NOX Neuberger Berman Income Opportunity Fund

 

 

Neuberger Berman
Income Opportunity
Fund Inc.

 

 

 

 

 

Semi-Annual Report

April 30, 2009

 

President's Letter

Dear Shareholder,

I am pleased to present to you this semi-annual report for Neuberger Berman Income Opportunity Fund Inc. for the six-month period ended April 30, 2009. The report includes portfolio commentary, a listing of the Fund's investments, and its financial statements for the reporting period.

The Fund's investment objective is to provide high current income with capital appreciation as a secondary objective through a diversified portfolio of both real estate securities and high yield bonds.

In the real estate portion of the Fund, our investment approach combines analysis of security fundamentals and real estate with property sector diversification. Our disciplined valuation methodology seeks real estate securities that are attractively priced relative to their historical growth rates and the valuation of other property sectors.

In the high yield portion of the Fund, our investment approach focuses on generating income and managing risk. We seek to avoid the default and volatility risk associated with many high yield bonds by applying rigorous credit analysis to higher quality issues, and by emphasizing the intermediate range of the yield curve.

We believe that our conservative investing philosophy and disciplined investment process will benefit shareholders by providing attractive current income over the long term.

Before concluding, I am pleased to inform you that in June 2009 the Fund completed its tender offer and accepted for tender 10% of its outstanding common shares. Additionally, during the reporting period, the Fund announced the implementation of a semi-annual tender offer program consisting of up to four tender offers over a two-year period. Under its tender offer program, if the Fund's common shares trade at an average daily discount to net asset value per share (NAV) of greater than 10% during a 12-week measurement period, the Fund would conduct a tender offer for between 5% and 20% of its outstanding common shares at a price equal to 98% of its NAV determined on the day the tender offer expires. As previously announced, the Fund's initial measurement period commenced on June 5, 2009 and will close on August 28, 2009. Furthermore, the Fund's Board has decided that should the Fund's common shares trade at a discount of greater than 10% during the initial measurement period the Fund will make a tender offer for up to 10% of its outstanding common shares. In addition, to offset the expenses associated with the tender offers, Neuberger Berman has agreed to extend the fee waiver currently in place for the Fund.

Thank you for your trust in Neuberger Berman. We will continue to do our best to earn it.

Sincerely,

Robert Conti
President and CEO
Neuberger Berman Income Opportunity Fund Inc.

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For the six-month period ended April 30, 2009, on a net asset value (NAV) basis, Neuberger Berman Income Opportunity Fund Inc. posted a positive return. During this period, the Fund's high yield securities produced a strong return while its real estate investment trust (REIT) holdings declined in value.

At the end of the reporting period, the Fund held 16.3% of its investments in REIT common stocks, 14.2% in REIT preferred shares, 66.1% in bonds and 3.4% in cash and cash equivalents.

Real Estate Securities

The REIT market was extremely volatile during the reporting period. The sharp sell-off that began earlier in calendar year 2008 continued as the reporting period began in November. REITs then generated an impressive rally, as the FTSE NAREIT Equity REITs Index returned in excess of 50% from November 20 through the end of the year. The rally was short lived, however, as the REIT market fell sharply from January until early March 2009. The REIT market rallied again during the last two months of the reporting period.

When the reporting period began, the Fund's real estate segment was defensively positioned, as we emphasized areas of the market that have historically held up well during economic downturns. In particular, our exposure to Heath Care and Self Storage REITs enhanced portfolio results. We also benefited from our holdings in grocery-anchored Shopping Centers and from underweighting (relative to the FTSE NAREIT index) the more economically sensitive Industrial and Office sectors within the REIT market.

As the reporting period progressed, we shifted our positioning to become somewhat more neutral. This change occurred as a number of high quality REITs obtained financing and certain large real estate transactions were completed. These developments, coupled with what we considered to be attractive valuations for select companies, led us to opportunistically purchase what we identified as high quality REITs with strong balance sheets. We also trimmed the portfolio's Health Care exposure as their valuations had become rich given their strong performance.

Looking ahead, while there have been some modest signs of improvement, the economy continues to face a number of headwinds which we believe could temper the pace and magnitude of the recovery. In our opinion, this could lead to ongoing challenges in the commercial real estate market, including lower occupancy rates and a weaker rental environment.

On the upside, since the beginning of March, a number of REITs have collectively raised more than $10 billion through the issuance of new common stock. This has helped to improve the balance sheet strength of the overall REIT sector. In our opinion, REIT valuations also remain attractive. Against this backdrop, we will continue to actively manage the Fund's real estate segment and seek higher quality companies with better access to capital, safe balance sheets and less refinancing risk.

High Yield Securities

The high yield securities portion of the Fund posted a strong absolute return during the reporting period and performed in line with its benchmark, the Barclays Capital U.S. Corporate High Yield 2% Issuer Cap Index.

The high yield market was extremely volatile during the reporting period. Prices fell sharply in November 2008, as heightened risk aversion dragged down the sector. Conditions then began to improve in December and January. High yield prices were supported by continued government policy intervention aimed at unfreezing the credit markets and warding off a prolonged and deep recession. After taking a step backward in February, high yield bond prices rallied in March and April as the Federal Reserve announced that it would purchase additional agency notes, mortgage-backed securities and longer-term Treasuries. Investors also reacted positively to the Treasury's plans to help banks remove toxic mortgage asset from their balance sheets.

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Investors who withstood the market's volatility were ultimately rewarded, as the Barclays Capital U.S. Corporate High Yield 2% Issuer Cap Index gained more than 16% during the six-month reporting period. Over this time, the yield difference between high yield securities and Treasuries narrowed from a high of 1,944 to 1,302 basis points. From a credit quality perspective, higher rated securities outperformed their lower rated counterparts, as BB and CCC rated bonds returned 18.5% and 7.9%, respectively.

Throughout the reporting period, we maintained a defensive posture. In particular, we emphasized securities issued by companies with solid balance sheets and cash flow stability. We also avoided more cyclical companies that we felt would be adversely affected by the severe recession and falling consumer spending. The high yield portfolio segment also benefited from our underweighting (relative to the benchmark) of CCC rated securities and overweighting of BB rated issues.

From an industry perspective, overweight positions and security selection in Energy and Utilities, an underweight in Paper, and an overweight in Technology contributed positively to relative performance. In contrast, sector positioning in Financial Services, security selection in Health Care and Chemicals, as well as an underweight to Homebuilders, detracted from relative results.

Looking ahead, high yield defaults are generally expected to continue trending upward. While there have been tentative signs of some better economic data, we believe growth is likely to remain muted for quite some time. In such an environment, we believe individual security selection will remain paramount as we seek to generate high total returns consistent with capital preservation. While we have begun to selectively increase our exposure to more cyclical names, we continue to seek those companies that have solid earnings and ample liquidity and are attractively valued.

Sincerely,

 

Ann Benjamin, Tom O'Reilly,
Brian Jones and Steve Shigekawa
Portfolio Co-Managers

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TICKER SYMBOL

RATING DIVERSIFICATION

 

INDUSTRY DIVERSIFICATION

PERFORMANCE HIGHLIGHTS

Closed-end funds, unlike open-end funds, are not continually offered. There is an initial public offering and, once issued, common shares of closed-end funds are sold in the open market through a stock exchange.

The composition, industries and holdings of the Fund are subject to change. Investment return will fluctuate. Past performance is no guarantee of future results.

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Endnotes

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Glossary of Indices

Please note that the indices and averages do not take into account any fees and expenses or any tax consequences of investing in the individual securities that they track and that investors cannot invest directly in any index or average. Data about the performance of each index and average is prepared or obtained by Management and includes reinvestment of all dividends and capital gain distributions. Each Fund may invest in securities not included in its respective index or average.

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TOP TEN EQUITY HOLDINGS

See Notes to Schedule of Investments

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See Notes to Schedule of Investments

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See Notes to Schedule of Investments

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See Notes to Schedule of Investments

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See Notes to Schedule of Investments

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See Notes to Schedule of Investments

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See Notes to Schedule of Investments

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See Notes to Schedule of Investments

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Notes to Schedule of Investments (Unaudited)

†	Investments in equity securities by Neuberger Berman Income Opportunity Fund Inc. (the "Fund") are valued by obtaining valuations from an independent pricing service. The independent pricing service values equity securities at the latest sale price when that price is readily available. Securities traded primarily on the NASDAQ Stock Market are normally valued by the Fund at the NASDAQ Official Closing Price ("NOCP") provided by NASDAQ each business day. The NOCP is the most recently reported price as of 4:00:02 p.m., Eastern time, unless that price is outside the range of the "inside" bid and asked prices (i.e., the bid and asked prices that dealers quote to each other when trading for their own accounts); in that case, NASDAQ will adjust the price to equal the inside bid or asked price, whichever is closer. Because of delays in reporting trades, the NOCP may not be based on the price of the last trade to occur before the market closes. If there is no reported sale of a security on a particular day, the independent pricing service may value the security based on reported market quotations. If a valuation is not available from an independent pricing service, the Fund seeks to obtain quotations from principal market makers. Investments in debt securities are valued daily by obtaining valuations from independent pricing services based on readily available bid quotations, or if quotations are not available, by methods which include considerations such as: yields or prices of securities of comparable quality, coupon, maturity and type; indications as to values from dealers; and general market conditions. If a valuation is not available from an independent pricing service, the Fund seeks to obtain quotations from principal market makers. For both debt and equity securities, if such quotations are not readily available, securities are valued using methods the Board of Directors of the Fund (the "Board") has approved on the belief that they reflect fair value. Numerous factors may be considered when determining the fair value of a security, including available analyst, media or other reports, trading in futures or ADRs and whether the issuer of the security being fair valued has other securities outstanding. Foreign security prices are furnished by independent quotation services and expressed in local currency values. Foreign security prices are currently translated from the local currency into U.S. dollars using the exchange rate as of 4:00 p.m., Eastern time. The Board has approved the use of Interactive Data Pricing and Reference Data, Inc. ("Interactive") to assist in determining the fair value of foreign equity securities when changes in the value of a certain index suggest that the closing prices on the foreign exchanges may no longer represent the amount that the Fund could expect to receive for those securities. In this event, Interactive will provide adjusted prices for certain foreign equity securities using a statistical analysis of historical correlations of multiple factors. In the absence of precise information about the market values of these foreign securities as of the close of the New York Stock Exchange, the Board has determined on the basis of available data that prices adjusted in this way are likely to be closer to the prices the Fund could realize on a current sale than are the prices of those securities established at the close of the foreign markets in which the securities primarily trade. Fair value prices are necessarily estimates, and there is no assurance that such a price will be at or close to the price at which the security is next quoted or next trades. Short-term debt securities with less than 60 days until maturity may be valued at cost which, when combined with interest earned, is expected to approximate market value.
	The Fund adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("FAS 157"), effective November 1, 2008. In accordance with FAS 157, "fair value" is defined as the price that a Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market for the investment. Various inputs are used in determining the value of the Fund's investments.
	In addition to defining fair value, FAS 157 established a three-tier hierarchy of inputs to establish a classification of fair value measurements for disclosure purposes. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below.

	•	Level 1 – quoted prices in active markets for identical investments
	•	Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, amortized cost, etc.)

  

See Notes to Financial Statements

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Notes to Schedule of Investments (Unaudited) (cont'd)

•

Level 3 – significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments)

The inputs or methodology used for valuing an investment are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used to value the Fund's investments as of April 30, 2009:

Following is a reconciliation between the beginning and ending balances of investments in which significant unobservable inputs (Level 3) were used in determining value:

##	At April 30, 2009, the cost of investments for U.S. federal income tax purposes was $171,458,000. Gross unrealized appreciation of investments was $6,434,000 and gross unrealized depreciation of investments was $42,942,000, resulting in net unrealized depreciation of $36,508,000 based on cost for U.S. federal income tax purposes.
@	Neuberger Berman Prime Money Fund ("Prime Money") is also managed by Neuberger Berman Management LLC, the Fund's investment manager, and may be considered an affiliate since it has the same officers, Board members, and investment manager as the Fund and because, at times, the Fund may own 5% or more of the outstanding voting securities of Prime Money (see Notes A & E of Notes to Financial Statements).
ñ	Restricted security subject to restrictions on resale under federal securities laws. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers under Rule 144A under the Securities Act of 1933, as amended, and have been deemed by the investment manager to be liquid. At April 30, 2009, these securities amounted to approximately $17,959,000 or 22.0% of net assets applicable to common shareholders.
ØØ	All or a portion of this security is segregated in connection with obligations for when-issued and delayed delivery purchase commitments.
µ	Floating rate securities are securities whose yields vary with a designated market index or market rate. These securities are shown at their current rates as of April 30, 2009.
^^	Denotes a step-up bond: a zero coupon bond that converts to a fixed rate of interest at a designated future date.

See Notes to Financial Statements

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Notes to Schedule of Investments (Unaudited) (cont'd)

‡	Managed by an affiliate of Neuberger Berman Management LLC and could be deemed an affiliate of the Fund and is segregated in connection with obligations for security lending (see Notes A & E of Notes to Financial Statements).
È	All or a portion of this security is on loan (see Note A of Notes to Financial Statements).
Ø	All or a portion of this security was purchased on a when-issued basis. At April 30, 2009, these securities amounted to $392,000 or 0.5% of net assets.
^	All or a portion of this security was purchased on a delayed delivery basis. As of April 30, 2009, the value of the Fund's unfunded loan commitments were approximately $1,138,000, pursuant to the following loan agreements

See Notes to Financial Statements

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Statement of Assets and Liabilities (Unaudited)

Neuberger Berman
(000's omitted except per share amounts)

See Notes to Financial Statements

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Statement of Operations (Unaudited)

Neuberger Berman
(000's omitted)

See Notes to Financial Statements

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Statements of Changes in Net Assets

Neuberger Berman
(000's omitted)

See Notes to Financial Statements

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Statement of Cash Flows (Unaudited)

Neuberger Berman
(000's omitted)

	INCOME OPPORTUNITY FUND INC
	For the Six Months Ended April 30, 2009

See Notes to Financial Statements

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Note A—Summary of Significant Accounting Policies:

1	General: Neuberger Berman Income Opportunity Fund Inc. (the "Fund") was organized as a Maryland corporation on April 17, 2003 as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). The Board of Directors of the Fund (the "Board") may classify or re-classify any unissued shares of capital stock into one or more classes of preferred stock without the approval of common shareholders.
	The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires Neuberger Berman Management LLC ("Management") to make estimates and assumptions at the date of the financial statements. Actual results could differ from those estimates.
2	Portfolio valuation: Investment securities are valued as indicated in the notes following the Schedule of Investments.
3	Securities transactions and investment income: Securities transactions are recorded on trade date for financial reporting purposes. Dividend income is recorded on the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Interest income, including accretion of discount (adjusted for original issue discount, where applicable), and amortization of premium, where applicable, is recorded on the accrual basis. Realized gains and losses from securities transactions and foreign currency transactions, if any, are recorded on the basis of identified cost and stated separately in the Statement of Operations.
4	Income tax information: It is the policy of the Fund to continue to qualify as a regulated investment company by complying with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its earnings to its shareholders. Therefore, no federal income or excise tax provision is required.
	The Fund has adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 ("FIN 48") "Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109". FIN 48 sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken, or expected to be taken, in a tax return. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as an income tax expense in the Statement of Operations. The Fund is subject to examination by U.S. federal and state tax authorities for returns filed for the prior three fiscal years 2005 - 2007. As of April 30, 2009, the Fund did not have any unrecognized tax benefits.
	Income distributions and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. These differences are primarily due to differing treatments of income and gains on various investment securities held by the Fund, timing differences and differing characterization of distributions made by the Fund as a whole.
	As determined on October 31, 2008, permanent differences resulting primarily from different book and tax accounting for amortization of bond premium, paydown gains and losses, distribution redesignations, income recognized on interest rate swaps, return of capital adjustments and characterization of distributions from real estate investment trusts ("REITs") were reclassified at fiscal year-end. These reclassifications had no effect on net income, net asset value applicable to common shareholders or net asset value per common share of the Fund.

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The tax character of distributions paid during the years ended October 31, 2008 and October 31, 2007 was as follows:

As of October 31, 2008, the components of distributable earnings (accumulated losses) on a U.S. federal income tax basis were as follows:

The difference between book basis and tax basis distributable earnings is attributable primarily to timing differences of distribution payments, capital loss carryforwards, wash sales, amortization of bond premium, and partnership basis adjustments.

To the extent the Fund's net realized capital gains, if any, can be offset by capital loss carryforwards, it is the policy of the Fund not to distribute such gains. As determined at October 31, 2008, the Fund had unused capital loss carryforwards available for federal income tax purposes to offset net realized capital gains, if any, as follows:

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Distributions to shareholders: The Fund earns income, net of expenses, daily on its investments. It is the policy of the Fund to declare and pay monthly distributions to common shareholders. The Fund has adopted a policy to pay common shareholders a stable monthly distribution. The Fund's ability to satisfy its policy will depend on a number of factors, including the stability of income received from its investments, the availability of capital gains, distributions paid on preferred shares, interest paid on notes and the level of Fund expenses. In an effort to maintain a stable distribution amount, the Fund may pay distributions consisting of net investment income, realized gains and paid-in capital. There is no assurance that the Fund will always be able to pay distributions of a particular size, or that distributions will consist solely of net investment income and realized capital gains. The composition of the Fund's distributions for the calendar year 2009 will be reported to Fund shareholders on IRS Form 1099DIV. The Fund may pay distributions in excess of those required by its stable distribution policy to avoid excise tax or to satisfy the requirements of Subchapter M of the Internal Revenue Code. Distributions to common shareholders are recorded on the ex-date. Net realized capital gains, if any, will be offset to the extent of any available capital loss carryforwards. Any such offset will not reduce the level of the stable distribution paid by the Fund. Distributions to preferred shareholders are accrued and determined as described in Note A-7.

The Fund invests a significant portion of its assets in securities issued by real estate companies, including real estate investment trusts ("REITs"). The distributions the Fund receives from REITs are generally comprised of income, capital gains, and return of capital, but the REITs do not report this information to the Fund until the following calendar year. At October 31, 2008, the Fund estimated these amounts within the financial statements since the information is not available from the REITs until after the Fund's fiscal year-end. At April 30, 2009, the Fund estimated these amounts for the period January 1, 2009 to April 30, 20009 within the financial statements since the 2009 information is not available from the REITs until after the Fund's fiscal period. For the year ended October 31, 2008, the character of distributions paid to shareholders disclosed within the Statements of Changes in Net Assets

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	is based on estimates made at that time. All estimates are based upon REIT information sources available to the Fund together with actual IRS Forms 1099DIV received to date. Based on past experience it is possible that a portion of the Fund's distributions during the most recently completed fiscal year will be considered tax return of capital but the actual amount of tax return of capital, if any, is not determinable until after the Fund's fiscal year-end. After calendar year-end, when the Fund learns the nature of the distributions paid by REITs during that year, distributions previously identified as income are often recharacterized as return of capital and/or capital gain. After all applicable REITs have informed the Fund of the actual breakdown of distributions paid to the Fund during its fiscal year, estimates previously recorded are adjusted on the books of the Fund to reflect actual results. As a result, the composition of the Fund's distributions as reported herein may differ from the final composition determined after calendar year-end and reported to Fund shareholders on IRS Form 1099DIV.
	On April 30, 2009, the Fund declared a monthly distribution to common shareholders in the amount of $0.05 per share, payable on May 29, 2009 to shareholders of record on May 15, 2009, with an ex-date of May 13, 2009. Subsequent to April 30, 2009, the Fund declared a monthly distribution to common shareholders in the amount of $0.05 per share, payable on June 30, 2009 to shareholders of record on June 15, 2009, with an ex-date of June 11, 2009.
6	Expense allocation: Certain expenses are applicable to multiple funds. Expenses directly attributable to the Fund are charged to the Fund. Expenses borne by the complex of related investment companies, which includes open-end and closed-end investment companies for which Management serves as investment manager, that are not directly attributed to the Fund are allocated among the Fund and the other investment companies in the complex or series thereof on the basis of relative net assets, except where a more appropriate allocation of expenses to each investment company in the complex or series thereof can otherwise be made fairly.
7	Financial leverage: On June 5, 2003, the Fund re-classified 6,000 unissued shares of capital stock as Series A Auction Preferred Shares and Series B Auction Preferred Shares ("Preferred Shares"). On September 26, 2003, the Fund issued 2,510 Series A Preferred Shares and 2,510 Series B Preferred Shares. All Preferred Shares have a liquidation preference of $25,000 per share plus any accumulated unpaid distributions, whether or not earned or declared by the Fund, but excluding interest thereon ("Liquidation Value").
	Except when the Fund declared a special rate period, distributions to preferred shareholders, which were cumulative, were accrued daily and paid every 7 days. Distribution rates were reset every 7 days based on the results of an auction, except during special rate periods. For the period ended November 11, 2008, the distribution rates ranged from 1.44% to 1.46% for Series B Preferred Shares.
	In September 2008, the Fund entered into a Master Securities Purchase Agreement and a Master Note Purchase Agreement pursuant to which it could issue privately placed notes ("PNs") and privately placed perpetual preferred shares ("PPS" and, together with PNs, "Private Securities") and use the proceeds to redeem outstanding Preferred Shares. On October 27, 2008, the Fund redeemed all of its outstanding Series A Preferred Shares, having an aggregate liquidation preference of $62,500,000. On October 29, 2008, the Fund redeemed half of its outstanding Series B Preferred Shares, having an aggregate liquidation preference of $31,250,000, and issued PNs with an aggregate principal amount of $19,000,000. On November 12, 2008, the Fund redeemed the remaining outstanding Series B Preferred Shares, having an aggregate liquidation value of $31,250,000, and issued additional PNs with an aggregate principal value of $23,400,000 and issued 595 PPS with an aggregate liquidation preference of $14,875,000. All Preferred Shares redemptions were effected at the liquidation price of $25,000 per share plus any accumulated and unpaid dividends.
	The PNs mature in October 2013 and interest thereon is accrued daily and paid quarterly. The PPS have a liquidation preference of $25,000 per share plus any accumulated unpaid distributions, whether or not earned or declared by the Fund, but excluding interest thereon ("PPS Liquidation Value"). Distributions are accrued daily and paid quarterly for PPS. For the six months ended April 30, 2009, the distribution rates on the PPS ranged from 4.12% to 5.19% and the interest rates on the PNs ranged from 2.62% to 4.92%. The Fund has paid upfront offering

 

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	and organizational expenses which are being amortized over the life of the PNs. These expenses are included in the interest expense that is reflected in the Statement of Operations.
	The Fund may redeem PPS or prepay the PNs, in whole or in part, at its option after giving a minimum amount of notice to the relevant holders of the Private Securities, but will incur additional expenses if it chooses to so redeem or prepay. The Fund is also subject to certain restrictions relating to the Private Securities. Failure to comply with these restrictions could preclude the Fund from declaring any distributions to common shareholders or repurchasing common shares and/or could trigger the mandatory redemption of PPS at PPS Liquidation Value and/or mandatory prepayment of PNs at par plus accrued but unpaid interest. The holders of PPS are entitled to one vote per share and will vote with holders of common shares as a single class, except that the holders of PPS will vote separately as a class on certain matters, as required by law or the Fund's charter. The holders of the PPS, voting as a separate class, are entitled at all times to elect two Directors of the Fund, and to elect a majority of the Directors of the Fund if the Fund fails to pay distributions on PPS for two consecutive years.
	During the six months ended April 30, 2009, the Fund prepaid $5,700,000 of the aggregate principal amount of the PNs outstanding and incurred certain additional expenses in connection therewith. For the six months ended April 30, 2009, the expenses amounted to $228,000 and are reflected in the Statement of Operations under the caption "Pre-Payment expenses."
8	Interest rate swaps: The Fund may enter into interest rate swap transactions, with institutions that Management has determined are creditworthy, to reduce the risk that an increase in short-term interest rates could reduce common share net earnings as a result of leverage. Under the terms of an interest rate swap contract, the Fund agrees to pay the swap counter party a fixed-rate payment in exchange for the counter party's paying the Fund a variable-rate payment that is intended to approximate all or a portion of the Fund's variable-rate payment obligation on the Fund's Private Securities. The fixed-rate and variable-rate payment flows are netted against each other, with the difference being paid by one party to the other on a monthly basis. The Fund segregates cash or liquid securities having a value at least equal to the Fund's net payment obligations under any swap transaction, marked to market daily.
	Risks may arise if the counter party to a swap contract fails to comply with the terms of its contract. The loss incurred by the failure of a counter party is generally limited to the net interest payment to be received by the Fund and/or the termination value at the end of the contract. Additionally, risks may arise from movements in interest rates unanticipated by Management.
	Periodic expected interim net interest payments or receipts on the swaps are recorded as an adjustment to unrealized gains/losses, along with the fair value of the future periodic payment streams on the swaps. The unrealized gains/losses associated with the periodic interim net interest payments are reclassified to realized gains/losses in conjunction with the actual net receipt or payment of such amounts. The reclassifications do not impact the Fund's total net assets applicable to common shareholders or its total net increase (decrease) in net assets applicable to common shareholders resulting from operations. At April 30, 2009, the Fund had no outstanding interest rate swap contracts.
9	Security lending: A third party, eSecLending, has assisted the Fund in conducting a bidding process to try to identify agents/principals that would pay a guaranteed amount to the Fund in consideration of the Fund entering into an exclusive securities lending arrangement. eSecLending currently serves as exclusive lending agent for the Fund. The Fund is currently not guaranteed any particular level of income.
	Under the securities lending arrangement, the Fund receives cash collateral at the beginning of each transaction equal to at least 102% of the prior day's market value of the loaned securities (105% in the case of international securities). The Fund may invest all the cash collateral in Neuberger Berman Securities Lending Quality Fund, LLC ("Quality Fund"), a fund managed by Neuberger Berman Fixed Income LLC (formerly known as Lehman Brothers Asset Management LLC) ("NBFI"), an affiliate of Management. The Quality Fund is not a money market fund that

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the high yield securities in which the Fund invests and the real or perceived difficulty of issuers of those high yield securities to meet their payment obligations during economic downturns or because of negative business developments relating to the issuer or its industry in general, the value of the Fund's shares may fluctuate more than would be the case if the Fund did not concentrate in high yield securities.

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Indemnifications: Like many other companies, the Fund's organizational documents provide that its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, both in some of its principal service contracts and in the normal course of its business, the Fund enters into contracts that provide indemnifications to other parties for certain types of losses or liabilities. The Fund's maximum exposure under these arrangements is unknown as this could involve future claims against the Fund.

Note B—Management Fees, Administration Fees, and Other Transactions with Affiliates:

The Fund retains Management as its investment manager under a Management Agreement. For such investment management services, the Fund pays Management a fee at the annual rate of 0.60% of its average daily Managed Assets. Managed Assets equal the total assets of the Fund, less liabilities other than the aggregate indebtedness entered into for purposes of leverage. For purposes of calculating Managed Assets, the Liquidation Value of any PPS or other Preferred Shares outstanding and principal balance of PNs issued is not considered a liability. Management has contractually agreed to waive a portion of the management fees it is entitled to receive from the Fund at the following annual rates:

	Management has not contractually agreed to waive any portion of its fees beyond October 31, 2011.
	In connection with the May 2009 tender offer and the tender offer program, Management has agreed to voluntarily extend for one year the contractual fee waivers currently in place, so that the fee waiver as a percentage of average daily Managed Assets would be 0.19% for the fiscal year ended October 31, 2010, 0.13% for the fiscal year ended October 31, 2011 and 0.07% for the fiscal year ended October 31, 2012.
	For the six months ended April 30, 2009, such waived fees amounted to $116,127.
	The Fund retains Management as its administrator under an Administration Agreement. The Fund pays Management an administration fee at the annual rate of 0.25% of its average daily Managed Assets under this agreement. Additionally, Management retains State Street Bank and Trust Company ("State Street") as its sub-administrator under a Sub-Administration Agreement. Management pays State Street a fee for all services received under the agreement.
	Neuberger and NBFI are retained by Management to furnish it with investment recommendations and research information without added cost to the Fund. Several individuals who are officers and/or Directors of the Fund are also employees of NBFI, Neuberger and/or Management.
	During the reporting period, the predecessor of Management, the investment manager of the Fund, Lehman Brothers Asset Management LLC and Neuberger Berman, LLC, the sub-advisers of the Fund, were wholly owned subsidiaries of Lehman Brothers Holdings Inc. ("Lehman Brothers"), a publicly owned holding company. On September 15, 2008, Lehman Brothers filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. On December 3, 2008, NBSH Acquisition, LLC ("NBSH"), an entity organized by key members of Neuberger Berman's senior management, was selected as the successful bidder in the public auction to acquire a majority interest in

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Neuberger Berman's business and the fixed income and certain alternative asset management businesses of Lehman Brothers' Investment Management Division (together with Neuberger Berman, the "Acquired Businesses") (the "Acquisition"). On December 22, 2008, the bankruptcy court having jurisdiction over the Lehman Brothers matter approved the sale of the Acquired Businesses to NBSH (or its successor or assign), as the successful bidder.

 The Acquisition closed after the end of the reporting period. As of May 4, 2009, the Acquired Businesses are now indirectly owned by, among others, portfolio managers, Neuberger Berman's management team, and certain key members and senior professionals who are employed in various parts of the Neuberger Berman complex of companies, with a minority interest retained by Lehman Brothers and certain affiliates of Lehman Brothers.

The closing of the Acquisition resulted in an "assignment" of the Fund's Management Agreement and Sub-Advisory Agreements. Such an assignment, by law, would automatically terminate those agreements. Accordingly, prior to the closing the Board, including the Directors who are not "interested persons" of the Fund's investment manager and its affiliates or the Fund, considered and approved a new Management Agreement and new Sub-Advisory Agreements and an interim Management Agreement and interim Sub-Advisory Agreements for the Fund. The interim agreements,which are virtually identical to the agreements previously in effect and can remain in effect for up to 150 days, became effective upon the closing of the Acquisition. The new agreements, which are virtually identical to those previously in effect and require shareholder approval, were approved by a vote of the Fund's shareholders in May 2009.

These events have not had a material impact on the Fund or its operations. Management, NBFI and Neuberger Berman LLC (formerly known as Neuberger Berman, LLC) ("Neuberger") continue to operate in the ordinary course of business as the investment manager and sub-advisers of the Fund.

The Fund has an expense offset arrangement in connection with its custodian contract. For the six months ended April 30, 2009, the impact of this arrangement was a reduction of expenses of $174.

In connection with the settlement of each Preferred Share auction, the Fund paid, through the auction agent, a service fee to each participating broker-dealer based upon the aggregate liquidation preference of the Preferred Shares held by the broker-dealer's customers. For any auction preceding a rate period of less than one year, the service fee was paid at the annual rate of ¹ / ₄ of 1%; for any auction preceding a rate period of one year or more, the service fee was paid at a rate agreed to by the Fund and the broker-dealer.

In order to satisfy rating agency requirements, the Fund is required to provide the rating agency a report on a monthly basis verifying that the Fund is maintaining eligible assets having a discounted value equal to or greater than a Basic Maintenance Amount, which is a minimum level set by the rating agency as one of the conditions to maintain the AAA rating on the Private Securities. "Discounted value" refers to the fact that the rating agency requires the Fund, in performing this calculation, to discount portfolio securities below their face value, at rates determined by the rating agency. The Fund pays a fee to State Street for the preparation of these reports, which is reflected in the Statement of Operations under the caption "Basic maintenance expense."

Note C—Securities Transactions:

During the six months ended April 30, 2009, there were purchase and sale transactions (excluding short-term securities and interest rate swap contracts) of $66,744,604 and $64,002,349, respectively.

During the six months ended April 30, 2009, brokerage commissions on securities transactions from affiliated brokers were as follows: Neuberger received $0.

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Note D—Capital:

At April 30, 2009, the common shares outstanding and the common shares of the Fund owned by Neuberger were as follows:

There were no transactions in common shares for the six months ended April 30, 2009 and the year ended October 31, 2008.

Note E—Investments In Affiliates:

Name of Issuer	Balance of Shares Held October 31, 2008	Gross Purchases and Additions	Gross Sales and Reductions	Balance of Shares Held April 30, 2009	Value April 30, 2009		Income from Investments in Affiliated Issuers Included in Total Income
Neuberger Berman Prime    Money Fund Trust Class*	6,735,947	45,024,906	47,692,925	4,067,928	$4,067,928		$30,512
Neuberger Berman Securities    Lending Quality Fund, LLC**	—	5,032,370	2,744,320	2,288,050	2,288,050		3,909
Total					$6,355,978		$34,421

*	Prime Money is also managed by Management and may be considered an affiliate since it has the same officers, Board members, and investment manager as the Fund and because, at times, the Fund may own 5% or more of the outstanding voting securities of Prime Money.
**	Quality Fund, a fund managed by NBFI, an affiliate of Management, is used to invest cash the Fund receives as collateral for securities loans as approved by the Board. Because all shares of Quality Fund are held by funds in the related investment management complex, Quality Fund may be considered an affiliate of the Fund.

Note F—Recent Accounting Pronouncements:

In March 2008, Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133" ("FAS 161"), was issued. FAS 161 is intended to improve financial reporting for derivative instruments by requiring enhanced disclosure that enables investors to understand how and why an entity uses derivatives, how derivatives are accounted for, and how derivative instruments affect an entity's results of operations and financial position. In September 2008, FASB Staff Position No. 133-1 and FASB Interpretation No. 45-4 (the "FSP"), "Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161" was issued. Certain provisions of the FSP amend FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. These FSP provisions are effective for fiscal years and interim periods ending after November 15, 2008. At this time, Management has assessed the implication of these FSP provisions and determined there is no impact to the Fund's financial statements. The FSP also clarifies the effective date of FAS 161, whereby disclosures required by FAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The impact of FAS 161 on the Fund's financial statement disclosures, if any, is currently being assessed.

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In April 2009, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position No. 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP 157-4"). FSP 157-4 provides additional guidance for estimating fair value in accordance with FASB Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157"), when the volume and level of activity for the asset or liability have significantly decreased as well as guidance on identifying circumstances that indicate a transaction is not orderly. FSP 157-4 is effective for fiscal years and interim periods ending after June 15, 2009. Management is currently evaluating the impact the adoption of FSP 157-4 will have on the Fund's financial statement disclosures.

Note G—Recent Market Events

The six months covered by this report witnessed an unusually high degree of volatility in the financial markets so that certain fixed income instruments experienced liquidity issues, increased price volatility, credit downgrades, and an increase in default rates. Both domestic and international equity markets have also been experiencing heightened volatility and turmoil, with issuers that have exposure to the real estate, mortgage and credit markets particularly affected. Due to the market turbulence, there was increased demand for securities issued or guaranteed by the U.S. Treasury, causing the prices of these securities to rise and their yields to decline to very low levels. The U.S. federal government and certain foreign governments have acted to calm credit markets and increase confidence in the U.S. and world economies. The U.S. government has assisted certain large financial services companies and has established programs to purchase troubled assets and certain money market instruments. Certain debt securities held by the Fund during the reporting period were affected by the volatility in the fixed income markets and may have been affected by governmental actions. The Fund's investments in certain issuers, as reflected in the Fund's schedule of investments, and the financial markets in general, expose investors to the volatile performance resulting from these market conditions and related events.

Note H—Subsequent Events

The Fund conducted a tender offer that commenced on May 1, 2009 and expired on May 29, 2009. The Fund offered to purchase up to 10% of its outstanding common shares at a price equal to 98% of its NAV per share determined on the day the tender offer expired. The Fund's tender offer was oversubscribed. In accordance with the terms of the tender offer, the Fund accepted all shares properly tendered by shareholders holding fewer than 100 common shares that tendered all their shares and that provided appropriate certification as part of the tender ("odd-lot adjustment"). The Fund purchased the remainder of the common shares on a pro-rata basis, after making the odd-lot adjustment, based on the number of shares properly tendered. Under the terms of the tender offer, on June 5, 2009, the Fund accepted 1,773,438 common shares, representing 10% of its then outstanding common shares. Final payment was made at $4.89 per share, representing 98% of the NAV per share on May 29, 2009.

In addition, the Fund has announced that its Board has authorized a semi-annual tender offer program consisting of up to four tender offers over a two-year period. Under the tender offer program, if the Fund's common shares trade at an average daily discount to NAV per share of greater than 10% during a 12-week measurement period, the Fund would conduct a tender offer for between 5% and 20% of its outstanding common shares at a price equal to 98% of its NAV per share determined on the day the tender offer expires. The Board has determined that the initial measurement period under the program will commence on June 5, 2009 and end on August 28, 2009 (the "Measurement Period"). Furthermore, the Board has decided that should the Fund's average daily discount exceed 10% during the Measurement Period, the Fund will make a tender offer for up to 10% of its outstanding common shares. In connection with the May 2009 tender offer and the tender offer program, Management has agreed to voluntarily extend for one year the contractual fee waivers currently in place to offset some of the expenses associated with, or possible increases in the Fund's expense ratio resulting from, the tender offers. The Board retains the ability, consistent with its fiduciary duty, to opt out of the tender offer program should circumstances arise that the Board believes could cause a material negative effect on the Fund or the Fund's shareholders.

Note I—Unaudited Financial Information

The financial information included in this interim report is taken from the records of each Fund without audit by an independent registered public accounting firm. Annual reports contain audited financial statements.

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Income Opportunity Fund Inc.

The following table includes selected data for a share outstanding throughout each period and other performance information derived from the Financial Statements.

See Notes to Financial Highlights

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†	Total return based on per share net asset value reflects the effects of changes in net asset value on the performance of the Fund during each fiscal period. Total return based on per share market value assumes the purchase of common shares at the market price on the first day and sale of common shares at the market price on the last day of the period indicated. Distributions, if any, are assumed to be reinvested at prices obtained under the Fund's distribution reinvestment plan. Results represent past performance and do not guarantee future results. Current returns may be lower or higher than the performance data quoted. Investment returns may fluctuate and shares when sold may be worth more or less than original cost. Total return would have been lower if Management had not waived a portion of the investment management fee.
#	The Fund is required to calculate an operating expense ratio without taking into consideration any expense reductions related to expense offset arrangements.
‡	After waiver of a portion of the investment management fee by Management. Had Management not undertaken such action, the annualized ratios of net operating expenses to average daily net assets applicable to common shareholders would have been:

@	Calculated by subtracting the Fund's total liabilities (excluding accumulated unpaid distributions on PPS (Preferred Shares prior to November 12, 2008)) from the Fund's total assets and dividing by the number of PPS/Preferred Shares outstanding.
@@	Calculated by subtracting the Fund's total liabilities (excluding accumulated unpaid distributions on PPS (Preferred Shares prior to November 12, 2008) and the Notes payable) from the Fund's total assets and dividing by the outstanding notes payable balance.
††	Expense ratios do not include the effect of distribution payments to preferred shareholders. Income ratios include income earned on assets attributable to Private Securities (Preferred Shares prior to November 12, 2008) outstanding.
ß	Prior to November 1, 2003, the Fund recorded the accrual of the net interest income or expense expected to be received or paid at interim settlement dates as a net payable or receivable for swap contracts and actual amounts paid as net interest income or expense on swap contracts. As a result of SEC staff guidance relating to the application of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities to registered investment companies, effective November 1, 2003, periodic expected interim net interest payments or receipts on the swaps are recorded as an adjustment to unrealized gains/losses, along with the fair value of the future periodic payment streams on the swaps. Accordingly, for the year ended October 31, 2004, the per share amounts and ratios shown decreased or increased as follows:

¢	Calculated based on the average number of shares outstanding during each fiscal period.
¢¢	From September 26, 2003 to October 27, 2008, the Fund had 2,510 Preferred Shares Series A outstanding; and from September 26, 2003 to November 12, 2008, the Fund had 2,510 Preferred Shares Series B outstanding; since November 12, 2008, the Fund has 595 PPS outstanding (see Note A-7 of Notes to Financial Statements).
Ø	For the six months ended April 30, 2009, interest expense is not included in operating expense ratios.
*	Annualized.
**	Not annualized.
§§	Pre-payment expense, which is an extraordinary and non-recurring expense, is included in ratios on a non-annualized basis.

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The Bank of New York Mellon ("Plan Agent") will act as Plan Agent for shareholders who have not elected in writing to receive dividends and distributions in cash (each a "Participant"), will open an account for each Participant under the Distribution Reinvestment Plan ("Plan") in the same name as their then current Shares are registered, and will put the Plan into effect for each Participant as of the first record date for a dividend or capital gains distribution.

Whenever the Fund declares a dividend or distribution with respect to the common stock of the Fund ("Shares"), each Participant will receive such dividends and distributions in additional Shares, including fractional Shares acquired by the Plan Agent and credited to each Participant's account. If on the payment date for a cash dividend or distribution, the net asset value is equal to or less than the market price per Share plus estimated brokerage commissions, the Plan Agent shall automatically receive such Shares, including fractions, for each Participant's account. Except in the circumstances described in the next paragraph, the number of additional Shares to be credited to each Participant's account shall be determined by dividing the dollar amount of the dividend or distribution payable on their Shares by the greater of the net asset value per Share determined as of the date of purchase or 95% of the then current market price per Share on the payment date.

Should the net asset value per Share exceed the market price per Share plus estimated brokerage commissions on the payment date for a cash dividend or distribution, the Plan Agent or a broker-dealer selected by the Plan Agent shall endeavor, for a purchase period lasting until the last business day before the next date on which the Shares trade on an "ex-dividend" basis, but in no event, except as provided below, more than 30 days after the payment date, to apply the amount of such dividend or distribution on each Participant's Shares (less their pro rata share of brokerage commissions incurred with respect to the Plan Agent's open-market purchases in connection with the reinvestment of such dividend or distribution) to purchase Shares on the open market for each Participant's account. No such purchases may be made more than 30 days after the payment date for such dividend or distribution except where temporary curtailment or suspension of purchase is necessary to comply with applicable provisions of federal securities laws. If, at the close of business on any day during the purchase period the net asset value per Share equals or is less than the market price per Share plus estimated brokerage commissions, the Plan Agent will not make any further open-market purchases in connection with the reinvestment of such dividend or distribution. If the Plan Agent is unable to invest the full dividend or distribution amount through open-market purchases during the purchase period, the Plan Agent shall request that, with respect to the uninvested portion of such dividend or distribution amount, the Fund issue new Shares at the close of business on the earlier of the last day of the purchase period or the first day during the purchase period on which the net asset value per Share equals or is less than the market price per Share, plus estimated brokerage commissions, such Shares to be issued in accordance with the terms specified in the third paragraph hereof. These newly issued Shares will be valued at the then-current market price per Share at the time such Shares are to be issued.

For purposes of making the reinvestment purchase comparison under the Plan, (a) the market price of the Shares on a particular date shall be the last sales price on the New York Stock Exchange (or if the Shares are not listed on the New York Stock Exchange, such other exchange on which the Shares are principally traded) on that date, or, if there is no sale on such Exchange (or if not so listed, in the over-the-counter market) on that date, then the mean between the closing bid and asked quotations for such Shares on such Exchange on such date and (b) the net asset value per Share on a particular date shall be the net asset value per Share most recently calculated by or on behalf of the Fund. All dividends, distributions and other payments (whether made in cash or Shares) shall be made net of any applicable withholding tax.

Open-market purchases provided for above may be made on any securities exchange where the Fund's Shares are traded, in the over-the-counter market or in negotiated transactions and may be on such terms as to price, delivery and otherwise as the Plan Agent shall determine. Each Participant's uninvested funds held by the Plan Agent will not bear interest, and it is understood that, in any event, the Plan Agent shall have no liability in connection with any inability to purchase Shares within 30 days after the initial date of such purchase as herein provided, or with the timing of any purchases effected. The Plan Agent shall have no responsibility as to the value of the Shares acquired for each Participant's account. For the purpose

33

of cash investments, the Plan Agent may commingle each Participant's funds with those of other shareholders of the Fund for whom the Plan Agent similarly acts as agent, and the average price (including brokerage commissions) of all Shares purchased by the Plan Agent as Plan Agent shall be the price per Share allocable to each Participant in connection therewith.

The Plan Agent may hold each Participant's Shares acquired pursuant to the Plan together with the Shares of other shareholders of the Fund acquired pursuant to the Plan in noncertificated form in the Plan Agent's name or that of the Plan Agent's nominee. The Plan Agent will forward to each Participant any proxy solicitation material and will vote any Shares so held for each Participant only in accordance with the instructions set forth on proxies returned by the Participant to the Fund.

The Plan Agent will confirm to each Participant each acquisition made for their account as soon as practicable but not later than 60 days after the date thereof. Although each Participant may from time to time have an undivided fractional interest (computed to three decimal places) in a Share, no certificates for a fractional Share will be issued. However, dividends and distributions on fractional Shares will be credited to each Participant's account. In the event of termination of a Participant's account under the Plan, the Plan Agent will adjust for any such undivided fractional interest in cash at the market value of the Shares at the time of termination, less the pro rata expense of any sale required to make such an adjustment.

Any Share dividends or split Shares distributed by the Fund on Shares held by the Plan Agent for Participants will be credited to their accounts. In the event that the Fund makes available to its shareholders rights to purchase additional Shares or other securities, the Shares held for each Participant under the Plan will be added to other Shares held by the Participant in calculating the number of rights to be issued to each Participant.

The Plan Agent's service fee for handling capital gains distributions or income dividends will be paid by the Fund. Participants will be charged their pro rata share of brokerage commissions on all open-market purchases.

Each Participant may terminate their account under the Plan by notifying the Plan Agent in writing. Such termination will be effective immediately if the Participant's notice is received by the Plan Agent not less than ten days prior to any dividend or distribution record date, otherwise such termination will be effective the first trading day after the payment date for such dividend or distribution with respect to any subsequent dividend or distribution. The Plan may be terminated by the Plan Agent or the Fund upon notice in writing mailed to each Participant at least 30 days prior to any record date for the payment of any dividend or distribution by the Fund.

These terms and conditions may be amended or supplemented by the Plan Agent or the Fund at any time or times but, except when necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority, only by mailing to each Participant appropriate written notice at least 30 days prior to the effective date thereof. The amendment or supplement shall be deemed to be accepted by each Participant unless, prior to the effective date thereof, the Plan Agent receives written notice of the termination of their account under the Plan. Any such amendment may include an appointment by the Plan Agent in its place and stead of a successor Plan Agent under these terms and conditions, with full power and authority to perform all or any of the acts to be performed by the Plan Agent under these terms and conditions. Upon any such appointment of any Plan Agent for the purpose of receiving dividends and distributions, the Fund will be authorized to pay to such successor Plan Agent, for each Participant's account, all dividends and distributions payable on Shares held in their name or under the Plan for retention or application by such successor Plan Agent as provided in these terms and conditions.

The Plan Agent shall at all times act in good faith and agrees to use its best efforts within reasonable limits to ensure the accuracy of all services performed under this Agreement and to comply with applicable law, but assumes no responsibility and shall not be liable for loss or damage due to errors unless such error is caused by the Plan Agent's negligence, bad faith, or willful misconduct or that of its employees.

These terms and conditions shall be governed by the laws of the State of Maryland.

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Directory

Investment Manager and Administrator Neuberger Berman Management LLC 605 Third Avenue, 2nd Floor New York, NY 10158-0180 877.461.1899 or 212.476.8800 Sub-Advisers Neuberger Berman LLC 605 Third Avenue New York, NY 10158-3698 Neuberger Berman Fixed Income LLC 200 South Wacker Drive Suite 2100 Chicago, IL 60601 Custodian State Street Bank and Trust Company 2 Avenue de Lafayette Boston, MA 02111

Stock Transfer Agent Bank of New York Mellon 480 Washington Boulevard Jersey City, NJ 07317 Legal Counsel K&L Gates LLP 1601 K Street, NW Washington, DC 20006 Independent Registered Public Accounting Firm Ernst & Young LLP 200 Clarendon Street Boston, MA 02116

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Proxy Voting Policies and Procedures

A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, by calling 1-800-877-9700 (toll-free) and on the website of the Securities and Exchange Commission at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is also available, without charge, by calling 1-800-877-9700 (toll-free), on the website of the Securities and Exchange Commission at www.sec.gov, and on Management's website at www.nb.com.

Quarterly Portfolio Schedule

The Fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the Securities and Exchange Commission's website at www.sec.gov and may be reviewed and copied at the Securities and Exchange Commission's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The information on Form N-Q is available upon request, without charge, by calling 1-800-877-9700 (toll-free).

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Board Consideration of the New and Interim Management and Sub-Advisory Agreements

Lehman Brothers Holdings Inc. ("Lehman Brothers") entered into an agreement to sell a controlling interest in the investment manager and sub-advisers of Neuberger Berman Income Opportunity Fund Inc. (the "Fund"). Under the agreement, Lehman Brothers sold substantially all of the Neuberger Berman business and the fixed income business and certain alternative asset management businesses of Lehman Brothers' Investment Management Division (collectively, the "Acquired Businesses") to NBSH Acquisition, LLC (the "Acquisition"). NBSH Acquisition, LLC ("NBSH") was organized by key members of Neuberger Berman's management for the purpose of facilitating the acquisition of the Acquired Businesses. As of the closing of the Acquisition on May 4, 2009, a majority interest in the Acquired Businesses is directly or indirectly owned by portfolio managers, Neuberger Berman's management team and certain key members and senior professionals who are employed in various parts of the Neuberger Berman complex of companies ("Management Members"), with a minority interest retained by Lehman Brothers and certain affiliates of Lehman Brothers.

The Acquired Businesses included Neuberger Berman Management LLC ("Management") and Lehman Brothers Asset Management LLC ("LBAM") and Neuberger Berman, LLC ("Neuberger"), the investment manager and sub-advisers to the Fund, respectively. The Acquisition was deemed to result in an "assignment" of the Fund's then-current Management Agreement and Sub-Advisory Agreements (the "then-Current Agreements") under the 1940 Act. As required by the 1940 Act, the Fund's then-Current Agreements provided for their automatic termination in the event of an assignment, and each terminated upon the consummation of the Acquisition. Accordingly, on December 17, 2008, the Board approved new Management and Sub-Advisory Agreements with Management and LBAM and Neuberger, respectively, or their successors (together, the "Advisers"), on the same terms and with the same compensation structure as was currently in effect on that date (together, "New Agreements"), which took effect after consummation of the Acquisition and approval by the Fund's shareholders.

In case shareholders of the Fund had not approved the New Agreements before the Acquisition was completed, the Board also approved interim Management and Sub-Advisory Agreements with Management and LBAM and Neuberger, respectively, or their successors (together, "Interim Agreements") to be used pending approval of the New Agreements by shareholders of the Fund. By their terms, compensation earned by the Advisers under the Interim Agreements would be held in an interest-bearing escrow account pending shareholder approval of the New Agreements. If shareholders approved the New Agreements within 150 days from the termination of the then-Current Agreements, the amount held in the escrow account, including interest, would be paid to the Advisers, as appropriate. If shareholders of the Fund did not approve the New Agreements, the Advisers would be paid the lesser of the costs incurred in performing their services under the Interim Agreements or the total amount in the escrow account, including interest earned. If at the end of 150 days following termination of the Fund's then-Current Agreements the Fund's shareholders still had not approved the New Agreements, the Directors would have taken such actions as they deem to be in the best interests of the Fund and its shareholders, which may have included negotiating a new Management Agreement and/or new Sub-Advisory Agreements with an advisory organization selected by the Board of Directors or making other arrangements. The shareholders of the Fund approved the New Agreements on May 13, 2009.

The Fund's Directors discussed the Acquisition on December 17, 2008. Prior to submission of the NBSH bid to public auction, Management met telephonically with the Independent Fund Directors to brief them on the Acquisition. Following the public auction wherein NBSH was determined to be the successful bidder, the Independent Fund Directors again met telephonically with Management to obtain additional information about the Acquisition. The Independent Fund Directors, with the assistance of independent counsel, prepared written due diligence requests that were presented to Management and appointed a Task Force of Independent Fund Directors to lead the due diligence effort ("Task Force").

Management provided written responses to the due diligence requests. After extensive review and analysis and discussions during a telephonic and in person meeting of the Independent Fund Directors, the Task Force submitted clarifying questions. The Independent Fund Directors met as a body in person to receive the report of the Task Force and consider the New Agreements. Throughout the process, the Task Force and the Independent Fund Directors were advised by experienced 1940 Act counsel that is independent of Management and NBSH. In addition, the Independent Fund

37

Directors received a memorandum from independent counsel discussing the legal standards for their consideration of the New Agreements.

Consideration of the New Agreements followed shortly on the heels of the Independent Fund Directors' annual consideration of whether to renew the then-Current Agreements, carried out pursuant to Section 15(c) of the 1940 Act. In that process, which began prior to the June 2008 quarterly meeting of the Board and was concluded at the September 2008 quarterly meeting, the Independent Fund Directors, following an extensive review of materials submitted by Management and a report from an independent data service, unanimously determined that the then-Current Agreements were fair and reasonable and that their renewal would be in the best interests of the Fund and its shareholders. Accordingly, in considering the New Agreements, the Independent Fund Directors took into account the fact that the terms of the New Agreements would be identical to those of the then-Current Agreements in every respect except for the term and termination date and potentially the name of the investment manager. The Board considerations in connection with the New Agreements and the then-Current Agreements also entered into the decision by the Board to approve the Interim Agreements.

In evaluating the proposed Interim Agreements and the New Agreements, the Independent Fund Directors considered that they have generally been satisfied with the nature and quality of the services provided to the Fund by Management, LBAM and Neuberger, including investment management, administrative and support services, and that the Fund would be best served by an arrangement that appeared likely to maintain the continuity and stability of the providers of these services. Accordingly, the Independent Fund Directors considered very carefully the intentions of NBSH (including its successor or assign) regarding capitalization, management structure, staffing, compensation and staff retention and whether these seemed designed to provide the desired continuity and stability. They inquired specifically about staffing and resources in the areas of portfolio management, investment research, trading, fund accounting, legal and compliance, internal audit, and senior executive staff. Although at the time the Board considered the Interim Agreements and the New Agreements no final decisions had been reached as to the distribution of equity interests in NBSH (or its successor or assign), the Directors were advised that senior members of management, including the two Fund Directors who are employed by the Advisers, would receive equity interests in NBSH. Because of these interests, as well as any future employment arrangements with the Advisers, these persons, individually or in the aggregate, could have a material interest in the Acquisition and in shareholder approval of the New Agreements. In considering the New Agreements, the Directors were aware of these interests.

The Independent Fund Directors inquired whether NBSH (or its successor or assign) had specific plans for the future structure of the Neuberger Berman Funds, whether they plan to propose to eliminate any Funds, and whether they intend to continue or alter certain expansion plans that are already underway. They also inquired whether there are plans to change the fees or expense structure of any of the Funds. The Independent Fund Directors inquired about the long-term plans for the Advisers, including any expectations for cost savings or expense reductions. They also inquired about the capital structure and working capital likely to be available to NBSH (or its successor or assign).

The Independent Fund Directors considered the following factors, in addition to the factors discussed above, among others, in connection with their consideration of the Interim Agreements and the New Agreements: (1) the nature, extent, and quality of the services provided by Management, LBAM and Neuberger; (2) the performance of the Fund compared to a relevant market index and a peer group of investment companies; (3) the costs of the services provided and profits or losses realized by Management, LBAM, Neuberger and their affiliates from their relationship with the Fund; (4) the extent to which economies of scale might be realized as the Fund grows; and (5) whether fee levels reflect any such potential economies of scale for the benefit of investors in the Fund. In their deliberations, the Independent Fund Directors did not identify any particular information that was all important or controlling, and each Director may have attributed different weights to the various factors.

In unanimously approving the Interim Agreements and approving and recommending the New Agreements, the Independent Fund Directors concluded that the terms of each Interim Agreement and New Agreement are fair and reasonable and that approval of the Interim Agreements and the New Agreements is in the best interests of the Fund and

38

its shareholders. In reaching this determination, the Independent Fund Directors considered the following factors, among others:

(1) that the terms of the New Agreements are identical in all material respects to those of the then-Current Agreements;

(2) that the Advisers will maintain operational autonomy and continuity of management following the Acquisition;

(3) the favorable history, reputation, qualification, and background of Management, LBAM and Neuberger, as well as the qualifications of each entity's personnel and each entity's respective financial condition;

(4) the commitment of NBSH (or its successor or assign) to retain key personnel currently employed by Management, LBAM and Neuberger who currently provide services to the Fund;

(5) the commitment of NBSH (or its successor or assign) to maintaining the current level and quality of Fund services;

(6) the proposed division of equity in NBSH (or its successor or assign) among Management Members and other personnel upon consummation of the Acquisition;

(7) the fees and expense ratio of the Fund relative to comparable funds;

(8) that the fees are identical to those paid under the then-Current Agreements;

(9) that the fees and expense ratio of the Fund appear to the Board to be reasonable given the quality of services expected to be provided;

(10) the commitment of Management to: (a) maintaining the Fund's current contractual management fee waiver agreement upon consummation of the Acquisition to ensure that shareholders of the Fund do not face an increase in management fees; and (b) not change any voluntary expense limitation or waiver so as to increase the expenses the Fund would pay without prior approval of the Board;

(11) the performance of the Fund relative to comparable funds and unmanaged indices;

(12) the commitment of Management (or its successor) to pay the expenses of the Fund in connection with the Acquisition, including expenses in connection with the solicitation of proxies with respect to the Acquisition, so that shareholders of the Fund would not have to bear such expenses;

(13) the actual and potential effects on the Advisers of the bankruptcy of Lehman Brothers, and the effects of the Lehman Brothers bankruptcy on the information considered by the Independent Fund Directors in their prior analyses of the principal service contracts;

(14) the provisions made to continue providing to the Advisers certain services that were previously provided to them by or through Lehman Brothers or its other affiliates;

(15) the possible benefits that may be realized by the Fund and by the Advisers as a result of the Acquisition; and

(16) that the Acquisition is expected to maintain continuity of management of the Fund and may reduce the potential for future vulnerability to changes in control of the Advisers that could be adverse to the Fund's interests and that could affect the retention of key employees providing services to the Fund.

39

Neuberger Berman Management LLC
605 Third Avenue, 2nd Floor
New York, NY 10158–0180
Internal Sales & Services
877.461.1899
www.nb.com

Statistics and projections in this report are derived from sources deemed to be reliable but cannot be regarded as a representation of future results of the Fund. This report is prepared for the general information of shareholders and is not an offer of shares of the Fund.

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