next year.
If inflation trends higher, more rate hikes are likely. Consequently, we plan to
maintain an average maturity in the low end of our range, to more quickly move
rollover holdings into higher yielding securities.
Sincerely,
/s/ Ted Giuliano /s/ John Dugenske
TED GIULIANO AND JOHN DUGENSKE
PORTFOLIO CO-MANAGERS
/s/ Cynthia Damian /s/ Alyssa Juros
CYNTHIA DAMIAN AND ALYSSA JUROS
PORTFOLIO ASSOCIATE MANAGERS
An investment in a money market fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although a money
market fund seeks to preserve the value of your investment at $1.00 per share,
it is possible to lose money by investing in the Fund.
The composition, industries and holdings of the fund are subject to change.
Investment return will fluctuate. Past performance is no guarantee of future
results.
3
<Page>
INSTITUTIONAL CASH FUND
MATURITY DIVERSIFICATION (% BY MATURITY)
<Table>
1 Day 0.0%
2 - 7 Days 16.7
8 - 15 Days 11.7
16 - 30 Days 17.8
31 - 60 Days 27.7
61 - 90 Days 14.8
91 - 180 Days 12.9
181 - 270 Days 0.0
271+ Days 0.0
Liabilities, less cash, receivables and
other assets (1.6)
</Table>
4
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
STRATEGIC INCOME FUND Portfolio Commentary
We are pleased to report that for the fiscal year ending October 31, 2004, the
Neuberger Berman Strategic Income Fund returned 10.65% compared to the Lehman
Brothers U.S. Aggregate Bond Index, which returned 5.53%. Since its inception on
July 11, 2003, the Fund has returned an annualized 9.62% compared to the Lehman
index's 3.61%.
The Fund's strong returns over these periods have demonstrated the benefits of
investing in a diversified portfolio of income-producing securities. During the
period, we maximized the Fund's exposure to nontraditional fixed-income sectors,
including European bonds, real estate investment trusts (REITs), dividend-paying
equities, and high-yield bonds -- all of which performed admirably -- while
minimizing the Fund's exposure to U.S. Treasury securities and high-grade
corporate bonds. Our strategy provided shareholders with returns well above
those of the broader bond market, as measured by the Lehman Aggregate Bond
Index, while remaining cognizant of risk. We believe that our ability to
strategically and tactically adjust our mix of investments provides the
flexibility to pursue the long-term return potential of better-performing,
income-producing market sectors.
At the end of this reporting period, 22.0% of the Fund's net assets were
invested in the core area of U.S. Treasury issues, agency obligations, and
mortgage-backed securities. Our largest holdings outside of this area were in
corporate bonds, which accounted for 30.5% of net assets. The Fund held 26.7% of
its net assets in common and preferred stocks (including REIT securities) and
17.2% in foreign bonds. Cash and cash equivalents accounted for 1.4% of net
assets and convertible debt represented 2.2% of net assets.
In terms of credit quality, we held a core of the highest-quality triple-A or
government bonds, which as of October 31, 2004 represented 46.7% of the
fixed-income portion of the portfolio at fiscal year-end, while higher-yielding
below-investment-grade bonds represented 33.3% of the fixed-income portion, of
which 16.1% were in the relatively strong credit quality BB bond rating category
and 17.2% were in the B-rated group. The remaining credit quality breakdown for
the fixed-income portion of the portfolio is as follows: AA- and A-rated bonds
comprised 13.1% of assets, BBB-rated bonds comprised 3.8% of assets, and
short-term paper comprised 3.1% of assets. We believe the Fund's credit quality
structure represents moderate but not excessive risk, which helps the portfolio
in seeking to achieve its high-income goal.
The Federal Reserve Board has raised interest rates four times since June, and
suggested it would not be opposed to increasing rates at a "measured" pace going
forward given the improvement in general economic conditions. In this
environment, we believe that the Fund, with its exposure to nontraditional
fixed-income and income-related securities, is better positioned against higher
interest rates than a portfolio limited to Treasuries and agencies.
We hope that the Neuberger Berman Strategic Income Fund will become a core
holding of your portfolio. We believe that our conservative investing philosophy
and disciplined investment process will benefit you with superior income without
undue risk to principal, in both the near and long term.
Sincerely,
NEUBERGER BERMAN STRATEGIC INCOME FUND
ASSET ALLOCATION COMMITTEE
5
<Page>
STRATEGIC INCOME FUND
AVERAGE ANNUAL TOTAL RETURN
<Table>
<Caption>
LEHMAN BROTHERS
INSTITUTIONAL CLASS U.S. AGGREGATE INDEX
1 YEAR 10.65% 5.53%
LIFE OF FUND 9.62% 3.61%
- ----------------------------------------------------------------------
INCEPTION DATE 07/11/2003
</Table>
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. RESULTS ARE SHOWN ON A "TOTAL RETURN" BASIS AND
INCLUDE REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS.
CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE DATA QUOTED. FOR
PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH END, PLEASE VISIT
www.nb.com/performance.
[CHART]
COMPARISON OF A $10,000 INVESTMENT
<Table>
<Caption>
INSTITUTIONAL CLASS 11,281
LEHMAN BROTHERS U.S.AGGREGATE INDEX 10,476
</Table>
This chart shows the value of a hypothetical $10,000 investment of the Fund over
the past 10 fiscal years, or since the Fund's inception, if it has not operated
for 10 years. The result is compared with benchmarks, which may include a
broad-based market index and/or a narrower index. Please note that market
indexes do not include expenses. All results include the reinvestment of
dividends and capital gain distributions. Results represent past performance and
do not indicate future results. The chart and table do not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or the redemption of
Fund shares.
Please see Endnotes for additional information.The 30-day SEC yield of the
Institutional Class Shares was 3.39% for the period ending October 31, 2004.
ASSET DIVERSIFICATION
(% BY ASSET CLASS)
<Table>
Asset Backed 0.0%
Corporate Debt 30.5
Convertible Debt 2.2
Foreign Securities 17.2
U.S. Government Agency Securities 2.7
Mortgage-Backed Securities 11.9
U.S. Treasury Securities 7.4
Preferred Stock 1.4
Common Stock 25.3
Other 0.0
Cash and Cash Equivalents, receivables
and other assets, less liabilities 1.4
</Table>
6
<Page>
ENDNOTES
1. Neuberger Berman Management Inc. ("Management") has contractually
undertaken to reimburse Neuberger Berman Institutional Cash Fund and
Neuberger Berman Strategic Income Fund so that total operating expenses
exclusive of taxes, interest, brokerage commissions and extraordinary
expenses of each Fund are limited to 0.41% and 0.85%, respectively, of
average daily net assets. The undertakings last until October 31, 2007 and
October 31, 2014, respectively. Each Fund has contractually undertaken to
reimburse Management for the excess expenses paid by Management, provided
the reimbursements do not cause operating expenses (exclusive of taxes,
interest, brokerage commissions, and extraordinary expenses) to exceed the
above-stated expense limitation and the reimbursements are made within
three years after the year that Management incurred the expense. For the
year ended October 31, 2004, there was no reimbursement of expenses by
Management to Neuberger Berman Institutional Cash Fund. For Neuberger
Berman Strategic Income Fund, if this reimbursement was not made,
performance would be lower.
2. "Current yield" of a money market fund refers to the income generated by an
investment in the Fund over a recent 7-day period. This income is then
"annualized." The "effective yield" is calculated similarly but, when
annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "current
yield" because of the compounding effect of this assumed reinvestment.
Yields of a money market fund will fluctuate and past performance is no
guarantee of future results.
7
<Page>
GLOSSARY OF INDICES
<Table>
THE IMONEYNET MONEY FUND
REPORT TAXABLE FIRST TIER INSTITUTIONAL AVERAGE: Measures the performance of institutional money market mutual funds
which invest in anything allowable, except Second Tier Commercial
Paper.
LEHMAN BROTHERS U.S. AGGREGATE INDEX: Represents securities that are U.S. domestic, taxable, and dollar
denominated. The index covers the U.S. investment-grade fixed-rate
bond market, with index components for government and corporate
securities, mortgage pass-through securities, and asset-backed
securities.
</Table>
Please note that the indices do not take into account any fees and expenses or
any tax consequences of investing in the individual securities that they track
and that investors cannot invest directly in any index or average. Data about
the performance of each index or average are prepared or obtained by Neuberger
Berman Management Inc. and include reinvestment of all dividends and capital
gain distributions. Each Fund may invest in securities not included in its
respective index.
8
<Page>
INFORMATION ABOUT YOUR FUND'S EXPENSES
These tables are designed to provide information regarding costs related to your
investments. All mutual funds incur operating expenses, which include management
fees, administrative services and shareholder reports among others. The
following examples are based on an investment of $1,000 made at the beginning of
the period shown and held for the entire period. The table illustrates the
fund's costs in two ways:
<Table>
ACTUAL EXPENSES: The first section of the table provides information about actual
account values and actual expenses in dollars. You may use the
information in this line, together with the amount you invested, to
estimate the expenses you paid over the period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES: The second section of the table provides information about
hypothetical account values and hypothetical expenses based on the
Fund's actual expense ratio and an assumed rate of return at 5% per
year before expenses. This return is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate
the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing
in these Funds versus other funds. To do so, compare this 5%
hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of other funds.
</Table>
9
<Page>
EXPENSE INFORMATION As of 10/31/04 (Unaudited)
NEUBERGER BERMAN INSTITUTIONAL CASH FUND
<Table>
<Caption>
BEGINNING ENDING EXPENSES
ACCOUNT ACCOUNT PAID DURING
ACTUAL VALUE VALUE THE PERIOD*
- ----------------------------------------------------------------------
Trust Class $ 1,000 $ 1,005.30 $ 1.36
</Table>
<Table>
<Caption>
HYPOTHETICAL (5% ANNUAL
RETURN BEFORE EXPENSES)**
- ----------------------------------------------------------------------
Trust Class $ 1,000 $ 1,023.78 $ 1.37
</Table>
NEUBERGER BERMAN STRATEGIC INCOME FUND
<Table>
<Caption>
BEGINNING ENDING EXPENSES
ACCOUNT ACCOUNT PAID DURING
ACTUAL VALUE VALUE THE PERIOD*
- ----------------------------------------------------------------------
Institutional Class $ 1,000 $ 1,075.00 $ 4.38
</Table>
<Table>
<Caption>
HYPOTHETICAL (5% ANNUAL
RETURN BEFORE EXPENSES)**
- ----------------------------------------------------------------------
Institutional Class $ 1,000 $ 1,020.91 $ 4.27
</Table>
* For each class of the Fund, expenses are equal to the expense ratio for the
class, multiplied by the average account value over the period, multiplied
by 184/366 (to reflect the one-half year period shown).
** Hypothetical 5% annual return before expenses is calculated by multiplying
the number of days in the most recent half year divided by 366
10
<Page>
SCHEDULE OF INVESTMENTS Institutional Cash Fund
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE ++
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
U.S. TREASURY SECURITIES--BACKED BY THE FULL FAITH AND
CREDIT OF THE U.S. GOVERNMENT (15.4%)
$ 50,000 U.S. Treasury Bills, 1.60%, due 11/12/04 TSY TSY $ 49,975
70,000 U.S. Treasury Bills, 1.33% & 1.67%, due 11/18/04 TSY TSY 69,950
35,000 U.S. Treasury Bills, 1.51%, due 11/26/04 TSY TSY 34,963
30,000 U.S. Treasury Bills, 1.61%, due 12/9/04 TSY TSY 29,949
35,000 U.S. Treasury Bills, 1.63%, due 12/16/04 TSY TSY 34,929
30,000 U.S. Treasury Bills, 1.65%, due 12/23/04 TSY TSY 29,929
100,000 U.S. Treasury Bills, 1.63% & 1.69%, due 1/13/05 TSY TSY 99,664
20,000 U.S. Treasury Bills, 1.72%, due 2/17/05 TSY TSY 19,897
25,000 U.S. Treasury Notes, 1.75%, due 12/31/04 TSY TSY 25,024
20,000 U.S. Treasury Notes, 1.63%, due 1/31/05 TSY TSY 20,024
-----------
TOTAL U.S. TREASURY SECURITIES--BACKED BY THE FULL
FAITH AND CREDIT OF THE U.S. GOVERNMENT 414,304
-----------
U.S. GOVERNMENT AGENCY SECURITIES (6.3%)
10,000 Federal Farm Credit Bank, Disc. Notes, 1.68%, due 11/1/04 AGY AGY 10,000
10,000 Federal Farm Credit Bank, Disc. Notes, 1.72%, due 11/16/04 AGY AGY 9,993
12,000 Federal Farm Credit Bank, Disc. Notes, 1.09%, due 12/10/04 AGY AGY 11,986
15,000 Federal Farm Credit Bank, Disc. Notes, 1.15%, due 12/13/04 AGY AGY 14,980
10,000 Federal Home Loan Bank, Disc. Notes, 1.73%, due 11/5/04 AGY AGY 9,998
50,000 Federal Home Loan Bank, Disc. Notes, 1.73%, due 11/10/04 AGY AGY 49,978
30,000 Federal Home Loan Bank, Disc. Notes, 1.74%, due 11/12/04 AGY AGY 29,984
8,489 Federal Home Loan Bank, Disc. Notes, 1.69%, due 12/27/04 AGY AGY 8,467
25,000 Federal Home Loan Bank, Disc. Notes, 1.70%, due 2/4/05 AGY AGY 24,888
-----------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES 170,274
-----------
CERTIFICATES OF DEPOSIT (22.6%)
25,000 American Express Centurion Bank, Domestic CD, 1.81%,
due 11/17/04 P-1 A-1 25,000
50,000 Bank of Montreal, Yankee CD, 1.78%, due 11/15/04 P-1 A-1+ 50,000
25,000 BNP Paribas NY, Domestic CD, 2.16%, due 4/25/05 P-1 A-1+ 25,001
10,000 Canadian Imperial Bank, Yankee CD, 1.30%, due 2/18/05 P-1 A-1 10,001
15,000 Citibank NA, Domestic CD, 1.66%, due 11/22/04 P-1 A-1+ 15,000
65,000 Deutsche Bank AG, Yankee CD, 1.16% - 1.96%,
due 12/15/04 - 3/9/05 P-1 A-1+ 65,000
57,000 Dexia Bank NY, Yankee CD, 1.58% - 1.90%,
due 11/10/04 - 12/29/04 P-1 A-1+ 57,000
40,000 HBOS Treasury Services, Yankee CD, 1.90%, due 12/1/04 P-1 A-1+ 40,000@@
23,000 HBOS Treasury Services, Yankee CD, 2.08%, due 3/29/05 P-1 A-1+ 23,000
50,000 Lloyd's TSB Bank PLC, Yankee CD, 1.71% & 2.01%,
due 12/14/04 & 1/25/05 P-1 A-1+ 50,001
55,000 Royal Bank of Canada NY, Yankee CD, 2.00% & 2.01%,
due 1/21/05 & 2/14/05 P-1 A-1+ 55,000
50,000 Royal Bank of Scotland, Yankee CD, 2.06%, due 2/2/05 P-1 A-1+ 50,001@@@
30,000 Svenska Handelsbanken AB, Yankee CD, 1.62%, due 11/12/04 P-1 A-1 30,000
58,000 Toronto Dominion Bank, Yankee CD, 1.13% - 1.89%,
due 11/29/04 - 12/31/04 P-1 A-1 58,000
55,000 Wells Fargo Bank NA, Domestic CD, 1.77% & 1.90%,
due 11/10/04 & 11/30/04 P-1 A-1+ 55,000
-----------
TOTAL CERTIFICATES OF DEPOSIT 608,004
-----------
</Table>
See Notes to Schedule of Investments
11
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE ++
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
COMMERCIAL PAPER (49.2%)
$ 50,000 ABN AMRO North America Finance, Inc., 1.63% & 1.89%,
due 11/22/04 & 11/29/04 P-1 A-1+ $ 49,939
27,800 Alcon Capital Corp., 1.60%, due 11/5/04 P-1 A-1+ 27,795
35,000 American Express Credit Corp., 1.78%, due 11/19/04 P-1 A-1 34,969
53,000 ANZ (Delaware), Inc., 1.63% & 1.70%, due 11/10/04 & 11/16/04 P-1 A-1+ 52,967
30,000 Bank of America Corp., 1.73%, due 12/13/04 P-1 A-1 29,939
29,078 Barclays U.S. Funding Corp., 1.17% & 1.82%,
due 11/15/04 & 11/24/04 P-1 A-1+ 29,057
30,000 Bear Stearns Co., Inc., 1.76%, due 11/4/04 P-1 A-1 29,996
60,000 BMW US Capital Corp., 1.84%, due 11/1/04 P-1 A-1 60,000
20,000 BNP Paribas Finance, 1.74%, due 1/18/05 P-1 A-1+ 19,925
60,000 BP Capital Markets PLC, 1.84%, due 11/1/04 P-1 A-1+ 60,000
40,000 Caisse D'Amortissement, 1.92%, due 12/6/04 P-1 A-1+ 39,925
50,000 Citigroup Global Markets, Inc., 1.76%, due 11/10/04 P-1 A-1+ 49,978
50,000 Eli Lilly & Co., 1.70%, due 12/6/04 P-1 A-1+ 49,917
60,000 General Electric Capital Corp., 1.85% & 1.94%,
due 12/1/04 & 2/15/05 P-1 A-1+ 59,788
60,000 Goldman Sachs Group, Inc., 1.60% - 1.92%,
due 11/8/04 - 2/22/05 P-1 A-1 59,850
25,000 ING America Insurance Holdings, Inc., 1.93%, due 1/21/05 P-1 A-1 24,892
38,000 ING U.S. Funding LLC, 1.77% & 1.88%, due 11/9/04 & 12/8/04 P-1 A-1+ 37,942
56,000 KFW International Finance, Inc., 1.75% & 1.82%,
due 11/8/04 & 11/29/04 P-1 A-1+ 55,948
30,000 MetLife Funding, Inc., 1.82%, due 12/7/04 P-1 A-1+ 29,945
50,000 Morgan Stanley Dean Witter & Co., 1.95%, due 12/8/04 P-1 A-1+ 49,900
30,000 Nestle Capital Corp., 1.91%, due 1/26/05 P-1 A-1+ 29,863
10,000 New York Life Capital Corp., 1.76%, due 11/2/04 P-1 A-1+ 9,999
32,250 Paccar Financial Corp., 1.70%, due 12/2/04 P-1 A-1+ 32,203
65,000 Pfizer, Inc., 1.64% & 1.83%, due 11/17/04 & 12/27/04 P-1 A-1+ 64,889
50,000 Procter & Gamble, Inc., 1.96%, due 1/18/05 P-1 A-1+ 49,788
55,000 Societe Generale NA, Inc., 1.84% & 1.93%,
due 12/7/04 & 3/9/05 P-1 A-1+ 54,748
60,000 Toyota Motor Credit Corp., 1.84% & 1.88%,
due 11/22/04 & 11/23/04 P-1 A-1+ 59,934
60,000 UBS Finance (Delaware), Inc., 1.72% - 1.81%,
due 1/18/05 - 2/22/05 P-1 A-1+ 59,703
50,000 Wal-Mart Stores, Inc., 1.75%, due 11/2/04 P-1 A-1+ 49,998
60,000 Westpac Capital Corp., 1.65% & 1.97%, due 11/29/04 & 1/7/05 P-1 A-1+ 59,828
-----------
TOTAL COMMERCIAL PAPER 1,323,625
-----------
BANK NOTES (0.9%)
25,000 U.S. Bank NA, 1.17%, due 11/17/04 P-1 A-1+ 25,000
-----------
TIME DEPOSITS (6.1%)
60,000 Chase Manhattan Bank, Grand Cayman, 1.84%, due 11/1/04 P-1 A-1+ 60,000
60,000 Danske Bank A/S, Copenhagen, 1.84%, due 11/1/04 P-1 A-1+ 60,000
45,000 National City Bank, Grand Cayman, 1.80%, due 11/1/04 P-1 A-1 45,000
-----------
TOTAL TIME DEPOSITS 165,000
-----------
</Table>
12
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT VALUE ++
(000'S OMITTED) (000'S OMITTED)
REPURCHASE AGREEMENTS (1.0%)
$ 26,732 State Street Bank and Trust Co. Repurchase Agreement, 1.75%,
due 11/1/04, dated 10/29/04, Maturity Value $26,735,898,
Collateralized by $18,660,000 U.S. Treasury Bonds, 8.75%
due 8/15/20 (Collateral Value $27,535,536) $ 26,732
-----------
TOTAL INVESTMENTS (101.5%) 2,732,939
Liabilities, less cash, receivables and other assets [(1.5%)] (41,462)
-----------
TOTAL NET ASSETS (100.0%) $ 2,691,477
-----------
</Table>
See Notes to Schedule of Investments
13
<Page>
SCHEDULE OF INVESTMENTS Strategic Income Fund
<Table>
<Caption>
NUMBER OF SHARES MARKET VALUE+
(000'S OMITTED)
COMMON STOCKS (25.3%)
AEROSPACE (0.4%)
2,000 Lockheed Martin $ 110++++
APARTMENTS (2.8%)
2,100 Apartment Investment &
Management 77
3,700 Archstone-Smith Trust 124
1,400 Avalonbay Communities 92
2,400 BRE Properties 96
5,600 Equity Residential 187
1,900 Essex Property Trust 149
5,000 United Dominion Realty Trust 105
---------
830
BASIC MATERIALS (0.2%)
700 Rio Tinto 74++++
BUSINESS SERVICES (0.2%)
3,000 FTI Consulting 56*++++
COMMUNICATIONS (0.2%)
2,500 Vodafone Group ADR 64
COMMUNITY CENTERS (1.4%)
3,300 Developers Diversified Realty 138
2,900 Federal Realty Investment Trust 137
2,400 Pan Pacific Retail Properties 136
---------
411
CONSUMER CYCLICALS (0.6%)
5,000 Corinthian Colleges 72*++++
2,000 Target Corp. 100++++
---------
172
CONSUMER STAPLES (0.3%)
1,500 Diageo PLC ADR 81
DIVERSIFIED (1.1%)
1,800 Duke Realty 62
3,800 Vornado Realty Trust 255
---------
317
ENERGY (0.9%)
1,500 BP PLC ADR 88++++
2,115 Enbridge Energy Management 93*
1,500 PetroChina Co. 79++++
---------
260
FINANCE (0.3%)
2,000 Bank of America 90++++
FINANCIAL SERVICES (0.5%)
1,500 Citigroup Inc. 67
4,000 Jackson Hewitt Tax Service 84++++
---------
151
HEALTH CARE (1.0%)
1,500 Abbott Laboratories $ 64++++
1,000 Anthem, Inc. 80*++++
5,600 Ventas, Inc. 151
---------
295
INDUSTRIAL (1.6%)
3,500 CenterPoint Properties 162
2,000 Dover Corp. 79++++
1,000 General Dynamics 102++++
3,600 ProLogis 140
---------
483
INSURANCE (0.4%)
1,000 American International Group 61++++
2,000 Willis Group Holdings 72++++
---------
133
LODGING (1.4%)
12,300 Host Marriott 179~~
8,600 La Quinta 69*
1,600 LaSalle Hotel Properties 46
6,800 Sunstone Hotel Investors 115*
---------
409
MANUFACTURED HOMES (0.5%)
4,000 Manufactured Home Communities 138
OFFICE (3.4%)
1,700 Alexandria Real Estate Equities 112
2,800 Arden Realty 95
2,100 Boston Properties 125
3,800 Brandywine Realty Trust 112
4,200 Brookfield Properties 143
2,100 Kilroy Realty 84
1,600 Mack-Cali Realty 71
3,000 SL Green Realty 164
5,400 Trizec Properties 86
---------
992
OFFICE--INDUSTRIAL (0.2%)
1,100 PS Business Parks 48
OIL & GAS (0.3%)
1,500 Anadarko Petroleum 101++++
REGIONAL MALLS (3.5%)
2,200 CBL & Associates Properties 144
4,300 General Growth Properties 142
3,700 Kimco Realty 202
3,000 Mills Corp. 166
3,900 Simon Property Group 227
4,900 Taubman Centers 141
---------
1,022
</Table>
14
<Page>
<Table>
<Caption>
NUMBER OF SHARES MARKET VALUE+
(000'S OMITTED)
RESTAURANTS (0.2%)
2,500 Ruby Tuesday $ 62
SEMICONDUCTORS (0.3%)
3,500 Intel Corp. 78++++
SOFTWARE (0.2%)
2,500 Microsoft Corp. 70
TECHNOLOGY (0.6%)
2,000 First Data 82++++
4,000 Texas Instruments 98++++
---------
180
TELECOMMUNICATIONS (0.3%)
2,000 Verizon Communications 78++++
UTILITIES (2.5%)
2,000 Ameren Corp. 96
3,000 California Water Service Group 89
2,500 Cinergy Corp. 99
1,400 Dominion Resources 90
4,000 Duke Energy 98
1,400 FPL Group 96
2,200 National Grid Transco 97
2,500 ONEOK, Inc. 67
---------
732
TOTAL COMMON STOCKS
(COST $6,545) 7,437
---------
CONVERTIBLE PREFERRED STOCKS (1.4%)
3,000 Citigroup Global Markets Holdings 28
2,000 Constellation Brands, Ser. A 66
2,000 General Motors 51
1,500 International Paper Capital Trust 76
7,500 Morgan Stanley, Ser. C 85
1,500 Newell Financial Trust I 67
500 Unocal Corp. 26
---------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $397) $ 399
---------
</Table>
15
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
U.S. TREASURY SECURITIES-BACKED BY THE FULL FAITH AND CREDIT
OF THE U.S. GOVERNMENT (7.4%)
$ 265 U.S. Treasury Bonds, 6.00%, due 2/15/26 TSY TSY $ 306
575 U.S. Treasury Notes, 1.25%, due 5/31/05 TSY TSY 572@@@
200 U.S. Treasury Notes, 1.88%, due 12/31/05 TSY TSY 199@@@
300 U.S. Treasury Notes, 2.00%, due 5/15/06 TSY TSY 298
525 U.S. Treasury Notes, 3.00%, due 11/15/07 TSY TSY 528
150 U.S. Treasury Notes, 5.75%, due 8/15/10 TSY TSY 168
105 U.S. Treasury Notes, 3.63%, due 5/15/13 TSY TSY 103@@@
TOTAL U.S. TREASURY SECURITIES-BACKED BY THE FULL FAITH
AND CREDIT OF THE U.S. GOVERNMENT (COST $2,185) 2,174
----------
U.S. GOVERNMENT AGENCY SECURITIES (2.7%)
500 Federal Home Loan Bank, Bonds, 2.75%, due 3/14/08 AGY AGY 493
300 Freddie Mac, Notes, 4.25%, due 6/15/05 AGY AGY 304@@@
----------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES (COST $796) 797
----------
MORTGAGE-BACKED SECURITIES (11.9%)
FANNIE MAE
60 Pass-Through Certificates, 4.50%, due 8/1/18 & 10/1/18 AGY AGY 60
452 Pass-Through Certificates, 5.00%, due 11/1/17 - 5/1/34 AGY AGY 457
566 Pass-Through Certificates, 5.50%, due 9/1/16 - 8/1/34 AGY AGY 580
194 Pass-Through Certificates, 6.00%, due 3/1/18 - 9/1/33 AGY AGY 202
138 Pass-Through Certificates, 6.50%, due 11/1/13 - 9/1/32 AGY AGY 144
47 Pass-Through Certificates, 7.00%, due 7/1/17 & 7/1/29 AGY AGY 51
12 Pass-Through Certificates, 7.50%, due 12/1/32 AGY AGY 12
FREDDIE MAC
27 Pass-Through Certificates, 4.50%, due 8/1/18 AGY AGY 27
89 Pass-Through Certificates, 5.00%, due 5/1/18 & 8/1/33 AGY AGY 89
203 Pass-Through Certificates, 5.50%, due 9/1/17 - 8/1/33 AGY AGY 207
160 Pass-Through Certificates, 6.00%, due 4/1/17 - 12/1/33 AGY AGY 167
98 Pass-Through Certificates, 6.50%, due 3/1/16 - 1/1/32 AGY AGY 104
17 Pass-Through Certificates, 7.00%, due 6/1/32 AGY AGY 19
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
100 Pass-Through Certificates, 4.50%, TBA, 30 Year Maturity AGY AGY 98e@@
380 Pass-Through Certificates, 5.00%, TBA, 30 Year Maturity AGY AGY 381e@@
628 Pass-Through Certificates, 4.50%, due 11/15/33 - 9/15/34 AGY AGY 615@@
123 Pass-Through Certificates, 5.00%, due 7/15/33 & 8/15/34 AGY AGY 124
53 Pass-Through Certificates, 5.50%, due 6/15/33 AGY AGY 54
42 Pass-Through Certificates, 6.00%, due 4/15/33 AGY AGY 44
26 Pass-Through Certificates, 6.50%, due 7/15/32 AGY AGY 28
19 Pass-Through Certificates, 7.00%, due 8/15/32 AGY AGY 20
8 Pass-Through Certificates, 7.50%, due 7/15/32 AGY AGY 8
----------
TOTAL MORTGAGE-BACKED SECURITIES (COST $3,454) 3,491
----------
CORPORATE DEBT SECURITIES (30.5%)
125 AES Corp., Senior Notes, 8.75%, due 6/15/08 B2 B- 138
125 Allied Waste North America, Inc., Guaranteed Senior Secured
Notes, Ser. B, 9.25%, due 9/1/12 B2 BB- 135
30 American Electric Power Co., Senior Notes, Ser. D, 5.25%,
due 6/1/15 Baa3 BBB 31
</Table>
16
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 125 Amerigas Partners L.P., Senior Notes, Ser. B,
8.88%, due 5/20/11 B2 BB- $ 137
125 Arch Western Finance Corp., Senior Notes, 6.75%, due 7/1/13 Ba3 BB 133**
75 Associates Corp. NA, Senior Notes, 6.25%, due 11/1/08 Aa1 AA- 82
40 Bank of America Corp., Subordinated Notes, 6.80%, due 3/15/28 Aa3 A 45
20 Bank One Corp., Subordinated Notes, 7.88%, due 8/1/10 A1 A 24
20 Boeing Capital Corp., Senior Notes, 6.13%, due 2/15/33 A3 A 21
125 Case New Holland, Inc., Senior Notes, 9.25%, due 8/1/11 Ba3 BB- 142**
15 Champion International Corp., Debentures, 7.35%, due 11/1/25 Baa2 BBB 17
125 Charter Communications Operating LLC, Senior Notes,
8.00%, due 4/30/12 B2 B- 126**
25 ChevronTexaco Corp., Debentures, 8.00%, due 8/1/32 Aa3 AA 34
125 Chiquita Brands International, Senior Notes, 7.50%, due 11/1/14 B2 B 128**
125 CMS Energy Corp., Senior Notes, 7.75%, due 8/1/10 B3 B+ 137
45 Coca-Cola Enterprises, Inc., Debentures, 6.95%, due 11/15/26 A2 A 53
40 ConocoPhillips Corp., Notes, 8.75%, due 5/25/10 A3 A- 50
25 Constellation Energy Group, Inc., Notes, 6.35%, due 4/1/07 Baa1 BBB 27
125 CSC Holdings, Inc., Senior Notes, Ser. B, 8.13%, due 7/15/09 B1 BB- 137
125 D. R. Horton, Inc., Guaranteed Senior Notes, 8.50%, due 4/15/12 Ba1 BB+ 141
1,000 Dow Jones CDX High Yield, Pass-Thru Certificates, Ser. 3.1,
7.75%, due 12/29/09 B3 1,029**
30 Duke Capital Corp., Senior Notes, 6.75%, due 2/15/32 aa3 BBB- 32
125 Edison Mission Energy, Senior Notes, 9.88%, due 4/15/11 B1 B 148
125 El Paso Natural Gas, Senior Notes, Ser. A, 7.63%, due 8/1/10 B1 B- 135
125 Ferrellgas, L. P., Senior Notes, 6.75%, due 5/1/14 Ba3 BB- 129
125 Forest Oil Corp., Senior Notes, 8.00%, due 6/15/08 Ba3 BB- 139
20 France Telecom SA, Notes, 9.00%, due 3/1/11 Baa2 BBB+ 24
45 General Electric Capital Corp., Medium-Term Notes, Ser. A,
6.00%, due 6/15/12 Aaa AAA 49
65 Goldman Sachs Group, Inc., Notes, 4.13%, due 1/15/08 Aa3 A+ 66
70 Hertz Corp., Notes, 4.70%, due 10/2/06 Baa2 BBB- 71
150 Host Marriott L.P., Senior Notes, 7.00%, due 8/15/12 Ba3 B+ 162**
80 Household Finance Corp., Notes, 4.63%, due 1/15/08 A1 A 83
35 International Bank for Reconstruction & Development, Notes,
3.63%, due 5/21/13 Aaa AAA 34
55 International Lease Finance Corp., Notes, 2.95%, due 5/23/06 A1 AA- 55
125 Invista, Notes, 9.25%, due 5/1/12 B1 B+ 138**
125 Iron Mountain, Inc., Guaranteed Senior Notes,
8.63%, due 4/1/13 B3 B 135
125 iStar Financial, Inc., Senior Notes, 6.00%, due 12/15/10 Baa3 BBB- 133@@@
75 J.P. Morgan Chase & Co., Senior Notes, 3.63%, due 5/1/08 Aa3 A+ 75
125 L-3 Communications Corp., Guaranteed Senior Subordinated
Notes, 7.63%, due 6/15/12 Ba3 BB- 138
125 LNR Property Corp., Senior Subordinated Notes, 7.63%,
due 7/15/13 Ba3 B+ 139
135 Lyondell Chemical Co., Guaranteed Senior Notes, 9.50%,
due 12/15/08 B1 B+ 147
125 Meritor Automotive, Inc., Notes, 6.80%, due 2/15/09 Ba1 BB+ 128
125 MGM Mirage, Inc., Guaranteed Notes, 9.75%, due 6/1/07 Ba2 BB- 141
125 Millennium America, Inc., Guaranteed Notes, 7.00%,
due 11/15/06 B1 BB- 131
</Table>
See Notes to Schedule of Investments
17
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 50 Morgan Stanley Dean Witter & Co., Senior Notes, 5.30%,
due 3/1/13 Aa3 A+ $ 52
125 MSW Energy Holdings LLC, Senior Secured Notes, Ser. B,
8.50%, due 9/1/10 Ba1 BB 137
125 Nalco Co., Senior Notes, 7.75%, due 11/15/11 B2 B- 135
125 Navistar International Corp., Senior Notes, 7.50%, due 6/15/11 Ba3 BB- 135
55 News America Holdings, Senior Debentures, 8.88%, due 4/26/23 Baa3 BBB- 72
25 Norfolk Southern Corp., Senior Notes, 6.00%, due 4/30/08 Baa1 BBB 27
15 Norfolk Southern Corp., Bonds, 7.80%, due 5/15/27 Baa1 BBB 19
125 Norske Skog Canada, Ltd., Guaranteed Senior Notes, Ser. D,
8.63%, due 6/15/11 Ba3 BB 135
125 Owens & Minor, Inc., Senior Subordinated Notes, 8.50%,
due 7/15/11 Ba3 BB- 138
125 Owens-Brockway Glass Container, Inc., Guaranteed Senior Notes,
8.88%, due 2/15/09 B2 BB- 137
20 Petroleos Mexicanos, Guaranteed Notes, 6.50%, due 2/1/05 Baa1 BBB- 20
50 PNC Funding Corp., Guaranteed Senior Notes, 5.75%,
due 8/1/06 A2 A- 52
50 Province of Ontario, Senior Unsubordinated Notes, 5.50%,
due 10/1/08 Aa2 AA 54
25 Quebec Province, Debentures, 7.50%, due 9/15/29 A1 A+ 33
125 Rent-A-Center, Inc., Guaranteed Senior Notes, Ser. B, 7.50%,
due 5/1/10 B1 BB- 130
80 Republic of Italy, Senior Unsubordinated Notes, 5.25%,
due 4/5/06 AA- 83
125 Salem Communications Holding Corp., Guaranteed Senior
Subordinated Notes, Ser. B, 9.00%, due 7/1/11 B3 B- 138
125 Sequa Corp., Senior Notes, Ser. B, 8.88%, due 4/1/08 B1 BB- 137
125 Smithfield Foods, Inc., Senior Notes, 7.00%, due 8/1/11 Ba2 BB 134**
30 Southern Power Co., Senior Notes, Ser. B, 6.25%, due 7/15/12 Baa1 BBB+ 33
50 Sprint Capital Corp., Guaranteed Notes, 6.00%, due 1/15/07 Baa3 BBB- 53
125 Standard Pacific Corp., Senior Notes, 6.50%, due 10/1/08 Ba2 BB 131
150 Stena AB, Senior Notes, 9.63%, due 12/1/12 Ba3 BB- 169
125 Suburban Propane Partners L.P., Senior Notes, 6.88%,
due 12/15/13 B1 B 129
55 Target Corp., Senior Notes, 7.50%, due 8/15/10 A2 A+ 65
125 Tembec Industries, Inc., Guaranteed Notes, 8.63%, due 6/30/09 Ba3 BB- 127
55 Time Warner Co., Inc., Notes, 7.75%, due 6/15/05 Baa1 BBB+ 57
125 Triad Hospitals, Inc., Senior Subordinated Notes, 7.00%,
due 11/15/13 B3 B 128
75 Tyco International Group SA, Guaranteed Senior Notes, 6.75%,
due 2/15/11 Baa3 BBB 85
40 Tyson Foods, Inc., Notes, 8.25%, due 10/1/11 Baa3 BBB 48
40 United Mexican States, Notes, 8.38%, due 1/14/11 Baa2 BBB- 47
30 Verizon Global Funding Corp., Senior Notes, 7.38%,
due 9/1/12 A2 A+ 36
125 Vintage Petroleum, Inc., Senior Notes, 8.25%, due 5/1/12 Ba3 BB- 140
125 Warner Music Group, Senior Subordinated Notes, 7.38%,
due 4/15/14 B3 B- 128**
75 Wells Fargo Co., Subordinated Notes, 6.25%, due 4/15/08 Aa2 A+ 82
</Table>
18
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 125 Westinghouse Air Brake, Senior Notes, 6.88%, due 7/31/13 Ba2 BB $ 130
125 Williams Cos., Inc., Notes, 8.13%, due 3/15/12 B3 B+ 147
125 Xerox Corp., Senior Notes, 6.88%, due 8/15/11 Ba2 B+ 133
125 Young Broadcasting, Inc., Guaranteed Senior Notes, 8.50%,
due 12/15/08 B2 B 134
-----------
TOTAL CORPORATE DEBT SECURITIES (COST $8,673) 8,969
-----------
FOREIGN GOVERNMENT SECURITIES^^ (17.2%)
EUR 70 Bundesrepublic Deutschland, Bonds, 5.00%, due 7/4/12 Aaa AAA 97
CAD 150 Canadian Government, Bonds, 7.25%, due 6/1/07 Aaa AAA 135
CAD 40 Canadian Government, Bonds, 8.00%, due 6/1/27 Aaa AAA 46
EUR 495 Government of France, Bonds, 7.75%, due 10/25/05 Aaa AAA 663
JPY 27,000 Inter-American Development Bank, 1.90%, due 7/8/09 Aaa AAA 270
JPY 18,000 Japan Development Bank, Bonds, 1.40%, due 6/20/12 Aaa AA- 172
JPY 8,000 Japan Development Bank, Bonds, 1.05%, due 6/20/23 Aaa AA- 62
JPY 20,000 Japan Financial Corp., Global Notes, 1.55%, due 2/21/12 Aaa AA- 194
EUR 400 Netherlands Government, Bonds, 5.25%, due 7/15/08 Aaa AAA 551
DKK 457 Nykredit, Mortgage-Backed Securities, Ser. 02A, 5.00%,
due 10/1/22 Aa1 AA 80
JPY 17,000 Quebec Province, Bonds, 1.60%, due 5/9/13 A1 A+ 163
AUD 70 Queensland Treasury, Bonds, 8.00%, due 9/14/07 Aaa AAA 56
JPY 23,000 Republic of Austria, Bonds, 3.75%, due 2/3/09 Aaa AAA 246
EUR 270 Republic of Germany, Bonds, 5.00%, due 8/19/05 Aaa AAA 351
EUR 295 Republic of Germany, Bonds, 5.50%, due 1/4/31 Aaa AAA 431
JPY 42,000 Republic of Italy, Bonds, 1.80%, due 2/23/10 Aa2 AA- 418
EUR 450 Spain Government, Bonds, 5.00%, due 7/30/12 Aaa AA+ 625
SEK 400 Swedish Government, Bonds, 5.50%, due 10/8/12 Aaa AAA 62
GBP 65 U K Treasury, Bonds, 8.50%, due 12/7/05 Aaa AAA 124
GBP 70 U K Treasury, Bonds, 5.75%, due 12/7/09 Aaa AAA 135
GBP 70 U K Treasury, Bonds, 8.00%, due 6/7/21 Aaa AAA 177
-----------
TOTAL FOREIGN GOVERNMENT SECURITIES (COST $4,566) 5,058
-----------
CONVERTIBLE BONDS (2.2%)
75 Devon Energy Corp., Senior Notes, 4.95%, due 8/15/08 Baa2 BBB 82
75 Echostar Communications Corp., Subordinated Notes, 5.75%,
due 5/15/08 B2 B 77
75 Edwards Lifescience Corp., Senior Notes, 3.88%, due 5/15/33 76^
50 Hilton Hotels Corp., Notes, 3.38%, due 4/15/23 Baa3 BBB- 56
65 Lamar Advertising Co., Notes, 2.88%, due 12/31/10 B2 B 70
75 Liberty Media Corp., Senior Debentures, 3.25%, due 3/15/31 Baa3 BBB- 70
75 Morgan Stanley Group, Inc., Senior Notes, 1.25%, due 12/30/08 Aa3 A+ 69
75 SCI Systems, Inc., Notes, 3.00%, due 3/15/07 B1 B 73
75 Thermo Electron Corp., Subordinated Debentures, 3.25%,
due 11/1/07 Baa3 BBB 74
-----------
TOTAL CONVERTIBLE BONDS (COST $623) 647
-----------
REPURCHASE AGREEMENTS (2.3%)
680 State Street Bank and Trust Co. Repurchase Agreement, 1.75%,
due 11/1/04, dated 10/29/04, Maturity Value $680,099,
Collateralized by $710,000 U.S. Treasury Bills, due
3/3/05 (Collateral Value $704,675) (COST $680) 680#
-----------
</Table>
See Notes to Schedule of Investments
19
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT VALUE +
(000'S OMITTED) (000'S OMITTED)
SHORT-TERM INVESTMENTS (1.3%)
$ 160 N&B Securities Lending Quality Fund, LLC $ 160+++
200 Neuberger Berman Institutional Cash Fund Trust Class 200@
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $360) 360#
-----------
NUMBER OF SHARES
WARRANTS (0.0%)
430 General Growth Properties (COST $0) --*
-----------
TOTAL INVESTMENTS (102.2%) (COST $28,279) 30,012##
Liabilities, less cash, receivables and other assets [(2.2%)] (635)
-----------
TOTAL NET ASSETS (100.0%) $ 29,377
-----------
</Table>
20
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
NOTES TO SCHEDULE OF INVESTMENTS
+ Investments in equity securities by Neuberger Berman Strategic Income
Fund ("Strategic Income") are valued at the latest sales price where
that price is readily available; equity securities for which no sales
were reported, unless otherwise noted, are valued at the mean between
the closing bid and asked prices. Securities traded primarily on the
NASDAQ Stock Market are normally valued by the Fund at the NASDAQ
Official Closing Price ("NOCP") provided by NASDAQ each business day.
The NOCP is the most recently reported price as of 4:00:02 p.m.,
Eastern time, unless that price is outside the range of the "inside"
bid and asked prices (i.e., the bid and asked prices that dealers
quote to each other when trading for their own accounts); in that
case, NASDAQ will adjust the price to equal the inside bid or asked
price, whichever is closer. Because of delays in reporting trades, the
NOCP may not be based on the price of the last trade to occur before
the market closes. Investments in debt securities by 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 debt securities requiring daily quotations, bid
prices are obtained from principal market makers in those securities.
The Fund values all other securities by a method the Board of Trustees
of Neuberger Berman Income Funds (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 and 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 noon, 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.
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.
++ Investment securities of Neuberger Berman Institutional Cash Fund
("Institutional Cash") are valued at amortized cost, which
approximates U.S. Federal income tax cost.
# At cost, which approximates market value.
## At October 31, 2004, the cost of investments for U.S. Federal income
tax purposes was $28,440,000. Gross unrealized appreciation of
investments was $1,641,000 and gross unrealized depreciation of
investments was $69,000, resulting in net unrealized appreciation of
$1,572,000, based on cost for U.S. Federal income tax purposes.
* Non-income producing security.
** Security exempt from registration under the Securities Act of 1933.
These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers under Rule
144A and are deemed liquid. At October 31, 2004, these securities
amounted to $2,120,000 or 7.2% of net assets for Strategic Income.
See Notes to Financial Statements
21
<Page>
@ Institutional Cash is also managed by Neuberger Berman Management Inc.
(see Notes A and F of Notes to Financial Statements) and may be
considered an affiliate since it has the same officers, Board members,
and investment manager as the Fund and because, at times, the Fund may
own 5% or more of the outstanding voting securities of Institutional
Cash.
~ Credit ratings are unaudited.
+++ The N&B Securities Lending Quality Fund, LLC ("Quality Fund") is an
investment vehicle established by the Fund's custodian to invest cash
the Fund receives as collateral for securities loans. The Fund's
shares in the Quality Fund are non-voting. However, because all shares
of the Quality Fund are held by funds in the related investment
company complex, the Quality Fund may be considered an affiliate of
the Fund (see Notes A and F of Notes to Financial Statements).
++++ The following securities were held in escrow at October 31, 2004, to
cover outstanding call options written:
<Table>
<Caption>
MARKET VALUE PREMIUM MARKET VALUE
NEUBERGER BERMAN SHARES SECURITIES AND OPTIONS OF SECURITIES ON OPTIONS OF OPTIONS
STRATEGIC INCOME 1,500 Abbott Laboratories $ 64,000 $ 1,000 $ 0
November 2004 @ 47.50
1,000 American International Group 61,000 1,000 0
November 2004 @ 80
1,500 Anadarko Petroleum 101,000 5,000 11,000
January 2005 @ 60
1,000 Anthem, Inc. 80,000 3,000 0
December 2004 @ 95
2,000 Bank of America 90,000 2,000 5,000
November 2004 @ 42.50
1,500 BP PLC ADR 88,000 1,000 2,000
January 2005 @ 60
5,000 Corinthian Colleges 72,000 2,000 2,000
February 2005 @ 17.50
2,000 Dover Corp. 79,000 3,000 2,000
December 2004 @ 40
2,000 First Data 82,000 2,000 0
November 2004 @ 45
3,000 FTI Consulting 56,000 2,000 1,000
March 2005 @ 22.50
1,000 General Dynamics 102,000 1,000 1,000
November 2004 @ 105
3,500 Intel Corp. 78,000 2,000 3,000
April 2005 @ 25
4,000 Jackson Hewitt Tax Service 84,000 2,000 6,000
January 2005 @ 20
1,500 Lockheed Martin 83,000 2,000 2,000
December 2004 @ 55
1,500 PetroChina Co. 79,000 1,000 1,000
December 2004 @ 55
700 Rio Tinto 74,000 4,000 3,000
January 2005 @ 110
2,000 Target Corp. 100,000 3,000 7,000
January 2005 @ 47.50
4,000 Texas Instruments 98,000 1,000 6,000
January 2005 @ 25
2,000 Verizon Communications 78,000 1,000 1,000
January 2005 @ 42.50
2,000 Willis Group Holdings 72,000 2,000 1,000
January 2005 @ 40
</Table>
22
<Page>
^^ Principal amount is stated in the currency in which the security is
denominated.
AUD = Australian Dollar
CAD = Canadian Dollar
DKK = Danish Krone
EUR = Euro Currency
GBP = Great Britain Pound
JPY = Japanese Yen
SEK = Swedish Krona
^ Not rated by a nationally recognized statistical rating organization.
~~ All or a portion of this security is on loan (see Note A of Notes to
Financial Statements).
@@ All or a portion of this security was purchased on a when-issued
basis. At October 31, 2004, these securities amounted to $40,000 and
$967,000 for Institutional Cash and Strategic Income, respectively.
@@@ All or a portion of this security is segregated as collateral for
when-issued purchase commitments and/or financial futures contracts
margin.
+++ TBA (To Be Assigned) Securities are purchased on a forward commitment
basis with an appropriate principal amount and no definite maturity
date. The actual principal amount and maturity date will be determined
upon settlement when the specific mortgage pools are assigned.
See Notes to Financial Statements
23
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
STATEMENTS OF ASSETS AND LIABILITIES
<Table>
<Caption>
NEUBERGER BERMAN INCOME FUNDS INSTITUTIONAL STRATEGIC
(000'S OMITTED EXCEPT PER SHARE AMOUNTS) CASH FUND(1) INCOME FUND(2)
ASSETS
INVESTMENTS IN SECURITIES, AT VALUE*+ (NOTES A & F)--SEE
SCHEDULE OF INVESTMENTS:
Unaffiliated issuers $ 2,732,939 $ 29,652
Affiliated issuers -- 360
=================================================================================================================
2,732,939 30,012
Cash 1 24
Foreign currency -- 203
Dividends and interest receivable 1,686 302
Receivable for securities sold -- 204
Receivable for Fund shares sold 2,000 --
Receivable from administrator--net (Note B) -- 20
Prepaid expenses and other assets 15 --
=================================================================================================================
TOTAL ASSETS 2,736,641 30,765
=================================================================================================================
LIABILITIES
Dividends payable 2,542 --
Option contracts written, at market value (Note A) -- 54
Net payable for forward foreign currency exchange contracts sold (Note C) -- 59
Payable for collateral on securities loaned (Note A) -- 160
Payable for securities purchased 40,000 1,038
Payable for Fund shares redeemed 2,000 --
Payable for variation margin (Note A) -- 1
Payable to investment manager (Notes A & B) 224 13
Payable to administrator (Note B) 337 --
Accrued expenses and other payables 61 63
=================================================================================================================
TOTAL LIABILITIES 45,164 1,388
=================================================================================================================
NET ASSETS AT VALUE $ 2,691,477 $ 29,377
=================================================================================================================
NET ASSETS CONSIST OF:
Paid-in capital $ 2,691,466 $ 27,530
Undistributed net investment income (loss) -- 79
Accumulated net realized gains (losses) on investments 11 107
Net unrealized appreciation (depreciation) in value of investments -- 1,661
=================================================================================================================
NET ASSETS AT VALUE $ 2,691,477 $ 29,377
=================================================================================================================
SHARES OUTSTANDING ($.001 par value; unlimited shares authorized) 2,691,466 2,740
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 1.00 $ 10.72
=================================================================================================================
+SECURITIES ON LOAN, AT MARKET VALUE $ -- $ 145
=================================================================================================================
*COST OF INVESTMENTS:
Unaffiliated issuers $ 2,732,939 $ 27,919
Affiliated issuers -- 360
=================================================================================================================
TOTAL COST OF INVESTMENTS $ 2,732,939 $ 28,279
=================================================================================================================
TOTAL COST OF FOREIGN CURRENCY $ -- $ 201
=================================================================================================================
</Table>
(1) Institutional Cash Fund currently offers Trust Class Shares.
(2) Strategic Income Fund currently offers Institutional Class Shares.
See Notes to Financial Statements
24
<Page>
NEUBERGER BERMAN FOR THE YEAR ENDED OCTOBER 31, 2004
STATEMENTS OF OPERATIONS
<Table>
<Caption>
NEUBERGER BERMAN INCOME FUNDS INSTITUTIONAL STRATEGIC
(000'S OMITTED) CASH FUND(1) INCOME FUND(2)
INVESTMENT INCOME
INCOME:
Interest income--unaffiliated issuers (Note A) $ 32,720 $ 943
Income from investments in affiliated issuers (Note A) -- 2
Dividend income--unaffiliated issuers -- 213
Income from securities loaned affiliated issuer (Note A) -- 13
Foreign taxes withheld (Note A) -- (1)
==================================================================================================================
Total income 32,720 1,170
==================================================================================================================
EXPENSES:
Investment management fee (Notes A & B) 2,712 163
Administration fee (Note B) 4,069 41
Audit fees 34 31
Custodian fees (Note B) 467 138
Insurance expense 67 1
Legal fees 25 35
Registration and filing fees 38 31
Shareholder reports 49 --
Shareholder servicing agent fees 12 9
Trustees' fees and expenses 31 24
Miscellaneous 54 --
==================================================================================================================
Total expenses 7,558 473
Expenses reimbursed by administrator (Note B) -- (241)
Investment management fee waived (Note A) -- 0
Expenses reduced by custodian fee expense offset and commission recapture
arrangements (Note B) (1) (2)
==================================================================================================================
Total net expenses 7,557 230
==================================================================================================================
Net investment income (loss) 25,163 940
=================================================================================================================
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE A)
Net realized gain (loss) on:
Sales of investment securities of unaffiliated issuers 11 771
Financial futures contracts -- (1)
Option contracts written -- 38
Foreign currency -- (296)
Change in net unrealized appreciation (depreciation) in value of:
Unaffiliated investment securities -- 1,352
Option contracts written -- 16
Foreign currency -- (49)
==================================================================================================================
Net gain (loss) on investments 11 1,831
==================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 25,174 $ 2,771
==================================================================================================================
</Table>
(1) Institutional Cash Fund currently offers Trust Class Shares.
(2) Strategic Income Fund currently offers Institutional Class Shares.
See Notes to Financial Statements
25
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
INSTITUTIONAL CASH FUND(1)
--------------------------------------
NEUBERGER BERMAN INCOME FUNDS
(000'S OMITTED)
YEAR YEAR
ENDED ENDED
OCTOBER 31, OCTOBER 31,
2004 2003
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) $ 25,163 $ 28,059
Net realized gain (loss) on investments 11 61
Change in net unrealized appreciation (depreciation) of investments -- --
----------------- -----------------
Net increase (decrease) in net assets resulting from operations 25,174 28,120
----------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (25,163) (28,059)
Net realized gain on investments (60) --
----------------- -----------------
Total distributions to shareholders (25,223) (28,059)
----------------- -----------------
FROM FUND SHARE TRANSACTIONS (NOTE D):
Proceeds from shares sold 7,534,445 12,498,219
Proceeds from reinvestment of dividends and distributions 5,644 4,312
Payments for shares redeemed (7,530,697) (12,976,936)
Net increase (decrease) from Fund share transactions 9,392 (474,405)
----------------- -----------------
NET INCREASE (DECREASE) IN NET ASSETS 9,343 (474,344)
----------------- -----------------
NET ASSETS:
Beginning of period 2,682,134 3,156,478
----------------- -----------------
End of period $ 2,691,477 $ 2,682,134
----------------- -----------------
Undistributed net investment income (loss) at end of period $ -- $ --
----------------- -----------------
<Caption>
STRATEGIC INCOME FUND(2)
--------------------------------------
NEUBERGER BERMAN INCOME FUNDS PERIOD FROM
(000'S OMITTED) JULY 11, 2003
YEAR (COMMENCEMENT
ENDED OF OPERATIONS) TO
OCTOBER 31, OCTOBER 31,
2004 2003
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) $ 940 $ 246
Net realized gain (loss) on investments 512 (151)
Change in net unrealized appreciation (depreciation) of investments 1,319 342
----------------- -----------------
Net increase (decrease) in net assets resulting from operations 2,771 437
----------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,171) (190)
Net realized gain on investments -- --
----------------- -----------------
Total distributions to shareholders (1,171) (190)
----------------- -----------------
FROM FUND SHARE TRANSACTIONS (NOTE D):
Proceeds from shares sold 4,693 24,659
Proceeds from reinvestment of dividends and distributions 825 143
Payments for shares redeemed (1,354) (1,436)
----------------- -----------------
Net increase (decrease) from Fund share transactions 4,164 23,366
----------------- -----------------
NET INCREASE (DECREASE) IN NET ASSETS 5,764 23,613
NET ASSETS:
Beginning of period 23,613 --
----------------- -----------------
End of period $ 29,377 $ 23,613
----------------- -----------------
Undistributed net investment income (loss) at end of period $ 79 $ 65
----------------- -----------------
</Table>
(1) Institutional Cash Fund currently offers Trust Class Shares.
(2) Strategic Income Fund currently offers Institutional Class Shares.
See Notes to Financial Statements
26
<Page>
NOTES TO FINANCIAL STATEMENTS Income Funds
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1 GENERAL: Neuberger Berman Institutional Cash Fund ("Institutional
Cash") and Neuberger Berman Strategic Income Fund ("Strategic Income")
(individually a "Fund", collectively, the "Funds") are separate
operating series of Neuberger Berman Income Funds (the "Trust"), a
Delaware statutory trust organized pursuant to a Trust Instrument
dated December 23, 1992. The Trust is registered as a diversified,
open-end management investment company under the Investment Company
Act of 1940, as amended, (the "1940 Act") and its shares are
registered under the Securities Act of 1933, as amended (the "1933
Act"). Institutional Cash offers Trust Class shares and Strategic
Income offers Institutional Class shares. Strategic Income had no
operations until July 11, 2003 other than matters relating to its
organization and registration of its shares under the 1933 Act. The
Board of Trustees of the Trust (the "Board") may establish additional
series or classes of shares without the approval of shareholders.
The assets of each Fund belong only to that Fund, and the liabilities
of each Fund are borne solely by that Fund and no other.
It is the policy of Institutional Cash to maintain a continuous net
asset value per share of $1.00; the Fund has adopted certain
investment, valuation, and dividend and distribution policies, which
conform to general industry practice, to enable it to do so. However,
there is no assurance the Fund will be able to maintain a stable net
asset value per share.
The preparation of financial statements in accordance with U.S.
generally accepted accounting principles requires Neuberger Berman
Management Inc. ("Management") to make estimates and assumptions at
the date of the financial statements. Actual results could differ from
those estimates.
2 PORTFOLIO VALUATION: Investment securities are valued as indicated in
the notes following the Funds' Schedule of Investments.
3 FOREIGN CURRENCY TRANSLATION: Strategic Income may invest in foreign
securities denominated in foreign currency. The accounting records of
the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars using the exchange rate as of 12:00 noon,
Eastern time, to determine the value of investments, other assets and
liabilities. Purchase and sale prices of securities, and income and
expenses, are translated into U.S. dollars at the prevailing rate of
exchange on the respective dates of such transactions. Net unrealized
foreign currency gain (loss) arises from changes in the value of
assets and liabilities, other than investments in securities, as a
result of changes in exchange rates and is stated separately in the
Statements of Operations.
4 SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions
are recorded on a trade date basis. Dividend income is recorded on the
ex-dividend date or, for certain foreign dividends, as soon as the
Fund becomes aware of the dividends. Non-cash dividends included in
dividend income, if any, are recorded at the fair market value of the
securities received. Interest income, including accretion of discount
(adjusted for original issue discount, where applicable), and
amortization of premium, where applicable, is recorded on the accrual
basis. Realized gains and losses from securities transactions and (for
27
<Page>
Strategic Income foreign currency transactions) are recorded on the
basis of identified cost and stated separately in the Statements of
Operations.
5 INCOME TAX INFORMATION: The Funds are treated as separate entities for
U.S. Federal income tax purposes. It is the policy of each Fund to
continue to qualify as a regulated investment company by complying
with the requirements of Subchapter M of the Internal Revenue Code
applicable to regulated investment companies and to distribute
substantially all of its earnings to its shareholders. Therefore, no
Federal income or excise tax provision is required.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations, which may differ from
generally accepted accounting principles. These differences are
primarily due to differing treatments of income and gains on various
investment securities held by each Fund, timing differences and
differing characterization of distributions made by each Fund as a
whole. Strategic Income may also utilize earnings and profits
distributed to shareholders on redemption of shares as a part of the
dividends paid deduction for income tax purposes.
As determined on October 31, 2004, permanent differences for Strategic
Income resulting primarily from different book and tax accounting for
foreign currency gains and losses, paydown gains and losses, mortgage
dollar rolls, and amortization of bond premium were reclassified at
year end. These reclassifications had no effect on net income, net
assets or net assets per share of the Fund. There were no permanent
differences from different book and tax accounting reclassified at
year end for Institutional Cash.
The tax character of distributions paid during the periods ended
October 31, 2004 and October 31, 2003 were as follows:
<Table>
<Caption>
DISTRIBUTIONS PAID FROM:
LONG-TERM TAX RETURN
ORDINARY INCOME CAPITAL GAIN OF CAPITAL
2004 2003 2004 2003 2004 2003
INSTITUTIONAL CASH $ 25,222,740 $ 28,059,371$ -- $ -- $ -- $ --
STRATEGIC INCOME 1,171,018 189,760 -- -- -- --
<Caption>
TOTAL
2004 2003
INSTITUTIONAL CASH $ 25,222,740 $ 28,059,371
STRATEGIC INCOME 1,171,018 189,760
</Table>
As of October 31, 2004, the components of distributable earnings
(accumulated losses) on a U.S. Federal income tax basis were as
follows:
<Table>
<Caption>
UNDISTRIBUTED UNDISTRIBUTED UNREALIZED LOSS
ORDINARY LONG-TERM APPRECIATION CARRYFORWARDS
INCOME GAIN (DEPRECIATION) AND DEFERRALS TOTAL
INSTITUTIONAL CASH $ 2,553,766 $ -- $ -- $ -- $ 2,553,766
STRATEGIC INCOME 286,404 -- 1,561,869 -- 1,848,273
</Table>
The difference between book basis and tax basis distributable earnings
for Institutional Cash is attributable primarily to timing differences
of dividend payments. The difference between book basis and tax basis
distributable earnings for Strategic Income is attributable primarily
to the timing differences of wash sales, amortization of bond premium,
mark to market on certain forward foreign currency and futures
contracts, and mortgage dollar rolls.
28
<Page>
6 FOREIGN TAXES: Foreign taxes withheld represent amounts withheld by
foreign tax authorities, net of refunds recoverable.
7 DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Each Fund earns income,
net of expenses, daily on its investments. It is the policy of
Institutional Cash to declare dividends from net investment income on
each business day; such dividends are paid monthly. Strategic Income
generally distributes substantially all of its net investment income,
if any, at the end of each calendar quarter. Distributions from net
realized capital gains, if any, are generally distributed in December.
Income dividends and capital gain distributions to shareholders are
recorded on the ex-dividend date.
Strategic Income invests a portion of its assets in securities issued
by real estate companies, including real estate investment trusts
("REITs"). The distributions received from REITs held by the Fund are
generally comprised of investment income, long-term capital gains, and
return of REIT capital but the REITs do not report this information to
the Fund until the following calendar year. At October 31, 2004, the
Fund estimated these amounts within the Statement of Operations since
the information is not available from the REITs until after the Fund's
fiscal year-end. The character of distributions paid to shareholders,
as disclosed within the Statement of Changes, is based on these
estimates. All estimates are based upon REIT information sources
available to the Fund together with actual IRS Forms 1099 received to
date. After calendar year-end, REITs 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. After all applicable REITs
have informed the Fund of the actual breakdown of distributions paid
to the Fund during its fiscal year, the Fund adjusts to actual,
estimates previously recorded. 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 IRS Form 1099.
8 EXPENSE ALLOCATION: Certain expenses are applicable to multiple funds.
Expenses directly attributable to a Fund are charged to that Fund.
Expenses of the Trust that are not directly attributed to a Fund are
allocated among the funds, on the basis of relative net assets, except
where a more appropriate allocation of expenses to each of the funds
can otherwise be made fairly. 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 a Fund or the Trust, are
allocated among the Funds 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.
9 CALL OPTIONS: Premiums received by Strategic Income upon writing a
covered call option are recorded in the liability section of the
Fund's Statement of Assets and Liabilities and are subsequently
adjusted to the current market value. When an option is exercised,
closed, or expired, the Fund realizes a gain or loss and the liability
is eliminated. The Fund bears the risk of a decline in the price of
the security during the period, although any potential loss during the
period would be reduced by the amount of the option premium received.
In general, written covered call options may serve as a partial hedge
against decreases
29
<Page>
in value in the underlying securities to the extent of the premium
received. All securities covering outstanding options are held in
escrow by the custodian bank.
Summary of option transactions for the year ended October 31, 2004:
<Table>
<Caption>
VALUE WHEN
STRATEGIC INCOME NUMBER WRITTEN
Contracts outstanding 10/31/2003 39,000 $ 40,000
Contracts written 130,000 124,000
Contracts expired (24,000) (21,000)
Contracts exercised (29,000) (37,000)
Contracts closed (73,000) (66,000)
------------ ------------
Contracts outstanding 10/31/2004 43,000 $ 40,000
------------ ------------
</Table>
10 FORWARD FOREIGN CURRENCY CONTRACTS: Strategic Income may enter into
forward foreign currency contracts ("contracts") in connection with
planned purchases or sales of securities to hedge the U.S. dollar
value of portfolio securities denominated in a foreign currency. The
gain or loss arising from the difference between the original contract
price and the closing price of such contract is included in net
realized gains or losses on foreign currency transactions.
Fluctuations in the value of forward foreign currency contracts are
recorded for financial reporting purposes as unrealized gains or
losses by the Fund. The Fund has no specific limitation on the
percentage of assets which may be committed to these types of
contracts, but the Fund may not invest more than 20% of its net assets
in foreign securities denominated in or indexed to foreign currencies.
The Fund could be exposed to risks if a counter party to a contract
were unable to meet the terms of its contract or if the value of the
foreign currency changes unfavorably. The U.S. dollar value of foreign
currency underlying all contractual commitments held by the Fund is
determined using forward foreign currency exchange rates supplied by
an independent pricing service.
11 SECURITY LENDING: Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, Strategic Income entered into a
Securities Lending Agreement ("Agreement") with Neuberger Berman, LLC
("Neuberger"). 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 Board,
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 Trust's investment
manager. Neuberger guaranteed a certain amount of revenue to the Fund
under the Agreement, and received a portion of any revenue earned in
excess of the guaranteed amount as a lending agency fee. At October
31, 2004, Strategic Income had not paid Neuberger any fees under the
Agreement.
The Agreement has been renewed and approved by the Board as of July 1,
2004 with substantially the same terms. Under this current Agreement,
Neuberger guarantees a certain amount of revenue to the Fund and
receives any revenue earned in excess of the guaranteed amount as a
lending agency fee.
30
<Page>
Income earned on the securities loaned, if any, is reflected in the
Statements of Operations under the caption Income from securities
loaned affiliated issuer.
12 REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements
with institutions that the Fund's investment manager has determined
are creditworthy. Each repurchase agreement is recorded at cost. Each
Fund requires that the securities purchased in a repurchase 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. Each Fund
monitors, on a daily basis, the value of the securities transferred to
ensure that their value, including accrued interest, is greater than
amounts owed to the Fund under each such repurchase agreement.
13 SHORT SALES: Strategic Income may enter into short sales of
securities it owns or has the right to acquire at no added cost
through conversion or exchange of other securities it owns (short
sales "against the box"). To make delivery to the purchaser in a short
sale the executing broker borrows the securities being sold short on
behalf of the Fund, and the Fund is obligated to replace the
securities borrowed by purchasing them at the market price at a date
in the future. When a Fund sells short, it establishes a margin
account with the broker effecting the short sale and deposits
collateral with the broker. In addition, the Fund maintains, in a
segregated account with its custodian, the securities that could be
used to cover the short sale. The Fund is required to pay the lender
any dividends and may be required to pay premium or interest, in
connection with the short sales.
The Fund may also attempt to limit exposure to a possible decline in
the market value of securities through short sales of securities that
Management believes possess volatility characteristics similar to
those being hedged. In such case, any loss in the Fund's long position
after the short sale should be reduced by a corresponding gain in the
short position. The Fund also may use short sales in an attempt to
realize gains. The Fund will realize a gain if the security declines
in price between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund will incur a loss if the
price of the security increases between those dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the
amount of any premium or interest the Fund is required to pay in
connection with the short sale. A short position may be adversely
affected by imperfect correlation between movements in the price of
the securities sold short and the securities being hedged. At October
31, 2004, there were no open positions in short sales for Strategic
Income.
14 DOLLAR ROLLS: Strategic Income may enter into dollar roll transactions
with respect to mortgage-backed securities. In a dollar roll
transaction, the Fund sells securities for delivery in the current
month and simultaneously agrees to repurchase substantially similar
(i.e., same type and coupon) securities on a specified future date
from the same party. During the period before the repurchase, the Fund
forgoes principal and interest payments on the securities. The Fund is
compensated by the difference between the current sales price and the
forward price for the future purchase (often referred to as the
"drop"), as well as by the interest earned on the cash proceeds of the
initial sale. Dollar rolls may increase fluctuations in the Fund's net
asset value and may be viewed as a form of leverage. There is a risk
that the counterparty will be unable or unwilling to complete the
transaction as scheduled, which may result in losses to the Fund.
31
<Page>
15 FINANCIAL FUTURES CONTRACTS: Strategic Income may buy and sell
financial futures contracts to hedge against changes in securities
prices resulting from changes in prevailing interest rates. At the
time a Fund enters into a financial futures contract, it is required
to deposit with its custodian a specified amount of cash or liquid
securities, known as "initial margin," ranging upward from 1.1% of the
value of the financial futures contract being traded. Each day, the
futures contract is valued at the official settlement price of the
board of trade or U.S. commodity exchange on which such futures
contract is traded. Subsequent payments, known as "variation margin,"
to and from the broker are made on a daily basis as the market price
of the financial futures contract fluctuates. Daily variation margin
adjustments, arising from this "mark to market," are recorded by the
Fund as unrealized gains or losses.
Although some financial futures contracts by their terms call for
actual delivery or acceptance of financial instruments, in most cases
the contracts are closed out prior to delivery by offsetting purchases
or sales of matching financial futures contracts. When the contracts
are closed, a Fund recognizes a gain or loss. Risks of entering into
futures contracts include the possibility there may be an illiquid
market and/or a change in the value of the contract may not correlate
with changes in the value of the underlying securities.
For U.S. Federal income tax purposes, the futures transactions
undertaken by a Fund may cause that Fund to recognize gains or losses
from marking to market even though its positions have not been sold or
terminated, may affect the character of the gains or losses recognized
as long-term or short-term, and may affect the timing of some capital
gains and losses realized by the Fund. Also, a Fund's losses on
transactions involving futures contracts may be deferred rather than
being taken into account currently in calculating such Fund's taxable
income.
During the year ended October 31, 2004, Strategic Income entered into
financial futures contracts. At October 31, 2004, open positions in
financial futures contracts were as follows:
<Table>
<Caption>
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
December 2004 4 U.S. Treasury Notes, 5 Year Short $ 2,781
</Table>
At October 31, 2004, Strategic Income had deposited $575,000 in U.S.
Treasury Notes, 1.25%, due 5/31/05, in a segregated account to cover
margin requirements on open financial futures contracts.
16 TRANSACTIONS WITH OTHER FUNDS MANAGED BY NEUBERGER BERMAN MANAGEMENT
INC.: Pursuant to an Exemptive Order issued by the Securities and
Exchange Commission, Strategic Income may invest in Institutional
Cash. Institutional Cash seeks to provide as high a level of current
income as is consistent with the preservation of capital and the
maintenance of liquidity. For any cash that Strategic Income invests
in Institutional Cash, Management waives a portion of its management
fee equal to the management fee it receives from Institutional Cash on
those assets. For the year ended October 31, 2004, income earned on
this investment amounted to $1,867 and is reflected in the Statements
of Operations under the caption Income from investments in affiliated
issuers. For the year ended October 31, 2004, management fees waived
on the investment in Institutional Cash amounted to $214.
32
<Page>
17 INDEMNIFICATIONS: Like many other companies, the Trust's
organizational documents provide that its officers and trustees are
indemnified against certain liabilities arising out of the performance
of their duties to the Trust. In addition, both in some of its
principal service contracts and in the normal course of its business,
the Trust enters into contracts that provide indemnifications to other
parties for certain types of losses or liabilities. The Trust's
maximum exposure under these arrangements is unknown as this could
involve future claims against the Trust.
NOTE B--MANAGEMENT FEES, ADMINISTRATION FEES, DISTRIBUTION
ARRANGEMENTS, AND OTHER TRANSACTIONS WITH AFFILIATES:
Each Fund retains Management as its investment manager under a
Management Agreement. For such investment management services, each
Fund pays Management a fee at the annual rate of 0.10% and 0.60%, for
Institutional Cash and Strategic Income, respectively, of its average
daily net assets.
Each Fund retains Management as its administrator under an
Administration Agreement. Each Fund pays Management an administration
fee at the annual rate of 0.15% of its average daily net 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.
Management has contractually undertaken to reimburse operating
expenses (including the fees payable to Management but excluding
interest, taxes, brokerage commissions, and extraordinary expenses)
("Operating Expenses") which exceed the expense limitation as detailed
in the following table:
<Table>
<Caption>
REIMBURSEMENT FROM
MANAGEMENT FOR THE
EXPENSE YEAR ENDED
CLASS LIMITATION(1) EXPIRATION OCTOBER 31, 2004
INSTITUTIONAL CASH FUND TRUST CLASS 0.41% 10/31/07 $ --
STRATEGIC INCOME FUND INSTITUTIONAL CLASS 0.85% 10/31/14 240,824
</Table>
(1) Expense limitation per annum of the respective class' average
daily net assets.
The Trust Class of Institutional Cash and the Institutional Class of
Strategic Income have agreed to repay Management for their excess
Operating Expenses previously reimbursed by Management, so long as
their annual Operating Expenses during that period do not exceed their
respective expense limitations, and the repayments are made within
three years after the year in which Management issued the
reimbursement.
During the year ended October 31, 2004, there was no reimbursement to
Management. At October 31, 2004, Strategic Income had a contingent
liability to Management under the agreement of $445,669 of which
$204,845 expires in 2006 and $240,824 expires in 2007.
On October 31, 2003, Management and Neuberger, a member firm of the
New York Stock Exchange and sub-adviser to each Fund, became indirect
wholly owned subsidiaries of Lehman Brothers Holdings Inc. ("Lehman"),
a publicly-owned holding company. Neuberger is retained by Management
to furnish it
33
<Page>
with investment recommendations and research information without added
cost to each Fund. Several individuals who are officers and/or
Trustees of the Trust are also employees of Neuberger and/or
Management.
Each class of shares also has a distribution agreement with
Management. Management receives no compensation therefor and no
commissions for sales or redemptions of shares of beneficial interest
of each share class.
Each Fund has an expense offset arrangement in connection with its
custodian contract. The impact of this arrangement, reflected in the
Statements of Operations under the caption Custodian fees, was a
reduction of $898 and $444, for Institutional Cash and Strategic
Income, respectively.
Strategic Income has entered into a commission recapture program,
which enables it to pay some of its operational expenses by recouping
a portion of the commissions it pays to a broker that is not a related
party of the Fund. Expenses paid through this program may include
costs of custodial, transfer agency or accounting services. For the
year ended October 31, 2004, the impact of this arrangement was a
reduction of expenses of $1,714.
NOTE C--SECURITIES TRANSACTIONS:
Cost of purchases and proceeds of sales and maturities of long-term
securities (excluding short-term securities, financial futures
contracts, foreign currency contracts, and option contracts) for the
year ended October 31, 2004 were as follows:
STRATEGIC INCOME
<Table>
<Caption>
SALES AND
PURCHASES OF PURCHASES EXCLUDING SALES AND MATURITIES MATURITIES EXCLUDING
U.S. GOVERNMENT U.S. GOVERNMENT OF U.S. GOVERNMENT U.S. GOVERNMENT
AND AGENCY OBLIGATIONS AND AGENCY OBLIGATIONS AND AGENCY OBLIGATIONS AND AGENCY OBLIGATIONS
$ 4,956,309 $ 23,034,385 $ 2,269,605 $ 19,667,199
</Table>
All securities transactions for Institutional Cash were short-term.
During the year ended October 31, 2004, Strategic Income had entered
into various contracts to deliver currencies at specified future
dates. At October 31, 2004, open contracts were as follows:
<Table>
<Caption>
NET UNREALIZED
IN EXCHANGE SETTLEMENT APPRECIATION
SELL CONTRACTS FOR DATE VALUE (DEPRECIATION)
CANADIAN DOLLAR 170,000 CAD $ 136,723 12/29/2004 $ 139,179 $ (2,456)
EURO DOLLAR 2,298,000 EUR 2,898,048 12/27/2004 2,929,237 (31,189)
JAPANESE YEN 160,716,000 JPY 1,497,819 12/27/2004 1,521,293 (23,474)
POUND STERLING 189,000 GBP 343,602 12/29/2004 345,139 (1,537)
</Table>
During the year ended October 31, 2004, brokerage commissions on
securities transactions for Strategic Income amounted to $27,037, of
which Neuberger received $670, Lehman received $5,976, and other
brokers received $20,391.
34
<Page>
NOTE D--FUND SHARE TRANSACTIONS:
Share activity for the years ended October 31, 2004 and October 31,
2003 was as follows:
<Table>
<Caption>
FOR THE YEAR ENDED OCTOBER 31, 2004 FOR THE YEAR ENDED OCTOBER 31, 2003
------------------------------------------------ ------------------------------------------------------
SHARES SHARES
ISSUED ON ISSUED ON
REINVESTMENT REINVESTMENT
OF DIVIDENDS OF DIVIDENDS
(000'S SHARES AND SHARES SHARES AND SHARES
OMITTED) SOLD DISTRIBUTIONS REDEEMED TOTAL SOLD DISTRIBUTIONS REDEEMED TOTAL
INSTITUTIONAL
CASH:
Trust Class 7,534,445 5,644 (7,530,697) 9,392 12,498,219 4,312 (12,976,936) (474,405)
<Caption>
FOR THE YEAR ENDED OCTOBER 31, 2004 FOR THE PERIOD ENDED OCTOBER 31, 2003*
------------------------------------------------ ------------------------------------------------------
STRATEGIC
INCOME:
Institutional
Class 455 79 (130) 404 2,466 14 (144) 2,336
</Table>
* Period from July 11, 2003 (Commencement of Operations) to October
31, 2003.
NOTE E--LINE OF CREDIT:
At October 31, 2004, each Fund was a participant in a single
committed, unsecured $150,000,000 line of credit with State Street, to
be used only for temporary or emergency purposes. Interest is charged
on borrowings under this agreement at the overnight Federal Funds Rate
plus 0.50% per annum. A facility fee of 0.10% per annum of the
available line of credit is charged, of which each Fund has agreed to
pay its pro rata share, based on the ratio of its individual net
assets to the net assets of all participants at the time the fee is
due and payable. The fee is paid quarterly in arrears. No compensating
balance is required. Other investment companies managed by Management
also participate in this line of credit on the same terms. Because
several investment companies participate, there is no assurance that
an individual Fund will have access to all or any part of the
$150,000,000 at any particular time. There were no loans outstanding
pursuant to this line of credit at October 31, 2004. During the year
ended October 31, 2004, neither Fund utilized this line of credit.
35
<Page>
NOTE F--INVESTMENTS IN AFFILIATES*:
STRATEGIC INCOME:
<Table>
<Caption>
BALANCE OF BALANCE OF
SHARES GROSS GROSS SHARES
HELD PURCHASES SALES HELD
OCTOBER 31, AND AND OCTOBER 31,
NAME OF ISSUER 2003 ADDITIONS REDUCTIONS 2004
N&B Securities Lending Quality
Fund, LLC** -- 3,965,300 3,805,300 160,000
Neuberger Berman Institutional
Cash Fund Trust Class*** 109,014 6,797,995 6,706,984 200,025
TOTAL
<Caption>
INCOME FROM
INVESTMENTS IN
AFFILIATED
VALUE ISSUERS
OCTOBER 31, INCLUDED IN TOTAL
NAME OF ISSUER 2004 INCOME
N&B Securities Lending Quality
Fund, LLC** $ 160,000 $ 13,352
Neuberger Berman Institutional
Cash Fund Trust Class*** 200,025 1,867
------------ -----------------
TOTAL $ 360,025 $ 15,219
============ =================
</Table>
* Affiliated issuers, as defined in the 1940 Act, include issuers in
which the Fund held 5% or more of the outstanding voting securities.
** The N&B Securities Lending Quality Fund, LLC ("Quality Fund") is an
investment vehicle established by the Fund's custodian to invest cash
the Fund receives as collateral for securities loans. The Fund's
shares in the Quality Fund are non-voting. However, because all shares
of the Quality Fund are held by funds in the related investment
management complex, the Quality Fund may be considered an affiliate of
the Fund.
*** Neuberger Berman Institutional Cash Fund ("Institutional Cash") is
also managed by Neuberger Berman Management Inc. and may be considered
an affiliate since it has the same officers, Board members, and
investment manager as the Fund and because, at times, the Fund may own
5% or more of the outstanding voting securities of Institutional Cash.
NOTE G--PLAN OF REORGANIZATION:
On October 1, 2004, the Board considered and approved a proposal for
reorganizing Institutional Cash ("current Fund") into a new series of
another investment company called Neuberger Berman Institutional
Liquidity Series ("new Fund"). The new Fund would have the same name
and a substantially identical investment program as the current Fund.
The new Fund would be part of a two-level master-feeder structure, as
opposed to the current single-level structure of the current Fund. In
connection with the reorganization, the new Fund--through its
investment in the master fund--would also have a new sub-adviser;
Lehman Brothers AsseT Management Inc. would replace Neuberger Berman,
LLC. Management would continue to serve as investment adviser.
Shareholders will vote on the proposal at the shareholder meeting on
December 21, 2004. If approved by the shareholders, on the closing
date of the reorganization, the current Fund will transfer all of its
assets to the new Fund, in exchange for the assumption by the new Fund
of all of the current Fund's liabilities and the issuance of that
number of shares of the new Fund equal to the number of outstanding
shares of the current Fund on such date. Upon completion of the
reorganization, each Fund shareholder will be the owner of full and
fractional new Fund shares equal in number and aggregate net asset
value to his or her current Fund shares. Upon approval of the
proposal, the effective date of the reorganization will be on or after
December 21, 2004.
36
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
FINANCIAL HIGHLIGHTS Institutional Cash Fund
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the Financial
Statements.
<Table>
<Caption>
TRUST CLASS+ PERIOD FROM
MAY 8, 2000^
YEAR ENDED OCTOBER 31, TO OCTOBER 31,
--------------------------------------------------- --------------
2004 2003 2002 2001 2000
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
NET INVESTMENT INCOME (LOSS) .0092 .0096 .0176 .0466 .0307
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS FROM:
NET INVESTMENT INCOME (.0092) (.0096) (.0176) (.0466) (.0307)
NET CAPITAL GAINS (.0000) -- (.0000) -- --
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (.0092) (.0096) (.0176) (.0466) (.0307)
--------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
--------- --------- --------- --------- ---------
TOTAL RETURN++ +.93% +.97% +1.77% +4.76% +3.11%**
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (IN MILLIONS) $ 2,691.5 $ 2,682.1 $ 3,156.5 $ 2,125.1 $ 635.4
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS# .28% .28% .28% .29% .36%*
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS .28% .28% .28% .29% .35%*
RATIO OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS .92% .97% 1.74% 4.52% 6.45%*
</Table>
See Notes to Financial Highlights
37
<Page>
FINANCIAL HIGHLIGHTS Strategic Income Fund
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the Financial
Statements.
<Table>
<Caption>
INSTITUTIONAL CLASS PERIOD FROM
YEAR ENDED JULY 11, 2003^
OCTOBER 31, TO OCTOBER 31,
------------ --------------
2004 2003
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.11 $ 10.00
------------ ------------
INCOME FROM INVESTMENT OPERATIONS:
NET INVESTMENT INCOME (LOSS) .36 .10
NET GAINS OR LOSSES ON SECURITIES (BOTH REALIZED AND UNREALIZED) .69 .09
------------ ------------
TOTAL FROM INVESTMENT OPERATIONS 1.05 .19
LESS DISTRIBUTIONS FROM:
NET INVESTMENT INCOME (.44) (.08)
------------ ------------
NET ASSET VALUE, END OF PERIOD $ 10.72 $ 10.11
------------ ------------
TOTAL RETURN++ +10.65% +1.95%**
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (IN MILLIONS) $ 29.4 $ 23.6
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS# .85% .85%*
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS++ .84% .84%*
RATIO OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS 3.44% 3.51%*
PORTFOLIO TURNOVER RATE 85% 34%
</Table>
See Notes to Financial Highlights
38
<Page>
NOTES TO FINANCIAL HIGHLIGHTS
+ The per share amounts and ratios which are shown reflect income and
expenses, including the Fund's proportionate share of the Portfolio's
income and expenses through February 9, 2001 under the prior master-feeder
fund structure.
++ Total return based on per share net asset value reflects the effects of
changes in net asset value on the performance of each Fund during each
fiscal period and assumes dividends and other distributions, if any, were
reinvested. Results represent past performance and do not guarantee future
results. Current returns may be lower or higher than the performance data
quoted. Investment returns and principal may fluctuate and shares when
redeemed may be worth more or less than original cost. For Strategic
Income, total return would have been lower if Management had not reimbursed
and/or waived certain expenses. 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 reimbursement of expenses by the investment manager and/or waiver of
a portion of the investment management fee. Had the investment manager not
undertaken such actions, the annualized ratios of net expenses to average
daily net assets would have been:
<Table>
<Caption>
YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31,
2004 2003(1)
STRATEGIC INCOME INSTITUTIONAL CLASS 1.72% 3.77%
</Table>
(1) Period from July 11, 2003 to October 31, 2003.
^ The date investment operations commenced.
* Annualized.
** Not annualized.
39
<Page>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees Neuberger Berman Income Funds and Shareholders of
Neuberger Berman Institutional Cash Fund
Neuberger Berman Strategic Income Fund
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Neuberger Berman Institutional Cash Fund and
Neuberger Berman Strategic Income Fund, two of the series constituting the
Neuberger Berman Income Funds (the "Trust") as of October 31, 2004, and the
related statements of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended for
Neuberger Berman Institutional Cash Fund and changes in net assets for the year
ended October 31, 2004 and for the period from July 11, 2003 (commencement of
operations) to October 31, 2003, for Neuberger Berman Strategic Income Fund, and
the financial highlights for the periods indicated herein. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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, 2004, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the above mentioned series of Neuberger Berman Income Funds as of October 31,
2004, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended for Neuberger
Berman Institutional Cash Fund and changes in net assets for the year ended
October 31, 2004 and for the period from July 11, 2003 (commencement of
operations) to October 31, 2003, for Neuberger Berman Strategic Income Fund, and
the financial highlights for each of the periods indicated therein, in
conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
December 3, 2004
40
<Page>
DIRECTORY
INVESTMENT MANAGER, ADMINISTRATOR AND DISTRIBUTOR
Neuberger Berman Management Inc.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
800.877.9700 or 212.476.8800
Institutional Services 800.366.6264
SUB-ADVISER
Neuberger Berman, LLC
605 Third Avenue
New York, NY 10158-3698
CUSTODIAN AND SHAREHOLDER SERVICING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
ADDRESS CORRESPONDENCE TO:
Neuberger Berman Funds
Institutional Services
605 Third Avenue 2nd Floor
New York, NY 10158-0180
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
2nd Floor
Washington, DC 20036-1800
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
41
<Page>
TRUSTEE AND OFFICER INFORMATION
The following tables set forth information concerning the trustees and officers
of the Trust. All persons named as trustees and officers also serve in similar
capacities for other funds administered or managed by NB Management and
Neuberger Berman. The Statement of Additional Information includes additional
information about fund trustees and is available upon request, without charge,
by calling (800) 877-9700.
INFORMATION ABOUT THE BOARD OF TRUSTEES
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION AND FUND COMPLEX
LENGTH OF TIME OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
NAME, AGE, AND ADDRESS (1) SERVED (2) PRINCIPAL OCCUPATION(S) (3) TRUSTEE FUND COMPLEX BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
John Cannon (74) Trustee since 1994 Consultant. Formerly, 41 Independent Trustee or Director
Chairman, CDC Investment of three series of
Advisers (registered OppenheimerFunds: Limited Term
investment adviser) 1993 to New York Municipal Fund,
January 1999; formerly, Rochester Fund Municipals, and
President and Chief Executive Oppenheimer Convertible
Officer, AMA Investment Securities Fund, since 1992.
Advisors, an affiliate of the
American Medical Association.
Faith Colish (69) Trustee since 2000 Counsel, Carter Ledyard & 41 Director, American Bar
Millburn LLP (law firm) Retirement Association (ABRA)
since October 2002; since 1997 (not-for-profit
formerly, Attorney-at-Law membership association).
and President, Faith Colish,
A Professional Corporation,
1980 to 2002.
Walter G. Ehlers (71) Trustee since 2000 Consultant, Retired 41 None.
President and Trustee,
Teachers Insurance & Annuity
(TIAA) and College
Retirement Equities Fund
(CREF).
C. Anne Harvey (67) Trustee since 2000 Consultant, C. A. Harvey 41 President, Board of Associates
Associates, since June 2001; to The National Rehabilitation
formerly, Director, AARP, Hospital's Board of Directors
1978 to December 2001. since 2002; formerly, Member,
Individual Investors Advisory
Committee to the New York Stock
Exchange Board of Directors,
1998 to June 2002; formerly,
Member, American Savings
Education Council's Policy Board
(ASEC), 1998 to 2000; formerly,
Member, Executive Committee,
Crime Prevention Coalition of
America, 1997 to 2000.
</Table>
42
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION AND FUND COMPLEX
LENGTH OF TIME OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
NAME, AGE, AND ADDRESS (1) SERVED (2) PRINCIPAL OCCUPATION(S) (3) TRUSTEE FUND COMPLEX BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
Barry Hirsch (71) Trustee since 1993 Attorney-at-Law. Formerly, 41 None.
Senior Counsel, Loews
Corporation (diversified
financial corporation) May
2002 until April 2003;
formerly, Senior Vice
President, Secretary and
General Counsel, Loews
Corporation.
Robert A. Kavesh (77) Trustee since 1993 Marcus Nadler Professor 41 Director, DEL Laboratories, Inc.
Emeritus of Finance and (cosmetics and pharmaceuticals)
Economics, New York since 1978; Director, The Caring
University Stern School of Community (not-for-profit).
Business.
Howard A. Mileaf (67) Trustee since 2000 Retired. Formerly, Vice 41 Director, WHX Corporation
President and Special (holding company) since August
Counsel, WHX Corporation 2002; Director, Webfinancial
(holding company) 1993 to Corporation (holding company)
2001. 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 (72) Trustee since 1993 Retired. Formerly, Senior 41 Director, Pro-Kids Golf and
Vice President, Foodmaker, Learning Academy (teach golf and
Inc. (operator and computer usage to "at risk"
franchiser of restaurants) children) since 1998; formerly,
until January 1997. Director, Prandium, Inc.
(restaurants) from March 2001
until July 2002.
Cornelius T. Ryan (72) Trustee since 2000 Founding General Partner, 41 Director, Capital Cash
Oxford Partners and Oxford Management Trust (money market
Bioscience Partners (venture fund), Naragansett Insured
capital partnerships) and Tax-Free Income Fund, Rocky
President, Oxford Venture Mountain Equity Fund, Prime Cash
Corporation. Fund, several private companies
and QuadraMed Corporation
(NASDAQ).
</Table>
43
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION AND FUND COMPLEX
LENGTH OF TIME OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
NAME, AGE, AND ADDRESS (1) SERVED (2) PRINCIPAL OCCUPATION(S) (3) TRUSTEE FUND COMPLEX BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
Tom Decker Seip (54) Trustee since 2000 General Partner, Seip 41 Director, H&R Block, Inc.
Investments LP (a private (financial services company)
investment partnership); since May 2001; Director,
formerly, President and CEO, Forward Management, Inc. (asset
Westaff, Inc. (temporary management) since 2001;
staffing), May 2001 to formerly, Director, General
January 2002; Senior Magic (voice recognition
Executive at the Charles software) 2001 until 2002;
Schwab Corporation from 1983 formerly, Director, E-Finance
to 1999, including Chief Corporation (credit decisioning
Executive Officer, Charles services) 1999 to 2003;
Schwab Investment Management, formerly, Director,
Inc. and Trustee, Schwab Save-Daily.com (micro investing
Family of Funds and Schwab services) 1999 to 2003;
Investments from 1997 to 1998 Director, Offroad Capital Inc.
and Executive Vice (pre-public internet commerce
President-Retail Brokerage, company).
Charles Schwab Investment
Management from 1994 to 1997.
Candace L. Straight (57) Trustee since 1993 Private investor and 41 Director, The Proformance
consultant specializing in Insurance Company (personal
the insurance industry; lines property and casualty
formerly, Advisory Director, insurance company) since March
Securitas Capital LLC (a 2004; Director, Providence
global private equity Washington (property and
investment firm dedicated to casualty insurance company)
making investments in the since December 1998; Director,
insurance sector) 1998 to Summit Global Partners
December 2002. (insurance brokerage firm) since
October 2000.
Peter P. Trapp (59) Trustee since 2000 Regional Manager for Atlanta 41 None.
Region, Ford Motor Credit
Company since August 1997;
formerly, President, Ford
Life Insurance Company, April
1995 to August 1997.
</Table>
44
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION AND FUND COMPLEX
LENGTH OF TIME OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
NAME, AGE, AND ADDRESS (1) SERVED (2) PRINCIPAL OCCUPATION(S) (3) TRUSTEE FUND COMPLEX BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
TRUSTEES WHO ARE "INTERESTED PERSONS"
Edward I. O'Brien* (76) Trustee since 2000 Formerly, Member, Investment 41 Director, Legg Mason, Inc.
Policy Committee, Edward (financial services holding
Jones 1993 to 2001; company) since 1993; formerly,
President, Securities Director, Boston Financial Group
Industry Association ("SIA") (real estate and tax shelters)
(securities industry's 1993 to 1999.
representative in government
relations and regulatory
matters at the federal and
state levels) 1974 to 1992;
Adviser to SIA, November 1992
to November 1993.
Jack L. Rivkin* (64) President and Executive Vice President and 41 Director, Dale Carnegie and
Trustee since Chief Investment Officer, Associates, Inc. (private
December 2002 Neuberger Berman Inc. company) since 1998; Director,
(holding company) since 2002 Emagin Corp. (public company)
and 2003, respectively; since 1997; Director, Solbright,
Executive Vice President and Inc. (private company) since
Chief Investment Officer, 1998; Director, Infogate, Inc.
Neuberger Berman since 2002 (private company) since 1997;
and 2003, respectively; Director, Broadway Television
Director and Chairman, NB Network (private company) since
Management since December 2000.
2002; formerly, Executive
Vice President, Citigroup
Investments, Inc. from
September 1995 to February
2002; formerly, Executive
Vice President, Citigroup
Inc. from September 1995 to
February 2002.
</Table>
45
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
POSITION AND FUND COMPLEX
LENGTH OF TIME OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
NAME, AGE, AND ADDRESS (1) SERVED (2) PRINCIPAL OCCUPATION(S) (3) TRUSTEE FUND COMPLEX BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
Peter E. Sundman* (45) Chairman of the Executive Vice President, 41 Director and Vice President,
Board, Chief Neuberger Berman Inc. Neuberger & Berman Agency, Inc.
Executive Officer (holding company) since 1999; since 2000; formerly, Director,
and Trustee since Head of Neuberger Berman Neuberger Berman Inc. (holding
2000 President and Inc.'s Mutual Funds and company) from October 1999
Chief Executive Institutional Business since through March 2003; Trustee,
Officer from 1999 to 1999; President and Director, Frost Valley YMCA.
2000 NB Management since 1999;
Executive Vice President,
Neuberger Berman since 1999;
formerly, Principal,
Neuberger Berman from 1997
until 1999; formerly, Senior
Vice President, NB Management
from 1996 until 1999.
</Table>
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Pursuant to the Trust's Trust Instrument, each Trustee shall hold office
for life or until his or her successor is elected or the Trust terminates;
except that (a) any Trustee may resign by delivering a written resignation;
(b) any Trustee may be removed with or without cause at any time by a
written instrument signed by at least two-thirds of the other Trustees; (c)
any Trustee who requests to be retired, or who has become unable to serve,
may be retired by a written instrument signed by a majority of the other
Trustees; and (d) any Trustee may be removed at any shareholder meeting by
a vote of at least two-thirds of the outstanding shares.
(3) Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
* Indicates a trustee who is an "interested person" within the meaning of the
1940 Act. Mr. Sundman and Mr. Rivkin are interested persons of the Trust by
virtue of the fact that they are officers and/or directors of NB Management
and Executive Vice Presidents of Neuberger Berman. Mr. O'Brien is an
interested person of the Trust by virtue of the fact that he is a director
of Legg Mason, Inc., a wholly owned subsidiary of which, from time to time,
serves as a broker or dealer to the Funds and other funds for which NB
Management serves as investment manager.
46
<Page>
<Table>
<Caption>
POSITION AND
NAME, AGE, AND ADDRESS (1) LENGTH OF TIME SERVED (2) PRINCIPAL OCCUPATION(S) (3)
- -----------------------------------------------------------------------------------------------------------------------------
Claudia A. Brandon (48) Secretary since 1985 Vice President-Mutual Fund Board
Relations, NB Management since 2000; Vice
President, Neuberger Berman since 2002 and
employee since 1999; formerly, Vice
President, NB Management from 1986 to
1999; Secretary, fourteen registered
investment companies for which NB
Management acts as investment manager and
administrator (four since 2002, three
since 2003, and four since 2004).
Robert Conti (48) Vice President since 2000 Senior Vice President, Neuberger Berman
since 2003, formerly, Vice President,
Neuberger Berman from 1999 until 2003;
Senior Vice President, NB Management since
2000; formerly, Controller, NB Management
until 1996; formerly, Treasurer, NB
Management from 1996 until 1999; Vice
President, fourteen registered investment
companies for which NB Management acts as
investment manager and administrator
(three since 2000, four since 2002, three
since 2003, and four since 2004).
Brian J. Gaffney (51) Vice President since 2000 Managing Director, Neuberger Berman since
1999; Senior Vice President, NB Management
since 2000; formerly, Vice President, NB
Management from 1997 until 1999; Vice
President, fourteen registered investment
companies for which NB Management acts as
investment manager and administrator
(three since 2000, four since 2002, three
since 2003, and four since 2004).
Sheila R. James (39) Assistant Secretary since 2002 Employee, Neuberger Berman since 1999;
formerly, Employee, NB Management from
1991 to 1999; Assistant Secretary,
fourteen registered investment companies
for which NB Management acts as investment
manager and administrator (seven since
2002, three since 2003, and four since
2004).
Kevin Lyons (49) Assistant Secretary since 2003 Employee, Neuberger Berman since 1999;
formerly, Employee, NB Management from
1993 to 1999; Assistant Secretary,
fourteen registered investment companies
for which NB Management acts as investment
manager and administrator (ten since 2003
and four since 2004).
</Table>
47
<Page>
INFORMATION ABOUT THE OFFICERS OF THE TRUST
<Table>
<Caption>
POSITION AND
NAME, AGE, AND ADDRESS (1) LENGTH OF TIME SERVED (2) PRINCIPAL OCCUPATION(S) (3)
- -----------------------------------------------------------------------------------------------------------------------------
John M. McGovern (34) Assistant Treasurer since 2002 Vice President, Neuberger Berman since
January 2004; Employee, NB Management
since 1993; Assistant Treasurer, fourteen
registered investment companies for which
NB Management acts as investment manager
and administrator (seven since 2002, three
since 2003, and four since 2004).
Barbara Muinos (45) Treasurer and Principal Financial and Vice President, Neuberger Berman since
Accounting Officer since 2002; prior thereto, 1999; formerly, Assistant Vice President,
Assistant Treasurer since 1996 NB Management from 1993 to 1999; Treasurer
and Principal Financial and Accounting
Officer, fourteen registered investment
companies for which NB Management acts as
investment manager and administrator
(seven since 2002, three since 2003, and
four since 2004); formerly, Assistant
Treasurer, three registered investment
companies for which NB Management acts as
investment manager and administrator from
1996 until 2002.
Frederic B. Soule (58) Vice President since 2000 Senior Vice President, Neuberger Berman
since 2003; formerly, Vice President,
Neuberger Berman from 1999 until 2003;
formerly, Vice President, NB Management
from 1995 until 1999; Vice President,
fourteen registered investment companies
for which NB Management acts as investment
manager and administrator (three since
2000, four since 2002, three since 2003,
and four since 2004).
</Table>
- ---------------
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Pursuant to the By-Laws of the Trust, each officer elected by the Trustees
shall hold office until his or her successor shall have been elected and
qualified or until his or her earlier death, inability to serve, or
resignation. Officers serve at the pleasure of the Trustees and may be
removed at any time with or without cause.
(3) Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
48
<Page>
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust 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. Information regarding how
the Trust 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 Trust's website at www.nb.com.
QUARTERLY PORTFOLIO SCHEDULE
The Trust files a complete schedule of portfolio holdings for each Fund with the
Securities and Exchange Commission for the first and third quarters of each
fiscal year on Form N-Q. The Trust's Forms N-Q are available on the Securities
and Exchange Commission's website at www.sec.gov and may be reviewed and copied
at the Securities and Exchange Commission's Public Reference Room in Washington,
DC. Information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330. The information on Form N-Q is available upon request,
without charge, by calling 1-800-877-9700 (toll free).
49
<Page>
NOTICE TO SHAREHOLDERS (Unaudited)
For Neuberger Berman Strategic Income Fund 3.9% of the dividends distributed
during the fiscal year ended October 31, 2004 qualifies for the dividends
received deduction for corporate shareholders.
Under most state tax laws, mutual fund dividends which are derived from direct
investments in U.S. Government obligations are not taxable, as long as a Fund
meets certain requirements. Some states require that a Fund must provide
shareholders with a written notice, within 60 days of the close of a Fund's
taxable year, designating the portion of the dividends which represents interest
which those states consider to have been earned on U.S. Government obligations.
The chart below shows the percentage of income derived from such investments for
the twelve months ended October 31, 2004. This information should not be used to
complete your tax returns.
<Table>
<Caption>
OTHER DIRECT OTHER INDIRECT
U.S. TREASURY U.S. GOVERNMENT U.S. GOVERNMENT REPURCHASE
NEUBERGER BERMAN OBLIGATIONS OBLIGATIONS OBLIGATIONS AGREEMENTS
INSTITUTIONAL CASH FUND 12.4% 9.3% 0.0% 0.6%
STRATEGIC INCOME FUND 4.1% 11.1% 1.0% 1.0%
</Table>
For the fiscal year ended October 31, 2004, Neuberger Berman Strategic Income
Fund designates $244,684, or up to the maximum amount of such dividends
allowable pursuant to the Internal Revenue Code, as qualified dividend income
eligible for reduced tax rates. These lower rates range from 5% to 15% depending
upon an individual's tax bracket. Complete information regarding the Fund's
distributions during the calendar year 2004 will be reported in conjunction with
Form 1099-DIV.
You will receive information to be used in filing your 2004 tax returns, which
will include a notice of the exact tax status of all dividends paid to you by
each Fund during calendar year 2004. Please consult your own tax advisor for
details as to how this information should be reflected on your tax returns.
50
<Page>
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<Page>
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<Page>
[NEUBERGER BERMAN LOGO]
A LEHMAN BROTHERS COMPANY
NEUBERGER BERMAN MANAGEMENT INC.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
SHAREHOLDER SERVICES
800.877.9700
INSTITUTIONAL SUPPORT SERVICES
800.366.6264
www.nb.com
Statistics and projections in this report are derived from sources deemed to be
reliable but cannot be regarded as a representation of future results of the
Funds. This report is prepared for the general information of shareholders and
is not an offer of shares of the Funds. Shares are sold only through the
currently effective prospectus, which must precede or accompany this report.
[GRAPHIC] B0909 12/04
ITEM 2. CODE OF ETHICS
The Board of Trustees ("Board") of Neuberger Berman Income Funds ("Registrant")
adopted a code of ethics that applies to the Registrant's principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions ("Code of Ethics"). For the
period covered by this Form N-CSR, the Code of Ethics was amended to require
that, whenever the Chief Legal Officer ("CLO") investigates a report of a
possible violation, the CLO will report the results of the investigation to the
independent Board members, and will tell the person who initially reported the
matter to the CLO that such an investigation and report to the Board members
have been made.
For the period covered by this Form N-CSR, there were no waivers from the Code
of Ethics granted to the Registrant's principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions.
The current Code of Ethics is available upon request, without charge, by calling
1-800-877-9700 (toll-free).
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
The Board has determined that the Registrant has two audit committee financial
experts serving on its audit committee. The Registrant's audit committee
financial experts are John Cannon and Walter G. Ehlers. Mr. Cannon and Mr.
Ehlers are both independent trustees as defined by Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Ernst & Young, LLP ("E&Y") serves as independent auditor to the Registrant.
(a) Audit Fees
----------
The aggregate fees billed for each of the last two fiscal years for professional
services rendered by E&Y for the audit of the annual financial statements or
services that are normally provided by E&Y in connection with statutory and
regulatory filings or engagements for those fiscal years were $215,900 and
$188,600 for 2004 and 2003, respectively.
(b) Audit-Related Fees
------------------
The aggregate fees billed to the Registrant in each of the last two fiscal years
for assurance and related services by E&Y that are reasonably related to the
performance of the audit of the Registrant's financial statements and are not
reported above in AUDIT FEES were $0 and $0 for 2004 and 2003, respectively.
The fees billed to other entities in the investment company complex for
assurance and related services by E&Y that are reasonably related to the
performance of the audit that the Audit Committee was required to approve
because the engagement related directly to the operations and financial
reporting of the Registrant were $0 and $0 for 2004 and 2003, respectively.
(c) Tax Fees
--------
The aggregate fees billed to the Registrant in each of the last two fiscal years
for professional services rendered by E&Y for tax compliance, tax advice, and
tax planning were $69,800 and $65,825 for 2004 and 2003, respectively. The
nature of the services provided was tax compliance, tax advice, and tax
planning. The Audit Committee approved 0% and 0% of these services provided by
E&Y for 2004 and 2003, respectively, pursuant to the waiver provisions of Rule
2-01(c)(7)(i)(C) of Regulation S-X.
The fees billed to other entities in the investment company complex for tax
compliance, tax advice, and tax planning that the Audit Committee was required
to approve because the engagement related directly to the operations and
financial reporting of the Registrant were $0 and $0 for 2004 and 2003,
respectively.
(d) All Other Fees
--------------
The aggregate fees billed to the Registrant in each of the last two fiscal years
for products and services provided by E&Y, other than services reported in AUDIT
FEES, AUDIT-RELATED FEES, and TAX FEES were $0 and $0 for 2004 and 2003,
respectively.
The fees billed to other entities in the investment company complex for products
and services provided by E&Y, other than services reported in AUDIT FEES,
AUDIT-RELATED FEES, and TAX FEES that the Audit Committee was required to
approve because the engagement related directly to the operations and financial
reporting of the Registrant were $0 and $0 for 2004 and 2003, respectively.
(e) Audit Committee's Pre-Approval Policies and Procedures
------------------------------------------------------
(1) The Audit Committee's pre-approval policies and procedures for the
Registrant to engage an accountant to render audit and non-audit services
delegate to the Chair of the Committee the power to pre-approve services between
meetings of the Committee.
(2) None of the services described in paragraphs (b) through (d) above were
approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01
of Regulation S-X.
(f) Hours Attributed to Other Persons
---------------------------------
Not applicable.
(g) Non-Audit Fees
--------------
Non-audit fees billed by E&Y for services rendered to the Registrant for each of
the last two fiscal years of the Registrant were $69,800 and $65,825 for 2004
and 2003, respectively.
Non-audit fees billed by E&Y for services rendered to the Registrant's
investment adviser and any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the Registrant for
each of the last two fiscal years of the Registrant were $256,050 and $233,037
for 2004 and 2003, respectively.
(h) The Audit Committee of the Board of Trustees considered whether the
provision of non-audit services rendered to the Registrant's investment adviser
and any entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the Registrant that were not
pre-approved by the Audit Committee because the engagement did not relate
directly to the operations and financial reporting of the Registrant is
compatible with maintaining E&Y's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable to the Registrant.
ITEM 6. SCHEDULE OF INVESTMENTS
The complete schedule of investments for each series is disclosed in the
Registrant's Annual Report, which is included as Item 1 of this Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES
Not applicable to the Registrant.
ITEM 8. PURCHASE OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
Not applicable to the Registrant.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no changes to the procedures by which shareholders may recommend
nominees to the Board.
ITEM 10. CONTROLS AND PROCEDURES
(a) Based on an evaluation of the disclosure controls and procedures (as
defined in rule 30a-3(c) under the Investment Company Act of 1940, as
amended (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 last fiscal half-year that have
materially affected, or are reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 11. EXHIBITS
(a)(1) Not applicable.
(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 certifications provided pursuant to Section 906 of the Sarbanes-Oxley Act
are not deemed "filed" for purposes of Section 18 of the Securities Exchange Act
of 1934 ("Exchange Act"), or otherwise subject to the liability of that section.
Such certifications will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Exchange Act, except to the
extent that the Registrant specifically incorporates them by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Neuberger Berman Income Funds
By: /s/ Peter E. Sundman
------------------------
Peter E. Sundman
Chief Executive Officer
Date: December 22, 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: December 22, 2004
By: /s/ Barbara Muinos
------------------------
Barbara Muinos
Treasurer and Principal Financial
and Accounting Officer
Date: December 22, 2004