<Page>
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 811-21342
---------------------------------------------
Lehman Brothers/First Trust Income Opportunity Fund
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
399 Park Ave., New York, NY 10022
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Bradley Tank, Chief Executive Officer of Lehman Brothers Asset Management Inc.
399 Park Ave., New York, NY 10022
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 526-7000
----------------------------
Date of fiscal year end: 12/31/2003
---------------------------
Date of reporting period: 07/28/2003-12/31/2003
---------------------------
<Page>
ITEM 1. REPORTS TO STOCKHOLDERS.
The annual report is attached.
<Page>
ANNUAL REPORT 2003
Lehman Brothers
First Trust Income
Opportunity Fund
[GRAPHIC]
[LEHMAN BROTHERS LOGO]
<Page>
CONTENTS
<Table>
Chairman and President's Letter 2
Portfolio Manager's Report 3
Fund Overview 4
Schedule of Investments 5
Notes to Schedule of Investments 13
Statement of Assets and Liabilities 14
Statement of Operations 15
Statement of Changes in Net Assets 16
Financial Highlights 17
Notes to Financial Statements 18
Report of Independent Auditors 21
Dividend Reinvestment Plan (Unaudited) 22
Trustee and Officer Table (Unaudited) 23
</Table>
<Page>
CHAIRMAN AND PRESIDENT'S LETTER
Dear Shareholder:
We are pleased to present our first report to shareholders of Lehman Brothers
First Trust Income Opportunity Fund (NYSE: LBC). Although it is a short
reporting period, the Fund is off to a very good start. During the period, the
Fund achieved several milestones. We launched and closed our common equity
offering in July 2003. We continued with a successful launch of preferred
shares, on schedule, in October 2003. And perhaps most importantly, the
favorable market environment for high yield investments combined with sector and
securities selections by the portfolio management team allowed us to achieve an
appreciation in the Fund's net asset value while maintaining a steady annualized
dividend rate of 11% on the $15 common share IPO price.
As you know, the Fund's investment objective is to seek high total return
through a combination of income plus capital appreciation. The Fund pursues this
investment objective by investing primarily in high yield debt securities.
During 2003, the high yield market performed favorably providing investors with
attractive relative yields and capital appreciation. We believe that the high
yield asset class can continue to offer investors distinct benefits including
high current income and opportunities for portfolio diversification. In today's
low interest rate environment, high yield securities can offer attractive
absolute yields relative to other asset classes. In addition, since the returns
of high yield securities have typically been only partially correlated with
returns of traditional stocks and higher grade bonds, an investment in the high
yield market can potentially provide diversification to an investor's portfolio.
Lehman Brothers Asset Management Inc., the adviser to the Fund, has retained
Lincoln Capital Fixed Income Management, LLC (a wholly owned subsidiary of
Lehman Brothers) as the sub-adviser to manage the Fund. Portfolio manager Ann H.
Benjamin and her team of seasoned investment professionals at Lincoln Capital
manage the portfolio. A review of the portfolio's performance and Ann's outlook
for the high yield markets may be found on the following page. Ann and her team
take a proactive approach to high yield asset management and integrate detailed
security and industry analysis within the context of a global economic outlook.
Ann's research analysts are industry specialists who carry out independent
primary research on companies and industries. In addition to seeking value from
specific issue selections, they also implement strategies seeking to take
advantage of valuation opportunities across industry sectors and credit quality
tiers.
We hope that the Lehman Brothers First Trust Income Opportunity Fund will become
a mainstay holding in your portfolio. We thank you for your trust in Lehman
Brothers Asset Management and Lincoln Capital. We will work diligently to keep
earning it.
Sincerely,
/s/ Kurt A. Locher /s/ Brad Tank
Kurt A. Locher Brad Tank
CHAIRMAN AND TRUSTEE PRESIDENT
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003
<Page>
PORTFOLIO MANAGER'S REPORT
We are pleased to report that Lehman Brothers First Trust Income Opportunity
Fund generated a positive return for the period July 28, 2003 (the inception
date of the Fund) through December 31, 2003. Generally, the high yield asset
class outperformed all higher quality bond indices for the reporting period.
Over this reporting period, the Fund's performance was driven by an overweight
in the Cable and the Wireless Communications sectors, both of which performed
relatively well during the period. Also contributing positively to the Fund's
return were issue selections in the Healthcare, Gaming and Metal and Mining
sectors. During August, we added leverage to the Fund and sought to take
advantage of the extremely low valuations in lower quality issues. Those issues
drove performance late in the year. We believe our intensive credit evaluation
process, coupled with our relative value analysis, will continue to help the
Fund seek to achieve its high total return objective.
We believe economic conditions will improve throughout 2004, fueled by a rise in
capital spending. Our outlook for the high yield market remains positive. Over
the course of the coming year, we expect corporate default rates to decline, and
earnings and credit quality to improve.
As the economy improves, there may be slight increases in interest rates;
however, we do not believe this will negatively impact the high yield market. In
fact, on a historical basis, high yield securities have generally outperformed
higher quality securities in a rising interest rate environment. We have
positioned the Fund with an emphasis on lower quality securities and higher
coupon callable securities, both of which we believe can outperform the overall
high yield asset class.
The holdings of the Fund remain diversified across the quality spectrum among
high yield grades, industries and individual companies. We maintain important
holdings in the Cable, Wireless Communications and Chemical sectors, all of
which we believe can outperform as the economy expands. Other important holdings
include securities in the Healthcare, Metals and Mining and Gaming sectors. As
always, we seek to invest in those companies with strong management teams and
improving fundamentals and securities with good relative value. By investing in
this manner, we seek to provide high total returns for our shareholders.
Sincerely,
/s/ Ann H. Benjamin
Ann H. Benjamin
PORTFOLIO MANAGER
3
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
FUND OVERVIEW (AS OF 12/31/03)
PERFORMANCE HIGHLIGHTS(1)
<Table>
<Caption>
JULY 28 - OCTOBER 1 - CUMULATIVE TOTAL RETURN
INCEPTION DATE SEPT 30, 2003 DECEMBER 31, 2003 SINCE INCEPTION(2)
- -----------------------------------------------------------------------------------------------------------------------
NAV 07/28/03 4.45% 7.93% 12.73%
- -----------------------------------------------------------------------------------------------------------------------
Market Price 07/28/03 -0.01% 10.48% 10.47%
- -----------------------------------------------------------------------------------------------------------------------
</Table>
FUND FACTS
<Table>
Ticker NYSE: LBC
- ---------------------------------------------------------------------
Market Price $15.91
- ---------------------------------------------------------------------
Net Asset Value (NAV) $15.51
- ---------------------------------------------------------------------
Premium 2.58%
- ---------------------------------------------------------------------
Shares outstanding 12,230,942
- ---------------------------------------------------------------------
CUSIP number 525178 10 9
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Inception Date 7/28/03
- ---------------------------------------------------------------------
</Table>
PORTFOLIO CHARACTERISTICS
<Table>
Portfolio Turnover 32.08%
- ---------------------------------------------------------------------
Expense Ratio(3) 1.42%
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Wtd. Avg. Maturity 6.75 Years
- ---------------------------------------------------------------------
Average Coupon 9.65%
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Average Credit Quality B
- ---------------------------------------------------------------------
Portfolio Composition (% High Yield) 98.5%
- ---------------------------------------------------------------------
</Table>
CAPITAL STRUCTURE AND LEVERAGE ($ MM)
<Table>
Total Net Assets $279.7
- ---------------------------------------------------------------------
Net Assets Attributable to Common Shares $189.7
- ---------------------------------------------------------------------
Net Assets Attributable to Preferred Shares $90.0
- ---------------------------------------------------------------------
Net Assets Attributable to Other Borrowings -
- ---------------------------------------------------------------------
Leverage (% of total net assets) 32.2%
- ---------------------------------------------------------------------
</Table>
[CHART]
CREDIT QUALITY BREAKDOWN
(% OF TOTAL INVESTMENTS AND CASH)
<Table>
A 1.4%
BBB 3.4%
BB 33.1%
B 42.3%
CCC 16.9%
CC 0.6%
Not Rated 2.2%
Cash 0.1%
</Table>
[CHART]
MARKET PRICE AND NAV PERFORMANCE
<Table>
<Caption>
PRICE ($) NAV ($) PREMIUM/DISCOUNT (%)
7/29/2003 $ 15.00 $ 14.30 4.90%
8/8/2003 $ 15.00 $ 14.16 5.93%
8/15/2003 $ 15.10 $ 13.98 8.01%
8/22/2003 $ 14.56 $ 14.39 1.18%
8/29/2003 $ 14.45 $ 14.60 -1.03%
9/5/2003 $ 14.75 $ 14.75 0.00%
9/12/2003 $ 14.83 $ 14.93 -0.67%
9/19/2003 $ 14.82 $ 14.90 -0.54%
9/26/2003 $ 14.78 $ 14.92 -0.94%
10/3/2003 $ 14.93 $ 14.87 0.40%
10/10/2003 $ 15.14 $ 15.00 0.93%
10/17/2003 $ 15.10 $ 14.95 1.00%
10/24/2003 $ 15.23 $ 14.80 2.91%
10/31/2003 $ 15.25 $ 14.88 2.49%
11/7/2003 $ 15.27 $ 14.94 2.21%
11/14/2003 $ 15.48 $ 15.01 3.13%
11/21/2003 $ 15.14 $ 14.99 1.00%
11/28/2003 $ 15.26 $ 15.06 1.33%
12/5/2003 $ 15.36 $ 15.34 0.13%
12/12/2003 $ 15.32 $ 15.43 -0.71%
12/19/2003 $ 15.43 $ 15.60 -1.09%
12/26/2003 $ 15.49 $ 15.46 0.19%
12/31/2003 $ 15.91 $ 15.51 2.78%
</Table>
[CHART]
TOP INDUSTRIES (% OF MANAGED ASSETS)
<Table>
Media Broadcasting & Publishing 16.5%
Telephone Systems 12.3%
Entertainment & Leisure 10.2%
Electric Utilities 9.8%
Forest Products & Paper 6.5%
Oil & Gas 5.6%
Health Care Providers 5.0%
Transportation 4.0%
Commercial Services 4.0%
Metals 3.8%
Other 22.3%
</Table>
[CHART]
MATURITY BREAKDOWN
(% OF TOTAL INVESTMENTS AND CASH)
<Table>
1 Year 0.1%
1-3 Years 3.2%
3-5 Years 11.4%
5-7 Years 45.2%
7-10 Years 37.5%
10+ Years 2.6%
</Table>
- ----------
1. Performance for NAV and Market Price assume reinvestment of all dividends and
capital gains. Shares of the Fund fluctuate in value. Fund performance
changes over time and currently may be different from that shown as of
12/31/03. Past performance is no guarantee of future results.
2. Not annualized.
3. Annualized.
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a)
CORPORATE DEBT -- 137.9% OF TOTAL NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------------
AIRLINES -- 2.1%
$3,750,000 Delta Airlines, Inc., Series 2000-1, Class A2
7.570%, 11/18/2010 A Baa NR $ 3,884,788
APPAREL RETAILERS -- 0.5%
1,050,000 Payless Shoesource, Inc., Senior Subordinated Note
8.250%, 8/01/2013 B B NR 1,010,625
BEVERAGES, FOOD & TOBACCO -- 2.7%
1,000,000 Del Monte Corp., Senior Subordinated Note
8.625%, 12/15/2012 B B B 1,095,000
2,000,000 Dole Food, Inc., Senior Note
8.625%, 5/01/2009 BB B NR 2,195,000
1,850,000 Nash Finch Co., Senior Subordinated Note
8.500%, 5/01/2008 B B B 1,850,000
5,140,000
CHEMICALS -- 5.5%
3,875,000 Equistar Chemicals, LP/Equistar Funding Corp., Senior Note
10.625%, 5/01/2011 BB B B 4,281,875
2,000,000 Methanex Corp., Senior Note
8.750%, 8/15/2012 BBB Ba BBB 2,230,000
2,000,000 Millennium Chemicals, Inc., Senior Note
9.250%, 6/15/2008 BB B NR 2,180,000
1,775,000 Resolution Performance Products LLC/Resolution
Performance Products Capital Corp., Senior Secured Note
9.500%, 4/15/2010 B B NR 1,801,625
10,493,500
COAL -- 0.8%
1,550,000 Massey Energy Co., Senior Note, 144A
6.625%, 11/15/2010 BB Ba NR 1,588,750
COMMERCIAL SERVICES -- 5.6%
2,000,000 Alderwoods Group, Inc., Note
12.250%, 1/02/2009 NR NR NR 2,250,000
1,000,000 Allied Waste North America, Inc., Senior Note
7.875%, 4/15/2013 BB Ba NR 1,082,500
2,100,000 Allied Waste North America, Inc., Senior Secured Note
8.875%, 4/01/2008 BB Ba NR 2,352,000
2,825,000 Muzak LLC/Muzak Finance Corp., Senior Note
10.000%, 2/15/2009 B B NR 3,008,625
</Table>
See accompanying notes to financial statements.
5
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
SCHEDULE OF INVESTMENTS CONTINUED
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a)
CORPORATE DEBT - CONTINUED
- --------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES - CONTINUED
$2,000,000 Muzak LLC/Muzak Finance Corp., Senior Subordinated Note
9.875%, 3/15/2009 CCC Caa NR $ 1,932,500
10,625,625
COMMUNICATIONS -- 3.2%
750,000 Avaya, Inc., Senior Secured Note
11.125%, 4/01/2009 B B NR 877,500
2,000,000 Hexcel Corp., Senior Subordinated Note
9.750%, 1/15/2009 CCC Caa NR 2,095,000
1,000,000 L-3 Communications Corp., Senior Subordinated Note
7.625%, 6/15/2012 BB Ba NR 1,083,750
2,000,000 Nortel Networks, Ltd., Note
6.125%, 2/15/2006 B B NR 2,025,000
6,081,250
CONTAINERS & PACKAGING -- 2.4%
75,000 Crown European Holdings SA, Senior Secured Note
9.500%, 3/01/2011 B B NR 84,937
1,000,000 Crown European Holdings SA, Senior Secured Note
10.875%, 3/01/2013 B B NR 1,176,250
3,000,000 Owens-Brockway Glass Container, Senior Secured Note
8.750%, 11/15/2012 BB B NR 3,341,250
4,602,437
ELECTRIC UTILITIES -- 15.0%
3,375,000 AES Corp. (The), Senior Secured Note, 144A
8.750%, 5/15/2013 B B NR 3,771,562
2,000,000 AES Corp. (The), Senior Secured Note, 144A
9.000%, 5/15/2015 B B NR 2,260,000
625,000 Calpine Corp., Senior Secured Note, 144A
8.750%, 7/15/2013 B NR BB 609,375
5,200,000 Calpine Corp., Senior Secured Note, 144A
9.875%, 12/01/2011 BB NR NR 5,343,000
2,250,000 CMS Energy Corp., Senior Secured Note, 144A
7.750%, 8/01/2010 B B B 2,365,312
2,650,000 Edison Mission Energy Corp., Senior Note
7.730%, 6/15/2009 B B NR 2,524,125
3,150,000 Illinois Power Co., Note
11.500%, 12/15/2010 B B B 3,780,000
3,300,000 Reliant Resources, Inc., Senior Secured Note, 144A
9.500%, 7/15/2013 B B B 3,531,000
</Table>
See accompanying notes to financial statements.
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003
<Page>
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a)
CORPORATE DEBT - CONTINUED
- --------------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - CONTINUED
$4,000,000 TECO Energy, Inc., Note
7.500%, 6/15/2010 BB Ba BB $ 4,280,000
28,464,374
ELECTRONICS -- 2.1%
800,000 Amkor Technology, Inc., Senior Note
9.250%, 2/15/2008 B B NR 908,000
2,750,000 Xerox Corp., Note
7.625%, 6/15/2013 B B BB 2,970,000
3,878,000
ENTERTAINMENT & LEISURE -- 15.7%
1,275,000 Bally Total Fitness Holding Corp., Note, 144A
10.500%, 7/15/2011 B B B 1,281,375
400,000 Bally Total Fitness Holding Corp., Senior
Subordinated Note, Series C
9.875%, 10/15/2007 B B B 364,000
2,100,000 Choctaw Resort Development Enterprise Corp., Senior Note
9.250%, 4/01/2009 BB B NR 2,278,500
3,175,000 Chukchansi Economic Development Authority,
Senior Note, 144A
14.500%, 6/15/2009 NR NR NR 3,857,625
2,000,000 Chumash Casino & Resort Enterprise, Senior Note, 144A
9.000%, 7/15/2010 BB Ba NR 2,210,000
375,000 Hollywood Entertainment Corp., Senior Subordinated Note
9.625%, 3/15/2011 B B NR 403,125
500,000 Horseshoe Gaming LLC, Senior Subordinated Note
8.625%, 5/15/2009 B B NR 528,125
4,125,000 Mohegan Tribal Gaming Authority, Senior Subordinated Note
8.000%, 4/01/2012 BB Ba NR 4,465,312
2,000,000 Mohegan Tribal Gaming Authority, Senior Subordinated Note
8.375%, 7/01/2011 BB Ba NR 2,180,000
1,175,000 Premier Parks, Inc., Senior Note
9.750%, 6/15/2007 B B NR 1,232,281
2,350,000 River Rock Entertainment Authority, Senior Note, 144A
9.750%, 11/01/2011 B B NR 2,526,250
1,725,000 Six Flags, Inc., Senior Note
8.875%, 2/01/2010 B B NR 1,770,281
875,000 Six Flags, Inc., Senior Note
9.750%, 4/15/2013 B B NR 920,938
</Table>
See accompanying notes to financial statements.
7
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
SCHEDULE OF INVESTMENTS CONTINUED
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a)
CORPORATE DEBT - CONTINUED
- --------------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT & LEISURE - CONTINUED
$1,785,000 Turning Stone Casino Resort Enterprise, Senior Note, 144A
9.125%, 12/15/2010 B B NR $ 1,941,188
3,250,000 Wynn Las Vegas Capital Corp., Note
12.000%, 11/01/2010 CCC B NR 3,826,875
29,785,875
FOREST PRODUCTS & PAPER -- 9.6%
550,000 Boise Cascade Corp., Senior Note
6.500%, 11/01/2010 BB Ba BB 573,737
300,000 Boise Cascade Corp., Senior Note
7.000%, 11/01/2013 BB Ba BB 311,863
2,000,000 Georgia-Pacific Corp., Senior Note
8.875%, 2/01/2010 BB Ba BB 2,280,000
2,000,000 Graphic Packaging International Corp., Senior Note, 144A
8.500%, 8/15/2011 B B NR 2,190,000
2,200,000 Louisiana-Pacific Corp., Senior Note
8.875%, 8/15/2010 BB Ba BB 2,596,000
4,000,000 Louisiana-Pacific Corp., Senior Subordinated Note
10.875%, 11/15/2008 BB Ba BB 4,760,000
2,800,000 Pacifica Papers, Inc., Senior Note
10.000%, 3/15/2009 BB Ba NR 2,968,000
2,575,000 Playtex Products, Inc., Senior Subordinated Note
9.375%, 6/01/2011 CCC Caa NR 2,600,750
18,280,350
HEALTH CARE PROVIDERS -- 7.5%
2,700,000 Express Scripts, Inc., Senior Note
9.625%, 6/15/2009 BBB Ba NR 2,902,500
2,975,000 Monitronics International, Inc., Senior
Subordinated Note, 144A
11.750%, 9/01/2010 B B NR 3,086,563
3,750,000 Tenet Healthcare Corp., Note
7.375%, 2/01/2013 BB B BB 3,768,750
1,000,000 Tenet Healthcare Corp., Senior Note
6.375%, 12/01/2011 BB B BB 960,000
125,000 Tenet Healthcare Corp., Senior Note
6.500%, 6/01/2012 BB B BB 119,844
3,075,000 US Oncology, Inc., Senior Subordinated Note
9.625%, 2/01/2012 B B NR 3,374,813
14,212,470
</Table>
See accompanying notes to financial statements.
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003
<Page>
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a)
CORPORATE DEBT - CONTINUED
- --------------------------------------------------------------------------------------------------------------------------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES -- 3.1%
$1,000,000 Beazer Homes USA, Inc., Senior Note
8.375%, 4/15/2012 BB Ba NR $ 1,102,500
1,000,000 Beazer Homes USA, Inc., Senior Note
8.625%, 5/15/2011 BB Ba NR 1,100,000
1,400,000 Salton, Inc., Senior Subordinated Note
10.750%, 12/15/2005 B B NR 1,428,000
2,000,000 Standard Pacific Corp., Senior Note
9.500%, 9/15/2010 BB Ba NR 2,230,000
5,860,500
MEDIA - BROADCASTING & PUBLISHING -- 19.9%
2,725,000 Charter Communications Holdings II LLC/Charter
Communications Holdings II Capital Corp., Senior Note, 144A
10.250%, 9/15/2010 CCC Caa NR 2,861,250
7,000,000 Charter Communications Holdings, Inc., Senior Note
10.000%, 5/15/2011 CCC Ca NR 6,090,000
150,000 Dex Media East LLC/Dex Media East Finance Co.,
Guaranteed Note
12.125%, 11/15/2012 B B B 184,500
2,025,000 Dex Media, Inc., Note, 144A
8.000%, 11/15/2013 B Caa NR 2,126,250
1,625,000 Dex Media, Inc., Note, 144A
0.000%/9.000%, 11/15/2013 (c) B B B 1,145,625
2,000,000 Insight Midwest, LP/Insight Capital, Inc., Senior Note
9.750%, 10/01/2009 B B NR 2,115,000
600,000 Mediacom LLC/Mediacom Capital Corp., Senior Note
9.500%, 1/15/2013 B B NR 636,000
2,825,000 Ono Finance PLC, Note
13.000%, 5/01/2009 CCC Caa B 2,941,531
3,500,000 Ono Finance PLC, Note
14.000%, 2/15/2011 CCC Caa B 3,679,375
3,000,000 Paxson Communications Corp., Senior Subordinated Note
10.750%, 7/15/2008 CCC Caa NR 3,273,750
5,750,000 Paxson Communications Corp., Senior Subordinated Note
0.000%/12.250%, 1/15/2009 (c) CCC Caa NR 5,045,625
2,000,000 Primedia, Inc., Senior Note
8.875%, 5/15/2011 B B NR 2,110,000
1,350,000 Rogers Cable, Inc., Senior Secured Note
7.875%, 5/01/2012 BBB Ba NR 1,505,250
</Table>
See accompanying notes to financial statements.
9
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
SCHEDULE OF INVESTMENTS CONTINUED
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a)
CORPORATE DEBT - CONTINUED
- --------------------------------------------------------------------------------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - CONTINUED
$ 675,000 Spanish Broadcasting System, Inc., Senior Subordinated Note
9.625%, 11/01/2009 CCC Caa NR $ 720,563
3,400,000 Telenet Group Holding NV, Senior Note, 144A
0.000%/11.500%, 6/15/2014 (c) CCC Caa NR 2,142,000
1,000,000 Vivendi Universal SA, Note, 144A
9.250%, 4/15/2010 BB B NR 1,185,000
37,761,719
METALS -- 5.9%
3,200,000 AK Steel Corp., Guaranteed Senior Note
7.750%, 6/15/2012 B B NR 2,736,000
2,000,000 IPSCO, Inc., Senior Note
8.750%, 6/01/2013 BB Ba NR 2,210,000
2,875,000 Oregon Steel Mills, Inc., Note
10.000%, 7/15/2009 B B NR 2,522,813
3,500,000 Shaw Group, Inc., Senior Note, 144A
10.750%, 3/15/2010 BB Ba NR 3,710,000
11,178,813
MULTIPLE UTILITIES -- 4.5%
4,000,000 Coastal Corp., Note
7.750%, 6/15/2010 B Caa NR 3,775,000
1,250,000 Coastal Corp., Senior Note
9.625%, 5/15/2012 B Caa NR 1,237,500
3,500,000 El Paso Natural Gas Co., Senior Note
7.625%, 8/01/2010 B B NR 3,596,250
8,608,750
OIL & GAS -- 5.7%
1,125,000 Lyondell Chemical Co., Senior Secured Note
10.500%, 6/01/2013 BB B BB 1,226,250
500,000 Newfield Exploration Co., Senior Note
7.625%, 3/01/2011 BB Ba NR 557,500
2,650,000 Newfield Exploration Co., Senior Subordinated Note
8.375%, 8/15/2012 BB Ba NR 2,968,000
2,300,000 Plains All American Pipeline LP/Plains All American
Finance Corp., Senior Note
7.750%, 10/15/2012 BBB Ba NR 2,653,625
850,000 Plains Exploration & Production Co., LP, Senior
Subordinated Note
8.750%, 7/01/2012 B B NR 933,938
</Table>
See accompanying notes to financial statements.
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003
<Page>
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a)
CORPORATE DEBT - CONTINUED
- --------------------------------------------------------------------------------------------------------------------------------
OIL & GAS - CONTINUED
$2,250,000 Vintage Petroleum, Inc., Senior Note
8.250%, 5/01/2012 BB Ba NR $ 2,446,875
10,786,188
PHARMACEUTICALS -- 2.3%
4,225,000 Biovail Corp., Senior Subordinated Note
7.875%, 4/01/2010 BB B NR 4,309,500
RETAILERS -- 0.8%
625,000 J.C. Penney Co., Inc., Note
9.000%, 8/01/2012 BB Ba BB 747,656
700,000 Michaels Stores, Inc., Senior Note
9.250%, 7/01/2009 BB Ba NR 772,625
1,520,281
TELEPHONE SYSTEMS -- 16.1%
1,875,000 ACC Escrow Corp., Senior Note, 144A
10.000%, 8/01/2011 B B NR 2,090,625
2,500,000 Centennial Cellular Corp./Centennial Cellular
Operating Co. LLC, Senior Subordinated Note
10.750%, 12/15/2008 CCC Caa B 2,637,500
2,750,000 Centennial Cellular Operating Co./Centennial
Communications Corp., Guaranteed Senior Note
10.125%, 6/15/2013 CCC Caa NR 3,018,125
2,575,000 Cincinnati Bell, Inc., Senior Subordinated Note, 144A
8.375%, 1/15/2014 B B B 2,768,125
4,000,000 Dobson Communications Corp., Senior Note
10.875%, 7/01/2010 CCC B NR 4,360,000
2,600,000 Nextel Communications, Inc., Senior Note
9.375%, 11/15/2009 B B BB 2,834,000
750,000 Qwest Capital Funding, Inc., Note
7.900%, 8/15/2010 CCC Caa CCC 761,250
2,000,000 Qwest Services Corp., Senior Subordinated Note, 144A
13.500%, 12/15/2010 CCC NR NR 2,430,000
5,330,881 Receivables Structured Trust Corp., Note, 144A
7.440%, 12/10/2006 NR Caa CCC 5,317,554
1,750,000 Rural Cellular Corp., Senior Subordinated Note
9.750%, 1/15/2010 CCC Caa NR 1,710,625
2,613,000 Rural Cellular Corp., Subordinated Note
9.625%, 5/15/2008 CCC Caa NR 2,547,675
30,475,479
</Table>
See accompanying notes to financial statements.
11
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
SCHEDULE OF INVESTMENTS CONTINUED
DECEMBER 31, 2003
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE (a)
CORPORATE DEBT - CONTINUED
- --------------------------------------------------------------------------------------------------------------------------------
TEXTILES, CLOTHING & FABRICS -- 1.4%
$2,625,000 Broder Brothers Co., Senior Note, 144A
11.250%, 10/15/2010 B B NR $ 2,585,625
TRANSPORTATION -- 5.5%
5,550,000 Grupo Transportacion Ferroviaria Mexicana SA de CV,
Senior Note
11.750%, 6/15/2009 B B B 5,702,625
700,000 Kansas City Southern Railway Co., Senior Note
9.500%, 10/01/2008 B Ba NR 777,000
2,250,000 Laidlaw International, Inc., Senior Note, 144A
10.750%, 6/15/2011 B B NR 2,542,500
1,350,000 Stena AB, Senior Note, 144A
7.500%, 11/01/2013 BB Ba NR 1,390,500
10,412,625
TOTAL CORPORATE DEBT (IDENTIFIED COST $246,434,907) 261,547,524
PREFERRED STOCKS -- 6.5%
MEDIA - BROADCASTING & PUBLISHING -- 4.4%
58,500 Cablevision Systems Corp., Class H, 11.750%, 10/01/2007 B B NR 6,084,000
18,000 Primedia, Inc., Series D, 10.000%, 2/01/2008 NR Ca NR 1,764,000
6,250 Primedia, Inc., Series H, 8.625%, 4/01/2010 B Ca NR 568,750
8,416,750
TELEPHONE SYSTEMS -- 2.1%
36,500 Dobson Communications Corp., 13.000%, 5/01/2009 NR Caa NR 3,923,750
TOTAL PREFERRED STOCKS (IDENTIFIED COST $12,367,000) 12,340,500
TOTAL INVESTMENTS -- 144.4%
(IDENTIFIED COST $258,801,907) (b) 273,888,024
Other Assets, Less Liabilities -- 3.1% 5,817,028
Money Market Cumulative Preferred Shares plus cumulative
unpaid dividends (47.5%) (90,041,418)
TOTAL NET ASSETS -- 100% $189,663,634
</Table>
See accompanying notes to financial statements.
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
NOTES TO SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
* Ratings have not been audited by Ernst & Young LLP.
a See Note 2a of Notes to Financial Statements.
b Federal Tax Information:
At December 31, 2003, the net unrealized appreciation on investments
based on cost of $258,507,389 for federal income tax purposes was as
follows:
<Table>
Aggregate gross unrealized appreciation for all investments in which
there is an excess of value over tax cost $ 15,595,700
Aggregate gross unrealized depreciation for all investments in which
there is an excess of tax cost over value (215,065)
Net unrealized appreciation $ 15,380,635
</Table>
c Denotes a step-up bond: a zero coupon bond that converts to a fixed rate
of interest at a designated future date.
144A Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of 144A Securities amounted to $68,857,054 or 36.3% of net
assets applicable to common shares.
Quality Profile (unaudited)
The quality ratings of securities in the Fund as of December 31, 2003
were as follows:
<Table>
<Caption>
PERCENT OF
TOTAL INVESTMENTS
S&P RATING/MOODY'S RATING/FITCH RATING AND CASH**
A/A/A 1.4%
BBB/Baa/BBB 3.4
BB/Ba/BB 33.1
B/B/B 42.3
CCC/Caa/CCC 16.9
CC/Ca/CC 0.6
NR (Not Rated) 2.2
Cash 0.1
100.0%
</Table>
** Percentages compiled using the highest rating for each security.
See accompanying notes to financial statements.
13
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 2003
<Table>
ASSETS
===========================================================================================================
Investments at cost $258,801,907
- -----------------------------------------------------------------------------------------------------------
Net unrealized appreciation 15,086,117
- -----------------------------------------------------------------------------------------------------------
Investments at value 273,888,024
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents 1,254,446
- -----------------------------------------------------------------------------------------------------------
Dividends and interest receivable 5,178,079
- -----------------------------------------------------------------------------------------------------------
Prepaid expenses 59,035
- -----------------------------------------------------------------------------------------------------------
TOTAL ASSETS 280,379,584
LIABILITIES
===========================================================================================================
Dividends payable to common shareholders 22,183
- -----------------------------------------------------------------------------------------------------------
Management fees payable 141,960
- -----------------------------------------------------------------------------------------------------------
Payable for offering costs on preferred shares 308,035
- -----------------------------------------------------------------------------------------------------------
Other accrued expenses 202,354
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 674,532
MONEY MARKET CUMULATIVE PREFERRED SHARES (3,600 SHARES ISSUED AND OUTSTANDING)
AT LIQUIDATION VALUE PLUS CUMULATIVE UNPAID DIVIDENDS 90,041,418
- -----------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO COMMON SHARES $189,663,634
===========================================================================================================
NET ASSETS CONSIST OF:
===========================================================================================================
Common Shares, no par value; unlimited number of shares authorized, 12,230,942
shares issued and outstanding $173,622,673
- -----------------------------------------------------------------------------------------------------------
Accumulated net investment income 343,688
- -----------------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments 611,156
- -----------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 15,086,117
- -----------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO COMMON SHARES $189,663,634
COMPUTATION OF NET ASSET VALUE PER COMMON SHARE:
===========================================================================================================
NET ASSETS $189,663,634
COMMON SHARES ISSUED AND OUTSTANDING 12,230,942
NET ASSET VALUE PER SHARE $ 15.51
MARKET VALUE (CLOSING PRICE PER SHARE ON THE NEW YORK STOCK EXCHANGE) $ 15.91
</Table>
See accompanying notes to financial statements.
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003
<Page>
LEHMAN BROTHER FIRST TRUST INCOME OPPORTUNITY FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD JULY 28, 2003 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31,
2003
<Table>
INVESTMENT INCOME
===========================================================================================================
Interest $ 8,305,055
- -----------------------------------------------------------------------------------------------------------
Dividends 457,063
- -----------------------------------------------------------------------------------------------------------
8,762,118
Expenses
Management fees 609,721
- -----------------------------------------------------------------------------------------------------------
Investor service fees 50,810
- -----------------------------------------------------------------------------------------------------------
Trustees' fees and expenses 61,989
- -----------------------------------------------------------------------------------------------------------
Custodian 110,182
- -----------------------------------------------------------------------------------------------------------
Audit and tax services 46,920
- -----------------------------------------------------------------------------------------------------------
Legal 50,050
- -----------------------------------------------------------------------------------------------------------
Reports to shareholders 46,046
- -----------------------------------------------------------------------------------------------------------
Preferred shares auction 45,125
- -----------------------------------------------------------------------------------------------------------
Interest expense 145,400
- -----------------------------------------------------------------------------------------------------------
Miscellaneous 52,969
- -----------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 1,219,212
NET INVESTMENT INCOME 7,542,906
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
===========================================================================================================
Realized gain on:
Investments -- net 1,163,262
- -----------------------------------------------------------------------------------------------------------
Change in unrealized appreciation of:
Investments -- net 15,086,117
- -----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 16,249,379
- -----------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 23,792,285
===========================================================================================================
LESS DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM NET INVESTMENT INCOME (202,338)
===========================================================================================================
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS APPLICABLE TO COMMON SHARES $23,589,947
===========================================================================================================
</Table>
See accompanying notes to financial statements.
15
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE PERIOD
JULY 28, 2003*
TO
DECEMBER 31, 2003
FROM OPERATIONS:
===========================================================================================================
Net investment income $ 7,542,906
- -----------------------------------------------------------------------------------------------------------
Net realized gain on investments 1,163,262
- -----------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 15,086,117
- -----------------------------------------------------------------------------------------------------------
Dividends to preferred shareholders from net investment income (202,338)
- -----------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 23,589,947
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS:
===========================================================================================================
Net investment income (7,356,716)
- -----------------------------------------------------------------------------------------------------------
Net realized gain (192,270)
- -----------------------------------------------------------------------------------------------------------
(7,548,986)
INCREASE IN NET ASSETS DERIVED FROM COMMON SHARE TRANSACTIONS: 174,859,218
===========================================================================================================
Offering costs and underwriting commissions on preferred shares (1,236,545)
- -----------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 189,663,634
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
===========================================================================================================
Beginning of period 0
- -----------------------------------------------------------------------------------------------------------
End of period $189,663,634
- -----------------------------------------------------------------------------------------------------------
ACCUMULATED NET INVESTMENT INCOME $ 343,688
</Table>
* Commencement of operations.
See accompanying notes to financial statements.
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
FOR THE PERIOD
JULY 28, 2003*
THROUGH
DECEMBER 31, 2003
NET ASSET VALUE, BEGINNING OF PERIOD (COMMON SHARES) (a) $ 14.33
- -----------------------------------------------------------------------------------------------------------
Net Investment Income (b) 0.64
- -----------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain on Investments 1.31
- -----------------------------------------------------------------------------------------------------------
Dividends to Preferred Shareholders From Net Investment Income (0.02)
- -----------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS 1.93
Less Distributions to Common Shareholders:
- -----------------------------------------------------------------------------------------------------------
From Net Investment Income (0.60)
- -----------------------------------------------------------------------------------------------------------
From Net Realized Gains (0.02)
- -----------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS TO COMMON SHAREHOLDERS (0.62)
Common Shares Offering Costs Charged to Paid-In Capital (0.03)
- -----------------------------------------------------------------------------------------------------------
Preferred Shares Underwriting Commissions and Offering Costs Charged to Paid-In Capital (0.10)
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD (COMMON SHARES) $ 15.51
===========================================================================================================
MARKET VALUE, END OF PERIOD (COMMON SHARES) $ 15.91
===========================================================================================================
Total Return on Net Asset Value (%) (c) 12.73
- -----------------------------------------------------------------------------------------------------------
Total Return on Market Value (%) (c) 10.47
- -----------------------------------------------------------------------------------------------------------
Ratio of Expenses (excluding interest expense) to Average Net Assets Applicable to
Common Shares (%) (d) (e) 1.42
- -----------------------------------------------------------------------------------------------------------
Ratio of Interest Expense to Average Net Assets Applicable to Common Shares
(%) (d) (e) 0.19
- -----------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets Applicable to Common Shares
(%) (d) (e) 10.00
- -----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate (%) 32.08
- -----------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Shares, End of Period (000) $189,664
- -----------------------------------------------------------------------------------------------------------
MONEY MARKET CUMULATIVE PREFERRED SHARES
===========================================================================================================
Preferred Shares Outstanding, End of Period (000) $ 90,000
- -----------------------------------------------------------------------------------------------------------
Asset Coverage Per $1,000 $ 3,107
- -----------------------------------------------------------------------------------------------------------
Involuntary Liquidation Preference Per Share (f) $ 25,000
- -----------------------------------------------------------------------------------------------------------
Approximate Market Value Per Share $ 25,000
- -----------------------------------------------------------------------------------------------------------
</Table>
* Commencement of operations.
(a) Net asset value at beginning of period reflects the deduction from the
$15.00 offering price of the sales load of $0.675 per share paid by the
shareholder.
(b) Calculated using average common shares outstanding during the period.
(c) Total return on net assets value is calculated assuming a purchase at the
offering price of $15.00 less the sales load of $0.675 paid by the
shareholder on the first day and the ending net asset value per share. Total
return on market value is calculated assuming a purchase at the offering
price of $15.00 on the first day and a sale at the current market price on
the day of the period. Total return on net asset value and total return on
on market value are not reflected on a annualized basis.
(d) Annualized.
(e) Ratios do not reflect the effect of dividend payments to preferred
shareholders. Ratios to average net assets applicable to common shares
reflect the Fund's leveraged capital structure.
(f) Plus accumulated and unpaid dividends.
See accompanying notes to financial statements.
17
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
NOTES TO FINANCIAL STATEMENTS December 31, 2003
NOTE 1 -- ORGANIZATION
Lehman Brothers First Trust Income Opportunity Fund (the "Fund") was organized
as a statutory trust under the laws of the state of Delaware on April 8, 2003,
and is registered under the Investment Company act of 1940, as amended (the
"1940 Act"), as a diversified, closed-end management investment company. Lehman
Brothers Asset Management Inc. (the "Adviser") is investment adviser to the
Fund. Lincoln Capital Fixed Income Management Company, LLC (a wholly owned
subsidiary of Lehman Brothers Holdings Inc.) is the subadviser to the Fund. The
Fund's common shares are listed on the New York Stock Exchange under the symbol
LBC.
The Fund's investment objective is to seek high total return (income plus
capital appreciation). The Fund will pursue its investment objective by
investing its assets primarily in high yield debt securities.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates. The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation of its financial
statements.
a) VALUATION: Debt securities are valued using an independent pricing service
approved by the Board of Trustees, which utilizes closing market prices, market
quotations and transactions, quotations from dealers and various relationships
among securities in determining value. Securities for which closing market
prices or market quotations are not available or are not considered by the
Adviser to be reflective of a security's market value, are valued at their fair
value as determined in good faith under consistently applied procedures
established by and under the supervision of the Board of Trustees. Securities
with remaining maturities of 60 days or less are valued at amortized cost. This
method involves valuing a portfolio security initially at its cost and
thereafter assumes a constant amortization to maturity of any discount or
premium.
b) SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME: Security transactions
are recorded on a trade date basis. Dividend income is recorded on the
ex-dividend date. Interest income, including amortization of premium and
accretion of discount on securities, is recorded on the accrual basis. Realized
gains and losses on investments are recorded on the basis of identified cost.
c) ORGANIZATION AND OFFERING COSTS: The Adviser has agreed to pay all
organizational expenses and the amount by which the Fund's offering costs for
common stock (other than sales load) exceeded $0.03 per share. Offering costs
for common stock paid for the Fund were charged as a reduction of common stock
paid-in-capital at the completion of the Fund's offering and amounted to
$366,000.
Additionally, offering costs of approximately $337,000 incurred with respect to
the issuance of Preferred Shares and paid by the Fund were charged as a
reduction of common stock paid-in-capital at the completion of the Fund's
preferred shares offering.
d) FEDERAL INCOME TAXES: It is the policy of the Fund to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and distribute all of its net taxable income, including any net
realized gains on investments, to its shareholders. Therefore, no federal income
tax provision is required.
e) REVERSE REPURCHASE AGREEMENTS: The Fund is permitted to enter into reverse
repurchase agreements with banks or securities firms deemed creditworthy by the
Adviser. A reverse repurchase agreement involves the sale of a security by the
Fund, with an agreement to repurchase the same or substantially similar security
at an agreed upon price and date. Securities purchased subject to repurchase
agreements must have an aggregate market value greater than or equal to the
repurchase price plus accrued interest at all times. Reverse repurchase
agreements involve the risk that the market value of the securities purchased
with the proceeds from the sale of securities received by the Fund may decline
below the price of the securities that the Fund is obligated to repurchase.
There were no reverse repurchase agreements outstanding at December 31, 2003.
NOTE 3 -- FEES AND TRANSACTIONS WITH RELATED PARTIES
The Fund pays all expenses incurred in connection with the operations of the
Fund. These expenses, among others, include custodian and fund accounting fees,
legal and audit fees, fees and
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003
<Page>
expenses of the disinterested Trustees, registration fees, and printing
expenses.
The Fund pays the Adviser a monthly fee computed at an annual rate of 0.60% of
the Fund's average daily Managed Assets (net assets, including assets
attributable to any outstanding preferred shares, plus the aggregate principal
amount of any borrowings). The Adviser is responsible for developing,
implementing and supervising the Fund's investment program and providing certain
administrative services to the Fund. The Adviser has retained Lincoln Capital
Fixed Income Management Company, LLC ("Lincoln Capital"), to serve as the
sub-adviser of the Fund and to manage the Fund's investment portfolio. The
Adviser compensates Lincoln Capital for its services as sub-adviser. The Adviser
pays Lincoln Capital a monthly sub-advisery fee calculated at the following
annual percentage rates of the Fund's average daily Managed Assets: 0.55% on the
Fund's first $25 million of Managed Assets, 0.45% on the next $25 million of
Managed Assets, 0.35% on the next $50 million of Managed Assets, and 0.30% on
Managed Assets that are in excess of $100 million. The Adviser and Lincoln
Capital are wholly owned subsidiaries of Lehman Brothers Holdings Inc., a
publicly traded corporation.
First Trust Portfolio L.P. ("First Trust") serves as the Fund's distribution and
marketing agent, and investor servicing agent. As the Fund's distribution and
marketing agent, First Trust provides certain distribution and marketing
services for the Fund's common shares including preparing marketing materials
and presentations, developing contacts with brokers whose clients may have an
interest in acquiring Fund shares and replying to information requests from
prospective investors. In consideration for these services, First Trust receives
a fee paid by the Adviser.
First Trust, as the investor servicing agent, developed and maintains a website
for the Fund, assists in the review of shareholder material, assists in the
dissemination of the Fund's net asset value and market price, provides ongoing
shareholder and account maintenance services, replies to information requests
from shareholders and aids in secondary market support. In consideration for
these services, the Fund pays First Trust a monthly fee computed at the annual
rate 0.05% of the Fund's average daily Managed Assets. For the period ended
December 31, 2003, the Fund paid First Trust, as the investor servicing agent, a
fee equal to $50,810.
During the period July 28, 2003 (commencement of operations) through December
31, 2003, Lehman Brothers Inc., an affiliate of the Adviser, received
underwriting commissions equal to $900,000 in connection with the offering of
the Fund's preferred stock.
The Fund pays no compensation to its officers or to its Trustees who are
interested Trustees of the Adviser or its affiliates.
NOTE 4 -- INVESTMENT IN SECURITIES
For the period July 28, 2003 (commencement of operations) through December 31,
2003, purchases and sales of investments, other than short-term securities,
aggregated $327,412,850 and $69,277,642, respectively.
NOTE 5 -- MONEY MARKET CUMULATIVE PREFERRED SHARES
The Fund is authorized to issue 3,750 Money Market Cumulative Preferred Shares
("MMP"), each without par value. On October 22, 2003, the Fund issued 3,600 MMP
with proceeds of $90,000,000 in a public offering. The underwriting commissions
and offering costs of $1,236,545 were incurred in connection with the offering
and were charged directly to paid-in capital of the common shares. Dividends on
the MMP are cumulative at a rate which was established at the offering and have
been reset every twenty-eight days thereafter by an auction. The Fund pays
commissions to certain broker-dealers at the end of each auction at an annual
rate of 0.25%. For the period October 22, 2003 (date of issuance of MMP) through
December 31, 2003, Lehman Government Securities, Inc., an affiliate of the
Adviser, earned $43,767 in commissions.
The MMP are redeemable at the option of the Fund at a redemption price equal to
$25,000 per share, plus accumulated and unpaid dividends, on any dividend
payment date. The MMP are also subject to mandatory redemption at a redemption
price equal to $25,000 per share, plus accumulated and unpaid dividends, if the
Fund defaults on its asset maintenance requirements with respect to the MMP and
fails to cure such a default within the time permitted. If the dividends on the
MMP shall remain unpaid in an amount equal to two full years' dividends, the
holders of the MMP, as a class, have the right to elect a majority of the Board
of Trustees. In general, the holders of the MMP and the common shares have equal
voting rights of one vote per share, except that the holders of the MMP, as a
19
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
NOTES TO FINANCIAL STATEMENTS CONTINUED
separate class, have the right to elect at least two members of the Board of
Trustees and to vote under certain other circumstances specified in the Fund's
Amended By-Laws. The MMP have a liquidation preference of $25,000 per share,
plus accumulated and unpaid dividends. The Fund is required to maintain certain
asset coverage with respect to the MMP as defined in the Fund's Amended By-Laws
and the Investment Company Act of 1940.
NOTE 6 -- DISTRIBUTIONS TO SHAREHOLDERS
The Fund intends to make monthly distributions of net investment income to
common shareholders, after payments of any dividends on outstanding MMP.
Distributions to common shareholders are recorded on the ex-dividend date.
Distributions to preferred shareholders are recorded daily and are payable at
the end of each dividend period. Each dividend payment period for the MMP is
generally twenty-eight days. For the period ended December 31, 2003, the
dividend rates for MMP ranged from 1.14% to 1.20%. The dividend rate for MMP on
December 31, 2003 was 1.20%. In addition, at least annually, the Fund intends to
distribute net capital gains, if any. The timing and characterization of certain
income and capital gains distributions are determined in accordance with federal
tax regulations which may differ from accounting principles generally accepted
in the United States of America. Permanent differences between book and tax
accounting relating to distributions are reclassified to paid-in capital.
NOTE 7 -- SHARES OF BENEFICIAL INTEREST
The Fund's Declaration of Trust authorizes the Trustees to issue an unlimited
number of common shares for the Fund, each without par value. Transactions in
common shares were as follows:
<Table>
<Caption>
FOR THE
PERIOD
JULY 28, 2003 (a)
TO DECEMBER 31, 2003
-------------------------
SHARES AMOUNT
-------------------------
Shares purchased by investment
advisor 6,667 $ 100,005
Initial Public Offering on
July 28, 2003 (b) 11,000,000 157,245,000
Purchase of additional shares by
underwriters on August 22, 2003
and September 16, 2003 (c) 1,200,000 $ 17,154,000
Shares issued pursuant to the Fund's
dividend reinvestment plan 24,275 360,213
---------- -------------
Increase derived from
capital shares transactions 12,230,942 $ 74,859,218
========== =============
</Table>
(a) Commencement of operations.
(b) After deduction of underwriting commissions and offering costs of
$7,755,000.
(c) After deduction of underwriting commissions and offering costs of $846,000.
NOTE 8 -- CONCENTRATION OF CREDIT RISK
The Fund will normally invest at least 80% of its Managed Assets in investments
offering high current income, which generally will be in the lower rating
categories of recognized rating agencies. These investments are regarded as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations and will generally
involve more credit risk than securities in the higher rating categories. In
addition, the trading market for high yield investments may be relatively less
liquid than the market for higher-rated investments.
NOTE 9 -- FEDERAL INCOME TAX INFORMATION
For the period ended December 31, 2003, the tax character of distributions paid
was $7,751,324 of ordinary income.
As of December 31, 2003, the components of accumulated earnings on a tax basis
were as follows:
<Table>
Undistributed ordinary income $ 660,326
----------------------------------------------------------
Unrealized gains 15,380,635*
----------------------------------------------------------
TOTAL ACCUMULATED GAINS $ 16,040,961
</Table>
* The difference between book-basis and tax-basis net unrealized gains is
attributed primarily to wash sales and return of capital.
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003
<Page>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees
Lehman Brothers First Trust Income Opportunity Fund
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Lehman Brothers First Trust Income Opportunity
Fund (the "Fund") as of December 31, 2003, and the related statements of
operations and of changes in net assets and the financial highlights for the
period July 28, 2003 (commencement of operations) through December 31, 2003.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights. Our procedures
included confirmation of securities owned as of December 31, 2003, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund at December 31, 2003, the results of its operations, changes in its net
assets and the financial highlights for the period July 28, 2003 (commencement
of operations) through December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Ernst & Young LLP
New York, New York
February 10, 2004
21
<Page>
DIVIDEND REINVESTMENT PLAN (UNAUDITED)
The Fund has a Dividend Reinvestment Plan (the "Plan") commonly referred to as
an "opt-out" plan. Each common shareholder will have all distributions of
dividends and capital gains automatically reinvested in additional common shares
by Investors Bank & Trust Company, as agent for shareholders pursuant to the
Plan (the "Plan Agent"), unless the shareholder elects to receive cash or unless
the shares are registered in the name of a broker-dealer or other nominee (that
is, in "street name") and the respective nominee does not participate in the
Plan. For Plan participants the Plan Agent will either (i) effect purchases of
common shares under the Plan in the open market or (ii) distribute newly issued
common shares of the Fund. Shareholders who elect not to participate in the Plan
will receive all distributions in cash paid by check mailed directly to the
shareholder of record (or if the shares are held in street or other nominee
name, then to the nominee) by the Plan Agent, as dividend disbursing agent.
Certain broker-dealers and nominees do not permit their clients to participate
in dividend reinvestment plans. Shareholders whose common shares are held in the
name of a broker or nominee should contact the broker or nominee to determine
whether and how they may participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the Plan.
After the Fund declares a dividend or makes a capital gain distribution, the
Plan Agent will, as agent for the participants, either (i) receive the cash
payment and use it to buy common shares in the open market, on the New York
Stock Exchange or elsewhere, for the participants' accounts or (ii) distribute
newly issued common shares of the Fund on behalf of the participants. The Plan
Agent will receive cash from the Fund with which to buy common shares in the
open market if, on the determination date, the net asset value per share exceeds
the market price per share plus estimated brokerage commissions on that date.
The Plan Agent will receive the dividend or distribution in newly issued common
shares of the Fund if, on the determination date, the market price per share
plus estimated brokerage commissions equals or exceeds the net asset value per
share of the Fund on that date. The number of shares to be issued will be
computed at a per share rate equal to the greater of (i) the net asset value or
(ii) 95% of the closing market price per share on the payment date.
Participants in the Plan may withdraw from the Plan upon written notice to the
Plan Agent. Such withdrawal will be effective immediately if received not less
than ten days prior to a distribution record date; otherwise, it will be
effective for all subsequent dividend record dates. When a participant withdraws
from the Plan or upon termination of the Plan as provided below, certificates
for whole common shares credited to his or her account under the Plan will be
issued and a cash payment will be made for any fraction of a common share
credited to such account. In the alternative, upon receipt of the participant's
instructions, common shares will be sold and the proceeds sent to the
participant less brokerage commissions and any applicable taxes.
The Plan Agent maintains each shareholder's account in the Plan and furnishes
confirmations of all acquisitions made for the participant. Common shares in the
account of each Plan participant will be held by the Plan Agent on behalf of the
participant. Proxy material relating to shareholders' meetings of the Fund will
include those shares purchased as well as shares held pursuant to the Plan.
In the case of shareholders, such as banks, brokers or nominees, which hold
common shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of common shares certified from
time to time by the record shareholders as representing the total amount
registered in the record shareholder's name and held for the account of
beneficial owners who are participants in the Plan.
The Plan Agent's fees for the handling of reinvestment of dividends and other
distributions will be paid by the Fund. Each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open
market purchases in connection with the reinvestment of distributions. There are
no other charges to participants for reinvesting dividends or capital gain
distributions; however, the Fund reserves the right to amend the Plan to include
a service charge payable by the participants.
The automatic reinvestment of dividends and other distributions will not relieve
participants of any income tax that may be payable or required to be withheld on
such dividends or distributions.
The Fund and the Plan Agent reserve the right to amend or terminate the Plan.
All correspondence concerning the Plan should be directed to: Investors Bank &
Trust Company, 200 Clarendon Street, Mail Stop OPS22, Boston, MA 02116
(Telephone) 617-937-6226.
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003
<Page>
TRUSTEE AND OFFICER TABLE (UNAUDITED)
Set forth below is information about the Trustees. The address for each Trustee
is Lehman Brothers Asset Management Inc., 399 Park Avenue, New York, NY 10022.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS
OVERSEEN IN OTHER
LEHMAN TRUSTEESHIPS
TERM OF BROTHERS HELD OUTSIDE OF
OFFICE AND ASSET LEHMAN
LENGTH OF MANAGEMENT BROTHERS ASSET
NAME AND POSITION TIME PRINCIPAL OCCUPATIONS FOR LAST FIVE FUNDS MANAGEMENT
DATE OF BIRTH WITH FUND SERVED YEARS COMPLEX FUNDS COMPLEX
- ------------------------------------------------------------------------------------------------------------------------
General James E. Dalton, Trustee 3 Year Term Board of Directors, Chair of the 1 None
USAF (Retired) and Trustee Audit Committee at William Lyon
10/17/1930 since 2003 Homes, a home building business
(since 1991); Director of Defense
Group Inc., a defense business
(since 1999); Director of Finance
America, a mortgage business (since
2002); formerly, Vice President of
Logicon Inc., a wholly-owned
subsidiary of Northrop Grumman
(1985-1998); General Manager of
Logicon's Defense Technology Group
(1995-1998).
- ------------------------------------------------------------------------------------------------------------------------
Margaret M.(Peggy) Eisen Trustee 1 Year Term Board of Directors, Chair of 1 Board of Trustees
6/19/1953 and Trustee Compensation Committee, and Member for Liberty Acorn
since 2003 of the Audit Committee of Family of Mutual
Antigenics Corporation, a Funds of Wanger
biopharmaceutical company (since Asset Management
2003); Managing Director and Chief (since 2002).
Investment Officer of Harbor Hills
Capital, an investment banking and
asset management firm focused on
entrepreneurs and ultra-high net
worth individuals (since 2003);
Managing Director of DeGuardiola
Advisors, an investment bank
specializing in mergers and
acquisitions of investment
management firms (2001-2002);
Managing Director of North American
Equities of General Motors
Investment Management Corporation
(1995-2001).
- ------------------------------------------------------------------------------------------------------------------------
Michael M. Knetter Trustee 2 Year Term Dean of the University of 1 None
4/8/1960 and Trustee Wisconsin-Madison School of
since 2003 Business (since 2002); prior
thereto, Professor of International
Economics and Associate Dean at the
Amos Tuck School of Business --
Dartmouth College (1997-2002).
- ------------------------------------------------------------------------------------------------------------------------
</Table>
23
<Page>
TRUSTEE AND OFFICER TABLE (UNAUDITED) CONTINUED
INDEPENDENT TRUSTEES:
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS
OVERSEEN IN OTHER
LEHMAN TRUSTEESHIPS
TERM OF BROTHERS HELD OUTSIDE OF
OFFICE AND ASSET LEHMAN
LENGTH OF MANAGEMENT BROTHERS ASSET
NAME AND POSITION TIME PRINCIPAL OCCUPATIONS FOR LAST FIVE FUNDS MANAGEMENT
DATE OF BIRTH WITH FUND SERVED YEARS COMPLEX FUNDS COMPLEX
- ------------------------------------------------------------------------------------------------------------------------
Eugene A. Matthews Trustee 1 Year Term President of Nintai Capital, Inc., 1 None
11/9/1958 and Trustee an investment advisory firm that is
since 2003 primarily focused on Japan's
private equity market and general
Asian investments (since 1997);
Senior Fellow of Asia Studies for
the Council of Foreign Relations
(2001-2003); formerly, Partner of
Apax-Globis Japan, Inc., a private
equity investment firm specializing
in venture capital and buyout
investments in Japan (1998-2000).
- ------------------------------------------------------------------------------------------------------------------------
George W. Morriss Trustee 3 Year Term Executive Vice President and Chief 1 None
9/24/1947 and Trustee Financial Officer of People's Bank,
since 2003 a diversified financial services
company providing commercial,
consumer, insurance and investment
services (1991-2001).
- ------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES:
- ------------------------------------------------------------------------------------------------------------------------
Stephanie E. Dolan Trustee and 2 Year Term Senior Vice President of Lehman 1 None
4/4/1963 Assistant and Trustee Brothers Inc.; Controller of Lehman
Treasurer since 2003 Brothers Asset Management.
- ------------------------------------------------------------------------------------------------------------------------
Scott Hall Trustee 2 Year Term Managing Director of First Trust 1 None
1/12/1957 and Trustee Advisors L.P. and First Trust
since 2003 Portfolios L.P. (since 1992)
- ------------------------------------------------------------------------------------------------------------------------
Kurt A. Locher Chairman 3 Year Term Managing Director of Lehman 1 None
5/9/1966 and Trustee and Trustee Brothers Inc. (since 1998);
since 2003 Managing Director of Lehman
Brothers Asset Management (since
2003); Vice President of Lincoln
Capital (since 2003); Director of
BNC Mortgage Inc. (since 2000),
Finance America LLC (since 1999),
and TrueLink Inc. (since 1999);
prior thereto President of Lehman
Brothers Bank, F.S.B. (1999); and
Senior Vice President of Lehman
Brothers Inc. (1995-1998).
- ------------------------------------------------------------------------------------------------------------------------
</Table>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND ANNUAL REPORT 2003
<Page>
Set forth below is information about the officers of the Fund. Each officer
serves for a one-year term. The address for each officer is Lehman Brothers
Asset Management Inc., 399 Park Avenue, New York, NY 10022.
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------------
NAME AND POSITION
DATE OF BIRTH WITH FUND PRINCIPAL OCCUPATIONS FOR LAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------
Bradley Tank President Chief Executive Officer of Lehman Brothers Asset Management; Managing Director
9/29/1957 and Global Head of Fixed Income Asset Management for Lehman Brothers (since
2002); Director of Fixed Income for Strong Capital Management in Menomonee
Falls, Wisconsin (1990-2002); formerly a member of the Office of the CEO and
Institutional and Intermediary Distribution; Named "Runner Up" for Morningstar
Mutual Fund Manager of the year (1997); Vice President at Salomon Brothers in
the Government, Mortgage and Financial Institutions businesses (1982-1990).
- ------------------------------------------------------------------------------------------------------------------------
Edward Grieb Treasurer Chief Financial Officer of Lehman Brothers Asset Management; Managing Director
9/22/1961 and Assistant Controller for Lehman Brothers; prior thereto, Audit Manager with
Arthur Andersen serving clients in financial services, advertising and consumer
products industries (1984-1991).
- ------------------------------------------------------------------------------------------------------------------------
Jonathan Morris Secretary Senior Vice President of Lehman Brothers Asset Management; Senior Vice President
3/1/1956 and General Counsel for Lehman Brother's Wealth and Asset Management business,
including Lehman Brothers Private Client Services Division and asset management
and investment advisory business (since 1997); prior thereto, Associate General
Counsel of Travelers Group and its predecessor companies (1998-1996); formerly,
Senior Vice President for Shearson Lehman Brothers (1993-1997) and First Vice
President for Shearson Lehman Brothers (1988-1991); prior thereto litigation
counsel for Seward & Kissel. Admitted to New York and Connecticut bars.
- ------------------------------------------------------------------------------------------------------------------------
</Table>
The Fund's Statement of Additional Information includes additional information
about the Trustees of the Fund and is available without charge, upon request, by
calling 1-800-988-5196 or visting the Fund's website at
www.lbftincomeopportunity.com.
A description of the Fund's proxy voting policies and procedures is available
(1) on the Fund's website at www.lbftincomeopportunity.com and (2) on the
Commission's website at www.sec.gov.
25
<Page>
[LEHMAN BROTHERS LOGO]
(C)2004 LEHMAN BROTHERS INC.ALL RIGHTS RESERVED. LB10183
<Page>
ITEM 2. CODE OF ETHICS.
At a Board meeting held on November 18, 2003, the Registrant adopted a code of
ethics that applies to the Registrant's President/Chief Executive Officer and
Treasurer/Chief Financial Officer. For the year ended December 31, 2003, there
were no amendments to a provision of the code of ethics, nor were there any
waivers granted from a provision of the code of ethics. A copy of the
Registrant's code of ethics is filed with this Form N-CSR under Item 10(a).
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
At a Board meeting held on June 26, 2003, the Registrant's Board of Trustees
designated George Morriss as the Registrant's Audit Committee Financial Expert.
George Morriss is deemed "independent" for purposes of this item because (i) he
does not accept directly or indirectly any consulting, advisory, or compensatory
fee from the issuer (other than in his capacity as a committee member or a
member of the board of trustees); and (ii) he is not an "interested person" of
the Registrant as that term is defined in Section 2(a)(19) of the Investment
Company Act of 1940, as amended (the "1940 Act").
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES: The aggregate fees billed by the Registrant for
professional services rendered by its independent auditors, Ernst
& Young LLP, for the audit of the Registrant's annual financial
statements and for the initial seed audit for 2003 were $35,000
and $8,400, respectively.
(b) AUDIT RELATED FEES: The aggregate fees billed by the Registrant
for professional services rendered by its independent auditors,
Ernst & Young LLP, for the review of related filing of Form N-2
for 2003 was $16,800.
(c) TAX FEES: The aggregate fees accrued for professional services
rendered by Ernst & Young LLP for tax compliance, tax advice, and
tax planning for 2003 was $4,000. Such services included the
preparation of the year-end tax provision and excise tax work.
(d) ALL OTHER FEES: The aggregate fees billed by the Registrant for
professional services rendered by its independent auditors, Ernst
& Young LLP, for the initial and year end agreed upon procedures
reporting for the preferred shares for 2003 was $10,000.
(e) (1) At a Board meeting held on June 26, 2003, the Registrant's
Audit Committee pre-approved the provision of audit and non-audit
services by Ernst & Young LLP for the fiscal year ending December
31, 2003. The Registrant has not delegated the pre-approval of
audit and non-audit services to a member of the audit committee.
Rather, any action of the audit committee with respect to the
pre-approval process requires the vote of a majority of the audit
committee members present, whether in person or otherwise, at the
meeting at which such action is considered. One member of the
audit committee shall constitute a quorum for the purpose of
taking any action.
(2) Not applicable.
(f) Not applicable.
(g) Aggregate non-audit fees billed to the Registrant by the
Registrant's accountant was $30,800 for the fiscal year ended
December 31, 2003. Aggregate non-audit fees billed to the
Investment Adviser by the Registrant's accountant were $3,048,000
and $2,376,000 for the fiscal years ended December 31, 2003 and
2002, respectively.
(h) Not applicable.
ITEM 5. LISTED COMPANY AUDIT COMMITTEES.
At a Board meeting held on June 26, 2003, the Board of Trustees of the
Registrant established an audit committee for the purpose of overseeing the
accounting and financial reporting processes of the Registrant and audits of the
financial
2
<Page>
statements of the Registrant in accordance with Section 3(a)(58)(A) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
To be eligible to serve as a member of the Registrant's audit committee, a
trustee must be an "Independent Trustee," which term shall mean a Trustee (i)
who is not an "interested person," as that term is defined in Section 2(a)(19)
of the 1940 Act, as amended of the Registrant; and (ii) who has not accepted
directly or indirectly any consulting, advisory, or other compensatory fee from
the Registrant (other than fees for serving as a trustee or committee member).
The Registrant's Audit Committee Members are:
James E. Dalton
Margaret M. Eisen
Michael M. Knetter
Eugene A. Matthews
George Morriss
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Board of the Registrant has delegated to the Registrant's sub-advisor (the
"Sub-Advisor") the authority to vote proxies on behalf of the Fund and has
approved the Sub-Advisor's proxy voting guidelines and procedures. A copy of the
Sub-Advisor's proxy voting procedures and guidelines are filed with this Form
N-CSR under Item 10.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) Within the 90-day period immediately preceding the filing of this
Report, the Registrant's Chief Executive Officer and Chief Financial Officer
have each evaluated the effectiveness of the Registrant's "Disclosure Controls
and Procedures" and have concluded that they were effective. As such term is
used above, the Registrant's Controls and Procedures are controls and other
procedures of the Registrant that are designed to ensure that information
required to be disclosed by the Registrant in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission's
rules and forms. Disclosure Controls and Procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by the Registrant in such reports is accumulated and communicated to
the Registrant's management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
(b) There were no significant changes in the Registrant's internal controls
over financial reporting or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
ITEM 10. EXHIBITS.
(a) Code of Ethics is attached.
(b) Proxy voting procedures and guidelines are attached.
(c) Certification letters are attached.
(d) Section 906 Certifications are attached.
3
<Page>
Pursuant to the requirements of the Exchange Act and the 1940 Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Lehman Brothers/First Trust Income Opportunity Fund
By: /S/ Bradley Tank
------------------------------------------------------
Bradley Tank, President/Chief Executive Officer
Date: March 3, 2004
Pursuant to the requirements of the Exchange Act and the 1940 Act, 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/ Bradley Tank
-------------------------------------------------------------------
Bradley Tank, President/Chief Executive Officer
Date: March 3, 2004
By: /S/ Edward Grieb
-------------------------------------------------------------------
Edward Grieb, Treasurer/Chief Financial Officer
Date: March 3, 2004
4