As filed with the Securities and Exchange Commission on July 10, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-21334
NEUBERGER BERMAN INCOME OPPORTUNITY FUND INC.
---------------------------------------------
(Exact Name of the Registrant as Specified in Charter)
c/o Neuberger Berman Management Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Registrant's Telephone Number, including area code: (212) 476-8800
Peter E. Sundman, Chief Executive Officer
c/o Neuberger Berman Management Inc.
Neuberger Berman Income Opportunity Fund Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Arthur C. Delibert, Esq.
Kirkpatrick & Lockhart Nicholson Graham LLP
1601 K Street, N.W
Washington, DC 20006-1600
(Names and addresses of agents for service)
Date of fiscal year end: October 31, 2006
Date of reporting period: April 30, 2006
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
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("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, 100 F Street, NE,
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
NEUBERGER | BERMAN
A LEHMAN BROTHERS COMPANY
Semi-Annual Report
April 30, 2006
Neuberger Berman
INCOME OPPORTUNITY
FUND INC.
<Page>
NEUBERGER BERMAN APRIL 30, 2006 (UNAUDITED)
CHAIRMAN'S LETTER
Dear Shareholder,
I am pleased to present to you this semi-annual report for Neuberger Berman
Income Opportunity Fund Inc., for the six months ended April 30, 2006. The
report includes portfolio commentary, a listing of the Fund's investments, and
its unaudited financial statements for the reporting period.
The Fund's investment objective is to provide high current income through a
diversified portfolio of both real estate company securities and high yield
bonds. Portfolio Co-Manager Steven Brown manages the real estate portion of the
Fund. His investment approach combines analysis of security fundamentals and
real estate with property sector diversification. His disciplined valuation
methodology seeks real estate company securities that are attractively priced
relative to their historical growth rates and the valuation of other property
sectors.
Portfolio Co-Managers Ann Benjamin and Tom O'Reilly manage the high yield bond
portion of the Fund. Their investment approach focuses on generating income and
managing risk. They seek to avoid the default and volatility risk associated
with many high yield bonds by applying rigorous credit analysis to higher
quality issues, and by emphasizing the intermediate range of the yield curve. We
believe that our conservative investing philosophy and disciplined investment
process will benefit shareholders by providing attractive current income over
the long term.
Thank you for your confidence in Neuberger Berman. We will continue to do our
best to earn it.
Sincerely,
/s/ PETER SUNDMAN
- ---------------------------------------------
PETER SUNDMAN
CHAIRMAN OF THE BOARD
NEUBERGER BERMAN INCOME OPPORTUNITY FUND INC.
"Neuberger Berman" and the Neuberger Berman logo are service marks of Neuberger
Berman, LLC. "Neuberger Berman Management Inc." and the individual fund name in
this shareholder report are either service marks or registered service marks of
Neuberger Berman Management Inc. (C)2006 Neuberger Berman Management Inc. All
rights reserved.
CONTENTS
<Table>
THE FUND
CHAIRMAN'S LETTER 1
PORTFOLIO COMMENTARY/PERFORMANCE HIGHLIGHTS 2
SCHEDULE OF INVESTMENTS/TOP TEN EQUITY HOLDINGS 6
FINANCIAL STATEMENTS 14
FINANCIAL HIGHLIGHTS/PER SHARE DATA 25
DISTRIBUTION REINVESTMENT PLAN 27
DIRECTORY 29
PROXY VOTING POLICIES AND PROCEDURES 30
QUARTERLY PORTFOLIO SCHEDULE 30
ADDITION OF ASSOCIATE PORTFOLIO MANAGER 30
REPORT OF VOTES OF SHAREHOLDERS 31
</Table>
1
<Page>
INCOME OPPORTUNITY FUND INC. Portfolio Commentary
For the six months ended April 30, 2006, on a Net Asset Value (NAV) basis,
Neuberger Berman Income Opportunity Fund Inc. (AMEX: NOX) provided a 9.78%
return.
The Fund pursues a primary objective of high current income by investing a
portion of its assets in intermediate term, high yield corporate bonds with
maturities of primarily ten years or less at the time of initial investment and
another portion in real estate company securities, including real estate
investment trust (REIT) common stocks and REIT preferred shares.
During the six-month reporting period, the portfolio's allocations remained
mostly unchanged. As of April 30, 2006, the Fund held 35.2% of its investments
in REIT common stocks, 14.1% in REIT preferred stocks, 48.6% in bonds and 2.1%
in cash and cash equivalents.
REAL ESTATE INVESTMENT TRUST HOLDINGS
During the period, REITs generally benefited from ongoing investor interest in
this segment of the market and healthy operating results, which we expect to
continue over the coming quarters. The commercial real estate market was robust,
as occupancies and rents improved due to a healthy economy and stronger demand
than supply in most regions of the country. Despite ongoing rate hikes by the
Federal Reserve, the long-term interest rate environment was relatively benign,
while REIT earnings were strong in both the fourth quarter of (calendar) 2005
and the first quarter of 2006. A variety of property sectors showed strength,
particularly Office properties, Shopping Centers, Apartments and Hotels.
Gains in the Apartment sector reflected a slowdown in the housing market, as
higher interest rates and slower housing price appreciation lessened the
attractiveness of buying homes and encouraged renters to stay longer. With a
slower supply of new apartments, we anticipate improving occupancy and economics
for apartment REITs. REITs that own office buildings were bolstered by growing
evidence of improvement in the office market, particularly over the last three
months of the period, as occupancy and expectations for rising rents improved.
In addition, community shopping centers and hotels performed well. With
fundamentals particularly strong in the Lodging/Resort sector, a number of hotel
REITs have been acquired by private buyers, reflecting optimism for continued
improvement.
On the downside, Regional Malls lagged over the six-month period, as investors
showed concern that a slowdown in housing price appreciation and the rise in
interest rates would have a negative impact on consumers. Despite the ongoing
strength of consumer spending, we think this remains a worrisome issue. The
Health Care sector also exhibited weakness, due to concerns over new government
reimbursement rates for Medicare and Medicaid and the potential impact of higher
interest rates on their ability to finance acquisitions.
Looking forward, we believe that REITs are unlikely to maintain the exceptional
performance they have shown over the past six months. Still, our outlook remains
positive for a number of reasons. First, the supply growth of commercial real
estate has been modest, due to the increased costs of raw materials,
construction and financing, and is likely to remain that way for the next 12-18
months. We anticipate that this dynamic, combined with what we expect will be
modest economic growth, bodes well for REIT earnings and price performance
moving into the second half of the fiscal year.
In addition, we expect to see solid dividend growth from REITs, as well as a
continuation of the merger and acquisition activity that has taken place over
the past 12 months. Although current yields are lower than usual, we believe
that they will grow over time through dividend increases reflecting the ongoing
strength of the commercial real estate market.
2
<Page>
HIGH YIELD SECURITIES HOLDINGS
High yield bonds produced solid returns for the period, despite the Federal
Reserve's ongoing campaign to raise short-term rates. The market continues to
show a strong appetite for yield and risk as lower quality issues outperformed
almost uniformly across the high yield market. From a sector perspective, the
best performing industries included areas such as airlines, paper and packaging.
We continue to believe that 2006 will prove to be a relatively good year for
high yield portfolios. Already, the high yield market is outperforming core
fixed income assets by a wide margin. While it will likely be difficult to
maintain this pace, given relatively tight spreads and rising interest rates, a
reasonably healthy economy and low default rates so far bode well in our opinion
for total return prospects in the high yield market.
We intend to maintain the portfolio's positioning in sectors and issues that
exhibit more stable cash flows, given the tight spreads in the cyclical sectors.
We will also maintain the portfolio's slight bias to higher quality issues, as
we believe that the economy is in the later stages of the market cycle. While we
might be slightly early in expressing this view, we are comfortable with the
positioning given the relative value currently offered across both quality and
sector tiers.
Sincerely,
/s/ STEVEN R. BROWN
- -------------------------------------
/s/ ANN H. BENJAMIN
- -------------------------------------
/s/ THOMAS P. O'REILLY
- -------------------------------------
STEVEN R. BROWN, ANN H. BENJAMIN
AND
THOMAS P. O'REILLY
PORTFOLIO CO-MANAGERS
3
<Page>
INCOME OPPORTUNITY FUND INC.
PERFORMANCE HIGHLIGHTS
<Table>
<Caption>
SIX MONTH
PERIOD ENDED AVERAGE ANNUAL TOTAL RETURN
INCEPTION DATE 4/30/2006 1 YEAR SINCE INCEPTION
NAV(1,3) 06/24/2003 9.78% 19.08% 17.23%
</Table>
PERFORMANCE HIGHLIGHTS
<Table>
<Caption>
SIX MONTH
PERIOD
ENDED AVERAGE ANNUAL TOTAL RETURN
INCEPTION DATE 4/30/2006 1 YEAR SINCE INCEPTION
Market Price(2,3) 06/24/2003 10.85% 19.99% 10.21%
</Table>
RATING SUMMARY
<Table>
AAA/Government/Government Agency 0.0%
AA 0.0
A 1.0
BBB 1.7
BB 28.0
B 31.0
CCC 6.5
CC 0.0
C 0.0
D 0.0
Not Rated 0.4
Short Term 13.1
</Table>
INDUSTRY DIVERSIFICATION
(% OF EQUITY HOLDINGS)
<Table>
Apartments 8.9%
Commercial Services 2.9
Community Centers 5.2
Diversified 10.6
Health Care 6.9
Industrial 2.3
Lodging 5.2
Office 15.0
Office-Industrial 3.0
Regional Malls 7.2
Self Storage 2.0
Specialty 0.3
Short-Term Investments 2.3
Liabilities, less cash, receivables and other assets (53.5)
</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.
4
<Page>
ENDNOTES
1. Returns based on Net Asset Value (NAV) of the Fund.
2. Returns based on market price of Fund shares on the American Stock
Exchange.
3. Neuberger Berman Management Inc. has contractually agreed to waive a
portion of the management fees that it is entitled to receive from the
Fund. The undertaking lasts until October 31, 2011. Please see the notes to
the financial statements for specific information regarding the rate of the
management fees waived by Neuberger Berman Management Inc. Absent such a
waiver, the performance of the Fund would be lower.
4. Unaudited performance data current to the most recent month-end are
available at www.nb.com.
5
<Page>
SCHEDULE OF INVESTMENTS Income Opportunity Fund Inc.
TOP TEN EQUITY HOLDINGS
<Table>
<Caption>
HOLDING %
1 iStar Financial 5.9
2 Mid-America Apartment Communities 3.7
3 Apartment Investment & Management 3.5
4 Glimcher Realty Trust 3.2
5 Brandywine Realty Trust 2.9
6 Maguire Properties 2.6
7 Colonial Properties Trust 2.5
8 Pennsylvania REIT 2.3
9 Reckson Associates Realty 2.3
10 Health Care REIT 2.2
</Table>
<Table>
<Caption>
MARKET VALUE +
NUMBER OF SHARES (000'S OMITTED)
COMMON STOCKS (49.6%)
APARTMENTS (3.7%)
56,000 Apartment Investment & Management $ 2,503
85,000 BNP Residential Properties 1,436
71,000 Education Realty Trust 1,059
66,500 Mid-America Apartment Communities 3,524
66,300 Post Properties 2,897
--------
11,419
COMMERCIAL SERVICES (2.6%)
107,500 Capital Trust 3,343
56,500 Deerfield Triarc Capital 754
156,500 Gramercy Capital 3,886
--------
7,983
COMMUNITY CENTERS (4.6%)
40,800 Cedar Shopping Centers 602
148,900 Heritage Property Investment Trust 5,750
151,000 New Plan Excel Realty Trust 3,722
122,000 Tanger Factory Outlet Centers 3,999
--------
14,073
DIVERSIFIED (7.4%)
152,100 Colonial Properties Trust 7,490
238,100 Crescent Real Estate Equities 4,762
231,600 iStar Financial 8,861
116,400 Spirit Finance 1,350
--------
22,463
HEALTH CARE (6.1%)
171,802 Health Care REIT 5,979(E)
75,600 Healthcare Realty Trust 2,863
134,300 Nationwide Health Properties 2,890
239,600 OMEGA Healthcare Investors 3,064
119,700 Ventas, Inc. 3,911
--------
18,707
INDUSTRIAL (2.3%)
61,400 EastGroup Properties 2,743
112,600 First Industrial Realty Trust 4,418
--------
7,161
LODGING (1.2%)
82,000 Hospitality Properties Trust 3,534
OFFICE (13.8%)
313,136 Brandywine Realty Trust 8,865
22,400 Glenborough Realty Trust 469
148,900 Highwoods Properties 4,696
270,000 HRPT Properties Trust 2,965
114,000 Mack-Cali Realty 5,155
234,500 Maguire Properties 7,964
162,200 Newkirk Realty Trust $ 2,898
169,000 Reckson Associates Realty 6,875
87,200 Trizec Properties 2,182
--------
42,069
OFFICE--INDUSTRIAL (1.8%)
120,000 Liberty Property Trust 5,364
REGIONAL MALLS (4.1%)
257,000 Glimcher Realty Trust 6,631
143,000 Pennsylvania REIT 5,800
--------
12,431
SELF STORAGE (2.0%)
2,700 Public Storage, Depositary Shares 72
120,900 Sovran Self Storage 5,942
--------
6,014
TOTAL COMMON STOCKS
(COST $113,198) 151,218
--------
PREFERRED STOCKS (19.9%)
APARTMENTS (5.2%)
300,000 Apartment Investment & Management, Ser. R 7,650
12,400 Apartment Investment & Management, Ser. T 312
10,000 Apartment Investment & Management, Ser. U 249
302,200 Mid-America Apartment Communities, Ser. H 7,631
--------
15,842
COMMERCIAL SERVICES (0.3%)
20,000 Anthracite Capital, Ser. C 511
20,000 Newcastle Investment, Ser. B 524
--------
1,035
COMMUNITY CENTERS (0.6%)
20,000 Cedar Shopping Centers, Ser. A 531
12,000 Developers Diversified Realty, Ser. I 303
34,000 Tanger Factory Outlet Centers, Ser. C 828
--------
1,662
DIVERSIFIED (3.2%)
9,000 Colonial Properties Trust, Ser. E 227
18,400 Crescent Real Estate Equities, Ser. B 467
200,000 iStar Financial, Ser. E 5,018
160,000 iStar Financial, Ser. F 3,970
--------
9,682
</Table>
6
<Page>
SCHEDULE OF INVESTMENTS Income Opportunity Fund Inc. cont'd
<Table>
<Caption>
MARKET VALUE +
NUMBER OF SHARES (000'S OMITTED)
HEALTH CARE (0.8%)
25,000 Health Care REIT, Ser. D $ 632
18,200 LTC Properties, Ser. E 799
34,000 LTC Properties, Ser. F 858
-------
2,289
LODGING (4.0%)
36,500 Eagle Hospitality Properties Trust, Ser. A 899
182,000 Equity Inns, Ser. B 4,681
22,600 Hersha Hospitality Trust, Ser. A 563
16,000 Host Hotels & Resorts, Ser. E 440
77,500 LaSalle Hotel Properties, Ser. B 1,974
28,000 LaSalle Hotel Properties, Ser. D 670
33,000 LaSalle Hotel Properties, Ser. E 825
31,000 Strategic Hotels & Resorts, Ser. B 770
51,300 Strategic Hotels & Resorts, Ser. C 1,284*
-------
12,106
OFFICE (1.2%)
60,000 DRA CRT Acquisition, Ser. A 1,422
25,878 Glenborough Realty Trust, Ser. A 641
60,000 Kilroy Realty, Ser. E 1,501
6,800 SL Green Realty, Ser. D 171
-------
3,735
OFFICE--INDUSTRIAL (1.2%)
50,000 Bedford Property Investors, Ser. A 2,431(n)
25,000 Digital Realty Trust, Ser. A 632
16,900 Digital Realty Trust, Ser. B 414
8,000 PS Business Parks, Ser. K 204
-------
3,681
REGIONAL MALLS (3.1%)
60,000 Glimcher Realty Trust, Ser. F 1,524
61,800 Glimcher Realty Trust, Ser. G 1,549
80,000 Mills Corp., Ser. B 1,920
131,400 Mills Corp., Ser. E 3,153
19,800 Pennsylvania REIT, Ser. A 1,096
11,300 Taubman Centers, Ser. G 288
-------
9,530
SPECIALTY (0.3%)
40,000 Entertainment Properties Trust, Ser. A 1,009
TOTAL PREFERRED STOCKS
(COST $61,146) 60,571
-------
</Table>
See Notes to Schedule of Investments 7
<Page>
SCHEDULE OF INVESTMENTS Income Opportunity Fund Inc. cont'd
<Table>
<Caption>
PRINCIPAL AMOUNT RATING VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
CORPORATE DEBT SECURITIES (68.6%)
$1,190 AES Corp., Senior Secured Notes, 9.00%, due 5/15/15 Ba3 BB- $1,297(n)
2,000 Allied Waste North America, Inc., Guaranteed Senior Secured
Notes, Ser. B, 9.25%, due 9/1/12 B2 BB- 2,155
1,000 AMC Entertainment, Inc., Guaranteed Notes, Ser. B, 8.63%,
due 8/15/12 B2 B- 1,045(E)
540 AMC Entertainment, Inc., Senior Subordinated Notes, 8.00%,
due 3/1/14 B3 CCC+ 508
490 AMC Entertainment, Inc., Guaranteed Notes, 11.00%,
due 2/1/16 B3 CCC+ 532(n)
1,675 American Cellular Corp., Senior Notes, Ser. B, 10.00%,
due 8/1/11 B3 B- 1,817
1,000 American Real Estate Partners, Guaranteed Notes, 7.13%,
due 2/15/13 Ba2 BB 993
1,750 AmeriGas Partners L.P., Senior Unsecured Notes, 7.25%,
due 5/20/15 B1 1,741
1,975 Amscan Holdings, Inc., Senior Subordinated Notes, 8.75%,
due 5/1/14 Caa1 CCC+ 1,782
2,000 Arch Western Finance, Senior Notes, 6.75%, due 7/1/13 Ba3 BB- 1,980
1,160 Athena Neuro Finance LLC, Guaranteed Notes, 7.25%,
due 2/21/08 B3 B 1,153
210 Autonation, Inc., Guaranteed Floating Rate Notes, 7.05%,
due 7/17/06 Ba2 BB+ 214(n)(u)
850 Autonation, Inc., Guaranteed Notes, 7.00%, due 4/15/14 Ba2 BB+ 854(n)
260 Avis Budget Car Rental LLC, Senior Notes, 7.75%, due
5/15/16 Ba3 BB- 265(n)
620 Ball Corp., Guaranteed Notes, 6.88%, due 12/15/12 Ba2 BB 626(E)
930 Biovail Corp., Senior Subordinated Notes, 7.88%, due 4/1/10 B2 BB- 939
1,025 Blockbuster, Inc., Senior Subordinated Notes, 9.75%,
due 9/1/12 Caa3 CCC 969(n)(E)
770 Bowater, Inc., Debentures, 9.00%, due 8/1/09 B1 B+ 801(E)
1,560 Cardtronics, Inc., Senior Subordinated Notes, 9.25%,
due 8/15/13 Caa1 B- 1,548(n)
3,740 CCH I LLC, Secured Notes, 11.00%, due 10/1/15 Caa3 CCC- 3,329
1,370 CDRV Investors, Inc., Senior Disc. Notes, 9.63%, due 1/1/15 Caa2 B- 969
1,860 Centennial Cell, Guaranteed Notes, 10.13%, due 6/15/13 B3 CCC 2,034
4,000 Charter Communications Operating LLC, Senior Notes, 8.00%,
due 4/30/12 B2 B- 4,020(n)
1,800 Chesapeake Energy Corp., Senior Notes, 7.50%, due 9/15/13 Ba2 BB 1,850
935 Choctaw Resort Development, Senior Notes, 7.25%,
due 11/15/19 B1 BB- 943(n)
1,950 Chukchansi Economic Development Authority, Senior Notes,
8.00%, due 11/15/13 B2 BB- 2,008(n)
2,125 CMS Energy Corp., Senior Notes, 7.75%, due 8/1/10 B1 B+ 2,205
1,500 Crown Americas, Senior Notes, 7.75%, due 11/15/15 B1 B 1,541(n)
2,500 CSC Holdings, Inc., Senior Notes, Ser. B, 8.13%, due
7/15/09 B2 B+ 2,594(E)
1,465 Dean Foods Co., Senior Notes, 6.63%, due 5/15/09 Ba2 BB- 1,465
1,000 Delta Air Lines, Pass Through Certificates, 7.57%,
due 11/18/10 Ba2 BB 1,000
2,000 Dex Media West, Senior Subordinated Notes, 9.88%,
due 8/15/13 B2 B 2,202
2,250 DirecTV Holdings LLC, Senior Notes, 8.38%, due 3/15/13 Ba2 BB- 2,405
475 Dollarama Group L.P., Senior Subordinated Notes, 8.88%,
due 8/15/12 B3 B- 481(n)
</Table>
8
<Page>
SCHEDULE OF INVESTMENTS Income Opportunity Fund Inc. cont'd
<Table>
<Caption>
PRINCIPAL AMOUNT RATING VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 975 EchoStar DBS Corp., Guaranteed Notes, 6.63%, due 10/1/14 Ba3 BB- $ 940(E)
1,885 EchoStar DBS Corp., Guaranteed Notes, 7.13%, due 2/1/16 Ba3 BB- 1,840(n)(E)
3,960 El Paso Natural Gas, Notes, 8.38%, due 6/15/32 B1 B 4,361
900 Elan Financial PLC, Guaranteed Floating Rate Notes, 8.75%,
due 5/15/06 B3 B 898(u)
1,525 Equistar Chemicals, Senior Notes, 10.63%, due 5/1/11 B2 BB- 1,662
2,000 Ferrellgas Partners L.P., Senior Notes, 8.75%, due 6/15/12 B2 B- 2,020
2,000 Flextronics Intl., Ltd., Senior Subordinated Notes 6.25%,
due 11/15/14 Ba2 BB- 1,945
5,985 Ford Motor Credit Co., Senior Notes, 4.95%, due 1/15/08 Ba2 BB- 5,563
4,420 Ford Motor Credit Co., Notes, 7.38%, due 10/28/09 Ba2 BB- 4,084(E)
2,000 Forest Oil Corp., Guaranteed Senior Notes, 7.75%, due 5/1/14 Ba3 BB- 2,065
2,500 Freescale Semiconductor, Inc., Senior Notes, 7.13%,
due 7/15/14 Ba1 BBB- 2,562
5,800 General Motors Acceptance Corp., Notes, 6.13%, due 2/1/07 Ba1 BB 5,706(E)
3,720 General Motors Acceptance Corp., Notes, 6.13%, due 1/22/08 Ba1 BB 3,583
1,645 General Motors Acceptance Corp., Notes, 5.13%, due 5/9/08 Ba1 BB 1,553(E)
1,340 General Motors Acceptance Corp., Notes, 6.88%, due 9/15/11 Ba1 BB 1,256
765 General Motors Acceptance Corp., Notes, 7.00%, due 2/1/12 Ba1 BB 718
740 Goodyear Tire & Rubber Co., Senior Notes, 9.00%, due 7/1/15 B3 B- 762
580 Graphic Packaging Intl., Senior Notes, 8.50%, due 8/15/11 B2 B- 580(E)
560 Graphic Packaging Intl., Senior Subordinated Notes, 9.50%,
due 8/15/13 B3 B- 543(E)
3,000 HCA, Inc., Notes, 7.50%, due 11/6/33 Ba2 BB+ 2,894
1,775 Host Marriott L.P., Senior Notes, Ser. M, 7.00%, due 8/15/12 Ba2 BB- 1,793
270 Houghton Mifflin Co., Senior Notes, 8.25%, due 2/1/11 B3 CCC+ 279
1,500 Houghton Mifflin Co., Senior Subordinated Notes, 9.88%,
due 2/1/13 Caa1 CCC+ 1,605(E)(OO)
2,970 Intelsat Subsidiary Holdings Co. Ltd., Guaranteed Notes, 8.63%,
due 1/15/15 B2 B+ 3,089
2,630 Jean Coutu Group (PJC), Inc., Senior Subordinated Notes
8.50%, due 8/1/14 Caa2 B- 2,466(E)
2,615 Kerr-McGee Corp., Secured Notes, 6.95%, due 7/1/24 Ba3 BB+ 2,627
2,000 Knowledge Learning Center, Guaranteed Notes, 7.75%,
due 2/1/15 B3 B- 1,897(n)
1,740 L-3 Communications Corp., Senior Subordinated Notes, 6.38%,
due 10/15/15 Ba3 BB+ 1,688(E)
1,000 Lamar Media Corp., Guaranteed Notes, 7.25%, due 1/1/13 Ba3 B 1,003
1,100 Language Line, Inc., Senior Subordinated Notes, 11.13%,
due 6/15/12 Caa1 CCC+ 1,045
790 Le-Natures, Inc., Senior Subordinated Notes, 9.00%,
due 6/15/13 B3 CCC+ 830(n)
960 Liberty Media Corp., Debentures, 8.50%, due 7/15/29 Ba1 BB+ 932
1,650 LIN Television Corp., Senior Subordinated Notes, 6.50%,
due 5/15/13 B1 B- 1,526(E)
40 LIN Television Corp., Guaranteed Notes, Ser. B, 6.50%, due
5/15/13 B1 B- 37
1,110 Majestic Star LLC, Secured Notes, 9.75%, due 1/15/11 B3 B- 1,138(n)
1,300 Massey Energy Co., Senior Notes, 6.88%, due 12/15/13 B1 BB- 1,251(n)(E)
1,925 Mediacom Capital Corp. LLC, Senior Unsecured Notes, 9.50%,
due 1/15/13 B3 B 1,968(E)
1,265 Methanex Corp., Senior Notes, 8.75%, due 8/15/12 Ba1 BBB- 1,390
3,000 MidWest Generation LLC, Secured Notes, 8.75%, due 5/1/34 B1 B 3,240
</Table>
See Notes to Schedule of Investments 9
<Page>
SCHEDULE OF INVESTMENTS Income Opportunity Fund Inc. cont'd
<Table>
<Caption>
PRINCIPAL AMOUNT RATING VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 600 Mirant Americas Generation, Inc., Senior Unsecured Notes,
8.30%, due 5/1/11 B2 B- $ 620
1,225 Mirant North America LLC, Senior Notes, 7.38%, due 12/31/13 B1 B- 1,230(n)
1,500 Mohegan Tribal Gaming, Senior Subordinated Notes, 6.38%,
due 7/15/09 Ba3 B+ 1,489
2,215 Monitronics International, Inc., Senior Subordinated Notes,
11.75%, due 9/1/10 B3 B- 2,198
2,565 Movie Gallery, Senior Unsecured Notes, 11.00%, due 5/1/12 Caa3 CCC- 1,359(E)
2,000 Mueller Group, Inc., Senior Subordinated Notes, 10.00%,
due 5/1/12 Caa1 B- 2,190
1,110 MultiPlan, Inc., Senior Subordinated Notes, 10.38%,
due 4/15/16 Caa1 B- 1,128(n)
1,455 Mylan Laboratories, Inc., Guaranteed Notes, 6.38%,
due 8/15/15 Ba1 BB+ 1,426
2,225 Newfield Exploration Co., Senior Notes, 7.63%, due 3/1/11 Ba2 BB+ 2,314
1,660 Newfield Exploration Co., Senior Subordinated Notes, 6.63%,
due 4/15/16 Ba3 BB- 1,631
2,925 Nextel Communications, Senior Notes, Ser. E, 6.88%,
due 10/31/13 Baa2 A- 3,002
995 Nordic Telephone Co. Holdings, Senior Notes, 8.88%,
due 5/1/16 B2 B 1,035(n)
1,000 Nortek, Inc., Senior Subordinated Notes, 8.50%, due 9/1/14 Caa1 CCC+ 1,025(E)
1,175 NPC International, Inc., Senior Subordinated Notes, 9.50%,
due 5/1/14 Caa1 B- 1,187(n)
2,000 NRG Energy, Inc., Notes, 7.38%, due 2/1/16 B1 B- 2,017(E)
4,750 Paxson Communications, Secured Floating Rate Notes, 11.32%,
due 7/15/06 B3 CCC- 4,797(n)(u)
1,000 Peabody Energy Corp., Guaranteed Senior Notes, Ser. B, 6.88%,
due 3/15/13 Ba2 BB- 1,007
960 Peabody Energy Corp., Senior Notes, 5.88%, due 4/15/16 Ba2 BB- 910
1,900 Pioneer Natural Resources, Senior Notes, 5.88%, due 7/15/16 Ba1 BB+ 1,789
1,215 PQ Corp., Guaranteed Notes, 7.50%, due 2/15/13 B3 B- 1,154(n)
240 Primedia, Inc., Floating Rate Senior Notes, 10.12%,
due 5/15/06 B2 B 245(u)
2,505 Primedia, Inc., Guaranteed Notes, 8.88%, due 5/15/11 B2 B 2,411(E)
3,000 Qwest Corp., Notes, 8.88%, due 3/15/12 Ba3 BB 3,285
3,045 R.H. Donnelley Corp., Senior Notes, 8.88%, due 1/15/16 Caa1 B 3,133(n)
2,000 Rogers Wireless, Inc., Senior Subordinated Notes, 8.00%,
due 12/15/12 Ba3 B+ 2,100(E)
1,045 Royal Caribbean Cruises, Debentures, 7.50%, due 10/15/27 Ba1 BBB- 1,067
950 San Pasqual Casino Development Group, Notes, 8.00%,
due 9/15/13 B2 B+ 960(n)
1,335 Sensata Technologies BV, Senior Notes, 8.00%, due 5/1/14 B2 B- 1,342(n)
1,000 Service Corp. International, Senior Notes, 7.70%, due 4/15/09 Ba3 BB 1,025
2,310 Shaw Communications, Inc., Senior Notes, 7.20%,
due 12/15/11 Ba2 BB+ 2,365(E)
1,400 Sierra Pacific Resources, Senior Notes, 6.75%, due 8/15/17 B1 B- 1,383
1,000 Smithfield Foods, Inc., Senior Notes, Ser. B, 8.00%,
due 10/15/09 Ba2 BB 1,025
1,000 Smithfield Foods, Inc., Senior Notes, 7.00%, due 8/1/11 Ba2 BB 982(E)
1,000 Spheris, Inc., Senior Subordinated Notes, 11.00%,
due 12/15/12 Caa2 CCC 890(n)
1,950 Station Casinos, Inc., Senior Subordinated Notes, 6.88%,
due 3/1/16 Ba3 B+ 1,916
</Table>
10
<Page>
SCHEDULE OF INVESTMENTS Income Opportunity Fund Inc. cont'd
<Table>
<Caption>
PRINCIPAL AMOUNT RATING VALUE +
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$2,000 Stena AB, Senior Notes, 9.63%, due 12/1/12 Ba3 BB- $ 2,155
495 Stena AB, Senior Notes, 7.50%, due 11/1/13 Ba3 BB- 491
2,250 Sungard Data Systems, Inc., Senior Unsecured Notes, 9.13%,
due 8/15/13 B3 B- 2,402(n)
595 Targa Resources, Inc., Guaranteed Notes, 8.50%, due 11/1/13 B2 B- 602(n)(E)
980 TECO Energy, Inc., Senior Notes, 7.50%, due 6/15/10 Ba2 BB 1,027
2,100 TFM SAde C.V., Senior Notes, 9.38%, due 5/1/12 B3 B- 2,257
905 Toll Corp., Senior Subordinated Notes, 8.25%, due 12/1/11 Ba2 BB+ 950
1,710 Transcontinental Gas Pipeline, Debentures, 7.25%,
due 12/1/26 Ba2 BB- 1,753
940 TXU Corp., Senior Notes, Ser. P, 5.55%, due 11/15/14 Ba1 BB+ 874
2,000 United Rentals N.A., Inc., Guaranteed Notes, 6.50%,
due 2/15/12 B3 B+ 1,960(E)
1,825 Universal Compression, Inc., Senior Notes, 7.25%,
due 5/15/10 Ba3 B 1,843
1,450 US Oncology Holdings, Inc., Senior Floating Rate Notes,
10.32%, due 9/15/06 Caa1 B- 1,472(u)
500 US Oncology Holdings, Inc., Guaranteed Notes, 10.75%,
due 8/15/14 B3 B- 559
1,000 Ventas Realty L.P., Guaranteed Notes, 6.75%, due 6/1/10 Ba2 BB+ 993
2,000 VWR International, Inc., Senior Subordinated Notes, 8.00%,
due 4/15/14 Caa1 B- 2,000(E)
1,500 Warner Music Group, Senior Subordinated Notes, 7.38%,
due 4/15/14 B2 B- 1,478(E)
2,000 Xerox Capital Trust I, Guaranteed Notes, 8.00%, due 2/1/27 Ba3 B+ 2,060(E)
500 Young Broadcasting, Inc, Guaranteed Notes, 10.00%,
due 3/1/11 Caa2 CCC- 456
240 Young Broadcasting, Inc., Senior Subordinated Notes, 8.75%,
due 1/15/14 Caa2 CCC- 203(E)
---------
TOTAL CORPORATE DEBT SECURITIES (COST $209,804) 208,776
---------
NUMBER OF SHARES
SHORT-TERM INVESTMENTS (15.4%)
41,095,420 Neuberger Berman Securities Lending Quality Fund, LLC 41,095++
5,867,200 Neuberger Berman Prime Money Fund Trust Class 5,867@
---------
TOTAL SHORT-TERM INVESTMENTS (COST $46,962) 46,962#
---------
TOTAL INVESTMENTS (153.5%) (COST $431,110) 467,527##
Liabilities, less cash, receivables and other assets [(12.3%)] (37,522)
Liquidation Value of Auction Preferred Shares [(41.2%)] (125,500)
---------
TOTAL NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS (100.0%) $ 304,505
---------
</Table>
See Notes to Schedule of Investments 11
<Page>
NOTES TO SCHEDULE OF INVESTMENTS
+ Investments in equity securities by Neuberger Berman Income Opportunity
Fund Inc. (the "Fund") are valued at the latest sale price where that price
is readily available; securities for which no sales were reported, unless
otherwise noted, are valued at the last available bid price. Securities
traded primarily on the NASDAQ Stock Market are normally valued by the Fund
at the NASDAQ Official Closing Price ("NOCP") provided by NASDAQ each
business day. The NOCP is the most recently reported price as of 4:00:02
p.m., Eastern time, unless that price is outside the range of the "inside"
bid and asked prices (i.e., the bid and asked prices that dealers quote to
each other when trading for their own accounts); in that case, NASDAQ will
adjust the price to equal the inside bid or asked price, whichever is
closer. Because of delays in reporting trades, the NOCP may not be based on
the price of the last trade to occur before the market closes. Investments
in debt securities by the Fund are valued daily by obtaining bid price
quotations from independent pricing services on all securities available in
each service's data base. For all other debt securities, bid prices are
obtained from principal market makers in those securities. The Fund values
all other securities, including securities for which the necessary last
sale, asked, and/or bid prices are not readily available, by methods the
Board of Directors of the Fund (the "Board") has approved on the belief
that they reflect 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 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. In this event, FT Interactive will provide adjusted
prices for certain foreign equity securities using a statistical analysis
of historical correlations of multiple factors. In the absence of precise
information about the market values of these foreign securities as of the
close of the New York Stock Exchange, the Board has determined on the basis
of available data that prices adjusted in this way are likely to be closer
to the prices the Fund could realize on a current sale than are the prices
of those securities established at the close of the foreign markets in
which the securities primarily trade. However, fair value prices are
necessarily estimates, and there is no assurance that such a price will be
at or close to the price at which the security next trades. Short-term debt
securities with less than 60 days until maturity may be valued at cost
which, when combined with interest earned, approximates market value.
# At cost, which approximates market value.
## At April 30, 2006, the cost of investments for U.S. federal income tax
purposes was $431,752,000. Gross unrealized appreciation of investments was
$41,140,000 and gross unrealized depreciation of investments was
$5,365,000, resulting in net unrealized appreciation of $35,775,000 based
on cost for U.S. federal income tax purposes.
@ Neuberger Berman Prime Money Fund ("Prime Money") is also managed by
Neuberger Berman Management Inc. (see Notes A & 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
Prime Money.
* Non-income producing security.
12
<Page>
(n) Restricted security subject to restrictions on resale under federal
securities laws. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers under Rule 144A,
and have been deemed by the investment manager to be liquid. At April 30,
2006, these securities amounted to $43,919,000 or 14.4% of net assets
applicable to common shareholders.
(OO) All or a portion of this security is segregated as collateral for interest
rate swap contracts.
++ Managed by an affiliate of Neuberger Berman Management Inc. and could be
deemed an affiliate of the Fund (see Notes A & E of Notes to Financial
Statements).
(E) All or a portion of this security is on loan (see Note A of Notes to
Financial Statements).
(u) Floating rate securities are securities whose yields vary with a designated
market index or market rate. These securities are shown at their current
rates as of April 30, 2006.
13
<Page>
STATEMENT OF ASSETS AND LIABILITIES
<Table>
<Caption>
INCOME
NEUBERGER BERMAN OPPORTUNITY
(000'S OMITTED EXCEPT PER SHARE AMOUNTS) FUND
ASSETS
INVESTMENTS IN SECURITIES, AT MARKET VALUE*+ (NOTES A & E)--SEE
SCHEDULE OF INVESTMENTS:
Unaffiliated issuers $420,565
- --------------------------------------------------------------------------------
Affiliated issuers 46,962
================================================================================
467,527
- --------------------------------------------------------------------------------
Dividends and interest receivable 5,304
- --------------------------------------------------------------------------------
Receivable for securities sold 703
- --------------------------------------------------------------------------------
Interest rate swaps, at market value (Note A) 3,329
- --------------------------------------------------------------------------------
Receivable for securities lending income (Note A) 189
- --------------------------------------------------------------------------------
Prepaid expenses and other assets 19
================================================================================
TOTAL ASSETS 477,071
================================================================================
LIABILITIES
Payable for collateral on securities loaned (Note A) 41,095
- --------------------------------------------------------------------------------
Distributions payable-preferred shares 66
- --------------------------------------------------------------------------------
Distributions payable-common shares 230
- --------------------------------------------------------------------------------
Payable for securities purchased 5,221
- --------------------------------------------------------------------------------
Payable to investment manager-net (Notes A & B) 124
- --------------------------------------------------------------------------------
Payable to administrator (Note B) 89
- --------------------------------------------------------------------------------
Payable for securities lending fees (Note A) 161
- --------------------------------------------------------------------------------
Accrued expenses and other payables 80
================================================================================
TOTAL LIABILITIES 47,066
================================================================================
AUCTION PREFERRED SHARES SERIES A & B AT LIQUIDATION VALUE
6,000 shares authorized; 5,020 shares issued and outstanding;
$.0001 par value; $25,000 liquidation value per share (Note A) 125,500
================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $304,505
================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS CONSIST OF:
Paid-in capital--common shares $249,429
- --------------------------------------------------------------------------------
Distributions in excess of net investment income (4,591)
- --------------------------------------------------------------------------------
Accumulated net realized gains (losses) on investments 19,944
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) in value of
investments 39,723
================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $304,505
================================================================================
COMMON SHARES OUTSTANDING ($.0001 par value; 999,994,000 shares
authorized) 17,724
- --------------------------------------------------------------------------------
NET ASSET VALUE PER COMMON SHARE OUTSTANDING $ 17.18
================================================================================
+SECURITIES ON LOAN, AT MARKET VALUE $ 39,988
================================================================================
*COST OF INVESTMENTS:
Unaffiliated issuers $384,148
- --------------------------------------------------------------------------------
Affiliated issuers 46,962
================================================================================
TOTAL COST OF INVESTMENTS $431,110
================================================================================
</Table>
See Notes to Financial Statements 14
<Page>
NEUBERGER BERMAN FOR THE SIX MONTHS ENDED APRIL 30, 2006 (UNAUDITED)
STATEMENT OF OPERATIONS
<Table>
<Caption>
INCOME
NEUBERGER BERMAN OPPORTUNITY
(000'S OMITTED) FUND
INVESTMENT INCOME
INCOME (NOTE A):
Dividend income--unaffiliated issuers $ 4,274
- --------------------------------------------------------------------------------
Interest income--unaffilated issuers 7,486
- --------------------------------------------------------------------------------
Income from securities loaned (affiliated issuers $902) (Note E) 185
- --------------------------------------------------------------------------------
Income from investments in affiliated issuers (Note E) 67
================================================================================
Total income 12,012
================================================================================
EXPENSES:
Investment management fee (Notes A & B) 1,267
- --------------------------------------------------------------------------------
Administration fee (Note B) 528
- --------------------------------------------------------------------------------
Auction agent fees (Note B) 158
- --------------------------------------------------------------------------------
Audit fees 20
- --------------------------------------------------------------------------------
Basic maintenance expense (Note B) 12
- --------------------------------------------------------------------------------
Custodian fees (Note B) 84
- --------------------------------------------------------------------------------
Directors'fees and expenses 15
- --------------------------------------------------------------------------------
Insurance expense 11
- --------------------------------------------------------------------------------
Legal fees 27
- --------------------------------------------------------------------------------
Shareholder reports 32
- --------------------------------------------------------------------------------
Stock exchange listing fees 3
- --------------------------------------------------------------------------------
Stock transfer agent fees 17
- --------------------------------------------------------------------------------
Miscellaneous 13
================================================================================
Total expenses 2,187
Investment management fee waived (Notes A & B) (529)
Expenses reduced by custodian fee expense offset and commission
recapture arrangements (Note B) (16)
================================================================================
Total net expenses 1,642
================================================================================
Net investment income 10,370
================================================================================
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE A)
- --------------------------------------------------------------------------------
Net realized gain (loss) on:
Sales of investment securities of unaffiliated issuers 20,154
- --------------------------------------------------------------------------------
Interest rate swap contracts 354
- --------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) in value of:
- --------------------------------------------------------------------------------
Unaffiliated investment securities (2,341)
- --------------------------------------------------------------------------------
Interest rate swap contracts 571
================================================================================
Net gain (loss) on investments 18,738
================================================================================
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
Net investment income (2,651)
================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS RESULTING FROM OPERATIONS $26,457
================================================================================
</Table>
See Notes to Financial Statements 15
<Page>
NEUBERGER BERMAN APRIL 30, 2006 (UNAUDITED)
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
INCOME OPPORTUNITY FUND
-------------------------
SIX MONTHS
ENDED YEAR
APRIL 30, ENDED
NEUBERGER BERMAN 2006 OCTOBER 31,
(000'S OMITTED) (UNAUDITED) 2005
INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
FROM OPERATIONS:
Net investment income (loss) $ 10,370 $ 18,942
- ---------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 20,508 7,623
- ---------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) of investments (1,770) 2,515
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM (NOTE A):
Net investment income (2,651) (2,189)
- ---------------------------------------------------------------------------------------------------
Net realized gain on investments -- (1,273)
- ---------------------------------------------------------------------------------------------------
Tax return of capital -- (223)
- ---------------------------------------------------------------------------------------------------
Total distributions to preferred shareholders (2,651) (3,685)
===================================================================================================
Net increase (decrease) in net assets applicable to common shareholders
resulting from operations 26,457 25,395
===================================================================================================
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM (NOTE A):
Net investment income (12,015) (18,527)
- ---------------------------------------------------------------------------------------------------
Net realized gain on investments -- (10,739)
- ---------------------------------------------------------------------------------------------------
Tax return of capital -- (1,885)
- ---------------------------------------------------------------------------------------------------
Total distributions to common shareholders (12,015) (31,151)
===================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 14,442 (5,756)
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period 290,063 295,819
===================================================================================================
End of period $304,505 $290,063
===================================================================================================
Distributions in excess of net investment income at end of period $ (4,591) $ (295)
===================================================================================================
</Table>
See Notes to Financial Statements 16
<Page>
NOTES TO FINANCIAL STATEMENTS Income Opportunity Fund Inc.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1 GENERAL: Neuberger Berman Income Opportunity Fund Inc. (the "Fund") was
organized as a Maryland corporation on April 17, 2003 as a non-diversified,
closed-end management investment company under the Investment Company Act
of 1940, as amended (the "1940 Act"). The Board of Directors of the Fund
(the "Board") may classify or re-classify any unissued shares of capital
stock into one or more classes of preferred stock without the approval of
shareholders.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires Neuberger Berman Management Inc.
("Management") to make estimates and assumptions at the date of the
financial statements. Actual results could differ from those estimates.
2 PORTFOLIO VALUATION: Investment securities are valued as indicated in the
notes following the Schedule of Investments.
3 SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on a trade date basis. Dividend income is recorded on the
ex-dividend date. Non-cash dividends included in dividend income, if any,
are recorded at the fair market value of the securities received. Interest
income, including accretion of discount (adjusted for original issue
discount, where applicable), and amortization of premium, where applicable,
is recorded on the accrual basis. Realized gains and losses from securities
transactions and foreign currency transactions, 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 distributions and capital gain distributions are determined in
accordance with income tax regulations, which may differ from U.S.
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, 2005, permanent differences resulting
primarily from different book and tax accounting for distributions in
excess of earnings, amortization of bond premium, and income recognized on
interest rate swaps were reclassified at fiscal-year end. These
reclassifications had no effect on net income, net assets applicable to
common shareholders or net asset value per common share of the Fund.
17
<Page>
The tax character of distributions paid during the years ended October 31,
2005 and October 31, 2004 was as follows:
<Table>
<Caption>
DISTRIBUTIONS PAID FROM:
LONG-TERM TAX RETURN
ORDINARY INCOME CAPITAL GAIN OF CAPITAL TOTAL
2005 2004 2005 2004 2005 2004 2005 2004
$23,827,885 $24,332,882 $8,900,047 $-- $2,108,248 $-- $34,836,180 $24,332,882
</Table>
As of October 31, 2005, 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
$-- $-- $40,921,019 $-- $40,921,019
</Table>
The difference between book and tax basis distributable earnings is
attributable primarily to timing differences of distribution payments, wash
sales, amortization of bond premium, and income recognized on interest rate
swaps.
5 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 monthly distribution. The
Fund's ability to satisfy its policy will depend on a number of factors,
including the stability of income received from its investments, the
availability of capital gains, distributions paid on preferred shares and
the level of expenses. In an effort to maintain a stable distribution
amount, the Fund may pay distributions consisting of net investment income,
realized gains and paid-in capital. There is no assurance that the Fund
will always be able to pay distributions of a particular size, or that
distributions will consist solely of net investment income and realized
capital gains. The composition of the Fund's distribution for the calendar
year 2006 will be reported to Fund shareholders on IRS Form 1099DIV. 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. Distributions to common
shareholders are recorded on the ex-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. 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 income, 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, 2005, the Fund estimated these
amounts within the financial statements since the information is not
available from the REITs until after the Fund's fiscal year-end. At April
30, 2006, the Fund estimated these amounts for the period January 1, 2006
through April 30, 2006 within the financial statements since the 2006
information is not available from REITs until after the Fund's fiscal
period. For the year ended October 31, 2005, the
18
<Page>
character of distributions paid to shareholders is disclosed within the
Statement of Changes and is also based on these estimates. All estimates
are based upon REIT information sources available to the Fund together with
actual IRS Forms 1099DIV received to date. Based on past experience it is
probable that a portion of the Fund's distributions during the current
fiscal year will be considered tax return of capital but the actual amount
of tax return of capital, if any, is not determinable until after the
Fund's fiscal year-end. After calendar year-end, when the Fund learns the
nature of the distributions paid by REITs during that year, distributions
previously identified as income are often 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, estimates previously recorded are adjusted to reflect actual
results. 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 1099DIV.
On March 30, 2006, the Fund declared two monthly distributions to common
shareholders in the amount of $0.10625 per share per month, payable after
the close of the reporting period, on May 31, 2006 and June 30, 2006, to
shareholders of record on May 15, 2006 and June 15, 2006, respectively,
with ex-dates of May 11, 2006 and June 13, 2006, respectively.
6 EXPENSE ALLOCATION: Certain expenses are applicable to multiple funds.
Expenses directly attributable to the Fund are charged to the Fund.
Expenses borne by the complex of related investment companies, which
includes open-end and closed-end investment companies for which Management
serves as investment manager, that are not directly attributed to the Fund
are allocated among the Fund and the other investment companies in the
complex or series thereof on the basis of relative net assets, except where
a more appropriate allocation of expenses to each investment company in the
complex or series thereof can otherwise be made fairly.
7 REDEEMABLE PREFERRED SHARES: On June 5, 2003, the Fund re-classified 6,000
unissued shares of capital stock as Series A Auction Preferred Shares and
Series B Auction Preferred Shares ("Preferred Shares"). On September 26,
2003, the Fund issued 2,510 Series A Preferred Shares and 2,510 Series B
Preferred Shares. All Preferred Shares have a liquidation preference of
$25,000 per share plus any accumulated unpaid distributions, 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, distributions to
preferred shareholders, which are cumulative, are accrued daily and paid
every 7 days. Distribution rates are reset every 7 days based on the
results of an auction, except during special rate periods. For the six
months ended April 30, 2006, distribution rates ranged from 3.64% to 4.85%
for Series A and 3.65% to 4.95% for Series B Auction Preferred Shares. The
Fund declared distributions to preferred shareholders for the period May 1,
2006 to May 31, 2006 of $252,883 and $250,885 for Series A and Series B
Preferred Shares, respectively.
The Fund may redeem Preferred Shares, in whole or in part, on the second
business day preceding any distribution 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
19
<Page>
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 shares as a single class,
except that the Preferred Shares will vote separately as a class on certain
matters, as required by law or the Fund's charter. The holders of the
Preferred Shares, voting as a separate class, are entitled at all times to
elect two Directors of the Fund, and to elect a majority of the Directors
of the Fund if the Fund fails to pay distributions on Preferred Shares for
two consecutive years.
8 INTEREST RATE SWAPS: The Fund may enter into interest rate swap
transactions, with institutions that Management 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 contracts, 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.
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. The reclassifications do not
impact the Fund's total net assets applicable to common shareholders. At
April 30, 2006, the Fund had outstanding interest rate swap contracts as
follows:
<Table>
<Caption>
RATE TYPE
--------------------------
FIXED-RATE VARIABLE-RATE ACCRUED
PAYMENTS PAYMENTS NET INTEREST UNREALIZED TOTAL
SWAP NOTIONAL MADE BY RECEIVED BY RECEIVABLE APPRECIATION FAIR
COUNTER PARTY AMOUNT TERMINATION DATE THE FUND THE FUND(1) (PAYABLE) (DEPRECIATION) VALUE
Citibank, N.A. $24,000,000 April 24, 2008 3.70% 4.95% $ 5,833 $ 691,043 $ 696,876
Citibank, N.A. 70,000,000 October 24, 2008 3.63% 4.95% 17,967 2,614,275 2,632,242
------- ---------- ----------
$23,800 $3,305,318 $3,329,118
</Table>
(1) 30 day LIBOR (London Interbank Offered Rate)
9 SECURITY LENDING: Effective October 4, 2005, the Fund entered into
securities lending arrangements using a third party, eSecLending, to secure
bids. Pursuant to such arrangements, eSecLending currently
20
<Page>
acts as lending agent for the Fund and assisted the Fund in conducting a
bidding process to identify principals that would guarantee a certain
amount of revenue to the Fund.
Under the securities lending arrangements, the Fund receives cash
collateral at the beginning of each transaction equal to at least 102% of
the prior day's market value of the loaned securities (105% in the case of
international securities). The Fund invests the cash collateral in the
Neuberger Berman Securities Lending Quality Fund, LLC ("Quality Fund"), a
fund managed by Lehman Brothers Asset Management LLC, an affiliate of
Management, as approved by the Board.
Income from the lending program represents income earned on the cash
collateral and, where necessary, payment under the guarantee for the Fund,
less fees and expenses associated with the loans. These amounts are
reflected in the Statement of Operations under the caption "Income from
securities loaned."
10 REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
institutions that Management has determined are creditworthy. Each
repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase agreement be transferred to the
custodian in a manner sufficient to enable the Fund to assert a perfected
security interest in those securities in the event of a default under the
repurchase agreement. The Fund monitors, on a daily basis, the value of the
securities transferred to ensure that their value, including accrued
interest, is greater than amounts owed to the Fund under each such
repurchase agreement.
11 TRANSACTIONS WITH OTHER FUNDS MANAGED BY NEUBERGER BERMAN MANAGEMENT INC.:
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, the Fund may invest in a money market fund managed by
Management or an affiliate. The Fund invests in the Neuberger Berman Prime
Money Fund ("Prime Money"), as approved by the Board. Prime Money seeks to
provide the highest available current income consistent with safety and
liquidity. For any cash that the Fund invests in Prime Money, Management
waives a portion of its management fee equal to the management fee it
receives from Prime Money on those assets (the "Arrangement"). For the six
months ended April 30, 2006, management fees waived under this Arrangement
amounted to $1,214 and is reflected in the Statement of Operations under
the caption "Investment management fee waived." For the six months ended
April 30, 2006, income earned under this Arrangement amounted to $67,271
and is reflected in the Statement of Operations under the caption "Income
from investments in affiliated issuers."
12 CONCENTRATION OF RISK: Under normal market conditions, the Fund's equity
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. The
value of the Fund's shares 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. The Fund's
debt investments will be concentrated in high-yield corporate debt
securities rated, at the time of investment, Ba or lower by Moody's
Investors Service,
21
<Page>
Inc. or BB or lower by Standard & Poor's, or if unrated by either of those
entities, determined by Management to be of comparable quality. Due to the
inherent volatility and illiquidity of the high yield securities in which
the Fund invests and the real or perceived difficulty of issuers of those
high yield securities to meet their payment obligations during economic
downturns or because of negative business developments relating to the
issuer or its industry in general, the value of the Fund's shares may
fluctuate more than would be the case if the Fund did not concentrate in
high yield securities.
13 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
----------------------------------
2006 - 2008 0.25
2009 0.19
2010 0.13
2011 0.07
</Table>
Management has not contractually agreed to waive any portion of its fees
beyond October 31, 2011.
For the six months ended April 30, 2006, such waived fees amounted to
$527,739.
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 Bank and Trust Company
("State Street") as its sub-administrator under a Sub-Administration
Agreement. Management pays State Street a fee for all services received
under the agreement.
Management and Neuberger Berman, LLC("Neuberger"), a member firm of the New
York Stock Exchange and sub-adviser to the Fund, are wholly-owned
subsidiaries of Lehman Brothers Holdings Inc.
22
<Page>
("Lehman"), a publicly-owned holding company. Neuberger is retained by
Management to furnish it with investment recommendations and research
information without added cost to the Fund. Several individuals who are officers
and/or Directors of the Fund are also employees of Neuberger and/or Management.
The Fund has entered into a commission recapture program, which enables it to
pay some of its operational expenses by recouping a portion of the commissions
it pays to a broker that is not a related party of the Fund. Expenses paid
through this program may include costs of custodial, transfer agency or
accounting services. For the six months ended April 30, 2006, the impact of this
arrangement was a reduction of expenses of $6,171.
The Fund has an expense offset arrangement in connection with its custodian
contract. For the six months ended April 30, 2006, the impact of this
arrangement was a reduction of expenses of $10,050.
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/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 rates determined by the rating agencies.
The Fund pays a fee to State Street for the preparation of this report, which is
reflected in the Statement of Operations under the caption "Basic maintenance
expense."
NOTE C--SECURITIES TRANSACTIONS:
During the six months ended April 30, 2006, there were purchase and sale
transactions (excluding short-term securities and interest rate swap contracts)
of $192,056,021 and $185,292,116, respectively.
During the six months ended April 30, 2006, brokerage commissions on securities
transactions amounted to $80,434, of which Neuberger received $0, Lehman
Brothers, Inc. received $13,438, and other brokers received $66,996.
23
<Page>
NOTE D--CAPITAL:
At April 30, 2006, the common shares outstanding and the common shares of the
Fund owned by Neuberger were as follows:
<Table>
<Caption>
COMMON SHARES COMMON SHARES
OUTSTANDING OWNED BY NEUBERGER
17,723,648 6,981
</Table>
There were no transactions in common shares for the six months ended April 30,
2006 and the year ended October 31, 2005.
NOTE E--INVESTMENTS IN AFFILIATES*:
<Table>
<Caption>
INCOME FROM
BALANCE OF GROSS BALANCE OF INVESTMENTS IN
SHARES HELD PURCHASES GROSS SHARES HELD VALUE AFFILIATED ISSUERS
OCTOBER 31, AND SALES AND APRIL 30, APRIL 30, INCLUDED IN
NAME OF ISSUER 2005 ADDITIONS REDUCTIONS 2006 2006 TOTAL INCOME
Neuberger Berman
Securities Lending Quality
Fund, LLC** 36,482,615 120,002,175 115,389,370 41,095,420 $41,095,420 $902,290
Neuberger Berman
Prime Money Fund
Trust Class*** 964,595 60,391,850 55,489,245 5,867,200 5,867,200 67,271
----------- --------
Total $46,962,620 $969,561
=========== ========
</Table>
* Affiliated issuers, as defined in the 1940 Act.
** The Quality Fund, a fund managed by Lehman Brothers Asset Management LLC,
an affiliate of Management, is used to invest cash the Fund receives as
collateral for securities loans as approved by the Board. 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.
*** Prime Money is also managed by Management 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 Prime Money.
NOTE F--UNAUDITED FINANCIAL INFORMATION:
The financial information included in this interim report is taken
from the records of the Fund without audit by an independent registered public
accounting firm. Annual reports contain audited financial statements.
24
<Page>
FINANCIAL HIGHLIGHTS Income Opportunity Fund Inc.
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the Financial
Statements.
<Table>
<Caption>
SIX MONTHS ENDED PERIOD FROM
APRIL 30, JULY 2, 2003^
---------------- YEAR ENDED OCTOBER 31, TO OCTOBER 31,
2006 ---------------------- --------------
(UNAUDITED) 2005 2004 2003
COMMON SHARE NET ASSET VALUE, BEGINNING OF PERIOD $ 16.37 $ 16.69 $ 14.72 $ 14.33
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS APPLICABLE TO
COMMON SHAREHOLDERS:
NET INVESTMENT INCOME (LOSS)(cc) .59 1.07 1.27(Y) .25
NET GAINS OR LOSSES ON SECURITIES (BOTH REALIZED
AND UNREALIZED) 1.05 .57 2.08(Y) .59
COMMON SHARE EQUIVALENT OF DISTRIBUTIONS TO
PREFERRED SHAREHOLDERS FROM:
NET INVESTMENT INCOME(cc) (.15) (.13) (.09) (.01)
NET CAPITAL GAINS(cc) -- (.07) (.01) (.00)
TAX RETURN OF CAPITAL(cc) -- (.01) -- (.00)
------- ------- ------- -------
TOTAL DISTRIBUTIONS TO PREFERRED SHAREHOLDERS (.15) (.21) (.10) (.01)
------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO
COMMON SHAREHOLDERS 1.49 1.43 3.25 .83
------- ------- ------- -------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
NET INVESTMENT INCOME (.68) (1.03) (1.11) (.27)
NET CAPITAL GAINS -- (.61) (.17) (.05)
TAX RETURN OF CAPITAL -- (.11) -- (.00)
------- ------- ------- -------
TOTAL DISTRIBUTIONS TO COMMON SHAREHOLDERS (.68) (1.75) (1.28) (.32)
------- ------- ------- -------
LESS CAPITAL CHARGES FROM:
ISSUANCE OF COMMON SHARES -- -- -- (.03)
ISSUANCE OF PREFERRED SHARES -- -- (.00) (.09)
------- ------- ------- -------
TOTAL CAPITAL CHARGES -- -- (.00) (.12)
------- ------- ------- -------
COMMON SHARE NET ASSET VALUE, END OF PERIOD $ 17.18 $ 16.37 $ 16.69 $ 14.72
------- ------- ------- -------
COMMON SHARE MARKET VALUE, END OF PERIOD $ 15.08 $ 14.23 $ 15.07 $ 13.98
------- ------- ------- -------
TOTAL RETURN, COMMON SHARE NET ASSET VALUE+ +9.78%** +10.33% +23.67% +5.11%**
TOTAL RETURN, COMMON SHARE MARKET VALUE+ +10.85%** +6.22% +17.57% -4.67%**
RATIOS/SUPPLEMENTAL DATA+++
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS, END
OF PERIOD (IN MILLIONS) $ 304.5 $ 290.0 $ 295.8 $ 260.8
PREFERRED SHARES, AT LIQUIDATION VALUE ($25,000
PER SHARE LIQUIDATION PREFERENCE) (IN MILLIONS) $ 125.5 $ 125.5 $ 125.5 $ 125.5
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS# 1.11%* 1.13% 1.16%(Y) .88%*
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS++ 1.10%* 1.13% 1.16%(Y) .87%*
RATIO OF NET INVESTMENT INCOME (LOSS) EXCLUDING
PREFERRED SHARES DISTRIBUTIONS TO AVERAGE NET
ASSETS APPLICABLE TO COMMON SHAREHOLDERS 6.97%* 6.49% 8.08%(Y) 5.24%*
RATIO OF PREFERRED SHARES DISTRIBUTIONS TO AVERAGE
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 1.78%* 1.26% .62% .17%*
RATIO OF NET INVESTMENT INCOME (LOSS) INCLUDING
PREFERRED SHARES DISTRIBUTIONS TO AVERAGE NET
ASSETS APPLICABLE TO COMMON SHAREHOLDERS 5.19%* 5.23% 7.46%(Y) 5.07%*
PORTFOLIO TURNOVER RATE 45%** 49% 74% 21%**
ASSET COVERAGE PER PREFERRED SHARE, END OF PERIOD@ $85,672 $82,794 $83,933 $76,957
</Table>
See Notes to Financial Highlights 25
<Page>
NOTES TO FINANCIAL HIGHLIGHTS Income Opportunity Fund Inc.
+ Total return based on per share net asset value reflects the effects of
changes in net asset value on the performance of the Fund during each
fiscal period. Total return based on per share market value assumes the
purchase of common shares at the market price on the first day and sales of
common shares at the market price on the last day of the period indicated.
Distributions, if any, are assumed to be reinvested at prices obtained
under the Fund's distribution reinvestment plan. Results represent past
performance and do not guarantee future results. Current returns may be
lower or higher than the performance data quoted. Investment returns may
fluctuate and shares when sold may be worth more or less than original
cost. Total return would have been lower if Management had not waived a
portion of the investment management fee.
# The Fund is required to calculate an expense ratio without taking into
consideration any expense reductions related to expense offset
arrangements.
++ After waiver of a portion of the investment management fee by Management.
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 FROM
SIX MONTHS ENDED OCTOBER 31, JULY 2, 2003 TO
APRIL 30, ----------- OCTOBER 31,
2006 2005 2004 2003
---------------- ---- ---- ---------------
1.46% 1.48% 1.52% 1.16%
</Table>
^ The date investment operations commenced.
* Annualized.
** Not annualized.
@ Calculated by subtracting the Fund's total liabilities (excluding
accumulated unpaid distributions 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 distributions to preferred
shareholders. Income ratios include income earned on assets attributable to
Preferred Shares.
(Y) Prior to November 1, 2003, the Fund recorded the accrual of the net
interest income or expense expected to be received or paid at interim
settlement dates as a net payable or receivable for swap contracts and
actual amounts paid as net interest income or expense on swap contracts. As
a result of SEC staff guidance relating to the application of FASB
Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES to registered investment companies, effective November 1, 2003,
periodic expected interim net interest payments or receipts on the swaps
are recorded as an adjustment to unrealized gains/losses, along with the
fair value of the future periodic payment streams on the swaps.
Accordingly, for the year ended October 31, 2004, the per share amounts and
ratios shown decreased or increased as follows:
<Table>
Net Investment Income $ .11
Net Gains or Losses on Securities (both realized and unrealized) (.11)
Ratio of Gross Expenses to Average Net Assets Applicable to Common
Shareholders (.71%)
Ratio of Net Expenses to Average Net Assets Applicable to Common
Shareholders (.71%)
Ratio of Net Investment Income (Loss) Excluding Preferred Shares
Distributions to Average Net Assets Applicable to Common
Shareholders .71%
Ratio of Net Investment Income (Loss) Including Preferred Shares
Distributions to Average Net Assets Applicable to Common
Shareholders .71%
</Table>
(cc) Calculated based on the average number of shares outstanding during
each fiscal period.
26
<Page>
DISTRIBUTION REINVESTMENT PLAN
The Bank of New York ("Plan Agent") will act as Plan Agent for shareholders who
have not elected in writing to receive dividends and distributions in cash (each
a "Participant"), will open an account for each Participant under the
Distribution 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 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 or distribution 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 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.
27
<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.
28
<Page>
DIRECTORY
INVESTMENT MANAGER AND ADMINISTRATOR
Neuberger Berman Management Inc.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
877.461.1899 or 212.476.8800
SUB-ADVISER
Neuberger Berman, LLC
605 Third Avenue
New York, NY 10158-3698
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
STOCK TRANSFER AGENT
The Bank of New York
101 Barclay Street, 11-E
New York, NY 10286
LEGAL COUNSEL
Kirkpatrick & Lockhart Nicholson Graham LLP
1601 K Street, NW
Washington, DC 20006
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
29
<Page>
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available, without charge,
by calling 1-800-877-9700 (toll-free) and on the website of the Securities and
Exchange Commission at www.sec.gov. Information regarding how the Fund voted
proxies relating to portfolio securities during the most recent 12-month period
ended June 30 is also 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).
ADDITION OF ASSOCIATE PORTFOLIO MANAGER
In January 2006, Steve S. Shigekawa was made an Associate Portfolio Manager for
the Fund. He is a Vice President of Neuberger Berman Management Inc. and of
Neuberger Berman, LLC. He was an analyst for the Fund from 2002 to 2005. He held
associate analyst positions at two other investment firms from 2000 to 2002.
30
<Page>
REPORT OF VOTES OF SHAREHOLDERS
An annual meeting of shareholders of Neuberger Berman Income Opportunity Fund
Inc. was held on April 6, 2006. Shareholders voted on the following matter: (1)
To elect five Class I Directors to serve until the annual meeting of
shareholders in 2009, or until their successors are elected and qualified. Class
II and III Directors continue to hold office until the annual meeting in 2007
and 2008, respectively.
Proposal 1 - To elect five Class I Directors to serve until the annual meeting
of shareholders in 2009.
Common and Preferred Shares
<Table>
<Caption>
VOTES BROKER
VOTES FOR WITHHELD ABSTENTIONS NON-VOTES
Faith Colish 17,001,316.000 170,118.000 -- --
C. Anne Harvey 16,993,759.000 177,675.000 -- --
Cornelius T. Ryan 16,998,024.000 173,410.000 -- --
Peter E. Sundman 17,010,923.000 160,511.000 -- --
Peter P. Trapp 17,008,661.000 162,773.000 -- --
</Table>
31
<Page>
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.
NEUBERGER | BERMAN
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
[GRAPHIC E0035 06/06]
ITEM 2. CODE OF ETHICS
The Board of Directors ("Board") of Neuberger Berman Income Opportunity Fund
Inc. ("Registrant") adopted a code of ethics that applies to the Registrant's
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions ("Code of
Ethics"). For the period covered by this Form N-CSR, there were no 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 is filed as Exhibit 12(a)(1) to this Form N-CSR.
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 two audit committee financial
experts serving on its audit committee. The Registrant's audit committee
financial experts are John Cannon and Howard Mileaf. Mr. Cannon and Mr. Mileaf
are independent directors as defined by Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Only required in the annual report.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Only required in the annual report.
ITEM 6. SCHEDULE OF INVESTMENTS
The complete schedule of investments for the Fund is disclosed in the
Registrant's semi-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
Only required in the annual report.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Only required in the annual report.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
No reportable purchases for the period covered by this report.
ITEM 10. 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 11. 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 in the report it
files or submits on Form N-CSR is accumulated and communicated to the
Registrant's management to allow timely decisions regarding required
disclosure.
(b) There were no significant changes in the Registrant's internal controls
over financial reporting (as defined in rule 30a-3(d) under the Act) that
occurred during the Registrant's second fiscal quarter of the period
covered by this report that have materially affected, or are reasonably
likely to materially affect, the Registrant's internal control over
financial reporting.
ITEM 12. EXHIBITS
(a)(1) A copy of the Code of Ethics is filed herewith.
(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 filed
herewith.
(a)(3) Not applicable.
(b) The certifications required by Rule 30a-2(b) of the Act and Section 906
of the Sarbanes-Oxley Act are filed herewith.
The certifications provided pursuant to Section 906 of the Sarbanes-Oxley Act
are not deemed "filed" for purposes of Section 18 of the Securities Exchange Act
of 1934 ("Exchange Act"), or otherwise subject to the liability of that section.
Such certifications will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Exchange Act, except to the
extent that the Registrant specifically incorporates them by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Neuberger Berman Income Opportunity Fund Inc.
By: /s/ Peter E. Sundman
-----------------------
Peter E. Sundman
Chief Executive Officer
Date: July 10, 2006
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: July 10, 2006
By: /s/ John M. McGovern
--------------------------
John M. McGovern
Treasurer and Principal Financial
and Accounting Officer
Date: July 10, 2006