As filed with the Securities and Exchange Commission on January 7, 2005
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-21334
NEUBERGER BERMAN INCOME OPPORTUNITY FUND INC.
---------------------------------------------
(Exact Name of the Registrant as Specified in Charter)
c/o Neuberger Berman Management Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Registrant's Telephone Number, including area code: (212) 476-8800
Peter E. Sundman, Chief Executive Officer
c/o Neuberger Berman Management Inc.
Neuberger Berman Income Opportunity Fund Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Arthur C. Delibert, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W. 2nd Floor
Washington, DC 20036-1800
(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. ss. 3507.
ITEM 1. REPORTS TO SHAREHOLDERS
<Page>
[NEUBERGER BERMAN LOGO]
A LEHMAN BROTHERS COMPANY
ANNUAL REPORT
OCTOBER 31, 2004
NEUBERGER BERMAN
INCOME OPPORTUNITY FUND INC.
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
CONTENTS
<Table>
THE FUND
CHAIRMAN'S LETTER 1
PORTFOLIO COMMENTARY/
PERFORMANCE HIGHLIGHTS 2
SCHEDULE OF INVESTMENTS/
TOP TEN EQUITY HOLDINGS 6
FINANCIAL STATEMENTS 14
FINANCIAL HIGHLIGHTS/PER SHARE DATA 25
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 27
DIVIDEND REINVESTMENT PLAN 28
DIRECTORY 30
DIRECTORS AND OFFICERS 31
PROXY VOTING POLICIES AND PROCEDURES 38
</Table>
CHAIRMAN'S LETTER
DEAR SHAREHOLDER,
I am pleased to present to you this annual report for the Neuberger Berman
Income Opportunity Fund Inc., for the period ending October 31, 2004. The report
includes portfolio commentary, a listing of the Fund's investments, and its
audited financial statements for the reporting period.
The Fund's investment objective is to provide high current income through a
diversified portfolio of both real estate securities and high-yield bonds.
Portfolio Co-Manager Steven Brown manages the real estate portion of the Fund.
His investment approach combines analysis of security fundamentals and real
estate with property sector diversification. His disciplined valuation
methodology seeks out real estate securities that are attractively priced
relative to their historical growth rates and the valuation of other property
sectors.
Portfolio Co-Manager Wayne Plewniak manages the high-yield bond portion of the
Fund. His investment approach focuses on generating income and managing risk. He
seeks to avoid the default and volatility risk associated with high-yield bonds
by applying rigorous credit analysis to higher quality issues, and by
emphasizing the intermediate range of the yield curve.
We believe that our conservative investing philosophy and disciplined investment
process will benefit shareholders by providing attractive current income over
the long term.
Thank you for your confidence in Neuberger Berman. We will continue to do our
best to keep earning it.
Sincerely,
/s/ Peter Sundman
PETER SUNDMAN
CHAIRMAN OF THE BOARD
NEUBERGER BERMAN INCOME OPPORTUNITY FUND INC.
"Neuberger Berman" and the Neuberger Berman logo are service marks of Neuberger
Berman, LLC. "Neuberger Berman Management Inc." and the individual fund name in
this shareholder report are either service marks or registered service marks of
Neuberger Berman Management Inc.(C)2004 Neuberger Berman Management Inc. All
rights reserved.
1
<Page>
INCOME OPPORTUNITY FUND INC. PORTFOLIO COMMENTARY
For the one-year period ending October 31, 2004, on a Net Asset Value (NAV)
basis, the Neuberger Berman Income Opportunity Fund Inc. (AMEX:NOX)
provided a 23.67% return.
Although the Fund has only been open since June 2003, we are pleased with
its performance thus far. The Fund pursues a primary objective of high
current income by investing a portion of its assets in intermediate-term,
high-yield corporate bonds with maturities of ten years or less at the time
of initial investment and another portion in real estate investment trust
(REIT) securities, including REIT common stocks and REIT preferred shares.
At the beginning of the period, the Fund was more heavily weighted toward
REIT securities, due to a strong REIT market in 2003. The Asset Allocation
Committee, which consists of Neuberger Berman Management Inc.'s Chief
Investment Officer and the Fund's portfolio managers, capitalized on this
strength during the period, shifting the portfolio's allocation to a more
even mix of REIT securities and high-yield bonds. As of October 31, 2004,
the Fund held 38.8% of its investments in REIT common stocks, 13.2% in REIT
preferred stocks, 45.8% in bonds, and 2.2% in cash.
REAL ESTATE INVESTMENT TRUST HOLDINGS
Over the past 12 months, the REIT market overall was very strong, primarily
due to improving economic conditions, a benign interest rate environment,
and stronger real estate fundamentals. As the economy gained traction,
demand and occupancy levels for commercial real estate also improved. In
addition, investors continued to emphasize companies with visible earnings,
which benefited the REIT market.
Within the REIT industry, regional malls, shopping centers, and industrial
properties did particularly well. Retailers also performed well, as they
continued to expand, causing occupancy and rent levels to increase. Healthy
consumer spending also contributed to retailers' strong performance.
Industrial REITs generated good returns primarily due to core improvements
in parts of the U.S. economy. Within the portfolio, retail and industrial
REITs contributed nicely to overall performance.
On the other hand, REITs that own office properties performed less well.
Office properties underperformed due to concerns about oversupply and
modest expansion plans. Apartment sector underperformance resulted from the
low interest rate environment, encouraging first time home buyers to become
more active.
As we look out to 2005, we believe we will see continued improvement in the
U.S. economy and improving fundamentals for most types of real estate,
albeit with expectations for higher interest rates. Our general outlook for
REITs remains favorable and we believe that demand for REITs has the
potential to remain robust.
HIGH-YIELD SECURITIES HOLDINGS
The fixed-income market generated strong returns during the period,
particularly within the high-yield sector. High-yield "spreads," which
represent the coupon differential between high-yield bonds and comparable
five- and ten-year Treasury securities, narrowed steadily throughout the
reporting period. We believe that narrowing credit spreads reflect improved
economic conditions, as well as stronger corporate balance sheets and
financial conditions. Over the last several years, improving cost controls
have helped to drive substantial margin improvements for many companies.
Issuers of high-yield debt have also taken advantage of low interest rates
to refinance existing debt and generally reduce their financing costs.
Spreads are not yet at historically "tight" levels, but considering they
have narrowed substantially, we believe that it is especially important for
the Fund
2
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
to stick to its discipline of buying the higher quality securities among
the high yield market. Our conservative positioning may hold back the
Fund's performance when lower-quality high-yield bonds are performing well,
but over time, our approach has produced a track record of steady,
consistent returns.
A variety of factors have contributed to spread tightening and credit
improvement across several industries. During the period, a weakening U.S.
dollar benefited the industrial sector of the high-yield market. A more
cautious approach to deregulation has allowed utility companies to repair
their balance sheets, which in turn has resulted in credit quality
upgrades. Energy securities have benefited from a tight supply/demand
dynamic based in large part on economic strength globally and political
uncertainty in a variety of oil-producing regions.
Against a backdrop of narrow credit spreads and a weak U.S. dollar, we
believe that a conservative approach is the best strategy going forward.
Therefore, we are maintaining a relatively short duration and maturity
stance and are continuing to pare back the number of holdings in the
portfolio. We also remain focused on upgrading the portfolio's credit
quality.
Our outlook for the high-yield market remains optimistic. Investors appear
comforted by recent economic releases that suggest a rebound in economic
activity. At the same time, inflation remains subdued, despite still-high
energy prices. We believe that these factors foster expectations for a
moderate and sustainable level of economic growth -- a notion underscored
by the Federal Reserve Board's four interest rate increases since June, and
its announced proclivity toward raising rates at a "measured" pace going
forward.
We believe that the return potential for the high-yield market should
remain positive. However, returns are likely to result from income for the
rest of 2004. Interest rates may have bottomed for this cycle, but the term
structure of rates remains low by historic standards and investor appetite
for higher-yielding products continues to be robust.
Our investment orientation will remain toward keeping duration relatively
short. This part of the yield curve still provides compelling income, but
historically has minimized risks related to rising interest rates. We also
intend to maintain our focus on credit selection and keep the high-yield
bond portion of the portfolio well diversified across industries.
Sincerely,
/s/ Steven R. Brown
/s/ Wayne C. Plewniak
STEVEN R. BROWN
AND
WAYNE C. PLEWNIAK
PORTFOLIO CO-MANAGERS
Closed-end funds, unlike open-end funds, are not continually offered. There is
an initial public offering and once issued, common shares of closed-end funds
are sold in the open market through a stock exchange.
3
<Page>
INCOME OPPORTUNITY FUND
AMEX TICKER SYMBOL NOX
1 YEAR TOTAL RETURN
<Table>
NAV (1) 23.67%
MARKET PRICE (2) 17.57%
AVERAGE ANNUAL TOTAL RETURN (Life of Fund as of October 31, 2004)
NAV (1) 21.28%
MARKET PRICE (2) 8.76%
INCEPTION DATE 06/24/2003
</Table>
RATING DIVERSIFICATION
(% OF HIGH-YIELD BOND RATINGS)
<Table>
AAA/Government/Government Agency 0.0%
AA 0.0
A 0.0
BBB 0.0
BB 18.7
B 41.2
CCC 4.3
CC 0.0
C 0.0
D 0.0
Not Rated 1.0
Short Term 3.6
</Table>
INDUSTRY DIVERSIFICATION
(% OF EQUITY HOLDINGS)
<Table>
Apartments 12.5%
Commercial Services 0.4
Community Centers 4.6
Diversified 6.4
Health Care 7.7
Industrial 2.2
Lodging 3.7
Office 20.5
Office-Industrial 6.1
Regional Malls 7.5
Self Storage 2.1
Specialty 0.4
Short-Term Investments 15.2
Liabilities, less cash, receivables and
other assets (58.10)
</Table>
The composition, industries and holdings of the fund are subject to change.
Investment return will fluctuate. Past performance is no guarantee of future
results.
4
<Page>
ENDNOTES
1. Returns based on Net Asset Value ("NAV") of the Fund.
2. Returns based on price of Fund shares on the American Stock Exchange.
3. Neuberger Berman Management Inc. has contractually agreed to waive a
portion of the management fees that it is entitled to receive from the
Fund. The undertaking lasts until October 31, 2011. Please see the
notes to the financial statements for specific information regarding
the rate of the management fees waived by Neuberger Berman Management
Inc. Absent such a waiver, the performance of the Fund would be lower.
5
<Page>
SCHEDULE OF INVESTMENTS INCOME OPPORTUNITY FUND INC.
[SIDENOTE]
TOP TEN EQUITY HOLDINGS
<Table>
<Caption>
HOLDING %
1 iStar Financial 4.4
2 Apartment
Investment &
Management 3.7
3 Mid-America
Apartment
Communities 3.6
4 Health Care REIT 3.2
5 Glimcher
Realty Trust 3.1
6 Kilroy Realty 2.8
7 Bedford Property
Investors 2.7
8 Brandywine
Realty Trust 2.5
9 Pennsylvania
REIT 2.5
10 Gables
Residential Trust 2.3
</Table>
<Table>
<Caption>
MARKET VALUE +
NUMBER OF SHARES (000'S OMITTED)
COMMON STOCKS (55.3%)
APARTMENTS (6.9%)
73,000 Amli Residential
Properties Trust $ 2,297~
66,000 Apartment Investment &
Management 2,422
85,000 BNP Residential Properties 1,187
185,300 Gables Residential Trust 6,764~
66,500 Mid-America Apartment
Communities 2,615
74,300 Post Properties 2,384~
94,500 Town & Country Trust 2,610
----------
20,279
COMMUNITY CENTERS (4.3%)
148,900 Heritage Property
Investment Trust 4,555
63,100 Kramont Realty Trust 1,190
151,000 New Plan Excel Realty Trust 3,950
61,000 Tanger Factory Outlet Centers 2,882
----------
12,577
DIVERSIFIED (3.1%)
138,000 Colonial Properties Trust 5,379~
89,200 iStar Financial 3,695
----------
9,074
HEALTH CARE (7.0%)
88,000 Health Care Property Investors 2,449~
247,802 Health Care REIT 8,921
75,600 Healthcare Realty Trust 3,050
134,300 Nationwide Health Properties 3,031~
119,700 Ventas, Inc. 3,220
----------
20,671
INDUSTRIAL (2.2%)
70,000 EastGroup Properties 2,480
105,100 First Industrial Realty Trust 4,057~
----------
6,537
LODGING (1.2%)
5,300 Eagle Hospitality
Properties Trust 50
82,000 Hospitality Properties Trust 3,514~
----------
3,564
OFFICE (19.0%)
164,200 Arden Realty 5,596
254,900 Brandywine Realty Trust 7,499~
125,300 CarrAmerica Realty 4,038~
137,800 Equity Office Properties Trust 3,875
63,400 Glenborough Realty Trust 1,331
148,900 Highwoods Properties $ 3,694
270,000 HRPT Properties Trust 3,021
169,200 Kilroy Realty 6,726~
115,000 Mack-Cali Realty 5,080
256,500 Maguire Properties 6,708~
181,000 Prentiss Properties Trust 6,512~
132,200 Trizec Properties 2,109
----------
56,189
OFFICE-INDUSTRIAL (5.2%)
192,500 Bedford Property Investors 5,535~
120,000 Liberty Property Trust 4,866
169,000 Reckson Associates Realty 5,129
----------
15,530
REGIONAL MALLS (4.3%)
257,000 Glimcher Realty Trust 6,636~
151,000 Pennsylvania REIT 6,123
----------
12,759
SELF STORAGE (2.1%)
45,200 Extra Space Storage 626~
2,700 Public Storage,
Depositary Shares 77
138,500 Sovran Self Storage 5,411
12,000 U-Store-It Trust 201
----------
6,315
TOTAL COMMON STOCKS
(COST $133,186) 163,495
----------
PREFERRED STOCKS (18.8%)
APARTMENTS (5.6%)
300,000 Apartment Investment &
Management, Ser. R 8,085~
12,400 Apartment Investment &
Management, Ser. T 312
10,000 Apartment Investment &
Management, Ser. U 247
302,200 Mid-America Apartment
Communities, Ser. H 7,942
----------
16,586
COMMERCIAL SERVICES (0.4%)
20,000 Anthracite Capital, Ser. C 529
20,000 Newcastle Investment, Ser. B 546
----------
1,075
COMMUNITY CENTERS (0.3%)
20,000 Cedar Shopping Centers, Ser. A 528
12,000 Developers Diversified Realty,
Ser. I 310
----------
838
</Table>
6
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
<Table>
<Caption>
MARKET VALUE +
NUMBER OF SHARES (000'S OMITTED)
DIVERSIFIED (3.3%)
18,400 Crescent Real Estate Equities,
Ser. B $ 499
200,000 iStar Financial, Ser. E 5,220
160,000 iStar Financial, Ser. F 4,144
----------
9,863
HEALTH CARE (0.7%)
25,000 Health Care REIT, Ser. D 642
18,200 LTC Properties, Ser. E 686
34,000 LTC Properties, Ser. F 874
----------
2,202
LODGING (2.5%)
182,000 Equity Inns, Ser. B 4,863
16,000 Host Marriott, Ser. E 439
77,500 LaSalle Hotel Properties,
Ser. B 2,007
----------
7,309
OFFICE (1.5%)
60,000 CRT Properties, Ser. A 1,620
43,071 Glenborough Realty Trust,
Ser. A 1,077~
60,000 Kilroy Realty, Ser. E 1,529
6,800 SL Green Realty, Ser. D 175
----------
4,401
OFFICE-INDUSTRIAL (0.9%)
50,000 Bedford Property Investors,
Ser. A 2,519**
8,000 PS Business Parks, Ser. K 208
----------
2,727
REGIONAL MALLS (3.2%)
60,000 Glimcher Realty Trust, Ser. F 1,586
38,000 Glimcher Realty Trust, Ser. G 965~
80,000 Mills Corp., Ser. B 2,202
131,400 Mills Corp., Ser. E 3,559
19,800 Pennsylvania REIT, Ser. A 1,198
----------
9,510
SPECIALTY (0.4%)
8,000 Capital Automotive REIT,
Ser. B 209
40,000 Entertainment Properties
Trust, Ser. A 1,079
----------
1,288
TOTAL PREFERRED STOCKS
(COST $53,715) 55,799
----------
</Table>
See Notes to Schedule of Investments
7
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
CORPORATE DEBT SECURITIES (64.9%)
$ 1,000 Abitibi-Consolidated Finance, Guaranteed Notes, 7.88%,
due 8/1/09 Ba3 BB $ 1,065
1,750 Aearo Co. I, Senior Subordinated Notes, 8.25%, due 4/15/12 B3 B- 1,811
3,000 AES Corp., Senior Secured Notes, 9.00%, due 5/15/15 B1 B+ 3,495**
2,750 Allied Waste North America, Inc., Guaranteed Senior Secured Notes,
Ser. B, 9.25%, due 9/1/12 B2 BB- 2,970
1,500 AMC Entertainment, Inc., Senior Subordinated Notes, 8.00%,
due 3/1/14 B3 CCC+ 1,440**~
1,500 American Achievement Corp., Senior Subordinated Notes,
8.25%, due 4/1/12 B3 B- 1,579
2,000 American Tower Corp., Senior Notes, 7.50%, due 5/1/12 Caa1 CCC 2,090~
1,000 American Tower Corp., Senior Notes, 7.13%, due 10/15/12 Caa1 CCC 1,017**
2,000 Arch Western Finance, Senior Notes, 6.75%, due 7/1/13 Ba3 BB 2,125**
1,250 Armor Holdings, Inc., Senior Subordinated Notes, 8.25%,
due 8/15/13 B1 B+ 1,375
2,000 Aviall, Inc., Senior Notes, 7.63%, due 7/1/11 B1 BB 2,160
2,000 BCP Caylux Holdings, Senior Subordinated Notes, 9.63%,
due 6/15/14 B3 B- 2,240**
1,750 Boise Cascade LLC, Senior Subordinated Notes, 7.13%,
due 10/15/14 B2 B+ 1,827**
2,000 Bombardier Recreational Products, Senior Subordinated Notes,
8.38%, due 12/15/13 B3 B- 2,150**~
1,750 Buckeye Technologies, Inc., Senior Subordinated Notes,
8.00%, due 10/15/10 Caa1 B 1,785
1,625 Calpine Corp., Secured Notes, 8.50%, due 7/15/10 B 1,194**~
1,500 Calpine Generating Co., Floating Rate Notes, 7.76%,
due 4/1/10 B2 B 1,433**
2,000 Case New Holland, Inc., Senior Notes, 9.25%, due 8/1/11 Ba3 BB- 2,280**
2,000 Charter Communications Operating LLC, Senior Notes, 8.38%,
due 4/30/14 B2 B- 2,017**
1,750 Chiquita Brands International, Senior Notes, 7.50%,
due 11/1/14 B2 B 1,794**
1,500 Choctaw Resort Development, Senior Notes, 7.25%,
due 11/15/19 B1 BB- 1,538**|
1,500 CITGO Petroleum Corp., Senior Notes, 6.00%, due 10/15/11 Ba2 BB 1,526**
2,625 CMS Energy Corp., Senior Notes, 7.75%, due 8/1/10 B3 B+ 2,874
1,000 Crescent Real Estate Equities, Notes, 7.50%, due 9/15/07 B1 B 1,033
1,500 Crown Cork & Seal Co., Guaranteed Notes, 7.00%, due 12/15/06 B3 B 1,564
1,875 CSC Holdings, Inc., Senior Notes, Ser. B, 8.13%, due 7/15/09 B1 BB- 2,062||
1,000 D. R. Horton, Inc., Guaranteed Senior Unsecured Notes,
5.00%, due 1/15/09 Ba1 BB+ 1,013
2,125 Dole Foods Co., Inc., Debentures, 8.75%, due 7/15/13 B2 B+ 2,391
1,500 Dresser, Inc., Guaranteed Notes, 9.38%, due 4/15/11 B2 B 1,665
1,500 Dresser-Rand Group, Inc., Senior Subordinated Notes, 7.38%,
due 11/1/14 B3 B- 1,571**
2,000 EchoStar DBS Corp., Guaranteed Notes, 6.63%, due 10/1/14 Ba3 BB- 2,045**
2,000 Edison Mission Energy, Senior Notes, 9.88%, due 4/15/11 B1 B 2,365
1,750 El Paso Natural Gas, Senior Notes, Ser. A, 7.63%, due 8/1/10 B1 B- 1,892
2,000 Entravision Communications Corp., Guaranteed Notes, 8.13%,
due 3/15/09 B3 B- 2,145
1,750 ERICO International Corp., Senior Subordinated Notes, 8.88%,
due 3/1/12 B3 B- 1,829
</Table>
8
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 1,625 Felcor Lodging L.P., Senior Floating Rate Notes, 5.84%,
due 12/1/04 B1 B- $ 1,678**
2,000 Ferrellgas Partners L.P., Senior Notes, 8.75%, due 6/15/12 B2 B 2,175
1,500 Forest Oil Corp., Guaranteed Senior Notes, 7.75%, due 5/1/14 Ba3 BB- 1,642||
2,000 Freescale Semiconductor, Senior Notes, 7.13%, due 7/15/14 Ba2 BB+ 2,120**
2,000 Graham Packaging Co., Subordinated Notes, 9.88%,
due 10/15/14 Caa2 CCC+ 2,120**~
2,000 Grant Prideco, Inc., Senior Notes, 9.00%, due 12/15/09 Ba3 BB- 2,245
2,000 GulfMark Offshore, Inc., Senior Notes, 7.75%, due 7/15/14 B2 BB- 2,100**
1,000 Hanover Equipment Trust 2001 A, Senior Secured Notes, Ser. A,
8.50%, due 9/1/08 B2 B+ 1,083
3,000 Hines Nurseries, Inc., Guaranteed Notes, 10.25%, due 10/1/11 B3 B 3,210
2,000 Host Marriott L.P., Senior Notes, 7.00%, due 8/15/12 Ba3 B+ 2,160**
2,000 Invista, Notes, 9.25%, due 5/1/12 B1 B+ 2,200**
1,500 Jafra Cosmetics, Senior Subordinated Notes, 10.75%,
due 5/15/11 B3 B- 1,710
2,500 Jean Coutu Group (PJC), Inc., Senior Subordinated Notes, 8.50%,
due 8/1/14 B3 B 2,550**~
1,500 Jefferson Smurfit Corp., Guaranteed Notes, 7.50%, due 6/1/13 B2 B 1,635
1,000 Kappa Beheer BV, Guaranteed Notes, 10.63%, due 7/15/09 B2 B 1,060
1,000 Lamar Media Corp., Guaranteed Notes, 7.25%, due 1/1/13 Ba3 B 1,085
1,615 LNR Property Corp., Senior Subordinated Notes, 7.63%,
due 7/15/13 Ba3 B+ 1,801
1,500 Lyondell Chemical Co., Guaranteed Senior Notes, 9.50%,
due 12/15/08 B1 B+ 1,635
1,500 Lyondell Chemical Co., Guaranteed Senior Notes, 10.50%,
due 6/1/13 B1 B+ 1,770~
2,000 MCI, Inc., Senior Notes, 5.91%, due 5/1/07 1,995^^
1,000 MCI, Inc., Senior Notes, 6.69%, due 5/1/09 986^^
2,000 Meritor Automotive, Inc., Notes, 6.80%, due 2/15/09 Ba1 BB+ 2,040
1,525 MGM Mirage, Inc., Guaranteed Notes, 9.75%, due 6/1/07 Ba2 BB- 1,716
1,000 MGM Mirage, Inc., Guaranteed Notes, 6.00%, due 10/1/09 Ba1 BB+ 1,035
2,000 Midwest Generation LLC, Secured Notes, 8.75%, due 5/1/34 B1 B- 2,265
1,875 Millennium America, Inc., Guaranteed Notes, 7.00%,
due 11/15/06 B1 BB- 1,959
1,000 Mohegan Tribal Gaming, Senior Subordinated Notes, 6.38%,
due 7/15/09 Ba3 BB- 1,053
1,000 MSW Energy Holdings LLC, Senior Secured Notes, Ser. B, 8.50%,
due 9/1/10 Ba1 BB 1,095
2,000 Mueller Group, Inc., Senior Subordinated Notes, 10.00%,
due 5/1/12 Caa1 B- 2,160
3,000 Nalco Co., Senior Subordinated Notes, 8.88%, due 11/15/13 Caa1 B- 3,289
1,750 Navistar International Corp., Senior Notes, 7.50%, due 6/15/11 Ba3 BB- 1,890
1,500 Nevada Power Co., Notes, Ser. E, 10.88%, due 10/15/09 Ba2 1,762
1,000 New Skies Satellites NV, Senior Floating Rate Notes, 7.44%,
due 5/3/05 B3 B- 1,015**|
1,500 Nextel Communications, Inc., Senior Notes, 6.88%,
due 10/31/13 Ba3 BB 1,627
2,000 Norske Skog Canada, Ltd., Guaranteed Senior Notes, Ser. D, 8.63%,
due 6/15/11 Ba3 BB 2,160
2,000 Nortek Inc., Senior Subordinated Notes, 8.50%, due 9/1/14 B3 B- 2,120**
1,500 NRG Energy, Inc., Secured Notes, 8.00%, due 12/15/13 B2 B+ 1,652**
</Table>
See Notes to Schedule of Investments
9
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 2,000 Owens-Brockway Glass Container, Inc., Senior Notes, 8.25%,
due 5/15/13 B3 B $ 2,200
2,000 Perry Ellis International, Inc., Senior Subordinated Notes, Ser. B,
8.88%, due 9/15/13 B3 B- 2,140
1,765 Pilgrims Pride Corp., Senior Subordinated Notes, 9.25%,
due 11/15/13 B2 B+ 1,968
1,625 Ply Gem Industries, Inc., Senior Subordinated Notes, 9.00%,
due 2/15/12 B3 B- 1,621**~
1,875 PSE&G Energy Holdings, Notes, 7.75%, due 4/16/07 Ba3 BB- 2,006
1,500 Qwest Communications International, Inc.,
Senior Floating Rate Notes, 5.21%, due 11/15/04 B3 B 1,459**
2,000 Reddy Ice Group, Inc., Senior Subordinated Notes, 8.88%,
due 8/1/11 B3 B- 2,165
3,066 Reliant Resources, Inc., Adjustable Rate Term Loan, 5.91%,
due 3/15/07 3,097^^
1,575 Salem Communications, Guaranteed Notes, 7.75%,
due 12/15/10 B3 B- 1,681
1,500 Seminis Vegetable Seeds, Inc., Senior Subordinated Notes,
10.25%, due 10/1/13 B3 B- 1,680
2,000 Sequa Corp., Senior Notes, Ser. B, 8.88%, due 4/1/08 B1 BB- 2,185
2,000 Six Flags, Inc., Senior Notes, 9.63%, due 6/1/14 B3 CCC+ 1,910
1,000 Smithfield Foods, Inc., Senior Notes, 7.00%, due 8/1/11 Ba2 BB 1,070**
1,000 Southern Star Central Corp., Senior Secured Notes, 8.50%,
due 8/1/10 B1 B+ 1,105
2,000 Spanish Broadcasting System, Inc., Guaranteed Senior Notes,
9.63%, due 11/1/09 Caa1 CCC+ 2,102
2,000 Stena AB, Senior Notes, 9.63%, due 12/1/12 Ba3 BB- 2,252
1,000 Stone Container Corp., Senior Notes, 9.75%, due 2/1/11 B2 B 1,115
1,000 Suburban Propane Partners L.P., Senior Notes, 6.88%,
due 12/15/13 B1 B 1,035
2,500 Tembec Industries, Inc., Guaranteed Notes, 8.63%,
due 6/30/09 Ba3 BB- 2,544
1,500 Tenet Healthcare Corp., Senior Notes, 9.88%, due 7/1/14 B- 1,571**
2,000 Triad Hospitals, Inc., Senior Subordinated Notes, 7.00%,
due 11/15/13 B3 B 2,050
1,000 Vintage Petroleum, Inc., Senior Notes, 8.25%, due 5/1/12 Ba3 BB- 1,120
2,000 Vitro Envases Norteamerica, Senior Secured Notes, 10.75%,
due 7/23/11 B2 B+ 1,980**
2,125 Vought Aircraft Industries, Inc., Senior Notes, 8.00%,
due 7/15/11 B2 B 2,072
2,000 VWR International, Inc., Senior Subordinated Notes, 8.00%,
due 4/15/14 B3 B 2,145**
1,375 Warnaco, Inc., Senior Notes, 8.88%, due 6/15/13 B2 B 1,537
1,625 Warner Music Group, Senior Subordinated Notes, 7.38%,
due 4/15/14 B3 B- 1,670**
1,000 Westinghouse Air Brake, Senior Notes, 6.88%, due 7/31/13 Ba2 BB 1,043
1,000 Williams Cos., Inc., Notes, 8.13%, due 3/15/12 B3 B+ 1,175
3,000 Williams Cos., Inc., Notes, 7.63%, due 7/15/19 B3 B+ 3,375||
1,750 Williams Scotsman, Inc., Guaranteed Senior Notes, 9.88%,
due 6/1/07 B3 B- 1,680
2,000 XM Satellite Radio, Inc., Floating Rate Secured Notes, 7.66%,
due 5/1/09 Caa1 CCC+ 2,042
----------
TOTAL CORPORATE DEBT SECURITIES (COST $184,534) 191,953
----------
</Table>
10
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT RATING ~~ VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
CONVERTIBLE BONDS (0.3%)
$ 1,000 Nortel Networks Corp., Notes, 4.25%, due 9/1/08 (COST $962) B3 B- $ 961
----------
REPURCHASE AGREEMENTS (3.6%)
10,505 State Street Bank and Trust Co. Repurchase Agreement, 1.75%,
due 11/1/04, dated 10/29/04, Maturity Value $10,506,532,
Collateralized by $10,905,000 U.S. Treasury Bills,
due 3/3/05 (Collateral Value $10,823,213) (COST $10,505) 10,505#
SHORT-TERM INVESTMENTS (15.2%)
44,249 N&B Securities Lending Quality Fund, LLC 44,249++
819 Neuberger Berman Institutional Cash Fund Trust Class 819@
----------
TOTAL SHORT-TERM INVESTMENTS (COST $45,068) 45,068#
----------
NUMBER OF SHARES
WARRANTS (0.0%)
8,923 Reliant Resources, Inc. (COST $0) --*
----------
TOTAL INVESTMENTS (158.1%) (COST $427,970) 467,781##
Liabilities, less cash, receivables and other assets [(15.7%)] (46,462)
Liquidation Value of Auction Preferred Shares [(42.4%)] (125,500)
----------
TOTAL NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS (100.0%) $ 295,819
----------
</Table>
See Notes to Schedule of Investments
11
<Page>
NOTES TO SCHEDULE OF INVESTMENTS
+ Investments in equity securities by Neuberger Berman Income
Opportunity Fund Inc. (the "Fund") are valued at the latest sales
price where that price is readily available; securities for which no
sales were reported, unless otherwise noted, are valued at the last
available bid price. 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
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 Directors of the Fund (the
"Board") believes accurately reflects fair value. Numerous factors may
be considered when determining the fair value of a security, including
available analyst, media or other reports, trading in futures or ADRs
and whether the issuer of the security being fair valued has other
securities outstanding. Foreign security prices are furnished by
independent quotation services 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.
# At cost, which approximates market value.
## At October 31, 2004, the cost of investments for U.S. Federal income
tax purposes was $428,321,000. Gross unrealized appreciation of
investments was $40,453,000 and gross unrealized depreciation of
investments was $993,000, resulting in net unrealized appreciation of
$39,460,000, based on cost for U.S. Federal income tax purposes.
@ Neuberger Berman Institutional Cash Fund ("Institutional Cash") is
also managed by Neuberger Berman Management Inc. (see Notes A and E 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.
* Non-income producing security.
12
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
** 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 $63,442,000 or 21.4% of net assets applicable to common
shareholders.
| Security purchased on a when-issued basis. At October 31, 2004, these
securities amounted to $2,553,000.
|| All or a portion of this security is segregated as collateral for
when-issued purchase commitments and/or as collateral for interest
rate swap contracts.
^^ Not rated by a nationally recognized statistical rating organization.
~~ 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
management complex, the Quality Fund may be considered an affiliate of
the Fund (see Notes A and E of Notes to Financial Statements).
~ All or a portion of this security is on loan (see Note A of Notes to
Financial Statements).
See Notes to Financial Statements
13
<Page>
STATEMENT OF ASSETS AND LIABILITIES
<Table>
<Caption>
NEUBERGER BERMAN INCOME OPPORTUNITY
(000'S OMITTED EXCEPT PER SHARE AMOUNTS) FUND
ASSETS
INVESTMENTS IN SECURITIES, AT MARKET VALUE*+ (NOTES A & E)--SEE
SCHEDULE OF INVESTMENTS:
Unaffiliated issuers $ 422,713
Affiliated issuers 45,068
==============================================================================================================
467,781
Dividends and interest receivable 4,770
- --------------------------------------------------------------------------------------------------------------
Receivable for securities sold 2,007
Prepaid expenses and other assets 6
==============================================================================================================
TOTAL ASSETS 474,564
==============================================================================================================
LIABILITIES
Payable for collateral on securities loaned (Note A) 44,249
Dividends payable--preferred shares 26
- --------------------------------------------------------------------------------------------------------------
Dividends payable--common shares 244
Payable for securities purchased 6,111
- --------------------------------------------------------------------------------------------------------------
Due to custodian 1,471
Interest rate swaps, at market value (Note A) 833
- --------------------------------------------------------------------------------------------------------------
Payable to investment manager--net (Notes A & B) 120
Payable to administrator (Note B) 86
- --------------------------------------------------------------------------------------------------------------
Accrued expenses and other payables 105
==============================================================================================================
TOTAL LIABILITIES 53,245
==============================================================================================================
AUCTION PREFERRED SHARES SERIES A & B AT LIQUIDATION VALUE
6,000 shares authorized; 5,020 shares issued and outstanding;
$.0001 par value; $25,000 liquidation value per share (Note A) 125,500
==============================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 295,819
==============================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS CONSIST OF:
Paid-in capital--common shares $ 251,537
Distributions in excess of net investment income (239)
- --------------------------------------------------------------------------------------------------------------
Accumulated net realized gains (losses) on investments 5,543
Net unrealized appreciation (depreciation) in value of investments 38,978
==============================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 295,819
==============================================================================================================
COMMON SHARES OUTSTANDING ($.0001 par value; 999,994,000 shares authorized) 17,724
NET ASSET VALUE PER COMMON SHARE OUTSTANDING $ 16.69
==============================================================================================================
+SECURITIES ON LOAN, AT MARKET VALUE $ 42,364
==============================================================================================================
*COST OF INVESTMENTS:
Unaffiliated issuers $ 382,902
Affiliated issuers 45,068
==============================================================================================================
TOTAL COST OF INVESTMENTS $ 427,970
==============================================================================================================
</Table>
See Notes to Financial Statements
14
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
STATEMENT OF OPERATIONS
<Table>
<Caption>
NEUBERGER BERMAN INCOME OPPORTUNITY
(000'S OMITTED) FUND
INVESTMENT INCOME
INCOME:
Dividend income--unaffiliated issuers $ 10,592
Interest income--unaffiliated issuers (Note A) 14,997
- -------------------------------------------------------------------------------------------------------------------
Income from securities loaned--affiliated issuer (Note A) 49
Income from investments in affiliated issuers (Note A) 14
===================================================================================================================
Total income 25,652
===================================================================================================================
EXPENSES:
Investment management fee (Notes A & B) 2,419
Administration fee (Note B) 1,008
- -------------------------------------------------------------------------------------------------------------------
Auction agent fees (Note B) 336
Audit fees 40
- -------------------------------------------------------------------------------------------------------------------
Basic maintenance expense (Note B) 25
Custodian fees (Note B) 177
- -------------------------------------------------------------------------------------------------------------------
Directors' fees and expenses 26
Insurance expense 9
- -------------------------------------------------------------------------------------------------------------------
Legal fees 64
Shareholder reports 77
- -------------------------------------------------------------------------------------------------------------------
Stock exchange listing fees 6
Stock transfer agent fees 32
Miscellaneous 16
===================================================================================================================
Total expenses 4,235
Investment management fee waived (Notes A & B) (1,010)
Expenses reduced by custodian fee expense offset and commission recapture arrangements (Note B) (16)
===================================================================================================================
Total net expenses 3,209
===================================================================================================================
Net investment income 22,443
===================================================================================================================
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE A)
Net realized gain (loss) on:
Sales of investment securities of unaffiliated issuers 9,298
============================================================================================================
Interest rate swap contracts (1,929)
------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) in value of:
Unaffiliated investment securities 30,253
============================================================================================================
Interest rate swap contracts (784)
------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments 36,838
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
Net investment income (1,735)
============================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS RESULTING FROM OPERATIONS $ 57,546
===================================================================================================================
</Table>
See Notes to Financial Statements
15
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
INCOME OPPORTUNITY FUND
--------------------------------
PERIOD FROM
JULY 2, 2003
YEAR (COMMENCEMENT
ENDED OF OPERATIONS) TO
NEUBERGER BERMAN OCTOBER 31, OCTOBER 31,
(000'S OMITTED) 2004 2003
INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
FROM OPERATIONS:
Net investment income (loss) $ 22,443 $ 4,410
Net realized gain (loss) on investments 7,369 931
- ----------------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) of investments 29,469 9,509
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
Net investment income (1,511) (117)
Net realized gain on investments (224) (23)
- ----------------------------------------------------------------------------------------------------------------------
Tax return of capital -- (2)
Total distributions to preferred shareholders (1,735) (142)
======================================================================================================================
Net increase (decrease) in net assets applicable to common shareholders resulting
from operations 57,546 14,708
======================================================================================================================
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (19,678) (4,645)
Net realized gain on investments (2,920) (903)
- ----------------------------------------------------------------------------------------------------------------------
Tax return of capital -- (101)
======================================================================================================================
Total distributions to common shareholders (22,598) (5,649)
======================================================================================================================
FROM CAPITAL SHARE TRANSACTIONS:
Net proceeds from initial capitalization (Note D) -- 100
Net proceeds from issuance of common shares -- 238,249
- ----------------------------------------------------------------------------------------------------------------------
Net proceeds from underwriters' over-allotment option exercised -- 15,010
Preferred shares offering costs 53 (1,600)
======================================================================================================================
Total net proceeds from capital share transactions 53 251,759
======================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 35,001 260,818
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period 260,818 --
======================================================================================================================
End of period $ 295,819 $ 260,818
======================================================================================================================
Distributions in excess of net investment income at end of period $ (239) $ (347)
======================================================================================================================
</Table>
See Notes to Financial Statements
16
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
NOTES TO FINANCIAL STATEMENTS INCOME OPPORTUNITY FUND INC.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1 GENERAL: Neuberger Berman Income Opportunity Fund Inc. (the "Fund") was
organized as a Maryland corporation on April 17, 2003 as a
non-diversified, closed-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund had
no operations until July 2, 2003, other than matters relating to its
organization and the sale on June 18, 2003 of 6,981 shares of common
stock for $100,003 ($14.325 per share) to Neuberger Berman, LLC
("Neuberger"), the Fund's sub-adviser. The Board of Directors of the Fund
(the "Board") may classify or re-classify any unissued shares of capital
stock into one or more classes of preferred stock without the approval of
shareholders.
The preparation of financial statements in accordance with 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 Schedule of Investments.
3 SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions
are recorded on a trade date basis. Dividend income is recorded on the
ex-dividend date. Non-cash dividends included in dividend income, if any,
are recorded at the fair market value of the securities received.
Interest income, including accretion of discount (adjusted for original
issue discount, where applicable), and amortization of premium, where
applicable, is recorded on the accrual basis. Realized gains and losses
from securities transactions and foreign currency transactions are
recorded on the basis of identified cost and stated separately in the
Statement of Operations.
4 INCOME TAX INFORMATION: It is the policy of the 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 the Fund, timing differences and differing characterization of
distributions made by the Fund as a whole.
As determined on October 31, 2004, permanent differences resulting
primarily from different book and tax accounting for distributions in
excess of earnings, amortization of bond premium, and income recognized
on interest rate swaps were reclassified at year end. These
reclassifications had no effect on net income, net assets or net assets
per share of the Fund.
17
<Page>
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 TOTAL
2004 2003 2004 2003 2004 2003 2004 2003
$ 24,332,882 $ 5,506,297 $ -- $ 182,404 $ -- $ 102,939 $ 24,332,882 $ 5,791,640
</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
$ 4,797,620 $ 1,095,747 $ 38,658,796 $ -- $ 44,552,163
</Table>
The difference between book basis and tax basis distributable earnings
are primarily due to timing differences of dividend payments, wash sales,
amortization of bond premium, and income recognized on interest rate
swaps.
5 DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund earns income, net
of expenses, daily on its investments. It is the policy of the Fund to
declare quarterly and pay monthly distributions to common shareholders.
The Fund has adopted a policy to pay common shareholders a stable
distribution. In an effort to maintain a stable distribution amount,
distributions may consist of net investment income, realized gains and
paid-in capital. The Fund may pay distributions in excess of those
required by its stable distribution policy to avoid excise tax or to
satisfy the requirements of Subchapter M of the Internal Revenue Code.
Income dividends and capital gain distributions to common shareholders
are recorded on the ex-dividend date. Net realized capital gains, if any,
will be offset to the extent of any available capital loss carryforwards.
Any such offset will not reduce the level of the stable distribution paid
by the Fund. Dividends and distributions to preferred shareholders are
accrued and determined as described in Note A-7.
The Fund invests a significant 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 Form 1099s 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.
18
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
On September 29, 2004, the Fund declared two monthly dividends to common
shareholders from its net investment income in the amount of $0.10625 per
share per month, payable after the close of the reporting period, on
November 30, 2004 and December 31, 2004, to shareholders of record on
November 12, 2004 and December 15, 2004, respectively, with ex-dividend
dates of November 10, 2004 and December 13, 2004, respectively.
6 EXPENSE ALLOCATION: Certain expenses are applicable to multiple funds.
Expenses directly attributable to the Fund are charged to the Fund.
Expenses borne by the complex of related investment companies, which
includes open-end and closed-end investment companies for which
Management serves as investment manager, that are not directly attributed
to the Fund, are allocated among the Fund and the other investment
companies in the complex or series thereof, on the basis of relative net
assets, except where a more appropriate allocation of expenses to each
investment company in the complex or series thereof can otherwise be made
fairly.
7 REDEEMABLE PREFERRED SHARES: On June 5, 2003, the Fund re-classified
6,000 unissued shares of capital stock as Series A Auction Preferred
Shares and Series B Auction Preferred Shares ("Preferred Shares"). On
September 26, 2003, the Fund issued 2,510 Series A Auction Preferred
Shares and 2,510 Series B Auction Preferred Shares. All Preferred Shares
have a liquidation preference of $25,000 per share plus any accumulated
unpaid dividends, whether or not earned or declared by the Fund, but
excluding interest thereon ("Liquidation Value").
Except when the Fund has declared a special rate period, dividends to
preferred shareholders, which are cumulative, are accrued daily and paid
every 7 days. Dividend rates are reset every 7 days based on the results
of an auction, except during special rate periods. For the year ended
October 31, 2004, dividend rates ranged from 1.07% to 1.95% for Series A
and 1.05% to 1.96% for Series B Auction Preferred Shares. The Fund
declared dividends to preferred shareholders for the period November 1,
2004 to November 30, 2004 of $103,043 and $103,416 for Series A and
Series B Auction Preferred Shares, respectively.
The Fund may redeem Preferred Shares, in whole or in part, on the second
business day preceding any dividend payment date at Liquidation Value.
The Fund is also subject to certain restrictions relating to the
Preferred Shares. Failure to comply with these restrictions could
preclude the Fund from declaring any distributions to common shareholders
or repurchasing common shares and/or could trigger the mandatory
redemption of Preferred Shares at Liquidation Value. The holders of
Preferred Shares are entitled to one vote per share and will vote with
holders of common stock as a single class, except that the Preferred
Shares will vote separately as a class on certain matters, as required by
law or the Fund's charter. The holders of the Preferred Shares, voting as
a separate class, are entitled at all times to elect two Directors of the
Fund, and to elect a majority of the Directors of the Fund if the Fund
fails to pay dividends on Preferred Shares for two consecutive years.
8 INTEREST RATE SWAPS: The Fund may enter into interest rate swap
transactions, with institutions that the Fund's investment manager has
determined are creditworthy, to reduce the risk that an increase in
short-term interest rates could reduce common share net earnings as a
result of leverage. Under the terms of the interest rate swap agreements,
the Fund agrees to pay the swap counter party a fixed-rate payment
19
<Page>
in exchange for the counter party's paying the Fund a variable-rate
payment that is intended to approximate all or a portion of the Fund's
variable-rate payment obligation on the Fund's Preferred Shares. The
fixed-rate and variable-rate payment flows are netted against each other,
with the difference being paid by one party to the other on a monthly
basis. The Fund segregates cash or liquid securities having a value at
least equal to the Fund's net payment obligations under any swap
transaction, marked to market daily.
Risks may arise if the counter party to a swap contract fails to comply
with the terms of its contract. The loss incurred by the failure of a
counter party is generally limited to the net interest payment to be
received by the Fund, and/or the termination value at the end of the
contract. Additionally, risks may arise from movements in interest rates
unanticipated by Management.
Prior to November 1, 2003, the Fund recorded the accrual of the net
interest income or expense expected to be received or paid at interim
settlement dates as a net payable or receivable for swap contracts and
actual amounts paid as net interest income or expense on swap contracts.
As a result of SEC staff guidance relating to the application of FASB
Statement No 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES to registered investment companies, effective November 1,
2003, periodic expected interim net interest payments or receipts on the
swaps are recorded as an adjustment to unrealized gains/losses, along
with the fair value of the future periodic payment streams on the swaps.
The unrealized gains/losses associated with the periodic interim net
interest payments are reclassified to realized gains/losses in
conjunction with the actual net receipt or payment of such amounts. As a
result of the SEC staff guidance, the Fund recorded an adjustment to
reflect the reclassification of such amounts. The adjustment resulted in
an increase to distributions in excess of net investment income of
$40,911, and a corresponding decrease to accumulated net realized
gains/losses as of November 1, 2003. The current year impact increased
net investment income by $1,960,648, increased net realized losses by
$1,929,295 and decreased unrealized appreciation (depreciation) in value
of investments by $31,353, and therefore did not impact the Fund's total
net assets or its total net increase (decrease) in net assets applicable
to common shareholders resulting from operations. At October 31, 2004,
the Fund had outstanding interest rate swap contracts as follows:
<Table>
<Caption>
RATE TYPE
---------------------------
FIXED-RATE VARIABLE-RATE ACCRUED
PAYMENTS PAYMENTS NET INTEREST UNREALIZED TOTAL
SWAP NOTIONAL MADE BY RECEIVED BY RECEIVABLE APPRECIATION FAIR
COUNTER PARTY AMOUNT TERMINATION DATE THE FUND THE FUND(1) (PAYABLE) (DEPRECIATION) VALUE
Citibank, N.A. $ 24,000,000 April 24, 2008 3.70% 1.9325% $ (8,248) $ (305,759) $ (314,007)
Citibank, N.A. 70,000,000 October 24, 2008 3.63% 1.9325% (23,105) (496,008) (519,113)
---------- ------------ -----------
$ (31,353) $ (801,767) $ (833,120)
</Table>
(1) 30 day LIBOR (London Interbank Offered Rate)
9 SECURITY LENDING: Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission, the Fund entered into a Securities Lending
Agreement ("Agreement") with Neuberger. 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
20
<Page>
Fund will not lend securities on which covered call options have been
written, or lend securities on terms which would prevent the Fund from
qualifying as a regulated investment company. The Fund receives cash
collateral equal to at least 102% of the current market value of the
loaned securities. The Fund invests the cash collateral in the N&B
Securities Lending Quality Fund, LLC, which is managed by State Street
Bank and Trust Company ("State Street") pursuant to guidelines approved
by the Fund's investment manager. Neuberger 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. For the year ended October 31, 2004, the Fund paid Neuberger $11,468
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.
Income earned on the securities loaned, if any, is reflected in the
Statement of Operations under the caption Income from securities
loaned-affilliated issuer.
10 REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund
requires that the securities purchased in a repurchase agreement be
transferred to the custodian in a manner sufficient to enable the Fund to
assert a perfected security interest in those securities in the event of
a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that their
value, including accrued interest, is greater than amounts owed to the
Fund under each such repurchase agreement.
11 TRANSACTIONS WITH OTHER FUNDS MANAGED BY NEUBERGER BERMAN MANAGEMENT
INC.: Pursuant to an Exemptive Order issued by the Securities and
Exchange Commission, the Fund may invest in the Neuberger Berman
Institutional Cash Fund (the "Cash Fund"), a fund managed by Management
and having the same Board members as the Fund. The Cash Fund seeks to
provide as high a level of current income as is consistent with the
preservation of capital and the maintenance of liquidity. For any cash
that the Fund invests in the Cash Fund, Management waives a portion of
its management fee equal to the management fee it receives from the Cash
Fund on those assets. For the year ended October 31, 2004, management
fees waived on the Cash Fund amounted to $1,606. For the year ended
October 31, 2004, income earned on this investment amounted to $13,612
and is reflected in the Statement of Operations under the caption Income
from investments in affiliated issuers.
12 ORGANIZATION EXPENSES AND OFFERING COSTS: Management has agreed to pay
all organizational expenses and the amount by which the Fund's offering
costs for common stock (other than sales load) exceed $0.03 per share.
The costs incurred by Management were $312,741. Offering costs for common
stock paid by the Fund were charged as a reduction of common stock
paid-in-capital at the completion of the Fund's offerings and amounted to
$531,709.
21
<Page>
Additionally, offering costs of $292,294 and a sales load of $1,255,000
incurred through the issuance of Preferred Shares were charged as a
reduction of common stock paid-in-capital at the completion of the Fund's
Preferred Shares offering.
13 CONCENTRATION OF RISK: Under normal market conditions, the Fund's equity
investments may be primarily concentrated in income-producing common
equity securities, preferred securities, convertible securities and
non-convertible debt securities issued by companies deriving the majority
of their revenue from the ownership, construction, financing, management
and/or sale of commercial, industrial, and/or residential real estate.
The value of the Fund's shares may fluctuate more due to economic, legal,
cultural or technological developments affecting the United States real
estate industry or a segment of the real estate industry in which the
Fund owns a substantial position, than would the shares of a fund not
concentrated in the real estate industry. The Fund's debt investments
will be primarily concentrated in high-yield corporate debt securities
rated, at the time of investment, Ba or lower by Moody's Investors
Service, Inc. or BB or lower by Standard & Poor's Corp., or if unrated by
either of those entities, determined by Management to be of comparable
quality. Due to the inherent volatility and illiquidity of the high yield
securities in which the Fund invests and the real or perceived difficulty
of issuers of those high yield securities to meet their payment
obligations during economic downturns or because of negative business
developments relating to the issuer or its industry in general, the value
of the Fund's shares may fluctuate more than would be the case if the
Fund did not concentrate in high yield securities.
14 INDEMNIFICATIONS: Like many other companies, the Fund's organizational
documents provide that its officers and directors are indemnified against
certain liabilities arising out of the performance of their duties to the
Fund. In addition, both in some of its principal service contracts and in
the normal course of its business, the Fund enters into contracts that
provide indemnifications to other parties for certain types of losses or
liabilities. The Fund's maximum exposure under these arrangements is
unknown as this could involve future claims against the Fund.
NOTE B--MANAGEMENT FEES, ADMINISTRATION FEES, AND OTHER TRANSACTIONS WITH
AFFILIATES:
The Fund retains Management as its investment manager under a Management
Agreement. For such investment management services, the Fund pays
Management a fee at the annual rate of 0.60% of its average daily Managed
Assets. Managed Assets equal the total assets of the Fund, less
liabilities other than the aggregate indebtedness entered into for
purposes of leverage. For purposes of calculating Managed Assets, the
Liquidation Value of any Preferred Shares outstanding is not considered a
liability.
Management has contractually agreed to waive a portion of the management
fees it is entitled to receive from the Fund at the following annual
rates:
<Table>
<Caption>
YEAR ENDED % OF AVERAGE
OCTOBER 31, DAILY MANAGED ASSETS
--------------------------------------------------------------------------------
2004 - 2008 0.25%
2009 0.19
2010 0.13
2011 0.07
</Table>
22
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
Management has not agreed to waive any portion of its fees beyond October
31, 2011.
For the year ended October 31, 2004, such waived fees amounted to
$1,008,005.
The Fund retains Management as its administrator under an Administration
Agreement. The Fund pays Management an administration fee at the annual
rate of 0.25% of its average daily Managed Assets under this agreement.
Additionally, Management retains State Street as its sub-administrator
under a Sub-Administration Agreement. Management pays State Street a fee
for all services received under the agreement.
On October 31, 2003, Management and Neuberger, a member firm of the New
York Stock Exchange and sub-adviser to the Fund, became indirect
wholly-owned subsidiaries of Lehman Brothers Holdings Inc. ("Lehman"), a
publicly-owned holding company. Neuberger is retained by Management to
furnish it with investment recommendations and research information
without added cost to the Fund. Several individuals who are officers
and/or Directors of the Fund are also employees of Neuberger and/or
Management.
The Fund entered into a commission recapture program, which enables it to
pay some of its operational expenses by recouping a portion of the
commissions it pays to a broker that is not a related party of the Fund.
Expenses paid through this program may include costs of custodial,
transfer agency or accounting services. For the year ended October 31,
2004, the impact of this arrangement was a reduction of $14,661.
The Fund has an expense offset arrangement in connection with its
custodian contract. The impact of this arrangement, reflected in the
Statement of Operations under the caption Custodian fees, was a reduction
of $1,644.
In connection with the settlement of each Preferred Share auction, the
Fund pays, through the auction agent, a service fee to each participating
broker-dealer based upon the aggregate liquidation preference of the
Preferred Shares held by the broker-dealer's customers. For any auction
preceding a rate period of less than one year, the service fee is paid at
the annual rate of 1/4 of 1%; for any auction preceding a rate period of
one year or more, the service fee is paid at a rate agreed to by the Fund
and the broker-dealer.
In order to satisfy rating agencies' requirements, the Fund is required
to provide each rating agency a report on a monthly basis verifying that
the Fund is maintaining eligible assets having a discounted value equal
to or greater than the Preferred Shares Basic Maintenance Amount, which
is a minimum level set by each rating agency as one of the conditions to
maintain the AAA rating on the Preferred Shares. 'Discounted Value'
refers to the fact that the rating agencies require the Fund, in
performing this calculation, to discount portfolio securities below their
face value, at a rate depending on their rating. The Fund pays a fee to
State Street, as Fund sub-administrator, for the preparation of this
report.
NOTE C--SECURITIES TRANSACTIONS:
During the year ended October 31, 2004, there were purchase and sale
transactions (excluding short-term securities and interest rate swap
contracts) of $306,605,000 and $290,239,000, respectively.
23
<Page>
During the year ended October 31, 2004, brokerage commissions on
securities transactions amounted to $58,688, of which Neuberger received
$0, Lehman received $13,101, and other brokers received $45,587.
NOTE D--CAPITAL:
At October 31, 2004, the common shares outstanding and the common shares
of the Fund owned by Neuberger were as follows:
<Table>
<Caption>
COMMON SHARES COMMON SHARES
OUTSTANDING OWNED BY NEUBERGER
17,723,648 6,981
</Table>
Transactions in common shares for the year ended October 31, 2004 and the
period ended October 31, 2003 were as follows:
<Table>
<Caption>
COMMON SHARES ISSUED IN CONNECTION WITH:
UNDERWRITERS' REINVESTMENT OF NET INCREASE IN
INITIAL INITIAL PUBLIC EXERCISE OF OVER- DIVIDENDS AND COMMON SHARES
CAPITALIZATION OFFERING ALLOTMENT OPTION DISTRIBUTIONS OUTSTANDING
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
-- 6,981 -- 16,666,667 -- 1,050,000 -- -- -- 17,723,648
</Table>
NOTE E--INVESTMENTS IN AFFILIATES*:
<Table>
<Caption>
INCOME FROM
BALANCE OF GROSS BALANCE OF INVESTMENTS IN
SHARES HELD PURCHASES GROSS SHARES HELD VALUE AFFILIATED ISSUERS
OCTOBER 31, AND SALES AND OCTOBER 31, OCTOBER 31, INCLUDED IN
NAME OF ISSUER 2003 ADDITIONS REDUCTIONS 2003 2004 TOTAL INCOME
N&B Securities Lending
Quality Fund, LLC** 0 6,313,395,000 6,269,146,000 44,249,000 $ 44,249,000 $ 49,441
Neuberger Berman
Institutional Cash Fund
Trust Class*** 3,991,000 16,488,000 19,660,000 819,000 819,000 13,612
------------ ------------
Total $ 45,068,000 $ 63,053
============ ============
</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.
24
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
FINANCIAL HIGHLIGHTS INCOME OPPORTUNITY FUND INC.
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the Financial
Statements.CENTS
<Table>
<Caption>
PERIOD FROM
YEAR ENDED JULY 2, 2003^
OCTOBER 31, TO OCTOBER 31,
------------ --------------
2004 2003
COMMON SHARE NET ASSET VALUE, BEGINNING OF PERIOD $ 14.72 $ 14.33
------------ --------------
INCOME FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS:
NET INVESTMENT INCOME (LOSS) 1.27Y .25
NET GAINS OR LOSSES ON SECURITIES
(BOTH REALIZED AND UNREALIZED) 2.08Y .59
COMMON SHARE EQUIVALENT OF DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
NET INVESTMENT INCOME (.09) (.01)
NET CAPITAL GAINS (.01) (.00)
TAX RETURN OF CAPITAL -- (.00)
------------ --------------
TOTAL DISTRIBUTIONS TO PREFERRED SHAREHOLDERS (.10) (.01)
------------ --------------
TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS 3.25 .83
------------ --------------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
NET INVESTMENT INCOME (1.11) (.27)
NET CAPITAL GAINS (.17) (.05)
TAX RETURN OF CAPITAL -- (.00)
------------ --------------
TOTAL DISTRIBUTIONS TO COMMON SHAREHOLDERS (1.28) (.32)
------------ --------------
LESS CAPITAL CHARGES:
ISSUANCE OF COMMON SHARES -- (.03)
ISSUANCE OF PREFERRED SHARES (.00) (.09)
------------ --------------
TOTAL CAPITAL CHARGES (.00) (.12)
------------ --------------
COMMON SHARE NET ASSET VALUE, END OF PERIOD $ 16.69 $ 14.72
------------ --------------
COMMON SHARE MARKET VALUE, END OF PERIOD $ 15.07 $ 13.98
------------ --------------
TOTAL RETURN, COMMON SHARE NET ASSET VALUE+ +23.67% +5.11%**
TOTAL RETURN, COMMON SHARE MARKET VALUE+ +17.57% -4.67%**
RATIOS/SUPPLEMENTAL DATA++
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS, END OF PERIOD (IN MILLIONS) $ 295.8 $ 260.8
PREFERRED STOCK, AT LIQUIDATION VALUE ($25,000 PER SHARE LIQUIDATION PREFERENCE)
(IN MILLIONS) $ 125.5 $ 125.5
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS# 1.16%Y .88%*
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS++ 1.16%Y .87%*
RATIO OF NET INVESTMENT INCOME (LOSS) EXCLUDING PREFERRED STOCK DIVIDENDS TO
AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 8.08%Y 5.24%*
RATIO OF PREFERRED STOCK DIVIDENDS TO AVERAGE NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS .62% .17%*
RATIO OF NET INVESTMENT INCOME (LOSS) INCLUDING PREFERRED STOCK DIVIDENDS TO
AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 7.46%Y 5.07%*
PORTFOLIO TURNOVER RATE 74% 21%
ASSET COVERAGE PER SHARE OF PREFERRED STOCK, END OF PERIOD@ $ 83,933 $ 76,957
</Table>
See Notes to Financial Highlights
25
<Page>
NOTES TO FINANCIAL HIGHLIGHTS Income Opportunity Fund Inc.
+ Total return based on per share net asset value reflects the effects of
changes in net asset value on the performance of the Fund during each
fiscal period. Total return based on per share market value assumes the
purchase of common shares at the market price on the first day and sales
of common shares at the market price on the last day of the period
indicated. Dividends and distributions, if any, are assumed to be
reinvested at prices obtained under the Fund's dividend reinvestment plan.
Results represent past performance and do not guarantee future results.
Current returns may be lower or higher than the performance data quoted.
Total return would have been lower if Management had not waived a portion
of the investment management fee. Performance data current to the most
recent month-end are available at www.nb.com.
# The Fund is required to calculate an expense ratio without taking into
consideration any expense reductions related to expense offset
arrangements.
++ After waiver of a portion of the investment management fee. Had Management
not undertaken such action, the annualized ratios of net expenses to
average daily net assets applicable to common shareholders would have
been:
<Table>
<Caption>
PERIOD FROM
YEAR ENDED JULY 2, 2003 TO
OCTOBER 31, OCTOBER 31,
2004 2003
1.52% 1.16%
</Table>
^ The date investment operations commenced.
* Annualized.
** Not annualized.
@ Calculated by subtracting the Fund's total liabilities (excluding
accumulated unpaid dividends on Preferred Shares) from the Fund's total
assets and dividing by the number of Preferred Shares outstanding.
++ Expense ratios do not include the effect of dividend payments to preferred
shareholders. Income ratios include income earned on assets attributable
to Preferred Shares.
Y Prior to November 1, 2003, the Fund recorded the accrual of the net
interest income or expense expected to be received or paid at interim
settlement dates as a net payable or receivable for swap contracts and
actual amounts paid as net interest income or expense on swap contracts.
As a result of SEC staff guidance relating to the application of FASB
Statement No 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES to registered investment companies, effective November 1, 2003,
periodic expected interim net interest payments or receipts on the swaps
are recorded as an adjustment to unrealized gains/losses, along with the
fair value of the future periodic payment streams on the swaps.
Accordingly, for the year ended October 31, 2004, the per share amounts
and ratios shown decreased or increased as follows:
<Table>
Net Investment Income .11
Net Gains or Losses on Securities (both realized and unrealized) (.11)
Ratio of Gross Expenses to Average Net Assets Applicable to Common Shareholders (.71%)
Ratio of Net Expenses to Average Net Assets Applicable to Common Shareholders (.71%)
Ratio of Net Investment Income (Loss) Excluding Preferred Stock Dividends to
Average Net Assets Applicable to Common Shareholders .71%
Ratio of Net Investment Income (Loss) Including Preferred Stock Dividends to
Average Net Assets Applicable to Common Shareholders .71%
</Table>
CENTS The per share amounts which are shown have been computed based on the
average number of shares outstanding during the year ended October 31,
2004 and the period ended October 31, 2003.
26
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Neuberger Berman Income Opportunity Fund Inc.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Neuberger Berman Income Opportunity Fund Inc.,
(the "Fund") as of October 31, 2004, and the related statement of operations for
the year ended October 31, 2004, statements of changes in net assets for the
year in the ended October 31, 2004 and for the period from July 2, 2003
(commencement of operations) to October 31, 2004 and financial highlights for
the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
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 or other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Neuberger Berman Income Opportunity Fund Inc., at October 31, 2004, the results
of its operations for the year ended October 31, 2004, changes in its net assets
for the year ended October 31, 2004 and the period from July 2, 2003
(commencement of operations) to October 31, 2004, and its financial highlights
for the periods indicated herein, in conformity with U.S. generally accepted
accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
December 3, 2004
27
<Page>
DIVIDEND REINVESTMENT PLAN (UNAUDITED)
The Bank of New York ("Plan Agent") will act as Plan Agent for shareholders who
have not elected in writing to receive dividends and distributions in cash (each
a "Participant"), will open an account for each Participant under the Dividend
Reinvestment Plan ("Plan") in the same name as their then current Shares are
registered, and will put the Plan into effect for each Participant as of the
first record date for a dividend or capital gains distribution.
Whenever the Fund declares a dividend or distribution with respect to the common
stock of the Fund ("Shares"), each Participant will receive such dividends and
distributions in additional Shares, including fractional Shares acquired by the
Plan Agent and credited to each Participant's account. If on the payment date
for a cash dividend or distribution, the net asset value is equal to or less
than the market price per Share plus estimated brokerage commissions, the Plan
Agent shall automatically receive such Shares, including fractions, for each
Participant's account. Except in the circumstances described in the next
paragraph, the number of additional Shares to be credited to each Participant's
account shall be determined by dividing the dollar amount of the dividend or
distribution payable on their Shares by the greater of the net asset value per
Share determined as of the date of purchase or 95% of the then current market
price per Share on the payment date.
Should the net asset value per Share exceed the market price per Share plus
estimated brokerage commissions on the payment date for a cash dividend or
distribution, the Plan Agent or a broker-dealer selected by the Plan Agent shall
endeavor, for a purchase period lasting until the last business day before the
next date on which the Shares trade on an "ex-dividend" basis, but in no event,
except as provided below, more than 30 days after the dividend payment date, to
apply the amount of such dividend or distribution on each Participant's Shares
(less their PRO RATA share of brokerage commissions incurred with respect to the
Plan Agent's open-market purchases in connection with the reinvestment of such
dividend or distribution) to purchase Shares on the open market for each
Participant's account. No such purchases may be made more than 30 days after the
payment date for such dividend except where temporary curtailment or suspension
of purchase is necessary to comply with applicable provisions of federal
securities laws. If, at the close of business on any day during the purchase
period the net asset value per Share equals or is less than the market price per
Share plus estimated brokerage commissions, the Plan Agent will not make any
further open-market purchases in connection with the reinvestment of such
dividend or distribution. If the Plan Agent is unable to invest the full
dividend or distribution amount through open-market purchases during the
purchase period, the Plan Agent shall request that, with respect to the
uninvested portion of such dividend or distribution amount, the Fund issue new
Shares at the close of business on the earlier of the last day of the purchase
period or the first day during the purchase period on which the net asset value
per Share equals or is less than the market price per Share, plus estimated
brokerage commissions, such Shares to be issued in accordance with the terms
specified in the third paragraph hereof. These newly issued Shares will be
valued at the then-current market price per Share at the time such Shares are to
be issued.
For purposes of making the dividend reinvestment purchase comparison under the
Plan, (a) the market price of the Shares on a particular date shall be the last
sales price on the New York Stock Exchange (or if the Shares are not listed on
the New York Stock Exchange, such other exchange on which the Shares are
principally traded) on that date, or, if there is no sale on such Exchange (or
if not so listed, in the over-the-counter market) on that date, then the mean
between the closing bid and asked quotations for such Shares on such Exchange on
such date and (b) the net asset value per Share on a particular date shall be
the net asset value per Share most recently calculated by or on behalf of the
Fund. All dividends, distributions and other payments (whether made in cash or
Shares) shall be made net of any applicable withholding tax.
Open-market purchases provided for above may be made on any securities exchange
where the Fund's Shares are traded, in the over-the-counter market or in
negotiated transactions and may be on such terms as to price, delivery and
otherwise as the Plan Agent shall determine. Each Participant's uninvested funds
held by the Plan Agent will not bear interest, and it is understood that, in any
event, the Plan Agent shall have no liability in connection with any inability
to purchase Shares within 30 days after the initial date of such purchase as
herein provided, or with the timing of any purchases effected. The Plan Agent
shall have no responsibility as to the value of the Shares acquired for each
Participant's account. For the purpose of cash investments, the Plan Agent may
commingle each Participant's funds with those of other shareholders of the Fund
for whom the Plan Agent similarly acts as agent, and the average price
(including brokerage commissions) of all Shares purchased by the Plan Agent as
Plan Agent shall be the price per Share allocable to each Participant in
connection therewith.
28
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
The Plan Agent may hold each Participant's Shares acquired pursuant to the Plan
together with the Shares of other shareholders of the Fund acquired pursuant to
the Plan in noncertificated form in the Plan Agent's name or that of the Plan
Agent's nominee. The Plan Agent will forward to each Participant any proxy
solicitation material and will vote any Shares so held for each Participant only
in accordance with the instructions set forth on proxies returned by the
participant to the Fund.
The Plan Agent will confirm to each Participant each acquisition made for their
account as soon as practicable but not later than 60 days after the date
thereof. Although each Participant may from time to time have an undivided
fractional interest (computed to three decimal places) in a Share, no
certificates for a fractional Share will be issued. However, dividends and
distributions on fractional Shares will be credited to each Participant's
account. In the event of termination of a Participant's account under the Plan,
the Plan Agent will adjust for any such undivided fractional interest in cash at
the market value of the Shares at the time of termination, less the PRO RATA
expense of any sale required to make such an adjustment.
Any Share dividends or split Shares distributed by the Fund on Shares held by
the Plan Agent for Participants will be credited to their accounts. In the event
that the Fund makes available to its shareholders rights to purchase additional
Shares or other securities, the Shares held for each Participant under the Plan
will be added to other Shares held by the Participant in calculating the number
of rights to be issued to each Participant.
The Plan Agent's service fee for handling capital gains distributions or income
dividends will be paid by the Fund. Participants will be charged their PRO RATA
share of brokerage commissions on all open-market purchases.
Each Participant may terminate their account under the Plan by notifying the
Plan Agent in writing. Such termination will be effective immediately if the
Participant's notice is received by the Plan Agent not less than ten days prior
to any dividend or distribution record date, otherwise such termination will be
effective the first trading day after the payment date for such dividend or
distribution with respect to any subsequent dividend or distribution. The Plan
may be terminated by the Plan Agent or the Fund upon notice in writing mailed to
each Participant at least 30 days prior to any record date for the payment of
any dividend or distribution by the Fund.
These terms and conditions may be amended or supplemented by the Plan Agent or
the Fund at any time or times but, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to each
Participant appropriate written notice at least 30 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by each
Participant unless, prior to the effective date thereof, the Plan Agent receives
written notice of the termination of their account under the Plan. Any such
amendment may include an appointment by the Plan Agent in its place and stead of
a successor Plan Agent under these terms and conditions, with full power and
authority to perform all or any of the acts to be performed by the Plan Agent
under these terms and conditions. Upon any such appointment of any Plan Agent
for the purpose of receiving dividends and distributions, the Fund will be
authorized to pay to such successor Plan Agent, for each Participant's account,
all dividends and distributions payable on Shares held in their name or under
the Plan for retention or application by such successor Plan Agent as provided
in these terms and conditions.
The Plan Agent shall at all times act in good faith and agrees to use its best
efforts within reasonable limits to ensure the accuracy of all services
performed under this Agreement and to comply with applicable law, but assumes no
responsibility and shall not be liable for loss or damage due to errors unless
such error is caused by the Plan Agent's negligence, bad faith, or willful
misconduct or that of its employees.
These terms and conditions shall be governed by the laws of the State of
Maryland.
29
<Page>
DIRECTORY
INVESTMENT MANAGER AND ADMINISTRATOR
Neuberger Berman Management Inc.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
877.461.1899 or 212.476.8800
SUB-ADVISER
Neuberger Berman, LLC
605 Third Avenue
New York, NY 10158-3698
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
STOCK TRANSFER AGENT
Bank of New York
101 Barclay Street, 11-E
New York, NY 10286
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
2nd Floor
Washington, DC 20036-1221
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
30
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
DIRECTORS AND OFFICERS (UNAUDITED)
The following tables set forth information concerning the directors and officers
of the Funds. All persons named as directors and officers also serve in similar
capacities for other funds administered or managed by NB Management and
Neuberger Berman, LLC. The Statement of Additional Information for each Fund
includes additional information about fund directors and is available upon
request, without charge, by calling (877) 461-1899.
THE BOARD OF DIRECTORS
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(s) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- --------------------------------------------------------------------------------------------------------------------------
CLASS I
INDEPENDENT FUND DIRECTORS*
Faith Colish (69) Counsel, Carter Ledyard & Milburn LLP (law 41 Director, American Bar Retirement
Director firm) since October 2002; formerly, Association (ABRA) since 1997
Attorney-at-Law and President, Faith (not-for-profit membership
Colish, A Professional Corporation, 1980 to association).
2002.
C. Anne Harvey (67) Consultant, C. A. Harvey Associates, since 41 President, Board of Associates to
Director June 2001; formerly, Director, AARP, 1978 The National Rehabilitation
to December 2001. Hospital's Board of Directors 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), 1998-2000; formerly, Member,
Executive Committee, Crime
Prevention Coalition of America,
1997-2000.
Cornelius T. Ryan (72) Founding General Partner, Oxford Partners 41 Director, Capital Cash Management
Director and Oxford Bioscience Partners (venture Trust (money market fund),
capital partnerships) and President, Oxford Naragansett Insured Tax-Free Income
Venture Corporation. Fund, Rocky Mountain Equity Fund,
Prime Cash Fund, several private
companies and QuadraMed Corporation
(NASDAQ).
Peter P. Trapp (59) Regional Manager for Atlanta Region, Ford 41 None.
Director Motor Credit Company since August 1997;
formerly, President, Ford Life Insurance
Company, April 1995 until August 1997.
</Table>
31
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(s) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- --------------------------------------------------------------------------------------------------------------------------
DIRECTOR WHO IS AN "INTERESTED PERSON"
Peter E. Sundman* (45) Executive Vice President, Neuberger Berman 41 Director and Vice President,
Chief Executive Officer, Inc. (holding company) since 1999; Head of Neuberger & Berman Agency, Inc.
Director and Chairman of Neuberger Berman Inc.'s Mutual Funds and since 2000; formerly, Director,
the Board Institutional Business since 1999; Neuberger Berman Inc. (holding
President and Director, NB Management since company) from October 1999 through
1999; Executive Vice President, Neuberger March 2003.
Berman since 1999; formerly, Principal,
Neuberger Berman from 1997 until 1999;
formerly, Senior Vice President, NB
Management from 1996 until 1999.
CLASS II
INDEPENDENT FUND DIRECTORS*
John Cannon (74) Consultant. Formerly, Chairman, CDC 41 Independent Trustee or Director of
Director Investment Advisers (registered investment three series of OppenheimerFunds:
adviser), 1993-January 1999; formerly, Limited Term New York Municipal
President and Chief Executive Officer, AMA Fund, Rochester Fund Municipals, and
Investment Advisors, an affiliate of the Oppenheimer Convertible Securities
American Medical Association. Fund, since 1992.
Barry Hirsch (71) Attorney-at-Law. Formerly, Senior Counsel, 41 None.
Director Loews Corporation (diversified financial
corporation) May 2002 until April 2003;
formerly, Senior Vice President, Secretary
and General Counsel, Loews Corporation.
</Table>
32
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(s) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- --------------------------------------------------------------------------------------------------------------------------
Tom Decker Seip (54) General Partner, Seip Investments LP (a 41 Director, H&R Block, Inc. (financial
Director private investment partnership); formerly, services company) since May 2001;
President and CEO, Westaff, Inc. (temporary Director, Forward Management, Inc.
staffing), May 2001 to January 2002; Senior (asset management) since 2001;
Executive at the Charles Schwab Corporation formerly, Director, General Magic
from 1983 to 1999, including Chief (voice recognition software) 2001
Executive Officer, Charles Schwab until 2002; formerly, Director,
Investment Management, Inc. and Trustee, E-Finance Corporation (credit
Schwab Family of Funds and Schwab decisioning services) 1999-2003;
Investments from 1997 to 1998 and Executive formerly, Director, Save-Daily.com
Vice President-Retail Brokerage, Charles (micro investing services)
Schwab Investment Management from 1994 to 1999-2003; Director, Offroad Capital
1997. Inc. (pre-public internet commerce
company).
DIRECTOR WHO IS AN "INTERESTED PERSON"
Jack L. Rivkin* (64) Executive Vice President and Chief 41 Director, Dale Carnegie and
President and Director Investment Officer, Neuberger Berman Inc. Associates, Inc. (private company)
(holding company) since 2002 and 2003, since 1998; Director, Emagin Corp.
respectively; Executive Vice President and (public company) since 1997;
Chief Investment Officer, Neuberger Berman Director, Solbright, Inc. (private
since 2002 and 2003, respectively; Director company) since 1998; Director,
and Chairman, NB Management since December Infogate, Inc. (private company)
2002; formerly, Executive Vice President, since 1997; Director, Broadway
Citigroup Investments, Inc. from September Television Network (private company)
1995 to February 2002; formerly, Executive since 2000.
Vice President, Citigroup Inc. from
September 1995 to February 2002.
CLASS III
INDEPENDENT FUND DIRECTORS*
Walter G. Ehlers (71) Consultant; Retired President and Trustee, 41 None.
Director Teachers Insurance & Annuity (TIAA) and
College Retirement Equities Fund (CREF).
</Table>
33
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(s) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- --------------------------------------------------------------------------------------------------------------------------
Robert A. Kavesh (77) Marcus Nadler Professor Emeritus of Finance 41 Director, DEL Laboratories, Inc.
Director and Economics, New York University Stern (cosmetics and pharmaceuticals)
School of Business. since 1978; Director, The Caring
Community (not-for-profit).
Howard A. Mileaf (67) Retired. Formerly, Vice President and 41 Director, WHX Corporation (holding
Director Special Counsel, WHX Corporation (holding company) since August 2002;
company) 1993-2001. Director, Webfinancial Corporation
(holding company) since December
2002; Director, State Theatre of New
Jersey (not-for-profit theater)
since 2000; formerly, Director,
Kevlin Corporation (manufacturer of
microwave and other products).
William E. Rulon (72) Retired. Formerly, Senior Vice President, 41 Director, Pro-Kids Golf and Learning
Director Foodmaker, Inc. (operator and franchiser of Academy (teach golf and computer
restaurants) until January 1997. usage to "at risk" children) since
1998; formerly, Director, Prandium,
Inc. (restaurants) from March 2001
until July 2002.
Candace L. Straight (57) Private investor and consultant 41 Director, The Proformance Insurance
Director specializing in the insurance industry; Company (personal lines property and
formerly, Advisory Director, Securitas casualty insurance company) since
Capital LLC (a global private equity March 2004; Director, Providence
investment firm dedicated to making Washington (property and casualty
investments in the insurance sector) 1998 insurance company) since December
until December 2002. 1998; Director, Summit Global
Partners (insurance brokerage firm)
since October 2000.
</Table>
34
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(s) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- --------------------------------------------------------------------------------------------------------------------------
DIRECTOR WHO IS AN "INTERESTED PERSON"
Edward I. O'Brien* (76) Formerly, Member, Investment Policy 41 Director, Legg Mason, Inc.
Director Committee, Edward Jones 1993-2001; (financial services holding company)
President, Securities Industry Association since 1993; formerly, Director,
("SIA") (securities industry's Boston Financial Group (real estate
representative in government relations and and tax shelters) 1993-1999.
regulatory matters at the federal and state
levels) 1974-1992; Adviser to SIA, November
1992-November 1993.
</Table>
* Indicates a director who is an "interested person" within the meaning of
the 1940 Act. Mr. Sundman and Mr. Rivkin are interested persons of the Fund
by virtue of the fact that each is an officer and/or director of NB
Management and Executive Vice President of Neuberger Berman. Mr. O'Brien is
an interested person of the Fund by virtue of the fact that he is a
director of Legg Mason, Inc., a wholly owned subsidiary of which, from time
to time, serves as a broker or dealer to the Fund and other funds or
accounts for which NB Management serves as investment manager.
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Except as otherwise indicated, each person has held the positions shown for
at least the last five years. The Board of Directors shall at all times be
divided as equally as possible into three classes of Directors designated
Class I, Class II, and Class III. The terms of office of Class I, Class II,
and Class III Directors shall expire at the annual meetings of stockholders
held in 2006, 2004, and 2005 respectively, and at each third annual meeting
of stockholders thereafter.
35
<Page>
INFORMATION ABOUT THE OFFICERS OF THE FUND (OTHER THAN THOSE LISTED ABOVE)
<Table>
<Caption>
POSITION AND
NAME, AGE, AND ADDRESS (1) LENGTH OF TIME SERVED (2) PRINCIPAL OCCUPATION(S)
- --------------------------------------------------------------------------------------------------------------
Claudia A. Brandon (48) Secretary since 2002 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 2002 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 2002 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;
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).
</Table>
36
<Page>
<Table>
<Caption>
POSITION AND
NAME, AGE, AND ADDRESS (1) LENGTH OF TIME SERVED (2) PRINCIPAL OCCUPATION(S)
- --------------------------------------------------------------------------------------------------------------
Kevin Lyons (49) Assistant Secretary since 2003 Employee, Neuberger Berman since 1999;
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).
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 Vice President, Neuberger Berman since 1999;
Financial and Accounting formerly, Assistant Vice President, NB
Officer since 2002 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 2002 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) Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
37
<Page>
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available, without charge,
by calling 1-800-877-9700 (toll-free) and on the website of the Securities and
Exchange Commission, at www.sec.gov. Information regarding how the Fund voted
proxies relating to portfolio securities during the most recent 12-month period
ended June 30 will also be available without charge, by calling 1-800-877-9700
(toll-free), on the website of the Securities and Exchange Commission, at
www.sec.gov, and on the Fund's website at www.nb.com.
QUARTERLY PORTFOLIO SCHEDULE
The Fund files a complete schedule of portfolio holdings for the Fund with the
Securities and Exchange Commission for the first and third quarters of each
fiscal year on Form N-Q. The Fund'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 1-800-977-9700 (toll free).
CHANGES TO THE BY-LAWS
On September 21, 2004, the Board adopted an amendment to the By-Laws of the Fund
stating that directors are elected by the vote of a majority of the outstanding
shares entitled to vote on the matter.
38
<Page>
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<Page>
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<Page>
[NEUBERGER BERMAN LOGO]
A LEHMAN BROTHERS COMPANY
NEUBERGER BERMAN MANAGEMENT INC.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
INTERNAL SALES & SERVICES
877.461.1899
www.nb.com
Statistics and projections in this report are derived from sources deemed to be
reliable but cannot be regarded as a representation of future results of the
Fund. This report is prepared for the general information of shareholders and is
not an offer of shares of the Fund.
[GRAPHIC] D0502 12/04
ITEM 2. CODE OF ETHICS
The Board of Directors ("Board") of Neuberger Berman Income Opportunity Fund
Inc. ("Registrant") adopted a code of ethics that applies to the Registrant's
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions ("Code of
Ethics"). For the period covered by this Form N-CSR, there were no amendments to
the Code of Ethics and 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.
A copy of the Code of Ethics was included as an exhibit to the Registrant's Form
N-CSR filed on January 9, 2004. The Code of Ethics is also available, without
charge, by calling 1-800-877-9700 (toll-free).
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
The Board has determined that the Registrant has one audit committee financial
expert serving on its audit committee. The Registrant's audit committee
financial expert is John Cannon. Mr. Cannon is an independent director as
defined by Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Ernst & Young, LLP ("E&Y") serves as independent registered public accounting
firm 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 $31,250 and
$54,000 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 $8,700 and $8,000 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 $8,700 and $8,000 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 Directors 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
The Board has established an Audit Committee to oversee particular aspects of
the Registrant's management. The Audit Committee's purposes are (a) to oversee
the accounting and financial reporting processes of the Registrant and their
internal controls and, as the Committee deems appropriate, to inquire into the
internal controls of certain service providers; (b) to oversee the quality and
objectivity of the Registrant's financial statements and the independent audit
thereof; (c) to oversee, or, as appropriate, assist Board oversight of, the
Registrant's compliance with legal and regulatory requirements that relate to
the Portfolios' accounting and financial reporting, internal controls and
independent audits; (d) to approve prior to appointment the engagement of the
Registrant's independent auditors and, in connection therewith, to review and
evaluate the qualifications, independence and performance of the Registrant's
independent auditors; and (e) to act as a liaison between the Registrant's
independent auditors and the full Board. The Audit Committee is composed
entirely of Independent Fund Directors; its members are John Cannon, Cornelius
T. Ryan (Chairman), Tom D. Seip, and Peter P. Trapp.
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
The Board has delegated to Neuberger Berman, LLC ("Neuberger Berman") the
responsibility to vote proxies related to the securities held in the Fund's
portfolios. Under this authority, Neuberger Berman is required by the Board to
vote proxies related to portfolio securities in the best interests of the Fund
and its stockholders. The Board permits Neuberger Berman to contract with a
third party to obtain proxy voting and related services, including research of
current issues.
Neuberger Berman has implemented written Proxy Voting Policies and Procedures
("Proxy Voting Policy") that are designed to reasonably ensure that Neuberger
Berman votes proxies prudently and in the best interest of its advisory clients
for whom Neuberger Berman has voting authority, including the Fund. The Proxy
Voting Policy also describes how Neuberger Berman addresses any conflicts that
may arise between its interests and those of its clients with respect to proxy
voting.
Neuberger Berman's Proxy Committee is responsible for developing, authorizing,
implementing and updating the Proxy Voting Policy, overseeing the proxy voting
process and engaging and overseeing any independent third-party vendors as
voting delegate to review, monitor and/or vote proxies. In order to apply the
Proxy Voting Policy noted above in a timely and consistent manner, Neuberger
Berman utilizes Institutional Shareholder Services Inc. ("ISS") to vote proxies
in accordance with Neuberger Berman's voting guidelines.
Neuberger Berman's guidelines adopt the voting recommendations of ISS. Neuberger
Berman retains final authority and fiduciary responsibility for proxy voting.
Neuberger Berman believes that this process is reasonably designed to address
material conflicts of interest that may arise between Neuberger Berman and a
client as to how proxies are voted.
In the event that an investment professional at Neuberger Berman believes that
it is in the best interests of a client or clients to vote proxies in a manner
inconsistent with Neuberger Berman's proxy voting guidelines or in a manner
inconsistent with ISS recommendations, the Proxy Committee will review
information submitted by the investment professional to determine that there is
no material conflict of interest between Neuberger Berman and the client with
respect to the voting of the proxy in that manner.
If the Proxy Committee determines that the voting of a proxy as recommended by
the investment professional presents a material conflict of interest between
Neuberger Berman and the client or clients with respect to the voting of the
proxy, the Proxy Committee shall: (i) take no further action, in which case ISS
shall vote such proxy in accordance with the proxy voting guidelines or as ISS
recommends; (ii) disclose such conflict to the client or clients and obtain
written direction from the client as to how to vote the proxy; (iii) suggest
that the client or clients engage another party to determine how to vote the
proxy; or (iv) engage another independent third party to determine how to vote
the proxy.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
No reportable purchases for the period covered by this report.
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) A copy of the Code of Ethics is incorporated by reference to
Registrant's Form N-CSR, Investment Company Act file number 811-21334
(filed January 9, 2004).
(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 Opportunity Fund Inc.
By: /s/ Peter E. Sundman
--------------------
Peter E. Sundman
Chief Executive Officer
Date: January 7, 2005
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: January 7, 2005
By: /s/ Barbara Muinos
------------------
Barbara Muinos
Treasurer and Principal Financial
and Accounting Officer
Date: January 7, 2005