<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: 12/31/2004
------------------------
Date of reporting period: 12/31/2004
------------------------
<Page>
ITEM 1. REPORTS TO STOCKHOLDERS.
The annual report for the period January 1, 2004 through December 31, 2004 is
filed herewith.
<Page>
ANNUAL REPORT 2004
LEHMAN BROTHERS
FIRST TRUST INCOME
OPPORTUNITY FUND
[GRAPHIC]
LEHMAN BROTHERS
<Page>
CONTENTS
<Table>
Chairman's and President's Letter 2
Portfolio Manager's Report 3
Fund Overview 4
Schedule of Investments 5
Notes to Schedule of Investments 15
Statement of Assets and Liabilities 16
Statement of Operations 17
Statements of Changes in Net Assets 18
Financial Highlights 19
Notes to Financial Statements 20
Report of Independent Registered
Public Accounting Firm 25
Dividend Reinvestment Plan (Unaudited) 26
Trustees and Officers Table (Unaudited) 27
</Table>
<Page>
CHAIRMAN'S AND PRESIDENT'S LETTER
Dear Shareholder:
We are pleased to present to you this annual report of the Lehman Brothers First
Trust Income Opportunity Fund for the year ended December 31, 2004. The report
includes portfolio commentary, a listing of the Fund's investments, and its
financial statements for the reporting period.
In the bond market, 2004 proved to be a bumpy but ultimately gratifying time, as
bonds advanced for the fifth consecutive year in spite of a concerted effort by
the Federal Reserve to tighten monetary conditions. High-yield bonds, in
particular, generated strong gains for the year as their spreads over Treasuries
narrowed steadily, reflecting healthy economic conditions as well as stronger
corporate balance sheets.
The Fund's investment objective is to seek high total return through income plus
capital appreciation. The Fund pursues this investment objective by investing
primarily in high-yield debt securities.* In seeking to achieve its investment
objective, the Fund employs leverage through the issuance of Money Market
Cumulative Preferred Shares. As noted in the accompanying Notes to the Financial
Statements, the use of leverage can enhance the return of the Fund, but also
involves a certain degree of risk for holders of common shares (Note #9).
Portfolio manager Ann H. Benjamin and her team of experienced 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 thank you for your trust in Lehman Brothers Asset Management and Lincoln
Capital. We will continue to do our best to keep earning it.
Sincerely,
/s/ Kurt A. Locher /s/ Brad Tank
Kurt A. Locher Brad Tank
CHAIRMAN AND TRUSTEE PRESIDENT
- ----------
* Portfolios that invest in bonds and other fixed income securities can
provide regular income and have historically been less volatile than most
stock funds. However, they are subject to risks including credit risk,
default on principal or interest payments and interest rate fluctuations.
High-yield bonds, also known as "junk bonds," are subject to additional
risks such as the increased risk of default.
<Page>
PORTFOLIO MANAGER'S REPORT
For the annual reporting period ended December 31, 2004, the Lehman Brothers
First Trust Income Opportunity Fund (NYSE: LBC) returned 11.99% on a Net Asset
Value (NAV) basis and 15.48% on a market value basis.
High-yield bonds* generated strong gains for the year as their spreads over
Treasuries narrowed, reflecting healthy economic conditions, as well as stronger
corporate balance sheets. The first half of 2004 was marked by ups and downs in
the high-yield market. The Lehman Brothers U.S. High Yield Index rose more than
3% in the first few weeks of January, before falling back modestly due to an
increase in issuance. Returns stabilized in March, helped by declining Treasury
rates, but declined again in April and May. However, the winds shifted in June,
as an improving economy combined with relatively benign inflation news and only
a "measured" tightening campaign by the Federal Reserve, helped to lift the
high-yield market over the rest of 2004.
Over the 12-month reporting period, the sectors that contributed to our
outperformance versus the benchmark included Gaming, Media, Metals and Mining,
Health Care, and Cable. The sectors that detracted from results were Wireless,
Restaurants, and Telecommunications, all of which underperformed primarily due
to issue selection.
Looking ahead, we believe that the high-yield market will continue its strong
performance. However, if the Federal Reserve decides to raise interest rates
more aggressively, a subsequent rise in U.S. Treasury rates may negatively
affect overall high-yield returns. In addition, an adverse increase in
short-term interest rates would increase the cost of the outstanding Money
Market Preferred Shares issued by the Fund and thus could negatively impact the
performance of the Fund. The good news is that, even with healthy new issuance,
we anticipate a reasonable level of investor demand for high-yield securities,
particularly from pension plan sponsors.
Fundamental business knowledge, credit research and proprietary financial
modeling have been essential to our record in managing this portfolio. Relative
value analysis across issuers, business sectors, and credit sectors drives our
portfolio positioning. By maintaining this investment approach, we will seek to
continue providing high total returns to our shareholders.
Sincerely,
/s/ Ann H. Benjamin
Ann H. Benjamin
PORTFOLIO MANAGER
- ----------
Past performance is not indicative of future results.
* Portfolios that invest in bonds and other fixed income securities can
provide regular income and have historically been less volatile than most
stock funds. However, they are subject to risks including credit risk,
default on principal or interest payments and interest rate fluctuations.
High-yield bonds, also known as "junk bonds," are subject to additional
risks such as the increased risk of default.
3
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
FUND OVERVIEW (AS OF 12/31/04)(1)
PERFORMANCE HIGHLIGHTS
<Table>
<Caption>
NOVEMBER 30- Q4 YEAR CUMULATIVE TOTAL RETURN
INCEPTION DATE DEC 31, 2004 2004 2004 SINCE INCEPTION
-------------- ------------ ---- ----- ----------------------
NAV 07/28/03 1.99% 6.52% 11.99% 26.24%
Market Price 07/28/03 3.26% 6.24% 15.48% 27.57%
</Table>
FUND FACTS
<Table>
Ticker NYSE: LBC
Market Price (12/31/2004) $ 16.48
Net Asset Value (NAV) $ 15.58
Premium / (Discount) 5.78%
Shares outstanding: 12,239,390
CUSIP number: 525178 10 9
Inception Date: 7/28/03
</Table>
PORTFOLIO CHARACTERISTICS
<Table>
Portfolio Turnover 106.76%
Expense Ratio 1.48%
Wtd. Avg. Maturity 8.36 Years
Average Coupon 8.65%
Average Credit Quality B
Portfolio Composition -- % High Yield 97.40%
</Table>
CAPITAL STRUCTURE AND LEVERAGE ($MM)
<Table>
Total Managed Assets $ 280.8
Net Assets Attributable to Common Shares $ 190.7
Net Assets Attributable to Preferred Shares $ 90.1
Net Assets Attributable to Other Borrowings --
Leverage (% of total net assets) 32.1%
</Table>
[CHART]
CREDIT QUALITY BREAKDOWN
(% OF TOTAL INVESTMENTS AND CASH)(2)
<Table>
Cash (AAA) 0.5%
BBB 6.4%
BB 30.2%
B 44.6%
CCC 16.9%
Not Rated 1.4%
</Table>
[CHART]
MARKET PRICE AND NAV PERFORMANCE
<Table>
<Caption>
PRICE($) NAV($) PREMIUM/DISCOUNT(%)
-------- ------ -------------------
7/29/2003 $ 15.00 $ 14.30 4.9%
8/8/2003 $ 15.00 $ 14.16 5.9%
8/15/2003 $ 15.10 $ 13.98 8.0%
8/22/2003 $ 14.56 $ 14.39 1.2%
8/29/2003 $ 14.45 $ 14.60 -1.0%
9/5/2003 $ 14.75 $ 14.75 0.0%
9/12/2003 $ 14.83 $ 14.93 -0.7%
9/19/2003 $ 14.82 $ 14.90 -0.5%
9/26/2003 $ 14.78 $ 14.92 -0.9%
10/3/2003 $ 14.93 $ 14.87 0.4%
10/10/2003 $ 15.14 $ 15.00 0.9%
10/17/2003 $ 15.10 $ 14.95 1.0%
10/24/2003 $ 15.23 $ 14.80 2.9%
10/31/2003 $ 15.25 $ 14.88 2.5%
11/7/2003 $ 15.27 $ 14.94 2.2%
11/14/2003 $ 15.48 $ 15.01 3.1%
11/21/2003 $ 15.14 $ 14.99 1.0%
11/28/2003 $ 15.26 $ 15.06 1.3%
12/5/2003 $ 15.36 $ 15.34 0.1%
12/12/2003 $ 15.32 $ 15.43 -0.7%
12/19/2003 $ 15.43 $ 15.60 -1.1%
12/26/2003 $ 15.49 $ 15.46 0.2%
12/31/2003 $ 15.91 $ 15.51 2.8%
1/9/2004 $ 15.79 $ 15.92 -0.8%
1/16/2004 $ 16.59 $ 15.98 3.8%
1/23/2004 $ 16.25 $ 15.95 1.9%
1/30/2004 $ 16.10 $ 15.60 3.2%
2/6/2004 $ 16.00 $ 15.31 4.5%
2/13/2004 $ 16.52 $ 15.49 6.6%
2/20/2004 $ 15.99 $ 15.22 5.1%
2/27/2004 $ 16.17 $ 15.17 6.6%
3/5/2004 $ 16.03 $ 15.27 5.0%
3/12/2004 $ 16.22 $ 15.25 6.4%
3/19/2004 $ 16.43 $ 15.12 8.7%
3/26/2004 $ 16.02 $ 14.98 6.9%
3/31/2004 $ 16.20 $ 15.09 7.4%
4/2/2004 $ 16.16 $ 15.06 7.3%
4/8/2004 $ 15.90 $ 15.16 4.9%
4/16/2004 $ 14.82 $ 15.17 -2.4%
4/23/2004 $ 14.90 $ 15.14 -1.6%
4/30/2004 $ 14.71 $ 15.02 -2.1%
5/7/2004 $ 14.39 $ 14.65 -1.8%
5/21/2004 $ 13.87 $ 14.35 -3.5%
5/28/2004 $ 14.94 $ 14.54 2.8%
6/4/2004 $ 14.95 $ 14.54 2.8%
6/10/2004 $ 14.98 $ 14.62 2.5%
6/18/2004 $ 14.95 $ 14.71 1.6%
6/25/2004 $ 14.75 $ 14.69 0.4%
6/30/2004 $ 14.85 $ 14.67 1.2%
7/2/2004 $ 14.94 $ 14.72 1.5%
7/9/2004 $ 15.00 $ 14.85 1.0%
7/16/2004 $ 15.20 $ 14.98 1.5%
7/23/2004 $ 15.18 $ 14.85 2.2%
7/30/2004 $ 15.15 $ 14.82 2.2%
8/13/2004 $ 15.44 $ 14.81 4.3%
8/20/2004 $ 15.55 $ 14.88 4.5%
8/27/2004 $ 15.49 $ 14.85 4.3%
8/31/2004 $ 15.58 $ 14.87 4.8%
8/13/2004 $ 15.44 $ 14.81 4.3%
8/20/2004 $ 15.55 $ 14.88 4.5%
8/27/2004 $ 15.49 $ 14.85 4.3%
8/31/2004 $ 15.58 $ 14.87 4.8%
9/3/2004 $ 15.53 $ 14.91 4.2%
9/10/2004 $ 15.73 $ 15.06 4.4%
9/17/2004 $ 15.85 $ 15.11 4.9%
9/24/2004 $ 15.67 $ 15.03 4.3%
10/1/2004 $ 15.75 $ 15.03 4.8%
10/15/2004 $ 16.29 $ 15.20 7.2%
10/22/2004 $ 16.13 $ 15.08 7.0%
10/29/2004 $ 15.86 $ 15.32 3.5%
11/5/2004 $ 16.30 $ 15.53 5.0%
11/12/2004 $ 16.10 $ 15.49 3.9%
11/19/2004 $ 16.35 $ 15.57 5.0%
11/26/2004 $ 16.34 $ 15.48 5.6%
12/3/2004 $ 16.40 $ 15.43 6.3%
12/10/2004 $ 16.10 $ 15.55 3.5%
12/17/2004 $ 16.48 $ 15.63 5.4%
12/23/2004 $ 16.26 $ 15.55 4.6%
12/31/2004 $ 16.48 $ 15.58 5.7%
</Table>
[CHART]
TOP INDUSTRIES (% OF TOTAL INVESTMENTS)
<Table>
Media Broadcasting & Publishing 15.6%
Telephone Systems 6.1%
Entertainment & Leisure 11.0%
Electric Utilities 11.3%
Multiple Utilities 3.8%
Oil & Gas 6.6%
Health Care Providers 3.8%
Transportation 4.4%
Commercial Services 4.7%
Chemicals 3.9%
Other 28.8%
</Table>
[CHART]
MATURITY BREAKDOWN
(% OF TOTAL INVESTMENTS AND CASH)
<Table>
LESS THAN 1 Year 0.5%
1-3 Years 2.9%
3-5 Years 12.8%
5-7 Years 29.3%
7-10 Years 42.8%
10+ Years 11.7%
</Table>
- ----------
1. High yield bonds are lower quality debt instruments also known as "junk
bonds". Such instruments entail greater risks than those found in higher
quality securities.
2. Percentages compiled using the highest rating for each security.
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2004
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a)
- ----------------------------------------------------------------------------------------------------------------------------------
CORPORATE DEBT--143.1% OF TOTAL NET ASSETS
AIRLINES--2.6%
$ 4,985,000 Delta Airlines, Inc., Series 2000-1, Class A2
7.570%, 11/18/2010 BBB Ba B $ 4,917,225
AUTOMOTIVE--3.6%
2,000,000 Dana Corp., Note
7.000%, 3/01/2029 BBB Ba BBB 1,995,000
2,000,000 General Motors Acceptance Corp., Note
8.000%, 11/01/2031 BBB Baa BBB 2,055,770
2,685,000 Navistar International Corp., Senior Note
7.500%, 6/15/2011 BB Ba BB 2,879,662
6,930,432
BEVERAGES, FOOD & TOBACCO--1.3%
1,000,000 Del Monte Corp., Senior Subordinated Note
8.625%, 12/15/2012 B B BB 1,120,000
1,250,000 Dole Food, Inc., Senior Note
8.625%, 5/01/2009 B B B 1,359,375
2,479,375
BUILDING MATERIALS--0.9%
1,595,000 THL Buildco, Inc., Senior Subordinated Note, 144A
8.500%, 9/01/2014 B B NR 1,666,775
CHEMICALS--5.5%
3,375,000 Equistar Chemicals, LP/Equistar Funding Corp., Senior Note
10.625%, 5/01/2011 B B B 3,915,000
1,195,000 Huntsman LLC, Senior Secured Note
11.625%, 10/15/2010 B B NR 1,413,087
2,545,000 Methanex Corp., Senior Note
8.750%, 8/15/2012 BBB Ba BBB 2,971,287
2,000,000 Millennium Chemicals, Inc., Senior Note
9.250%, 6/15/2008 B B B 2,275,000
10,574,374
COAL--0.2%
310,000 Peabody Energy Corp., Senior Note
5.875%, 4/15/2016 BB Ba BB 308,450
</Table>
See accompanying notes to financial statements.
5
<Page>
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a)
- ----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES--6.8%
$ 1,265,000 Allied Waste North America, Inc., Senior Secured Note
8.875%, 4/01/2008 BB B BB $ 1,353,550
1,424,000 Coinmach Corp., Senior Note
9.000%, 2/01/2010 CCC B NR 1,488,080
3,105,000 Monitronics International, Inc., Senior Subordinated Note
11.750%, 9/01/2010 B B NR 3,388,331
2,960,000 Muzak LLC/Muzak Finance Corp., Senior Note
10.000%, 2/15/2009 CCC Caa NR 2,756,500
3,940,000 Muzak LLC/Muzak Finance Corp.,
Senior Subordinated Note
9.875%, 3/15/2009 CCC Caa NR 2,753,075
1,070,000 UGS Corp., Senior Subordinated Note, 144A
10.000%, 6/01/2012 B B NR 1,217,125
12,956,661
COMMUNICATIONS--4.1%
1,000,000 L-3 Communications Corp., Senior Subordinated Note
7.625%, 6/15/2012 BB Ba BB 1,097,500
2,305,000 Language Line, Inc., Note
11.125%, 6/15/2012 CCC Caa NR 2,443,300
2,005,000 PanAmSat Corp., Senior Note, 144A
9.000%, 8/15/2014 B B NR 2,238,081
2,900,000 PanAmSat Holding Corp., Senior Note,144A
0.000%/10.375%, 11/01/2014 (c) B Caa NR 1,993,750
7,772,631
COMPUTERS--0.2%
440,000 Unisys Corp., Senior Note
6.875%, 3/15/2010 BB Ba BBB 470,800
CONTAINERS & PACKAGING--4.0%
510,000 Crown European Holdings SA, Senior Secured Note
9.500%, 3/01/2011 B B NR 581,400
3,160,000 Crown European Holdings SA, Senior Secured Note
10.875%, 3/01/2013 B B NR 3,736,700
3,000,000 Owens-Brockway Glass Container, Senior Secured Note
8.750%, 11/15/2012 BB B B 3,382,500
7,700,600
</Table>
See accompanying notes to financial statements.
<Page>
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a)
- ----------------------------------------------------------------------------------------------------------------------------------
COSMETICS & PERSONAL CARE--1.0%
$ 1,755,000 Playtex Products, Inc., Senior Secured Note
8.000%, 3/01/2011 B B NR $ 1,917,337
ELECTRIC UTILITIES--16.2%
4,305,000 AES Corp. (The), Senior Secured Note, 144A
8.750%, 5/15/2013 B B BB 4,891,556
3,215,000 Calpine Corp., Senior Note, 144A
9.625%, 9/30/2014 B NR B 3,327,525
1,635,000 Calpine Corp., Senior Secured Note, 144A
8.750%, 7/15/2013 B NR B 1,348,875
2,720,000 Calpine Corp., Senior Secured Note, 144A
9.875%, 12/01/2011 B NR B 2,380,000
2,250,000 CMS Energy Corp., Senior Note
7.750%, 8/01/2010 B B B 2,460,937
1,060,000 CMS Energy Corp., Senior Note
9.875%, 10/15/2007 B B B 1,184,550
440,000 Edison Mission Energy Corp., Senior Note
9.875%, 4/15/2011 B B B 521,400
1,785,000 Midwest Generation LLC, Senior Secured Note
8.750%, 5/01/2034 B B B 2,025,975
1,410,000 Mission Energy Holding Co., Senior Secured Note
13.500%, 7/15/2008 CCC B B 1,758,975
3,610,000 Reliant Resources, Inc., Senior Secured Note
9.500%, 7/15/2013 B B BB 4,101,862
500,000 TECO Energy, Inc., Note
7.000%, 5/01/2012 BB Ba BB 546,250
4,000,000 TECO Energy, Inc., Note
7.500%, 6/15/2010 BB Ba BB 4,420,000
1,950,000 Texas Genco LLC/Texas Genco Financing Corp.,
Senior Note, 144A
6.875%, 12/15/2014 B B NR 2,015,812
30,983,717
ELECTRICAL EQUIPMENT--0.9%
1,700,000 Hexcel Corp., Senior Subordinated Note
9.750%, 1/15/2009 CCC Caa NR 1,768,000
</Table>
See accompanying notes to financial statements.
7
<Page>
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a)
- ----------------------------------------------------------------------------------------------------------------------------------
ELECTRONICS--1.9%
$ 1,675,000 Freescale Semiconductor, Inc., Senior Note
7.125%, 7/15/2014 BB Ba BB $ 1,817,375
1,720,000 Xerox Corp., Note
7.625%, 6/15/2013 B Ba BB 1,887,700
3,705,075
ENTERTAINMENT & LEISURE--15.8%
2,215,000 AMF Bowling Worldwide, Inc., Senior Subordinated Note
10.000%, 3/01/2010 CCC B B 2,364,512
2,500,000 Blockbuster, Inc., Senior Subordinated Note, 144A
9.000%, 9/01/2012 B B B 2,468,750
2,160,000 Choctaw Resort Development Enterprise, Senior Note, 144A
7.250%, 11/15/2019 BB B NR 2,181,600
3,165,000 Chukchansi Economic Development Authority,
Senior Note, 144A
14.500%, 6/15/2009 NR NR NR 3,987,900
2,000,000 Chumash Casino & Resort Enterprise, Senior Note, 144A
9.000%, 7/15/2010 BB Ba NR 2,215,000
3,130,000 Hollywood Entertainment Corp., Senior Subordinated Note
9.625%, 3/15/2011 B B NR 3,317,800
2,230,000 Marquee, Inc., Senior Note, 144A
8.625%, 8/15/2012 B B NR 2,464,150
360,000 Mohegan Tribal Gaming Authority, Senior
Subordinated Note
8.000%, 4/01/2012 B Ba NR 390,600
1,295,000 Royal Caribbean Cruises, Ltd., Senior Note
7.500%, 10/15/2027 BB Ba NR 1,413,169
1,510,000 Seneca Gaming Corp., Senior Note
7.250%, 5/01/2012 BB B NR 1,589,275
3,510,000 Station Casinos, Inc., Senior Subordinated Note
6.875%, 3/01/2016 B B NR 3,654,787
1,210,000 Turning Stone Casino Resort Enterprise, Senior Note, 144A
9.125%, 12/15/2010 B B NR 1,309,825
2,560,000 WMG Holdings Corp., Senior Note, 144A
0.000%/9.500%, 12/15/2014 (c) B Caa NR 1,635,200
1,185,000 Wynn Las Vegas LLC/Wynn Las Vegas Capital Corp.,
Note, 144A
6.625%, 12/01/2014 B B NR 1,173,150
30,165,718
</Table>
See accompanying notes to financial statements.
<Page>
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a)
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCE & INSURANCE--0.7%
$ 1,215,000 Arch Western Finance LLC, Guaranteed Senior Note
6.750%, 7/01/2013 BB Ba NR $ 1,254,487
FOOD RETAILERS--1.5%
2,705,000 Stater Brothers Holdings, Senior Note
8.125%, 6/15/2012 BB B NR 2,860,538
FOREST PRODUCTS & PAPER--2.3%
665,000 Abitibi-Consolidated, Inc., Guaranteed Note
6.000%, 6/20/2013 BB Ba NR 634,244
1,260,000 Georgia-Pacific Corp., Note
7.750%, 11/15/2029 BB Ba BB 1,411,200
2,000,000 Georgia-Pacific Corp., Senior Note
8.875%, 2/01/2010 BB Ba BB 2,327,500
4,372,944
HEALTH CARE PROVIDERS--5.4%
2,305,000 HCA, Inc., Note
7.500%, 11/06/2033 BB Ba BB 2,351,407
1,705,000 Spheris, Senior Subordinated Note, 144A
11.000%, 12/15/2012 CCC Caa NR 1,747,625
2,500,000 US Oncology, Inc., Senior Note, 144A
9.000%, 8/15/2012 B B NR 2,793,750
535,000 US Oncology, Inc., Senior Subordinated Note, 144A
10.750%, 8/15/2014 B B NR 619,263
2,585,000 Vanguard Health Holding Co. II, Senior
Subordinated Note, 144A
9.000%, 10/01/2014 CCC Caa NR 2,765,950
10,277,995
HEAVY MACHINERY--2.4%
3,310,000 Mueller Group, Inc., Senior Subordinated Note
10.000%, 5/01/2012 B Caa NR 3,607,900
1,280,000 Mueller Holdings, Inc., Senior Note, Step-Up
0.000%/14.750%, 4/15/2014 (c) B NR NR 876,800
4,484,700
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES--1.4%
655,000 Beazer Homes USA, Inc., Senior Note
8.375%, 4/15/2012 BB Ba BB 720,500
</Table>
See accompanying notes to financial statements.
9
<Page>
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a)
- ----------------------------------------------------------------------------------------------------------------------------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES--CONTINUED
$ 560,000 K Hovnanian Enterprises, Inc., Senior Note
8.000%, 4/01/2012 BB Ba BB $ 611,800
1,255,000 Standard-Pacific Corp., Senior Note
7.750%, 3/15/2013 BB Ba NR 1,355,400
2,687,700
MEDIA - BROADCASTING & PUBLISHING--22.4%
3,295,000 Charter Communications Holdings, Inc., Senior Note
10.000%, 5/15/2011 CCC Ca CCC 2,817,225
2,435,000 Charter Communications Operating LLC/Charter
Communications Capital Corp., Senior Note, 144A
8.000%, 4/30/2012 B B B 2,532,400
1,835,000 CSC Holdings, Inc., Series B, Senior Note
8.125%, 8/15/2009 BB B BB 2,007,031
97,000 Dex Media East LLC/Dex Media East Finance Co.,
Guaranteed Note
12.125%, 11/15/2012 B B B 118,219
1,000,000 Dex Media East LLC/Dex Media East Finance Co.,
Senior Note
9.875%, 11/15/2009 B B B 1,138,750
1,545,000 Dex Media, Inc., Note
8.000%, 11/15/2013 B B CCC 1,672,463
2,275,000 Echostar DBS Corp., Senior Note, 144A
6.625%, 10/01/2014 BB Ba BB 2,303,438
795,000 Houghton Mifflin Co., Senior Note
8.250%, 2/01/2011 B B B 846,675
2,195,000 Houghton Mifflin Co., Senior Subordinated Note
9.875%, 2/01/2013 B Caa CCC 2,403,525
7,300,000 Ono Finance PLC, Note
14.000%, 2/15/2011 CCC Caa B 8,395,000
1,265,000 Paxson Communications Corp., Senior Subordinated Note
10.750%, 7/15/2008 CCC Caa NR 1,328,250
7,330,000 Paxson Communications Corp., Senior Subordinated Note
0.000%/12.250%, 1/15/2009 (c) CCC Caa NR 6,853,550
2,490,000 RH Donnelley Finance Corp. I, Senior Subordinated Note
10.875%, 12/15/2012 B B NR 2,956,875
1,325,000 Rogers Cable, Inc., Senior Secured Note
6.250%, 6/15/2013 BB Ba NR 1,328,313
1,990,000 Rogers Cable, Inc., Senior Secured Note
7.875%, 5/01/2012 BB Ba NR 2,179,050
</Table>
See accompanying notes to financial statements.
<Page>
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a)
- ----------------------------------------------------------------------------------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING--CONTINUED
$ 1,435,000 Rogers Cable, Inc., Senior Secured Note
8.750%, 5/01/2032 BB Ba NR $ 1,592,850
700,000 Young Broadcasting, Inc., Senior Subordinated Note
8.750%, 1/15/2014 CCC Caa NR 705,250
1,350,000 Young Broadcasting, Inc., Senior Subordinated Note
10.000%, 3/01/2011 CCC Caa NR 1,441,125
42,619,989
MEDICAL SUPPLIES--0.8%
2,500,000 CDRV Investors, Inc., Note, 144A
0.000%/9.625%, 1/01/2015 (c) B Caa NR 1,553,125
METALS--3.6%
3,005,000 AK Steel Corp., Guaranteed Senior Note
7.750%, 6/15/2012 B B NR 3,095,150
3,270,000 IPSCO, Inc., Senior Note
8.750%, 6/01/2013 BB Ba NR 3,744,150
6,839,300
MULTIPLE UTILITIES--5.5%
2,650,000 Coastal Corp., Note
7.750%, 6/15/2010 CCC Caa NR 2,769,250
3,630,000 Coastal Corp., Senior Note
9.625%, 5/15/2012 CCC Caa NR 4,029,300
1,280,000 El Paso Natural Gas Co., Note
8.375%, 6/15/2032 B B NR 1,425,600
1,985,000 El Paso Natural Gas Co., Senior Note
7.625%, 8/01/2010 B B NR 2,173,575
10,397,725
OIL & GAS--9.4%
390,000 Chesapeake Energy Corp., Senior Note
6.875%, 1/15/2016 BB Ba BB 408,525
1,595,000 Chesapeake Energy Corp., Senior Note
7.000%, 8/15/2014 BB Ba BB 1,698,675
1,000,000 Enterprise Products Operating, LP, Senior Note
6.875%, 3/01/2033 BB Baa BBB 1,062,867
840,000 Forest Oil Corp., Senior Note
7.750%, 5/01/2014 BB Ba NR 913,500
1,710,000 Forest Oil Corp., Senior Note
8.000%, 12/15/2011 BB Ba NR 1,953,675
</Table>
See accompanying notes to financial statements.
11
<Page>
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a)
- ----------------------------------------------------------------------------------------------------------------------------------
OIL & GAS--CONTINUED
$ 500,000 Newfield Exploration Co., Senior Note
7.625%, 3/01/2011 BB Ba NR $ 562,500
3,000,000 Newfield Exploration Co., Senior Subordinated Note
8.375%, 8/15/2012 BB Ba NR 3,360,000
3,250,000 Petroleos Mexicanos, Global Guaranteed Note
9.500%, 9/15/2027 BBB Baa BBB 4,078,750
2,245,000 Transcontinental Gas Pipe Line Corp., Note
7.250%, 12/01/2026 B Ba BB 2,441,438
1,370,000 Vintage Petroleum, Inc., Senior Note
8.250%, 5/01/2012 BB Ba NR 1,510,425
17,990,355
PHARMACEUTICALS--3.7%
4,870,000 Biovail Corp., Senior Subordinated Note
7.875%, 4/01/2010 BB B NR 5,040,450
1,915,000 Elan Finance PLC/Elan Finance Corp., Senior Note, 144A
7.750%, 11/15/2011 B B NR 2,039,475
7,079,925
RESTAURANTS--0.1%
215,000 Carrols Corp., Senior Subordinated Note, 144A
9.000%, 1/15/2013 B B NR 222,525
RETAILERS--2.2%
2,330,000 Amscan Holdings, Inc., Senior Subordinated Note
8.750%, 5/01/2014 B B NR 2,330,000
585,000 Jean Coutu Group, Inc., Senior Note, 144A
7.625%, 8/01/2012 B B NR 618,638
1,245,000 Jean Coutu Group, Inc., Senior Subordinated Note, 144A
8.500%, 8/01/2014 B B NR 1,276,125
4,224,763
TELEPHONE SYSTEMS--8.8%
3,425,000 Centennial Cellular Operating Co./Centennial
Communications Corp., Guaranteed Senior Note
10.125%, 6/15/2013 CCC Caa NR 3,844,563
3,840,000 Dobson Communications Corp., Senior Note
8.875%, 10/01/2013 CCC Ca NR 2,697,600
2,525,000 LCI International, Inc., Senior Note
7.250%, 6/15/2007 NR NR B 2,455,563
</Table>
See accompanying notes to financial statements.
<Page>
<Table>
<Caption>
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a)
- ----------------------------------------------------------------------------------------------------------------------------------
TELEPHONE SYSTEMS--CONTINUED
$ 750,000 Qwest Capital Funding, Inc., Note
7.900%, 8/15/2010 B Caa B $ 757,500
2,000,000 Qwest Services Corp., Senior Subordinated Note, 144A
13.500%, 12/15/2010 B Caa B 2,405,000
3,395,139 Receivables Structured Trust Corp., Note, 144A
7.440%, 12/10/2006 NR Caa CCC 3,471,529
415,000 Rogers Wireless Communications, Inc.,
Senior Secured Note, 144A
7.250%, 12/15/2012 BB Ba BB 439,900
665,000 Rogers Wireless Communications, Inc.,
Senior Secured Note, 144A
7.500%, 3/15/2015 BB Ba BB 701,575
16,773,230
TEXTILES, CLOTHING & FABRICS--1.6%
1,930,000 Broder Brothers, Senior Note
11.250%, 10/15/2010 B B NR 2,016,850
1,000,000 Broder Brothers, Senior Note, 144A
11.250%, 10/15/2010 B B NR 1,045,000
3,061,850
TRANSPORTATION--6.3%
4,850,000 Grupo Transportacion Ferroviaria Mexicana SA de CV,
Senior Note
0.000%/11.750%, 6/15/2009 (c) B B B 4,940,938
220,000 Grupo Transportacion Ferroviaria Mexicana SA de CV,
Senior Note
12.500%, 6/15/2012 B B B 256,850
950,000 Kansas City Southern Railway Co., Senior Note
9.500%, 10/01/2008 B B NR 1,079,438
3,390,000 Laidlaw International, Inc., Senior Note
10.750%, 6/15/2011 B B NR 3,957,825
175,000 Stena AB, Note
9.625%, 12/01/2012 BB Ba NR 197,750
1,525,000 Stena AB, Senior Note, 144A
7.000%, 12/01/2016 BB Ba NR 1,509,750
11,942,551
TOTAL CORPORATE DEBT (IDENTIFIED COST $257,588,642) 272,960,872
</Table>
See accompanying notes to financial statements.
13
<Page>
<Table>
<Caption>
S&P MOODY'S FITCH
SHARES DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a)
- ----------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS--0.4%
MEDIA - BROADCASTING & PUBLISHING--0.4%
11,400 Paxson Communications Corp. CCC Caa NR $ 837,900
TOTAL PREFERRED STOCKS (IDENTIFIED COST $963,506) 837,900
TOTAL INVESTMENTS--143.5%
(IDENTIFIED COST $258,552,148)(b) 273,798,772
Other Assets, Less Liabilities--3.7% 6,997,455
Auction Market Preferred Shares plus cumulative unpaid dividends(47.2%) (90,096,666)
TOTAL NET ASSETS--100% $ 190,699,561
</Table>
See accompanying notes to financial statements.
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
NOTES TO SCHEDULE OF INVESTMENTS
DECEMBER 31, 2004
* Ratings of issues shown are not audited by Ernst & Young LLP.
(a) See Note 2a of Notes to Financial Statements.
(b) Federal Tax Information:
At December 31, 2004, the net unrealized appreciation on investments based
on cost of $258,650,293 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 $ 16,974,125
Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value (1,825,646)
Net unrealized appreciation $ 15,148,479
</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 $66,560,142 or 34.9% of net
assets.
Quality Profile (unaudited)
The quality ratings of securities in the Fund as of December 31, 2004 were
as follows:
<Table>
<Caption>
PERCENT OF
TOTAL INVESTMENTS
S&P RATING/MOODY'S RATING/FITCH RATING AND CASH**
BBB/Baa/BBB 6.4%
BB/Ba/BB 30.2
B/B/B 44.6
CCC/Caa/CCC 16.9
NR (Not Rated) *** 1.4
Cash 0.5
100.0%
</Table>
** Percentages compiled using the highest rating for each security.
*** Securities not rated are of quality that is permitted to be invested in by
the Fund.
See accompanying notes to financial statements.
15
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004
<Table>
<Caption>
ASSETS
Investments at cost $ 258,552,148
Net unrealized appreciation 15,246,624
INVESTMENTS AT VALUE 273,798,772
Cash 1,406,087
Interest receivable 4,826,671
Unrealized appreciation on swap contracts 1,080,000
Prepaid expenses 63,449
TOTAL ASSETS 281,174,979
LIABILITIES
Management fees payable 142,489
Other accrued expenses 236,263
TOTAL LIABILITIES 378,752
MONEY MARKET CUMULATIVE PREFERRED SHARES (3,600 SHARES ISSUED AND OUTSTANDING)
AT LIQUIDATION VALUE PLUS CUMULATIVE UNPAID DIVIDENDS 90,096,666
NET ASSETS APPLICABLE TO COMMON SHARES $ 190,699,561
NET ASSETS CONSIST OF:
Common Shares, no par value; unlimited number of shares authorized, 12,239,390 shares issued and outstanding $ 173,752,386
Accumulated net realized gain on investments 620,551
Net unrealized appreciation of investments and swap agreements 16,326,624
NET ASSETS APPLICABLE TO COMMON SHARES $ 190,699,561
COMPUTATION OF NET ASSET VALUE PER COMMON SHARE:
NET ASSETS $ 190,699,561
COMMON SHARES ISSUED AND OUTSTANDING 12,239,390
NET ASSET VALUE PER SHARE $ 15.58
MARKET VALUE (CLOSING PRICE PER SHARE ON THE NEW YORK STOCK EXCHANGE) $ 16.48
</Table>
See accompanying notes to financial statements.
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
<Table>
<Caption>
INVESTMENT INCOME
Interest $ 23,409,624
Dividends 335,009
23,744,633
Expenses
Management fee 1,650,405
Investor service fee 137,534
Trustees' fees and expenses 100,685
Custodian fee 310,495
Audit and tax services 43,230
Legal fee 137,024
Shareholder Reports 1,000
Preferred shares auction 232,619
Insurance expense 93,005
Miscellaneous 25,295
TOTAL EXPENSES 2,731,292
NET INVESTMENT INCOME 21,013,341
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) on:
Investments -- net 477,437
Interest rate swap contracts -- net (255,313)
Change in unrealized appreciation of:
Investments -- net 160,507
Interest rate swap contracts -- net 1,080,000
Net realized and unrealized gain on investments 1,462,631
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 22,475,972
LESS DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM NET INVESTMENT INCOME (1,380,048)
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS APPLICABLE TO COMMON SHARES $ 21,095,924
</Table>
See accompanying notes to financial statements.
17
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE PERIOD
YEAR ENDED JULY 28, 2003*
DECEMBER 31, TO
2004 DECEMBER 31, 2003
FROM OPERATIONS:
Net investment income $ 21,013,341 $ 7,542,906
Net realized gain on investments and swaps 222,124 1,163,262
Net change in unrealized appreciation of investments 1,240,507 15,086,117
Dividends to preferred shareholders from net investment income (1,380,048) (202,338)
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 21,095,924 23,589,947
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS
Net investment income (19,016,408) (7,356,716)
Net realized gain on investments (1,173,302) (192,270)
(20,189,710) (7,548,986)
INCREASE (DECREASE) IN NET ASSETS DERIVED FROM
COMMON SHARE TRANSACTIONS: 128,713 174,859,218
Offering costs and underwriting discounts on preferred shares 1,000 (1,236,545)
TOTAL INCREASE IN NET ASSETS 1,035,927 189,663,634
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
Beginning of period 189,663,634 0
End of period $ 190,699,561 $ 189,663,634
UNDISTRIBUTED NET INVESTMENT INCOME $ 0 $ 343,688
</Table>
* Commencement of operations.
See accompanying notes to financial statements.
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
FOR THE PERIOD
YEAR JULY 28, 2003
ENDED THROUGH
DECEMBER 31, DECEMBER 31,
2004 2003*
NET ASSET VALUE, BEGINNING OF YEAR (COMMON SHARES) $ 15.51 $ 14.33(a)
Net Investment Income (b) 1.72 0.64
Net Realized and Unrealized Gain (Loss) on Investments 0.11 1.31
Dividends to Preferred Shareholders from Net Investment Income (0.11) (0.02)
TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS 1.72 1.93
Less Distributions to Common Shareholders
From Net Investment Income (1.55) (0.60)
From Net Realized Gains (0.10) (0.02)
TOTAL DISTRIBUTIONS TO COMMON SHAREHOLDERS (1.65) (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 YEAR (COMMON SHARES) $ 15.58 $ 15.51
MARKET VALUE -- END OF PERIOD (COMMON SHARES) $ 16.48 $ 15.91
Total Return on Net Asset Value (%) 11.99 12.73(c)
Total Return on Market Value (%) 15.48 10.47(d)
Ratio of Expenses (excluding interest expense) to Average Net Assets Applicable to
Common Shares (%) (f) 1.48 1.42(e)
Ratio of Interest Expense to Average Net Assets Applicable to Common Shares (%) (f) -- 0.19(e)
Ratio of Net Investment Income to Average Net Assets Applicable to Common Shares (%) (f) 11.36 10.00(e)
Portfolio Turnover Rate (%) 106.76 32.08
Net Assets Applicable to Common Shares, End of the Year (000) $ 190,700 $ 189,644
MONEY MARKET CUMULATIVE PREFERRED SHARES
Preferred Shares Outstanding, End of Period (000) $ 90,000 $ 90,000
Asset Coverage Per $1,000 $ 3,119 $ 3,107
Involuntary Liquidation Preference Per Share $ 25,000 $ 25,000
Approximate Market Value Per Share $ 25,000 $ 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 shares outstanding during the period.
(c) Total return on net asset 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 and
is not annualized.
(d) 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 and is not annualized.
(e) Annualized.
(f) Expense and net investment income ratios include accumulated and unpaid
dividends.
See accompanying notes to financial statements.
19
<Page>
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004
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 U.S. generally
accepted accounting principles 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 fair value
as determined in good faith under consistently applied procedures established by
and under the supervision of the Board of Trustees. Criteria considered in
making this determination may include, but is not limited to, a review of other
securities by the same issuer for which market quotations are available, recent
bid and ask prices for the security, the issuer's position in and economic
outlook of the industry and, if necessary, a review of similar securities in
similar industries. 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 to common shares outstanding 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 continue 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, 2004.
<Page>
F) SWAP AGREEMENTS: The Fund may invest in swap agreements. A swap is an
agreement to exchange the return generated by one instrument for the return
generated by another instrument. The Fund may enter into interest rate swap
agreements to manage its exposure to interest rates and credit risk. Interest
rate swap agreements involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest. Swaps are marked to
market daily based upon quotations from market makers and the change in value,
if any, is recorded as unrealized gain or loss in the Statement of Operations.
Net payments of interest on interest rate swap agreements are included as part
of realized gain or loss. Entering into these agreements involves, to varying
degrees, elements of credit, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to these agreements may default on its
obligation to perform and that there may be unfavorable changes in interest
rates. At December 31, 2004, the Fund had the following open swap agreements:
<Table>
<Caption>
NOTIONAL AMOUNT EXPIRATION DATE DESCRIPTION NET UNREALIZED APPRECIATION
- ----------------- --------------- -------------------------------------------------- ---------------------------
$ 22,500,000 03/15/06 Agreement with Citibank N.A. dated 03/11/04 to $ 360,000
pay the notional amount multiplied by 1.78% and
to receive the notional amount multiplied by the
1 month U.S. Dollars - London Interbank Offered
Rate - British Bankers Association (USD - LIBOR -
BBA) adjusted for compounding
$ 22,500,000 03/15/07 Agreement with Citibank N.A. dated 03/11/04 to $ 545,000
pay the notional amount multiplied by 2.27% and
to receive the notional amount multiplied by the
1 month U.S. Dollars - London Interbank Offered
Rate - British Bankers Association (USD - LIBOR -
BBA) adjusted for compounding
$ 22,500,000 09/28/07 Agreement with Citibank N.A. dated 09/24/04 to $ 175,000
pay the notional amount multiplied by 3.22% and
to receive the notional amount multiplied by the
1 month U.S. Dollars - London Interbank Offered
Rate - British Bankers Association (USD - LIBOR -
BBA) adjusted for compounding
</Table>
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 and
administrative fees, legal and audit fees, fees and 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-advisory
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%
21
<Page>
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 materials, 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 year ended
December 31, 2004, the Fund paid First Trust, as the investor servicing agent, a
fee equal to $137,534.
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 year ended December 31, 2004, purchases and sales of investments, other
than short-term securities, aggregated $285,303,532 and $285,154,566,
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 year ended December 31, 2004, Lehman Government
Securities, Inc., an affiliate of the Adviser, earned $225,617 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
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 year ended December 31, 2004, the dividend
rates for MMP ranged from 1.09% to 2.45%. The dividend rate for MMP on December
31, 2004 was 2.45%. 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.
<Page>
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
YEAR ENDED JULY 28, 2003 (a)
DECEMBER 31, TO
2004 DECEMBER 31, 2003
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------ -------------
Shares purchased by investement adviser -- $ -- 6,667 $ 100,005
Initial Public Offering on July 28, 2003 (b) -- -- 11,000,000 157,245,000
Purchase of additional shares by undewriters 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 8,448 128,713 24,275 360,213
------------- ------------- ------------ -------------
Increase derived from capital share transactions 8,448 $ 128,713 12,230,942 $ 174,859,218
============= ============= ============ =============
</Table>
(a) Commencement of operations.
(b) After deduction of underwriting commissions and offering costs of
$7,775,000.
(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 -- RISK ASSOCIATED WITH THE USE OF LEVERAGE
The Fund's use of leverage through the issuance of preferred shares and
borrowings, as well as the economic leverage inherent in certain derivatives,
including credit default swaps, creates risks for holders of common shares.
There is no assurance that the Fund's leveraging strategies will be successful.
If the Fund issues preferred shares or borrows money to make additional
investments and the income and capital appreciation from those investments
exceed the dividends payable on the preferred shares or the costs of borrowing,
the Fund's investment return will be greater than if leverage had not been used.
However, if the dividends payable on the preferred shares or the costs of
borrowing exceed the income and capital appreciation from the additional
investments, the Fund would lose money and its investment return will be lower
than if leverage had not been used. An increase in interest rates, which would
increase the costs of leverage, may be likely because market rates of interest
are currently near their lowest levels in recent years. Leverage creates risks
which may adversely affect the return for holders of common shares, including:
a) the likelihood of greater volatility of net asset value and market price of
the Fund's common shares;
b) the possibility either that common share income will fall if the preferred
share dividend rate rises or the Fund's borrowing costs increase, and that
common share income will fluctuate because of changes in the preferred
share dividend rates or borrowing costs.
23
<Page>
NOTE 10 -- INDEMNIFICATIONS
In the ordinary course of business, the Fund enters into contracts that contain
a variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts and expects the risk of loss to be remote.
NOTE 11 -- FEDERAL INCOME TAX INFORMATION
For the year December 31, 2004 and for the period December 31, 2003, the tax
character of distributions paid was $21,569,758 and $7,751,324 of ordinary
income, respectively.
As of December 31, 2004, the components of accumulated earnings on a tax basis
were as follows:
<Table>
Undistributed long-term capital gains $ 234,950
Undistributed ordinary income 483,746
Unrealized gains 16,228,479*
TOTAL ACCUMULATED EARNINGS $ 16,947,175
</Table>
* The difference between book-basis and tax-basis net unrealized gains is
attributed primarily to wash sales.
A permanent difference incurred during the period ended December 31, 2004,
resulting from differences in book and tax accounting due to the tax treatment
for paydown gains and losses on mortgage backed securities, the tax treatment
for swaps and return of capital distributions received from preferred stock, has
been reclassified at year end from undistributed net income for $(960,573) to
undistributed realized gain for $960,573.
ADDITIONAL INFORMATION (UNAUDITED)
TAX INFORMATION
For the dividends paid during the year ended December 31, 2004 the Fund
designates $71,950 as qualified dividend income.
For corporate shareholders, 0.34% of the income dividends paid by the Fund
qualifies for the dividends received deduction.
<Page>
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
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, 2004, the related statement of operations
for the year then ended and statements of changes in net assets and the
financial highlights for the year then ended and for the period July 28, 2003
(Commencement of Operations) to 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 audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Fund's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and financial
highlights, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our procedures included confirmation of securities owned as of December 31,
2004, by correspondence with the custodian and others. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund at December 31, 2004, the results of its operations, changes in its net
assets and the financial highlights for the year then ended and for the period
July 28 2003 (Commencement of Operations) to December 31, 2003, in conformity
with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
February 14, 2005
25
<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) 800-988-5196.
<Page>
TRUSTEES AND OFFICERS 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
BROTHERS HELD OUTSIDE OF
ASSET LEHMAN
LENGTH OF MANAGEMENT BROTHERS ASSET
NAME AND DATE OF POSITION TIME PRINCIPAL OCCUPATIONS FOR LAST FIVE FUNDS MANAGEMENT
BIRTH WITH FUND SERVED YEARS COMPLEX FUNDS COMPLEX
General James E. Dalton, Trustee Trustee Board of Directors, Chair of the Audit 1 None
USAF (Retired) since 2003 Committee at William Lyon Homes, a
10/17/1930 home building business (since 1991);
Director of Defense Group Inc., a
defense business (since 1999);
formerly Director of Finance America,
a mortgage business (2002-2004);
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 Trustee Managing Director and Chief Investment 1 Director, Chair
6/19/1953 since 2003 Officer of EAM International, LLC, an of Compensation
investment banking and asset Committee, and
management firm (since 2003); Member of the
formerly, Managing Director of Audit Committee
DeGuardiola Advisors, an investment of Antigenics
bank specializing in mergers and Corporation, a
acquisitions of investment management bio-pharmaceutical
firms (2001-2002); Managing Director company (since
of North American Equities of General 2003); Trustee
Motors Investment Management of Columbia
Corporation (1995-2001). Acorn family of
Wanger Asset
Management (six
portfolios under
management)
(since 2002).
</Table>
27
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
OVERSEEN IN OTHER
LEHMAN TRUSTEESHIPS
BROTHERS HELD OUTSIDE OF
ASSET LEHMAN
LENGTH OF MANAGEMENT BROTHERS ASSET
NAME AND DATE OF POSITION TIME PRINCIPAL OCCUPATIONS FOR LAST FIVE FUNDS MANAGEMENT
BIRTH WITH FUND SERVED YEARS COMPLEX FUNDS COMPLEX
Michael M. Knetter Trustee Trustee Dean of the University of 1 None
4/8/1960 since 2003 Wisconsin-Madison School of Business
(since 2002); formerly, Professor of
International Economics and Associate
Dean at the Amos Tuck School of
Business -- Dartmouth College
(1997-2002).
Eugene A. Matthews Trustee Trustee President of Nintai, Incorporated, an 1 None
11/9/1958 since 2003 investment advisory firm (since 1997);
formerly, Senior Fellow of Asia
Studies for the Council of Foreign
Relations (2001-2003); founding and
general Partner of Apax-Globis Japan,
Inc., a private equity investment firm
(1998-present); formerly
Founder/President of Ashta
International, a Vietnamese investment
firm (1989).
George W. Morriss Trustee Trustee Executive Vice President and Chief 1 None
9/24/1947 since 2003 Financial Officer of People's Bank, a
financial services company (1991-2001).
INTERESTED TRUSTEES:
Stephanie E. Dolan Trustee Trustee Senior Vice President of Lehman 1 None
4/4/1963 since 2003 Brothers Inc.; Controller of Lehman
Brothers Asset Management.
Scott Hall Trustee Trustee Managing Director of First Trust 1 None
1/12/1957 since 2003 Advisors L.P. and First Trust
Portfolios L.P. (since 1992).
Kurt A. Locher Trustee Trustee Managing Director of Lehman Brothers 1 None
5/9/1966 since 2003 Inc. (since 1998); Managing Director
of Lehman Brothers Asset Management
(since 2003); Vice President of
Lincoln Capital (since 2003); formerly
Director of BNC Mortgage Inc.
(2000-2004), Finance America LLC
(1999-2004), and TrueLink Inc.
(1999-2004); formerly, President of
Lehman Brothers Bank, F.S.B. (1999);
and Senior Vice President of Lehman
Brothers Inc. (1995-1998).
</Table>
<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 DATE OF POSITION
BIRTH WITH FUND PRINCIPAL OCCUPATION FOR LAST FIVE YEARS
Bradley Tank President Chief Executive Officer of Lehman Brothers Asset Management; Managing Director and
9/29/1957 Global Head of Fixed Income Asset Management for Lehman Brothers (since 2002);
formerly, Director of Fixed Income for Strong Capital Management in Menomonee Falls,
Wisconsin (1990-2002).
Edward Grieb Treasurer Chief Financial Officer of Lehman Brothers Asset Management; Managing Director (since
9/22/1961 2003) and Assistant Controller for Lehman Brothers (since 1997).
Jonathan Morris Secretary Senior Vice President of Lehman Brothers Asset Management; Senior Vice President and
3/1/1956 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).
</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 visiting 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.
Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12 month period ended June 30, 2004 is
available (1) on the Fund's website www.lbftincomeopportunity.com and (2) on the
Commission's website at www.sec.gov.
In accordance with Section 303A.12 (a) of the New York Stock Exchange Listed
Company Manual, the Fund's Annual CEO Certification certifying as to compliance
with NYSE's Corporate Governance Listing Standards was submitted to the Exchange
on June 23, 2004.
The Fund files a complete schedule of investments with the Commission for the
first and third quarters of its fiscal year on Form N-Q, which when filed will
be available on the Commission's website at www.sec.gov. The Fund's Form N-Q may
be reviewed and copied at the Commission Public Reference Room, which may be
obtained by calling 1-800-SEC-0330.
29
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<Page>
LEHMAN BROTHERS
(C)2004 Lehman Brother Inc. All Rights Reserved. LB10183
<Page>
ITEM 2. CODE OF ETHICS.
For the year ended December 31, 2004, 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 11(a).
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
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 for the year ended 2004 were $36,400. 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 the years ended 2004 and 2003 were none and $16,800,
respectively.
(c) TAX FEES: The aggregate fees accrued for professional services
rendered by Ernst & Young LLP for tax compliance, tax advice, and
tax planning for the years ended 2004 and 2003 were $4,200 and
$4,000, respectively. 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 years ended 2004 and 2003
were $5,400 and $10,000, respectively.
(e) (1) The Registrant's Audit Committee pre-approved the provision of
audit and non-audit services by Ernst & Young LLP for the fiscal
years ended December 31, 2004 and December 31, 2004. 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)The percentage of services described in each of paragraphs (b)
through (d) of this Item that were approved by the audit committee
pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X
are as follows:
(b) 100%
(c) 100%
(d) 100%
<Page>
(f) Not applicable.
(g) Aggregate non-audit fees billed to the Registrant by the
Registrant's accountant for the fiscal years ended December 31,
2004 and 2003 were $9,600 and $30,800, respectively. Aggregate
non-audit fees billed to the Investment Adviser or Sub-Adviser by
the Registrant's accountant were $0 and $0 for the fiscal years
ended December 31, 2004 and 2003, respectively.
(h) Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
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 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. SCHEDULE OF INVESTMENTS
Not applicable to this filing.
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 11(b).
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to this registrant.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The Registrant's Principal Executive Officer and Principal Financial
Officer concluded that the Registrant's disclosure controls and procedures
(as defined in Rule 30a-3(c) under the Investment Company Act of 1940) were
effective as of a date within 90 days prior to the filing date of this
report, based on their evaluation of the effectiveness of the Registrant's
disclosure controls and procedures as of the Evaluation Date.
(b) There were no significant changes in the Registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the second fiscal quarter of the
<Page>
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal control
over financial reporting.
ITEM 11. EXHIBITS.
(a) Sox Code of Ethics is attached.
(b) Proxy voting procedures and guidelines are attached.
(c) Section 302 Certification letters are attached.
(d) Section 906 Certifications are attached.
<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 9, 2005
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 9, 2005
By: /S/ Edward Grieb
-----------------------------------------------------------------
Edward Grieb, Treasurer/Chief Financial Officer
Date: March 9, 2005