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: 811-21315
NEUBERGER BERMAN REALTY INCOME FUND INC.
----------------------------------------
(Exact Name of the Registrant as Specified in Charter)
c/o Neuberger Berman Management Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Registrant's Telephone Number, including area code: (212) 476-8800
Peter E. Sundman, Chief Executive Officer
c/o Neuberger Berman Management Inc.
Neuberger Berman Realty Income 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 REALTY INCOME 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 7
FINANCIAL STATEMENTS 10
FINANCIAL HIGHLIGHTS/PER SHARE DATA 21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 24
DIVIDEND REINVESTMENT PLAN 25
DIRECTORY 27
DIRECTORS AND OFFICERS 28
PROXY VOTING POLICIES AND PROCEDURES AND OTHER INFORMATION 35
</Table>
CHAIRMAN'S LETTER
DEAR SHAREHOLDER,
I am pleased to present to you this annual report for the Neuberger Berman
Realty Income Fund Inc. for the reporting 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, which commenced operations on April 24, 2003, seeks to provide high
current income with capital appreciation as a secondary objective. To pursue
both, we have assembled a portfolio with a broad mix of equity securities of
real estate investment trusts (REITs) and other real estate companies.
Portfolio Manager Steven Brown's investment approach combines analysis of
security fundamentals and real estate with property sector diversification. His
disciplined valuation methodology seeks out real estate company securities that
are attractively priced relative to both their historical growth rates and the
valuation of other property sectors.
We believe our conservative investment philosophy and disciplined investment
process will benefit you with superior returns over the long term.
Thank you for your confidence in Neuberger Berman. We will continue to do our
best to keep earning it.
Sincerely,
/s/ Peter Sundman
PETER SUNDMAN
CHAIRMAN OF THE BOARD
NEUBERGER BERMAN
REALTY INCOME 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>
REALTY INCOME FUND INC. PORTFOLIO COMMENTARYS
We are pleased to announce that, for the fiscal year ending October 31, 2004, on
a Net Asset Value (NAV) basis, the Neuberger Berman Realty Income Fund (NYSE:
NRI) returned 30.07% compared to 29.95% for its benchmark, the NAREIT Equity
REIT Index.
Over the 12-month reporting period, the REIT market was very strong, primarily
due to improving economic conditions, a benign interest rate environment, and
improving real estate fundamentals. As the economy gained traction, demand and
occupancy levels for commercial real estate also increased. In addition,
investors continued to emphasize companies with visible earnings, which
benefited the REIT market.
Among the REIT sectors, regional malls, shopping centers, and industrial
properties did particularly well. Retailers also performed well, as they
continued to expand over the past year, causing occupancy and rent levels to
increase. Healthy consumer spending levels 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, industrial and
health care REITs contributed positively 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. Within
the portfolio, apartment REITs also detracted from relative performance.
As we look out to 2005, we expect 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.
Sincerely,
/s/ Steven R. Brown
STEVEN R. BROWN
PORTFOLIO MANAGER
2
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
REALTY INCOME FUND
NYSE TICKER SYMBOL NRI
1 YEAR TOTAL RETURN
<Table>
NAV (1) 30.07%
MARKET PRICE (2) 19.77%
AVERAGE ANNUAL TOTAL RETURN (Life of Fund as of October 31, 2004)
NAV (1) 34.72%
MARKET PRICE (2) 20.23%
INCEPTION DATE 04/24/2003
</Table>
INDUSTRY DIVERSIFICATION
(% OF INDUSTRY HOLDINGS)
<Table>
Apartments 19.5%
Commercial Services 1.3
Community Centers 19.3
Diversified 18.9
Health Care 19.2
Industrial 6.6
Lodging 1.0
Office 23.8
Office-Industrial 7.1
Regional Malls 19.4
Self Storage 3.1
Specialty 0.5
Short-Term Investments 15.70
Liabilities, less cash, receivables and other assets (55.4)
</Table>
Closed-end funds, unlike open-end funds, are not continually offered. There is
an initial public offering and once issued, common shares of closed-end funds
are sold in the open market through a stock exchange.
The composition, industries and holdings of the fund are subject to change.
Investment return will fluctuate. Past performance is no guarantee of future
results.
3
<Page>
ENDNOTES
1. Returns based on Net Asset Value ("NAV") of the Fund.
2. Returns based on price of Fund shares on the New York Stock Exchange.
3. 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.
4
<Page>
GLOSSARY OF INDICES
NAREIT EQUITY REIT INDEX: Tracks the performance of all Equity REITs currently
listed on the New York Stock Exchange, the NASDAQ
National Market System and the American Stock
Exchange. REITs are classified as Equity if 75% or
more of their gross invested book assets are
invested directly or indirectly in equity of
commercial properties.
Please note that the index does not take into account any fees and expenses or
any tax consequences of investing in the individual securities that it tracks
and that investors cannot invest directly in any index. Data about the
performance of the index is prepared or obtained by Neuberger Berman Management
Inc. and includes reinvestment of all dividends and capital gain distributions.
The Fund may invest in securities not included in its index.
5
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6
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
SCHEDULE OF INVESTMENTS REALTY INCOME FUND INC.
[SIDE NOTE]
TOP TEN EQUITY HOLDINGS
<Table>
<Caption>
HOLDING %
1 Mills Corp. 7.6
2 iStar Financial 7.1
3 Ventas, Inc. 6.4
4 Citigroup
Global Markets 5.7
5 Health Care
REIT 5.7
6 New Plan Excel
Realty Trust 4.5
7 Maguire
Properties 4.5
8 Apartment
Investment &
Management 4.3
9 EastGroup
Properties 4.1
10 Colonial
Properties Trust 4.1
</Table>
<Table>
<Caption>
MARKET VALUE+
NUMBER OF SHARES (000'S OMITTED)
COMMON STOCKS (103.6%)
APARTMENTS (15.4%)
138,200 Amli Residential Properties
Trust $ 4,349
531,400 Apartment Investment &
Management 19,497~
430,500 Archstone-Smith Trust 14,443~
464,200 Camden Property Trust 21,075
433,500 Gables Residential Trust 15,823
171,100 Home Properties 7,041
1,700 Mid-America Apartment
Communities 67
35,300 Post Properties 1,133
4,400 Town & Country Trust 121~
49,100 United Dominion Realty Trust 1,035
-----------------
84,584
COMMERCIAL SERVICES (0.5%)
92,000 Capital Trust 2,693
COMMUNITY CENTERS (11.4%)
43,400 Developers Diversified Realty 1,814~
30,000 Federal Realty Investment Trust 1,423
221,400 Heritage Property Investment
Trust 6,773
942,400 New Plan Excel Realty Trust 24,653~
331,100 Ramco-Gershenson Properties
Trust 8,940
404,700 Tanger Factory Outlet Centers 19,122
-----------------
62,725
DIVERSIFIED (13.3%)
575,400 Colonial Properties Trust 22,429~
813,100 iStar Financial 33,679^^
219,600 Lexington Corporate Properties
Trust 4,928~
182,100 Vornado Realty Trust 12,237~
-----------------
73,273
HEALTH CARE (15.7%)
652,800 Health Care Property Investors 18,168~
382,400 Health Care REIT 13,766~
157,300 Healthcare Realty Trust 6,347
563,700 Nationwide Health Properties 12,723
1,312,900 Ventas, Inc. 35,317
-----------------
86,321
INDUSTRIAL (6.6%)
642,129 EastGroup Properties 22,750
353,000 First Industrial Realty Trust 13,626
-----------------
36,376
LODGING (0.4%)
18,300 Eagle Hospitality Properties
Trust $ 174
51,000 Hospitality Properties Trust 2,185
-----------------
2,359
OFFICE (20.5%)
191,000 Arden Realty 6,509
385,400 Brandywine Realty Trust 11,339
290,400 CarrAmerica Realty 9,360
374,300 Equity Office Properties Trust 10,525
217,000 Glenborough Realty Trust 4,557
408,700 Highwoods Properties 10,140~
341,000 HRPT Properties Trust 3,816
271,300 Kilroy Realty 10,784
132,200 Mack-Cali Realty 5,839
942,000 Maguire Properties 24,633
323,500 Prentiss Properties Trust 11,640
233,600 Trizec Properties 3,726
-----------------
112,868
OFFICE--INDUSTRIAL (7.1%)
149,500 Bedford Property Investors 4,298
332,200 Liberty Property Trust 13,471
704,700 Reckson Associates Realty 21,387~
-----------------
39,156
REGIONAL MALLS (9.6%)
55,500 CBL & Associates Properties 3,638
452,700 Glimcher Realty Trust 11,689~
104,700 Macerich Co. 6,256
164,000 Mills Corp. 9,094~
177,600 Pennsylvania REIT 7,202
253,200 Simon Property Group 14,766~
10,400 Taubman Centers 298
-----------------
52,943
SELF STORAGE (3.1%)
175,100 Extra Space Storage 2,427~
119,700 Public Storage, Depositary
Shares 3,402
75,700 Shurgard Storage Centers 3,005~
131,500 Sovran Self Storage 5,138~
195,000 U-Store-It Trust 3,258~
-----------------
17,230
TOTAL COMMON STOCKS
(COST $420,094) 570,528
-----------------
</Table>
See Notes to Schedule of Investments
7
<Page>
<Table>
<Caption>
MARKET VALUE+
NUMBER OF SHARES (000'S OMITTED)
PREFERRED STOCKS (36.1%)
APARTMENTS (4.1%)
7,200 Apartment Investment &
Management, Ser. Q $ 194
8,600 Apartment Investment &
Management, Ser. R 232
138,000 Apartment Investment &
Management, Ser. T 3,477
377,800 Mid-America Apartment
Communities, Ser. H 9,929
151,300 Post Properties, Ser. A 8,927
-----------------
22,759
COMMERCIAL SERVICES (0.8%)
156,000 Anthracite Capital, Ser. C 4,126
COMMUNITY CENTERS (7.9%)
743,644 Citigroup Global Markets 31,419
66,000 Developers Diversified Realty,
Ser. I 1,705
49,600 Ramco-Gershenson Properties
Trust, Ser. B 1,364
85,500 Saul Centers, Ser. A 2,266~
60,000 Urstadt Biddle Properties,
Ser. C 6,585**
-----------------
43,339
DIVERSIFIED (5.6%)
398,600 Crescent Real Estate Equities,
Ser. B 10,822
200,000 iStar Financial, Ser. E 5,220
580,000 Lexington Corp. Properties
Trust, Ser. B 15,010
-----------------
31,052
HEALTH CARE (3.5%)
685,000 Health Care REIT, Ser. D 17,596
59,000 LTC Properties, Ser. F 1,516
1,000 Nationwide Health Properties 103
-----------------
19,215
LODGING (0.6%)
81,700 Hospitality Properties Trust,
Ser. B 2,249
32,000 Host Marriott, Ser. E 878
5,300 LaSalle Hotel Properties, Ser. A 148
-----------------
3,275
OFFICE (3.3%)
23,200 Highwoods Properties, Ser. B 586
96,400 Highwoods Properties, Ser. D 2,420
50,000 HRPT Properties Trust, Ser. B 1,372
480,000 Parkway Properties, Ser. D 12,480
53,200 SL Green Realty, Ser. D 1,370
-----------------
18,228
REGIONAL MALLS (9.8%)
40,000 CBL & Associates Properties,
Ser. B $ 2,178~
48,000 Glimcher Realty Trust, Ser. F 1,269
108,500 Glimcher Realty Trust, Ser. G 2,755
31,200 Mills Corp., Ser. B 859
206,200 Mills Corp., Ser. C 5,625
965,900 Mills Corp., Ser. E 26,166
225,300 Pennsylvania REIT, Ser. A 13,631
23,400 Simon Property Group, Ser. I 1,272
7,700 Taubman Centers, Ser. A 196
-----------------
53,951
SPECIALTY (0.5%)
30,000 Capital Automotive REIT, Ser. B 783
76,500 Entertainment Properties
Trust, Ser. A 2,064
-----------------
2,847
TOTAL PREFERRED STOCKS
(COST $182,306) 198,792
-----------------
PRINCIPAL AMOUNT
SHORT-TERM INVESTMENTS (15.7%)
$ 83,008,100 N&B Securities Lending
Quality Fund, LLC 83,008++
3,376,748 Neuberger Berman
Institutional Cash Fund
Trust Class 3,377@
-----------------
TOTAL SHORT-TERM INVESTMENTS
(COST $86,385) 86,385#
-----------------
TOTAL INVESTMENTS (155.4%)
(COST $688,785) 855,705##
Liabilities, less cash, receivables
and other assets [(14.0%)] (77,205)
Liquidation Value of Auction
Preferred Shares [(41.4%)] (228,000)
-----------------
TOTAL NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS (100.0%) $ 550,500
-----------------
</Table>
8
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
NOTES TO SCHEDULE OF INVESTMENTS
+ Investments in equity securities by Neuberger Berman Realty Income 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. 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 may 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 $688,785,000. Gross unrealized appreciation of investments was
$167,046,000 and gross unrealized depreciation of investments was $126,000
resulting in net unrealized appreciation of $166,920,000, based on cost for
U.S. Federal income tax purposes.
* Non-income producing security.
** Security exempt from registration under the Securities Act of 1933. These
securities may be resold in transactions exempt from registration, normally
to qualified institutional buyers under Rule 144A and are deemed liquid. At
October 31, 2004, these securities amounted to $6,585,000 or 1.2% of net
assets applicable to common shareholders.
^^ All or a portion of this security is segregated as collateral for interest
rate swap contracts.
@ 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.
~ All or a portion of this security is on loan (see Note A of Notes to
Financial Statements).
++ 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).
See Notes to Financial Statements
9
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
STATEMENT OF ASSETS AND LIABILITIES
<Table>
<Caption>
NEUBERGER BERMAN REALTY INCOME
(000'S OMITTED EXCEPT PER SHARE AMOUNTS) FUND
ASSETS
INVESTMENTS IN SECURITIES, AT MARKET VALUE*+ (NOTES A & E)--SEE
SCHEDULE OF INVESTMENTS:
Unaffiliated issuers $ 769,320
Affiliated issuers 86,385
=================================================================================================
855,705
Interest rate swaps, at market value (Note A) 4,118
- -------------------------------------------------------------------------------------------------
Dividends and interest receivable 2,544
Prepaid expenses and other assets 29
=================================================================================================
TOTAL ASSETS 862,396
=================================================================================================
LIABILITIES
Payable for collateral on securities loaned (Note A) 83,008
Dividends payable--preferred shares 56
- -------------------------------------------------------------------------------------------------
Dividends payable--common shares 346
Payable to investment manager--net (Notes A & B) 220
- -------------------------------------------------------------------------------------------------
Payable to administrator (Note B) 158
Accrued expenses and other payables 108
=================================================================================================
TOTAL LIABILITIES 83,896
=================================================================================================
AUCTION PREFERRED SHARES SERIES A, B, C & D AT LIQUIDATION VALUE
14,000 shares authorized; 9,120 shares issued and outstanding
$.0001 par value; $25,000 liquidation value per share (Note A) 228,000
=================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 550,500
=================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS CONSIST OF:
Paid-in capital--common shares $ 379,851
Distributions in excess of net investment income (389)
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) in value of investments 171,038
=================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 550,500
=================================================================================================
COMMON SHARES OUTSTANDING ($.0001 PAR VALUE; 999,986,000 SHARES AUTHORIZED) 27,372
=================================================================================================
NET ASSET VALUE PER COMMON SHARE OUTSTANDING $ 20.11
=================================================================================================
+SECURITIES ON LOAN, AT MARKET VALUE $ 79,596
=================================================================================================
*COST OF INVESTMENTS:
Unaffiliated issuers $ 602,400
Affiliated issuers 86,385
=================================================================================================
TOTAL COST OF INVESTMENTS $ 688,785
=================================================================================================
</Table>
See Notes to Financial Statements
10
<Page>
NEUBERGER BERMAN FOR THE YEAR ENDED OCTOBER 31, 2004
STATEMENT OF OPERATIONS
<Table>
<Caption>
NEUBERGER BERMAN REALTY INCOME
(000'S OMITTED) FUND
INVESTMENT INCOME
INCOME:
Dividend income--unaffiliated issuers $ 32,794
Income from investments in affiliated issuers (Note A) 50
- -------------------------------------------------------------------------------------------------
Income from securities loaned--affiliated issuer (Note A) 32
=================================================================================================
Total income 32,876
=================================================================================================
EXPENSES:
Investment management fee (Notes A & B) 4,371
Administration fee (Note B) 1,821
- -------------------------------------------------------------------------------------------------
Auction agent fees (Note B) 616
Audit fees 41
- -------------------------------------------------------------------------------------------------
Basic maintenance expense (Note B) 25
Custodian fees (Note B) 178
- -------------------------------------------------------------------------------------------------
Directors' fees and expenses 26
Insurance expense 18
- -------------------------------------------------------------------------------------------------
Legal fees 66
Shareholder reports 111
- -------------------------------------------------------------------------------------------------
Stock exchange listing fees 40
Stock transfer agent fees 33
- -------------------------------------------------------------------------------------------------
Miscellaneous 3
=================================================================================================
Total expenses 7,349
Investment management fee waived (Notes A & B) (1,827)
Expenses reduced by custodian fee expense offset and commission recapture
arrangements (Note B) (7)
=================================================================================================
Total net expenses 5,515
=================================================================================================
Net investment income 27,361
=================================================================================================
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE A)
Net realized gain (loss) on:
Sales of investment securities of unaffiliated issuers 8,396
------------------------------------------------------------------------------------------
Interest rate swap contracts (1,882)
Change in net unrealized appreciation (depreciation) in value of:
Unaffiliated investment securities 100,129
Interest rate swap contracts (1,745)
------------------------------------------------------------------------------------------
Net gain (loss) on investments 104,898
=================================================================================================
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
Net investment income (3,079)
==========================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
RESULTING FROM OPERATIONS $ 129,180
=================================================================================================
</Table>
See Notes to Financial Statements
11
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
REALTY INCOME FUND
--------------------------------
PERIOD FROM
YEAR APRIL 29, 2003
ENDED (COMMENCEMENT
NEUBERGER BERMAN OCTOBER 31, OF OPERATIONS) TO
(000'S OMITTED) 2004 OCTOBER 31, 2003
INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
FROM OPERATIONS:
Net investment income (loss) $ 27,361 $ 11,641
Net realized gain (loss) on investments 6,514 1,553
- ---------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) of investments 98,384 72,654
===============================================================================================================
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
Net investment income (2,126) (599)
Net realized gain on investments (590) (77)
- ---------------------------------------------------------------------------------------------------------------
Tax return of capital (363) (130)
===============================================================================================================
Total distributions to preferred shareholders (3,079) (806)
===============================================================================================================
Net increase (decrease) in net assets applicable to common shareholders
resulting from operations 129,180 85,042
===============================================================================================================
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (25,515) (11,441)
Net realized gain on investments (7,083) (1,476)
- ---------------------------------------------------------------------------------------------------------------
Tax return of capital (4,353) (2,477)
===============================================================================================================
Total distributions to common shareholders (36,951) (15,394)
===============================================================================================================
FROM CAPITAL SHARE TRANSACTIONS:
Net proceeds from initial capitalization (Note D) -- 100
Net proceeds from issuance of common shares -- 343,080
- ---------------------------------------------------------------------------------------------------------------
Net proceeds from underwriters' over-allotment option exercised -- 47,745
Proceeds from reinvestment of dividends -- 377
- ---------------------------------------------------------------------------------------------------------------
Preferred shares offering costs (50) (2,629)
===============================================================================================================
Total net proceeds from capital share transactions (50) 388,673
===============================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 92,179 458,321
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period 458,321 --
===============================================================================================================
End of period $ 550,500 $ 458,321
===============================================================================================================
Distributions in excess of net investment income at end of period $ (389) $ (399)
===============================================================================================================
</Table>
See Notes to Financial Statements
12
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
NOTES TO FINANCIAL STATEMENTS REALTY INCOME FUND INC.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1 GENERAL: Neuberger Berman Realty Income Fund Inc. (the "Fund") was
organized as a Maryland corporation on March 4, 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
April 29, 2003, other than matters relating to its organization and the
sale on April 14, 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 original issue discount, where applicable,
and accretion of discount on short-term investments, is recorded on the
accrual basis. Realized gains and losses from securities transactions and
foreign currency transactions, if any, 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 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.
13
<Page>
The tax character of distributions paid during the year ended October 31,
2004 and the period ended October 31, 2003 were as follows:
<Table>
<Caption>
DISTRIBUTIONS PAID FROM:
LONG-TERM TAX RETURN OF
ORDINARY INCOME CAPITAL GAIN CAPITAL TOTAL
2004 2003 2004 2003 2004 2003 2004 2003
$ 28,122,835 $ 12,073,815 $ 7,191,866 $ 1,518,618 $ 4,716,586 $ 2,607,119 $ 40,031,287 $ 16,199,552
</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
$ -- $ -- $ 171,051,311 $ -- $ 171,051,311
</Table>
The differences between book and tax basis distributable earnings are
primarily due to timing differences on dividend payments 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.
14
<Page>
On September 29, 2004, the Fund declared two monthly dividends to common
shareholders from its net investment income in the amount of $0.1125 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 12,000
unissued shares of capital stock as Series A Auction Preferred Shares,
Series B Auction Preferred Shares, Series C Auction Preferred Shares and
Series D Auction Preferred Shares ("Preferred Shares"). On June 23, 2003,
the Fund issued 1,950 Series A Auction Preferred Shares, 1,950 Series B
Auction Preferred Shares, 1,950 Series C Auction Preferred Shares and 1,950
Series D Auction Preferred Shares. On September 10, 2003, the Fund
re-classified an additional 2,000 unissued shares of capital stock as
Preferred Shares. On October 24, 2003, the Fund issued an additional 330
Series A Auction Preferred Shares, 330 Series B Auction Preferred Shares,
330 Series C Auction Preferred Shares and 330 Series D 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 1.06% to 2.24% for Series A, 1.05% to
1.97% for Series B, 1.05% to 2.00% for Series C, and 1.04% to 1.94% for
Series D Preferred Shares. The Fund declared dividends to preferred
shareholders for the period November 1, 2004 to November 30, 2004 of
$90,751, $93,578, $93,337, and $89,187 for Series A, Series B, Series C,
and Series D 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
15
<Page>
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 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 $767,939, and a corresponding decrease
to accumulated net realized gains/losses as of November 1, 2003. The
current year impact increased net investment income by $1,895,017 increased
net realized losses by $1,882,397 and decreased unrealized appreciation
(depreciation) in value of investments by $12,620, 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
SWAP PAYMENTS PAYMENTS NET INTEREST UNREALIZED
COUNTER NOTIONAL TERMINATION MADE BY RECEIVED BY RECEIVABLE APPRECIATION TOTAL
PARTY AMOUNT DATE THE FUND THE FUND(1) (PAYABLE) (DEPRECIATION) FAIR VALUE
Citibank, N.A. $ 83,000,000 June 26, 2007 2.22% 1.94% $ (3,873) $ 1,875,687 $ 1,871,814
Citibank, N.A. $ 82,000,000 June 26, 2008 2.58% 1.94% (8,747) 2,255,803 2,247,056
------------ ------------ ------------
$ (12,620) $ 4,131,490 $ 4,118,870
</Table>
(1) 30 day LIBOR (London Interbank Offered Rate)
16
<Page>
9 REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund
requires that the securities purchased in a repurchase agreement be
transferred to the custodian in a manner sufficient to enable the Fund to
assert a perfected security interest in those securities in the event of a
default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that their value,
including accrued interest, is greater than amounts owed to the Fund under
each such repurchase agreement.
10 SECURITY LENDING: Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission, the Fund entered into a Securities Lending
Agreement ("Agreement") with Neuberger. Securities loans involve certain
risks in the event a borrower should fail financially, including delays or
inability to recover the lent securities or foreclose against the
collateral. The investment manager, under the general supervision of the
Board, monitors the creditworthiness of the parties to whom the Fund makes
security loans. The Fund will not lend securities on which covered call
options have been written, or lend securities on terms which would prevent
the Fund from qualifying as a regulated investment company. The Fund
receives cash collateral equal to at least 102% of the current market value
of the loaned securities. The Fund invests the cash collateral in the N&B
Securities Lending Quality Fund, LLC, which is managed by State Street Bank
and Trust Company ("State Street") pursuant to guidelines approved by the
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 $7,122 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-affiliated
issuer.
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
$5,660. For the year ended October 31, 2004, income earned on this
investment amounted to $50,102 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 $116,384. Offering costs for common stock
17
<Page>
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
$820,409.
Additionally, offering costs of $399,423 and a sales load of $2,280,000
incurred through the issuance of Preferred Shares were charged as a
reduction of common stock paid-in-capital at the completion of the Fund's
Preferred Shares offerings.
As of October 31, 2004 there was no remaining payable for offering costs.
13 CONCENTRATION OF RISK: Under normal market conditions, the Fund's
investments will be concentrated in income-producing common equity
securities, preferred securities, convertible securities and
non-convertible debt securities issued by companies deriving the majority
of their revenue from the ownership, construction, financing, management
and/or sale of commercial, industrial, and/or residential real estate.
Values of the securities of such companies may fluctuate more due to
economic, legal, cultural, geopolitical or technological developments
affecting the United States real estate industry or a segment of the United
States 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.
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 - 2007 0.25
2008 0.20
2009 0.15
2010 0.10
2011 0.05
</Table>
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
$1,821,171.
18
<Page>
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.
On July 1, 2003, the Fund entered into a commission recapture program,
which enables it to pay some of its operational expenses by recouping a
portion of the commissions it pays to a broker that is not a related party
of the Fund. Expenses paid through this program may include costs of
custodial, transfer agency or accounting services. For the year ended
October 31, 2004, the impact of this arrangement was a reduction of $6,104.
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 $611.
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 $27,214,665 and $9,068,078, respectively.
During the year ended October 31, 2004, brokerage commissions on securities
transactions amounted to $34,616, of which Neuberger received $1,321,
Lehman received $5,005, and other brokers received $28,290.
19
<Page>
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
27,372,139 6,981
</Table>
Transactions in common shares for the year ended October 31, 2004 and the
period ended October 31, 2003 were as follows:
COMMON SHARES ISSUED IN CONNECTION WITH:
<Table>
<Caption>
UNDERWRITERS' EXERCISE REINVESTMENT OF
INITIAL OF OVER-ALLOTMENT DIVIDENDS AND NET INCREASE IN COMMON
CAPITALIZATION INITIAL PUBLIC OFFERING OPTION DISTRIBUTIONS SHARES OUTSTANDING
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
-- 6,981 -- 24,000,000 -- 3,340,000 -- 25,158 -- 27,372,139
</Table>
NOTE E--INVESTMENTS IN AFFILIATES*:
<Table>
<Caption>
BALANCE OF BALANCE OF INCOME FROM
SHARES GROSS SHARES INVESTMENTS IN
HELD GROSS SALES HELD VALUE AFFILIATED ISSUERS
OCTOBER 31, PURCHASES AND OCTOBER 31, OCTOBER 31, INCLUDED IN TOTAL
NAME OF ISSUER 2003 AND ADDITIONS REDUCTIONS 2004 2004 INCOME
N&B Securities Lending
Quality Fund, LLC** 16,189,400 7,567,467,200 7,500,648,500 83,008,100 $ 83,008,100 $ 31,956
Neuberger Berman
Institutional Cash Fund
Trust Class*** 35,894,615 40,815,842 73,333,709 3,376,748 3,376,748 50,102
-------------- --------------
Total $ 86,384,848 $ 82,058
</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.
20
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
FINANCIAL HIGHLIGHTS REALTY INCOME FUND INC.
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the Financial
Statements.^^
<Table>
<Caption>
PERIOD FROM
YEAR ENDED APRIL 29, 2003^
OCTOBER 31, TO OCTOBER 31,
-------------- ---------------
2004 2003
COMMON SHARE NET ASSET VALUE, BEGINNING OF PERIOD $ 16.74 $ 14.33
-------------- --------------
INCOME FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS:
NET INVESTMENT INCOME (LOSS) 1.00(Y) .43
NET GAINS OR LOSSES ON SECURITIES (BOTH REALIZED AND UNREALIZED) 3.83(Y) 2.70
COMMON SHARE EQUIVALENT OF DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
NET INVESTMENT INCOME (.08) (.02)
NET CAPITAL GAINS (.02) (.00)
TAX RETURN OF CAPITAL (.01) (.01)
-------------- --------------
TOTAL DISTRIBUTIONS TO PREFERRED SHAREHOLDERS (.11) (.03)
-------------- --------------
TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS 4.72 3.10
-------------- --------------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
NET INVESTMENT INCOME (.93) (.42)
NET CAPITAL GAINS (.26) (.05)
TAX RETURN OF CAPITAL (.16) (.09)
-------------- --------------
TOTAL DISTRIBUTIONS TO COMMON SHAREHOLDERS (1.35) (.56)
-------------- --------------
LESS CAPITAL CHARGES:
ISSUANCE OF COMMON SHARES -- (.03)
ISSUANCE OF PREFERRED SHARES (.00) (.10)
-------------- --------------
TOTAL CAPITAL CHARGES (.00) (.13)
-------------- --------------
COMMON SHARE NET ASSET VALUE, END OF PERIOD $ 20.11 $ 16.74
-------------- --------------
COMMON SHARE MARKET VALUE, END OF PERIOD $ 17.70 $ 16.00
-------------- --------------
TOTAL RETURN, COMMON SHARE NET ASSET VALUE+ +30.07% +21.16%**
TOTAL RETURN, COMMON SHARE MARKET VALUE+ +19.77% +10.60%**
RATIOS/SUPPLEMENTAL DATA++
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS, END OF PERIOD (IN MILLIONS) $ 550.5 $ 458.3
PREFERRED STOCK, AT LIQUIDATION VALUE ($25,000 PER SHARE LIQUIDATION PREFERENCE)
(IN MILLIONS) $ 228.0 $ 228.0
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS# 1.10%(Y) 1.35%*
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS++ 1.10%(Y) 1.35%*
RATIO OF NET INVESTMENT INCOME (LOSS) EXCLUDING PREFERRED STOCK DIVIDENDS TO AVERAGE
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 5.47%(Y) 5.42%*
RATIO OF PREFERRED STOCK DIVIDENDS TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS .62% .37%*
RATIO OF NET INVESTMENT INCOME (LOSS) INCLUDING PREFERRED STOCK DIVIDENDS TO AVERAGE
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 4.85%(Y) 5.05%*
PORTFOLIO TURNOVER RATE 1% 1%
ASSET COVERAGE PER SHARE OF PREFERRED STOCK, END OF PERIOD@ $ 85,368 $ 75,257
</Table>
See Notes to Financial Highlights
21
<Page>
NOTES TO FINANCIAL HIGHLIGHTS REALTY INCOME 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>
YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31,
2004 2003(1)
1.47% 1.68%
</Table>
(1) Period from April 29, 2003 to October 31, 2003.
^ The date investment operations commenced.
* Annualized.
** Not annualized.
@ Calculated by subtracting the Fund's total liabilities (excluding
accumulated unpaid dividends on Preferred Shares) from the Fund's total
assets and dividing by the number of Preferred Shares outstanding.
++ Expense ratios do not include the effect of dividend payments to preferred
shareholders. Income ratios include income earned on assets attributable to
Preferred Shares outstanding.
^^ 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.
22
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
(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>
<Caption>
YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31,
2004 2003(1)
Net Investment Income .07 .06
Net Gains or Losses in Securities (both realized and unrealized) (.07) (.06)
Ratio of Gross Expenses to Average Net Assets Applicable to
Common Shareholders (.38) (.36)
Ratio of Net Expenses to Average Net Assets Applicable to
Common Shareholders (.38) (.36)
Ratio of Net Investment Income (Loss) Excluding Preferred Stock
Dividends to Average Net Assets Applicable to Common Shareholders .38% .36%
Ratio of Net Investment Income (Loss) Including Preferred Stock
Dividends to Average Net Assets Applicable to Common Shareholders .38% .36%
</Table>
23
<Page>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Neuberger Berman Realty Income Fund Inc.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Neuberger Berman Realty Income 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
ended October 31, 2004 and the period from April 29, 2003 (commencement of
operations) to October 31, 2003 and financial highlights for the periods
indicated herein. 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 Realty Income 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 for the period from April 29, 2003
(commencement of operations) to October 31, 2003, and its financial highlights
for the periods indicated herein, in conformity with U.S. generally accepted
accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
December 3, 2004
24
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
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.
25
<Page>
The Plan Agent may hold each Participant's Shares acquired pursuant to the Plan
together with the Shares of other shareholders of the Fund acquired pursuant to
the Plan in noncertificated form in the Plan Agent's name or that of the Plan
Agent's nominee. The Plan Agent will forward to each Participant any proxy
solicitation material and will vote any Shares so held for each Participant only
in accordance with the instructions set forth on proxies returned by the
participant to the Fund.
The Plan Agent will confirm to each Participant each acquisition made for their
account as soon as practicable but not later than 60 days after the date
thereof. Although each Participant may from time to time have an undivided
fractional interest (computed to three decimal places) in a Share, no
certificates for a fractional Share will be issued. However, dividends and
distributions on fractional Shares will be credited to each Participant's
account. In the event of termination of a Participant's account under the Plan,
the Plan Agent will adjust for any such undivided fractional interest in cash at
the market value of the Shares at the time of termination, less the PRO RATA
expense of any sale required to make such an adjustment.
Any Share dividends or split Shares distributed by the Fund on Shares held by
the Plan Agent for Participants will be credited to their accounts. In the event
that the Fund makes available to its shareholders rights to purchase additional
Shares or other securities, the Shares held for each Participant under the Plan
will be added to other Shares held by the Participant in calculating the number
of rights to be issued to each Participant.
The Plan Agent's service fee for handling capital gains distributions or income
dividends will be paid by the Fund. Participants will be charged their PRO RATA
share of brokerage commissions on all open-market purchases.
Each Participant may terminate their account under the Plan by notifying the
Plan Agent in writing. Such termination will be effective immediately if the
Participant's notice is received by the Plan Agent not less than ten days prior
to any dividend or distribution record date, otherwise such termination will be
effective the first trading day after the payment date for such dividend or
distribution with respect to any subsequent dividend or distribution. The Plan
may be terminated by the Plan Agent or the Fund upon notice in writing mailed to
each Participant at least 30 days prior to any record date for the payment of
any dividend or distribution by the Fund.
These terms and conditions may be amended or supplemented by the Plan Agent or
the Fund at any time or times but, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to each
Participant appropriate written notice at least 30 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by each
Participant unless, prior to the effective date thereof, the Plan Agent receives
written notice of the termination of their account under the Plan. Any such
amendment may include an appointment by the Plan Agent in its place and stead of
a successor Plan Agent under these terms and conditions, with full power and
authority to perform all or any of the acts to be performed by the Plan Agent
under these terms and conditions. Upon any such appointment of any Plan Agent
for the purpose of receiving dividends and distributions, the Fund will be
authorized to pay to such successor Plan Agent, for each Participant's account,
all dividends and distributions payable on Shares held in their name or under
the Plan for retention or application by such successor Plan Agent as provided
in these terms and conditions.
The Plan Agent shall at all times act in good faith and agrees to use its best
efforts within reasonable limits to ensure the accuracy of all services
performed under this Agreement and to comply with applicable law, but assumes no
responsibility and shall not be liable for loss or damage due to errors unless
such error is caused by the Plan Agent's negligence, bad faith, or willful
misconduct or that of its employees.
These terms and conditions shall be governed by the laws of the State of
Maryland.
26
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
DIRECTORY
IRECTORY INVESTMENT MANAGER AND ADMINISTRATOR
Neuberger Berman Management Inc.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
800.461.1899 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
27
<Page>
DIRECTORS AND OFFICERS (UNAUDITED)
The following tables set forth information concerning the directors and officers
of the Funds. All persons named as directors and officers also serve in similar
capacities for other funds administered or managed by NB Management and
Neuberger Berman, LLC. The Statement of Additional Information for each Fund
includes additional information about fund directors and is available upon
request, without charge, by calling (877) 461-1899.
THE BOARD OF DIRECTORS
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS I
INDEPENDENT FUND DIRECTORS*
Faith Colish (69) Counsel, Carter Ledyard & Milburn 41 Director, American Bar Retirement
Director LLP (law firm) since October 2002; Association (ABRA) since 1997
formerly, Attorney-at-Law and (not-for-profit membership
President, Faith Colish, A association).
Professional Corporation, 1980 to
2002.
C. Anne Harvey (67) Consultant, C. A. Harvey 41 President, Board of Associates to
Director Associates, since June 2001; The National Rehabilitation
formerly, Director, AARP, 1978 to Hospital's Board of Directors since
December 2001. 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 41 Director, Capital Cash Management
Director Partners and Oxford Bioscience Trust (money market fund),
Partners (venture capital Naragansett Insured Tax-Free Income
partnerships) and President, Oxford Fund, Rocky Mountain Equity Fund,
Venture Corporation. Prime Cash Fund, several private
companies and QuadraMed Corporation
(NASDAQ).
Peter P. Trapp (59) Regional Manager for Atlanta 41 None.
Director Region, Ford Motor Credit Company
since August 1997; formerly,
President, Ford Life Insurance
Company, April 1995 until August
1997.
</Table>
28
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
<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 41 Director and Vice President,
Chief Executive Officer, Berman Inc. (holding company) since Neuberger & Berman Agency, Inc.
Director and Chairman of 1999; Head of Neuberger Berman since 2000; formerly, Director,
the Board Inc.'s Mutual Funds and Neuberger Berman Inc. (holding
Institutional Business since 1999; company) from October 1999 through
President and Director, NB March 2003.
Management since 1999; Executive
Vice President, Neuberger Berman
since 1999; formerly, Principal,
Neuberger Berman from 1997 until
1999; formerly, Senior Vice
President, NB Management from 1996
until 1999.
CLASS II
INDEPENDENT FUND DIRECTORS*
John Cannon (74) Consultant. Formerly, Chairman, CDC 41 Independent Trustee or Director
Director Investment Advisers (registered of three series of OppenheimerFunds:
investment adviser), 1993-January Limited Term New York
1999; formerly, President and Chief Municipal Fund, Rochester Fund
Executive Officer, AMA Investment Municipals, and Oppenheimer
Advisors, an affiliate of the Convertible Securities Fund, since
American Medical Association. 1992.
Barry Hirsch (71) Attorney-at-Law. Formerly, Senior 41 None.
Director Counsel, Loews Corporation
(diversified financial corporation)
May 2002 until April 2003;
formerly, Senior Vice President,
Secretary and General Counsel,
Loews Corporation.
</Table>
29
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- ---------------------------------------------------------------------------------------------------------------------------------
Tom Decker Seip (54) General Partner, Seip Investments 41 Director, H&R Block, Inc.
Director LP (a private investment (financial services company) since
partnership); formerly, President May 2001; Director, Forward
and CEO, Westaff, Inc. (temporary Management, Inc. (asset management)
staffing), May 2001 to January since 2001; formerly, Director,
2002; Senior Executive at the General Magic (voice recognition
Charles Schwab Corporation from software) 2001 until 2002;
1983 to 1999, including Chief formerly, Director, E-Finance
Executive Officer, Charles Schwab Corporation (credit decisioning
Investment Management, Inc. and services) 1999-2003; formerly,
Trustee, Schwab Family of Funds and Director, Save-Daily.com (micro
Schwab Investments from 1997 to investing services) 1999-2003;
1998 and Executive Vice Director, Offroad Capital Inc.
President-Retail Brokerage, Charles (pre-public internet commerce
Schwab Investment Management from company).
1994 to 1997.
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 Associates, Inc. (private company)
Berman Inc. (holding company) since since 1998; Director, Emagin Corp.
2002 and 2003, respectively; (public company) since 1997;
Executive Vice President and Chief Director, Solbright, Inc. (private
Investment Officer, Neuberger company) since 1998; Director,
Berman since 2002 and 2003, Infogate, Inc. (private company)
respectively; Director and since 1997; Director, Broadway
Chairman, NB Management since Television Network (private
December 2002; formerly, Executive company) since 2000.
Vice President, Citigroup
Investments, Inc. from September
1995 to February 2002; formerly,
Executive Vice President, Citigroup
Inc. from September 1995 to
February 2002.
CLASS III
INDEPENDENT FUND DIRECTORS*
Walter G. Ehlers (71) Consultant; Retired President and 41 None.
Director Trustee, Teachers Insurance &
Annuity (TIAA) and College
Retirement Equities Fund (CREF).
</Table>
30
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- ---------------------------------------------------------------------------------------------------------------------------------
Robert A. Kavesh (77) Marcus Nadler Professor Emeritus of 41 Director, DEL Laboratories, Inc.
Director Finance and Economics, New York (cosmetics and pharmaceuticals)
University Stern School of since 1978; Director, The Caring
Business. Community (not-for-profit).
Howard A. Mileaf (67) Retired. Formerly, Vice President 41 Director, WHX Corporation (holding
Director and Special Counsel, WHX company) since August 2002;
Corporation (holding company) Director, Webfinancial Corporation
1993-2001. (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 41 Director, Pro-Kids Golf and
Director President, Foodmaker, Inc. Learning Academy (teach golf and
(operator and franchiser of computer usage to "at risk"
restaurants) until January 1997. 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 Company (personal lines property
industry; formerly, Advisory and casualty insurance company)
Director, Securitas Capital LLC (a since March 2004; Director,
global private equity investment Providence Washington (property and
firm dedicated to making casualty insurance company) since
investments in the insurance December 1998; Director, Summit
sector) 1998 until December 2002. Global Partners (insurance
brokerage firm) since October 2000.
</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"
Edward I. O'Brien* (76) Formerly, Member, Investment Policy 41 Director, Legg Mason, Inc.
Director Committee, Edward Jones 1993-2001; (financial services holding
President, Securities Industry company) since 1993; formerly,
Association ("SIA") (securities Director, Boston Financial Group
industry's representative in (real estate and tax shelters)
government relations and regulatory 1993-1999.
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.
32
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
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>
33
<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 Financial and Vice President, Neuberger Berman since 1999;
Accounting Officer since 2002 formerly, Assistant Vice President, NB Management
from 1993 to 1999; Treasurer and Principal
Financial and Accounting Officer, fourteen
registered investment companies for which NB
Management acts as investment manager and
administrator (seven since 2002, three since 2003,
and four since 2004); formerly, Assistant
Treasurer, three registered investment companies
for which NB Management acts as investment manager
and administrator from 1996 until 2002.
Frederic B. Soule (58) Vice President since 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.
34
<Page>
NEUBERGER BERMAN OCTOBER 31, 2004
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 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 1-800-877-9700 (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.
CERTIFICATION
The Chief Executive Officer of the Fund certified to the New York Stock Exchange
on April 14, 2004 that he was not aware of any violations by the Fund of the
NYSE Corporate Governance Listing Standards. In addition, the Chief Executive
Officer and the Chief Financial Officer on September 28, 2004 signed the
certifications to the SEC required by Rule 30a-2 under the Investment Company
Act of 1940 regarding the quality of the Fund's public disclosure.
35
<Page>
This page has been left blank intentionally
36
<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] D499 12/04
37
ITEM 2. CODE OF ETHICS
The Board of Directors ("Board") of Neuberger Berman Realty Income 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
$74,000 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 $5,000 and $0 for 2004 and 2003, respectively.
The nature of the services provided involved agreed upon procedures relating to
the Preferred Shares. The Audit Committee approved 0% of these services provided
by E&Y for 2004, 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
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
--------
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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 $13,700 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
39
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.
40
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.
41
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 Realty Income 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
42