<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 811-02145
LORD ABBETT BOND-DEBENTURE FUND, INC.
-------------------------------------
(Exact name of Registrant as specified in charter)
90 Hudson Street, Jersey City, NJ 07302
---------------------------------------
(Address of principal executive offices) (zip code)
Christina T. Simmons, Vice President & Assistant Secretary
90 Hudson Street, Jersey City, NJ 07302
---------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 201-6984
--------------
Date of fiscal year end: 12/31
Date of reporting period: 12/31/05
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ITEM 1: REPORT TO SHAREHOLDERS.
<Page>
[LORD ABBETT LOGO]
2005
ANNUAL
REPORT
LORD ABBETT
BOND-DEBENTURE FUND
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
<Page>
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LORD ABBETT BOND-DEBENTURE FUND
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
DEAR SHAREHOLDERS: We are pleased to provide you with this overview of the Lord
Abbett Bond-Debenture Fund's strategies and performance for the year ended
December 31, 2005. On this and the following pages, we discuss the major factors
that influenced performance.
Thank you for investing in Lord Abbett mutual funds. We value the trust
that you place in us and look forward to serving your investment needs in the
years to come.
BEST REGARDS,
/s/ Robert S. Dow
ROBERT S. DOW
CHAIRMAN
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Q: WHAT WERE THE OVERALL MARKET CONDITIONS FOR THE FISCAL YEAR ENDED DECEMBER
31, 2005?
A: With the economy expanding at a solid rate and consumer and producer prices
both rising, the Federal Reserve Board (the Fed) lifted the federal funds rate
eight times during 2005, ending the year at 4.25 percent amid concerns about
inflationary pressures. (The fed funds rate is the interest rate at which
depository institutions lend balances at the Federal Reserve to other depository
institutions overnight.) But while short-term rates increased, 10-year
maturities slipped lower in late December, creating an inverted yield curve.
The second half of 2005 was a study in volatility and resilience. In late
August, Hurricane Katrina devastated the Gulf Coast region, making it the
costliest storm in history. Oil and gas production was disrupted. But as autumn
wore on, industrial production rebounded. The pace of housing and construction
activity remained brisk. There was an improvement in employment growth after the
depressing effects of hurricanes. In the high-yield market, the ongoing troubles
of Ford and General Motors weighed on valuations as automaker junk bonds
downgraded in the spring added to the supply of such debt instruments.
At its last meeting of the year, the Federal Open Market Committee
indicated additional rate hikes may be needed to keep inflation and inflation
expectations in check, but will largely depend on the economic data.
Q: HOW DID THE FUND PERFORM OVER THE FISCAL YEAR ENDED DECEMBER 31, 2005?
A: The fund returned 1.6 percent, reflecting performance at the net asset value
(NAV) of Class A shares with all distributions reinvested, compared with its
benchmark, the Lehman Brothers Aggregate Bond Index,(1) which returned 2.4
percent over the same period. STANDARDIZED AVERAGE ANNUAL TOTAL RETURNS, WHICH
REFLECT PERFORMANCE AT THE MAXIMUM 4.75 PERCENT SALES CHARGE APPLICABLE TO
1
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CLASS A SHARE INVESTMENTS AND INCLUDE THE REINVESTMENT OF ALL DISTRIBUTIONS, AS
OF DECEMBER 31, 2005, ARE: 1 YEAR: -3.27 PERCENT, 5 YEARS: 5.56 PERCENT, AND 10
YEARS: 5.89 PERCENT. Class A shares purchased subject to a front-end sales
charge have no contingent deferred sales charge (CDSC). However, certain
purchases of Class A shares made without a front-end sales charge may be subject
to a CDSC. Please see section "Your Investment-Purchases" in the Prospectus for
more information on redemptions that may be subject to a CDSC.
PERFORMANCE DATA QUOTED REFLECT PAST PERFORMANCE AND ARE NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
QUOTED. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT IN THE FUND
WILL FLUCTUATE SO THAT SHARES, ON ANY GIVEN DAY OR WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. YOU CAN OBTAIN PERFORMANCE DATA CURRENT
TO THE MOST RECENT MONTH-END BY CALLING LORD ABBETT AT 800-821-5129 OR REFERRING
TO OUR WEBSITE AT www.LordAbbett.com.
Q: WHAT WERE THE MOST SIGNIFICANT FACTORS AFFECTING PERFORMANCE?
A: The fund employs a flexible investment strategy, which allows its investment
managers to adjust allocations among asset classes as market conditions change.
The primary asset classes in which the fund participates are high-yield bonds
and convertible securities. In addition, the fund must hold 20 percent of its
portfolio in investment-grade corporate bonds, government bonds and/or agencies.
Detracting from performance were high-yield securities in the diversified
media, telecommunications equipment, auto parts and equipment sectors. In other
investments, the fund's positions in equity securities also underperformed
relative to the benchmark.
Contributing to performance were high-yield credits of wireless telecom,
energy and gaming companies. The fund's holdings in high-grade debt securities,
such as mortgage-backed securities, also outperformed relative to the benchmark.
THE FUND'S PORTFOLIO IS ACTIVELY MANAGED AND, THEREFORE, ITS HOLDINGS AND
WEIGHTINGS OF A PARTICULAR ISSUER OR PARTICULAR SECTOR AS A PERCENTAGE OF
PORTFOLIO ASSETS ARE SUBJECT TO CHANGE. SECTORS MAY INCLUDE MANY INDUSTRIES.
2
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A PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT A FUND, INCLUDING ITS
INVESTMENT OBJECTIVES, RISKS, CHARGES, AND ONGOING EXPENSES, WHICH AN INVESTOR
SHOULD CAREFULLY CONSIDER BEFORE INVESTING. TO OBTAIN A PROSPECTUS ON ANY LORD
ABBETT MUTUAL FUND, PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR LORD ABBETT
DISTRIBUTOR LLC AT 800-874-3733 OR VISIT OUR WEBSITE AT www.LordAbbett.com. READ
THE PROSPECTUS CAREFULLY BEFORE INVESTING.
(1) The Lehman Brothers Aggregate Bond Index represents securities that are U.S.
domestic, taxable, non-convertible and dollar denominated. The index covers the
investment-grade, fixed-rate bond market, with index components for government
and corporate securities, mortgage pass-through securities, and asset-backed
securities.
The index is unmanaged, does not reflect the deduction of fees or expenses, and
is not available for direct investment.
IMPORTANT PERFORMANCE AND OTHER INFORMATION
The views of the fund's management and the portfolio holdings described in this
report are as of December 31, 2005; these views and portfolio holdings may have
changed subsequent to this date, and they do not guarantee the future
performance of the markets or the fund. Information provided in this report
should not be considered a recommendation to purchase or sell securities.
A NOTE ABOUT RISK: See Notes to Financial Statements for a discussion of
investment risks. For a more detailed discussion of the risks associated with
the fund, please see the fund's prospectus.
PERFORMANCE: BECAUSE OF ONGOING MARKET VOLATILITY, FUND PERFORMANCE MAY BE
SUBJECT TO SUBSTANTIAL FLUCTUATION. Except where noted, comparative fund
performance does not account for the deduction of sales charges and would be
different if sales charges were included. The fund offers additional classes of
shares with distinct pricing options. For a full description of the differences
in pricing alternatives, please see the fund's prospectus.
MUTUAL FUNDS ARE NOT INSURED BY THE FDIC, ARE NOT DEPOSITS OR OTHER OBLIGATIONS
OF, OR GUARANTEED BY, BANKS, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
3
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INVESTMENT COMPARISON
Below is a comparison of a $10,000 investment in Class A shares with the same
investment in the Credit Suisse First Boston High Yield Index and the Lehman
Brothers Aggregate Bond Index, assuming reinvestment of all dividends and
distributions. The performance of other classes will be greater than or less
than the performance shown in the graph below due to different sales loads and
expenses applicable to such classes. The graph and performance table below do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. PAST PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS.
[CHART]
<Table>
<Caption>
THE FUND (CLASS A SHARES) THE FUND (CLASS A SHARES) CREDIT SUISSE FIRST LEHMAN BROTHERS
AT NET ASSET VALUE AT MAXIMUM OFFERING PRICE(1) BOSTON HIGH YIELD INDEX(2) AGGREGATE BOND INDEX(2)
12/31/1995 $ 10,000 $ 9,525 $ 10,000 $ 10,000
12/31/1996 $ 11,116 $ 10,588 $ 11,242 $ 10,363
12/31/1997 $ 12,527 $ 11,932 $ 12,661 $ 11,363
12/31/1998 $ 13,123 $ 12,500 $ 12,735 $ 12,350
12/31/1999 $ 13,635 $ 12,987 $ 13,153 $ 12,249
12/31/2000 $ 13,517 $ 12,875 $ 12,467 $ 13,674
12/31/2001 $ 14,174 $ 13,501 $ 13,188 $ 14,828
12/31/2002 $ 14,021 $ 13,355 $ 13,598 $ 16,348
12/31/2003 $ 16,865 $ 16,064 $ 17,397 $ 17,018
12/31/2004 $ 18,308 $ 17,439 $ 19,476 $ 17,757
12/31/2005 $ 18,594 $ 17,711 $ 19,916 $ 18,188
</Table>
AVERAGE ANNUAL TOTAL RETURN AT MAXIMUM APPLICABLE
SALES CHARGE FOR THE PERIODS ENDED DECEMBER 31, 2005
<Table>
<Caption>
1 YEAR 5 YEARS 10 YEARS LIFE OF CLASS
CLASS A(3) -3.27% 5.56% 5.89% --
CLASS B(4) -2.93% 5.76% -- 5.66%
CLASS C(5) 0.89% 5.93% -- 5.78%
CLASS P(6) 1.45% 6.48% -- 5.15%
CLASS Y(7) 1.93% 7.00% -- 5.01%
</Table>
(1) Reflects the deduction of the maximum initial sales charge of 4.75%.
(2) Performance for each unmanaged index does not reflect transaction costs,
management fees or sales charges. The performance of each index is not
necessarily representative of the Fund's performance.
(3) Total return, which is the percentage change in net asset value, after
deduction of the maximum initial sales charge of 4.75% applicable to Class A
shares, with all dividends and distributions reinvested for the periods shown
ended December 31, 2005, is calculated using the SEC-required uniform method to
compute such return.
(4) Class B shares were first offered on August 1, 1996. Performance reflects
the deduction of a CDSC of 4% for 1 year, 1% for 5 years and 0% for the life of
the class.
(5) Class C shares were first offered on July 15, 1996. The 1% CDSC for Class C
shares normally applies before the first anniversary of the purchase date.
Performance is at net asset value.
(6) Class P shares commenced operations on August 21, 1998. Performance is at
net asset value.
(7) Class Y shares commenced operations on March 27, 1998. Performance is at net
asset value.
4
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EXPENSE EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges on purchase payments (these charges vary among
the share classes); and (2) ongoing costs, including management fees;
distribution and service (12b-1) fees (these charges vary among the share
classes); and other Fund expenses. This Example is intended to help you
understand your ongoing costs (in dollars) of investing in the Fund and to
compare these costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning
of the period and held for the entire period (July 1, 2005 through December 31,
2005).
ACTUAL EXPENSES
For each class of the Fund, the first line of the table on the following
page provides information about actual account values and actual expenses. You
may use the information in this line, together with the amount you invested, to
estimate the expenses that you paid over the period. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number in the first line under the heading
entitled "Expenses Paid During the Period 7/1/05 - 12/31/05" to estimate the
expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
For each class of the Fund, the second line of the table on the following
page provides information about hypothetical account values and hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing costs of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
5
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Please note that the expenses shown in the table are meant to highlight
your ongoing costs only and do not reflect any transactional costs, such as
sales charges. Therefore, the second line of the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT ACCOUNT DURING THE
VALUE VALUE PERIOD+
----- ----- -------
7/1/05 -
7/1/05 12/31/05 12/31/05
------ -------- --------
CLASS A
Actual $ 1,000.00 $ 1,019.20 $ 5.04
Hypothetical (5% Return Before Expenses) $ 1,000.00 $ 1,020.21 $ 5.04
CLASS B
Actual $ 1,000.00 $ 1,014.50 $ 8.28
Hypothetical (5% Return Before Expenses) $ 1,000.00 $ 1,016.99 $ 8.29
CLASS C
Actual $ 1,000.00 $ 1,015.80 $ 8.28
Hypothetical (5% Return Before Expenses) $ 1,000.00 $ 1,016.99 $ 8.29
CLASS P
Actual $ 1,000.00 $ 1,017.20 $ 5.49
Hypothetical (5% Return Before Expenses) $ 1,000.00 $ 1,019.76 $ 5.50
CLASS Y
Actual $ 1,000.00 $ 1,021.10 $ 3.21
Hypothetical (5% Return Before Expenses) $ 1,000.00 $ 1,022.03 $ 3.21
</Table>
+ For each class of the Fund, expenses are equal to the annualized expense
ratio for such class (0.99% for Class A, 1.63% for Classes B and C, 1.08%
for Class P and .63% for Class Y) multiplied by the average account value
over the period, multiplied by 184/365 (to reflect one-half year period).
- --------------------------------------------------------------------------------
PORTFOLIO HOLDINGS PRESENTED BY SECTOR
DECEMBER 31, 2005
<Table>
<Caption>
SECTOR* %**
Agency 7.31%
Banking 1.35%
Basic Industry 8.17%
Brokerage 0.18%
Capital Goods 7.40%
Consumer Cyclical 5.63%
Consumer Non-Cyclical 8.12%
Energy 9.10%
Finance & Investment 1.48%
Government Guaranteed 3.36%
Insurance 0.39%
Media 9.61%
Mortgage Backed 0.26%
Services Cyclical 12.41%
Services Non-Cyclical 6.41%
Short-Term Investment 2.98%
Technology & Electronics 5.04%
Telecommunications 5.63%
Utility 5.17%
Total 100.00%
</Table>
* A sector may comprise several industries.
** Represents percent of total investments.
6
<Page>
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 95.53%
ASSET-BACKED SECURITY 0.15%
MEDIA - DIVERSIFIED 0.15%
Globo Comunicacoes E Participacoes S.A.+(b)
(cost $11,783,110) 7.375%# 10/20/2011 $ 12,360 $ 12,329,082
===============
<Caption>
SHARES
(000)
------
COMMON STOCKS 5.56%
AEROSPACE/DEFENSE 0.12%
EDO Corp. 350 9,471,000
---------------
AGRICULTURE 0.23%
Archer Daniels Midland Co. 750 18,495,000
---------------
BANKING 0.32%
Wachovia Corp. 500 26,430,000
---------------
BEVERAGE 0.29%
PepsiCo, Inc. 400 23,632,000
---------------
CHEMICALS 0.49%
Lyondell Chemical Co. 325 7,741,500
Praxair, Inc. 500 26,480,000
Texas Petrochemical, Inc.* 271 5,770,298
---------------
TOTAL 39,991,798
---------------
DIVERSIFIED CAPITAL GOODS 0.28%
3M Co. 300 23,250,000
---------------
ELECTRIC - INTEGRATED 0.55%
NiSource Inc. 500 10,430,000
Northeast Utilities System Co. 1,000 19,690,000
TECO Energy, Inc. 850 14,603,000
---------------
TOTAL 44,723,000
---------------
ELECTRONICS 0.40%
Emerson Electric Co. 400 29,880,000
Mentor Graphics Corp.* 250 2,585,000
---------------
TOTAL 32,465,000
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
SHARES U.S. $
INVESTMENTS (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
ENERGY - EXPLORATION & PRODUCTION 0.55%
Devon Energy Corp. 400 $ 25,016,000
Exxon Mobil Corp. 350 19,659,500
---------------
TOTAL 44,675,500
---------------
FOOD - WHOLESALE 0.36%
ConAgra Foods, Inc. 400 8,112,000
Kellogg Co. 500 21,610,000
---------------
TOTAL 29,722,000
---------------
FORESTRY/PAPER 0.16%
International Paper Co. 400 13,444,000
---------------
GAMING 0.06%
Aztar Corp.* 150 4,558,500
---------------
INTEGRATED ENERGY 0.21%
Chevron Corp. 300 17,031,000
---------------
MACHINERY 0.16%
Parker Hannifin Corp. 200 13,192,000
---------------
MEDIA - BROADCAST 0.10%
Clear Channel Communications, Inc. 250 7,862,500
---------------
METALS/MINING EXCLUDING STEEL 0.05%
Alcoa, Inc. 150 4,435,500
---------------
NON-ELECTRIC UTILITIES 0.15%
National Fuel Gas Co. 300 9,357,000
SEMCO Energy, Inc.* 489 2,746,949
---------------
TOTAL 12,103,949
---------------
PHARMACEUTICALS 0.46%
Amgen Inc.* 100 7,886,000
Merck & Co., Inc. 375 11,928,750
Mylan Laboratories, Inc. 400 7,984,000
Pfizer, Inc. 400 9,328,000
---------------
TOTAL 37,126,750
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
SHARES U.S. $
INVESTMENTS (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
RESTAURANTS 0.12%
McDonald's Corp. 300 $ 10,116,000
---------------
SOFTWARE/SERVICES 0.06%
BEA Systems, Inc.* 525 4,935,000
---------------
SUPPORT - SERVICES 0.06%
CRA Int'l., Inc.* 100 4,769,000
---------------
TELECOM - INTEGRATED/SERVICES 0.27%
Qwest Communications Int'l., Inc.* 2,000 11,299,989
Verizon Communications, Inc. 350 10,542,000
---------------
TOTAL 21,841,989
---------------
TELECOMMUNICATIONS EQUIPMENT 0.10%
Avaya Inc.* 750 8,002,500
---------------
THEATERS & ENTERTAINMENT 0.01%
Live Nation, Inc.* 31 409,375
---------------
TOTAL COMMON STOCKS (cost $395,577,178) 452,683,361
===============
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT
RATE DATE (000)
-----------------------------------------------------
CONVERTIBLE NOTES & BONDS 10.48%
AEROSPACE/DEFENSE 0.96%
Alliant Techsystems, Inc. 2.75% 2/15/2024 $ 20,000 21,675,000
EDO Corp. 4.00% 11/15/2025 9,025 9,194,218
L-3 Communication Holdings, Inc+ 3.00% 8/1/2035 15,000 14,906,250
Lockheed Martin Corp. 4.09%# 8/15/2033 30,000 32,141,400
---------------
TOTAL 77,916,868
---------------
BROKERAGE 0.18%
Morgan Stanley+ 1.00% 3/30/2012 14,000 14,638,400
---------------
BUILDING & CONSTRUCTION 0.47%
Fluor Corp. 1.50% 2/15/2024 27,000 38,643,750
---------------
COMPUTER HARDWARE 0.14%
ASML Holding N.V.(b) 5.75% 10/15/2006 10,000 11,444,000
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED CAPITAL GOODS 0.25%
Tyco Int'l. Group S.A.(b) 2.75% 1/15/2018 $ 16,175 $ 20,562,469
---------------
ELECTRONICS 0.54%
Artesyn Technologies, Inc. 5.50% 8/15/2010 4,000 5,630,000
Cypress Semiconductor Corp. 1.25% 6/15/2008 12,500 14,218,750
FLIR Systems, Inc. 3.00% 6/1/2023 12,500 14,734,375
RF Micro Devices, Inc. 1.50% 7/1/2010 10,000 9,237,500
---------------
TOTAL 43,820,625
---------------
GAMING 0.29%
International Game Technology Zero Coupon 1/29/2033 35,000 23,493,750
---------------
HEALTH SERVICES 1.37%
Advanced Medical Optics, Inc. 2.50% 7/15/2024 15,000 15,318,750
Apogent Technologies Inc. 3.241%# 12/15/2033 10,000 11,879,600
Fisher Scientific Int'l., Inc. 2.50% 10/1/2023 20,000 27,950,000
Invitrogen Corp. 1.50% 2/15/2024 20,000 17,000,000
Invitrogen Corp. 3.25% 6/15/2025 7,500 7,218,750
Manor Care, Inc.+ 2.125%# 8/1/2035 4,500 4,657,500
SFBC Int'l., Inc. 2.25% 8/15/2024 14,500 10,458,125
Universal Health Services, Inc. 0.426% 6/23/2020 30,000 17,212,500
---------------
TOTAL 111,695,225
---------------
HOTELS 0.25%
Hilton Hotels Corp. 3.375% 4/15/2023 17,000 20,081,250
---------------
HOUSEHOLD & LEISURE PRODUCTS 0.14%
Costco Cos., Inc. Zero Coupon 8/19/2017 10,000 11,287,500
---------------
INVESTMENTS & MISC. FINANCIAL SERVICES 0.65%
American Express Co. 1.85% 12/1/2033 20,000 21,325,000
Lehman Brothers Holdings Inc. 0.25% 7/7/2011 11,000 11,756,800
Lehman Brothers Holdings Inc. 0.25% 12/8/2012 20,000 19,814,000
---------------
TOTAL 52,895,800
---------------
MEDIA - BROADCAST 0.29%
Sinclair Broadcast Group, Inc. 4.875%# 7/15/2018 10,000 8,712,500
Sinclair Broadcast Group, Inc. 6.00% 9/15/2012 17,000 14,896,250
---------------
TOTAL 23,608,750
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
MEDIA - DIVERSIFIED 1.00%
Liberty Media Corp. 3.25% 3/15/2031 $ 45,000 $ 34,143,750
Mediacom Communications Corp. 5.25% 7/1/2006 4,600 4,605,750
Walt Disney Co. (The) 2.125% 4/15/2023 42,500 42,712,500
---------------
TOTAL 81,462,000
---------------
OIL FIELD EQUIPMENT & SERVICES 0.69%
Hanover Compressor Co. 4.75% 1/15/2014 10,000 11,450,000
Schlumberger Ltd.(b) 1.50% 6/1/2023 32,500 44,850,000
---------------
TOTAL 56,300,000
---------------
PHARMACEUTICALS 1.28%
Celgene Corp. 1.75% 6/1/2008 10,000 26,962,500
MGI PHARMA, Inc. 1.682% 3/2/2024 22,000 13,695,000
Teva Pharmaceutical Finance B.V.(b) 0.375% 11/15/2022 20,000 40,100,000
Watson Pharmaceuticals, Inc. 1.75% 3/15/2023 25,000 23,937,500
---------------
TOTAL 104,695,000
---------------
SOFTWARE/SERVICES 1.13%
DST Systems, Inc. 4.125% 8/15/2023 27,000 35,910,000
EMC Corp. 4.50% 4/1/2007 20,000 20,900,000
Manugistics Group, Inc. 5.00% 11/1/2007 15,000 14,043,750
Mentor Graphics Corp. 6.875% 6/15/2007 21,000 20,973,750
---------------
TOTAL 91,827,500
---------------
SUPPORT - SERVICES 0.25%
Charles River Assoc., Inc. 2.875% 6/15/2034 15,000 20,737,500
---------------
TELECOM - WIRELESS 0.12%
Nextel Communications, Inc. 5.25% 1/15/2010 10,000 10,037,500
---------------
TELECOMMUNICATIONS EQUIPMENT 0.30%
LSI Logic Corp. 4.00% 5/15/2010 25,000 24,093,750
---------------
THEATERS & ENTERTAINMENT 0.18%
Lions Gate Entertainment Corp.(b) 3.625% 3/15/2025 17,000 14,683,750
---------------
TOTAL CONVERTIBLE NOTES & BONDS (cost $820,086,755) 853,925,387
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
INTEREST SHARES U.S. $
INVESTMENTS RATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 2.83%
AGENCY 0.11%
Federal National Mortgage Assoc. 5.375% -(d) $ 9,214,075
---------------
AUTOMOTIVE 0.06%
Ford Motor Co. Capital Trust II 6.50% 175 4,830,000
---------------
BANKING 0.31%
Marshall & Ilsley Corp. 6.50% 950 25,156,000
---------------
BEVERAGE 0.11%
Constellation Brands, Inc. 5.75% 220 8,586,600
---------------
ELECTRIC - DISTRIBUTION/TRANSPORTATION 0.15%
FPL Group, Inc. 8.00% 200 12,394,000
---------------
ELECTRIC - GENERATION 0.06%
PNM Resources, Inc. 6.75% 100 4,709,000
---------------
FOOD & DRUG RETAILERS 0.14%
Albertson's, Inc. 7.25% 500 11,275,000
---------------
GAS DISTRIBUTION 0.13%
El Paso Corp.+ 4.99% 10 10,696,969
---------------
INTEGRATED ENERGY 0.50%
Williams Cos., Inc. (The) 5.50% 360 40,500,000
---------------
INVESTMENTS & MISC. FINANCIAL SERVICES 0.20%
Morgan Stanley+(e) 8.25% 223 16,033,350
---------------
LIFE INSURANCE 0.32%
MetLife, Inc. 6.375% 960 26,448,000
---------------
PHARMACEUTICALS 0.40%
Schering-Plough Corp. 6.00% 600 32,274,000
---------------
PRINTING & PUBLISHING 0.29%
Interpublic Group of Cos. Inc. Series A (The) 5.375% 650 24,056,500
---------------
PROPERTY & CASUALTY INSURANCE 0.05%
XL Capital Ltd. Class A(b) 6.50% 200 4,468,000
---------------
TOTAL CONVERTIBLE PREFERRED STOCKS (cost $225,554,570) 230,641,494
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
GOVERNMENT SPONSORED ENTERPRISES
BONDS 1.70%
Federal Home Loan Mortgage Corp. 5.75% 4/15/2008 $ 60,000 $ 61,324,560
Federal National Mortgage Assoc. 6.625% 10/15/2007 75,000 77,404,950
---------------
Total Government Sponsored Enterprises Bonds (cost $140,085,785) 138,729,510
===============
GOVERNMENT SPONSORED ENTERPRISES
PASS-THROUGHS 5.38%
Federal National Mortgage Assoc. 5.50% 2/1/2033 41,036 40,759,408
Federal National Mortgage Assoc. 5.50% 7/1/2033 48,720 48,378,174
Federal National Mortgage Assoc. 5.50% 10/1/2033 15,014 14,908,290
Federal National Mortgage Assoc. 6.00% 10/1/2033 7,137 7,214,203
Federal National Mortgage Assoc. 6.00% 1/1/2034 20,859 21,083,075
Federal National Mortgage Assoc. 6.00% 2/1/2034 38,301 38,712,344
Federal National Mortgage Assoc. 6.00% 8/1/2034 26,990 27,279,970
Federal National Mortgage Assoc. 6.00% 11/1/2034 60,294 60,883,140
Federal National Mortgage Assoc. 6.00% 2/1/2035 27,512 27,781,017
Federal National Mortgage Assoc. 6.00% 4/1/2035 24,343 24,580,444
Federal National Mortgage Assoc. 6.00% 12/1/2035 25,000 25,244,792
Federal National Mortgage Assoc. 6.50% 9/1/2035 43,909 45,060,233
Federal National Mortgage Assoc. 6.50% 10/1/2035 3,758 3,856,580
Federal National Mortgage Assoc. 6.50% 12/1/2035 44,029 45,183,491
Federal National Mortgage Assoc. 7.00% 3/1/2032 5,508 5,749,836
Government National Mortgage Assoc. 8.00% 3/15/2032 1,799 1,926,876
---------------
TOTAL GOVERNMENT SPONSORED ENTERPRISES PASS-THROUGHS (cost $442,773,473) 438,601,873
===============
HIGH YIELD CORPORATE NOTES & BONDS 65.88%
AEROSPACE/DEFENSE 1.30%
Alliant Techsystems Inc. 8.50% 5/15/2011 15,000 15,825,000
Armor Holdings, Inc. 8.25% 8/15/2013 10,000 10,800,000
DRS Technologies, Inc. 6.875% 11/1/2013 30,000 28,837,500
Esterline Technologies Corp. 7.75% 6/15/2013 16,000 16,800,000
L-3 Communications Corp. 6.125% 1/15/2014 14,000 13,930,000
L-3 Communications Corp.+ 6.375% 10/15/2015 11,850 11,879,625
Moog Inc. Class A+ 6.25% 1/15/2015 4,000 3,960,000
Moog Inc. Class A 6.25% 1/15/2015 4,000 3,960,000
---------------
TOTAL 105,992,125
---------------
APPAREL/TEXTILES 0.57%
INVISTA+ 9.25% 5/1/2012 25,000 26,812,500
Quiksilver, Inc. 6.875% 4/15/2015 20,000 19,350,000
---------------
TOTAL 46,162,500
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
AUTO LOANS 2.02%
Ford Motor Credit Co. 7.25% 10/25/2011 $ 35,000 $ 30,269,155
Ford Motor Credit Co. 7.375% 10/28/2009 35,000 31,065,755
General Motors Acceptance Corp. 6.75% 12/1/2014 12,590 11,344,471
General Motors Acceptance Corp. 7.25% 3/2/2011 100,000 92,009,600
---------------
TOTAL 164,688,981
---------------
AUTO PARTS & EQUIPMENT 1.09%
Accuride Corp. 8.50% 2/1/2015 10,050 9,949,500
ArvinMeritor, Inc. 8.75% 3/1/2012 9,500 9,143,750
Cooper-Standard Automotive Inc 8.375% 12/15/2014 20,000 15,300,000
Cummins, Inc. 9.50% 12/1/2010 16,650 18,065,250
Stanadyne Corp.** 0.00%/12.00% 8/15/2009 & 2/15/2015 15,000 7,650,000
Stanadyne Corp. 10.00% 8/15/2014 10,000 9,650,000
Tenneco Inc. 8.625% 11/15/2014 20,000 19,000,000
---------------
TOTAL 88,758,500
---------------
AUTOMOTIVE 0.29%
General Motors Corp. 7.20% 1/15/2011 10,000 7,075,000
Navistar Int'l. Corp.^ 7.50% 6/15/2011 17,500 16,756,250
Venture Holdings Trust 9.50% 7/1/2005(g) 10,000 87,500
---------------
TOTAL 23,918,750
---------------
BANKING 0.70%
Regions Financial Corp. 4.50% 8/8/2008 25,000 24,725,625
Regions Financial Corp. 7.00% 3/1/2011 11,500 12,583,001
Wells Fargo & Co. 5.35% 5/6/2018 20,000 19,806,060
---------------
TOTAL 57,114,686
---------------
BEVERAGE 0.14%
Le-Nature's, Inc.+ 10.00% 6/15/2013 10,425 10,998,375
---------------
BUILDING & CONSTRUCTION 0.56%
Beazer Homes USA, Inc. 6.50% 11/15/2013 10,000 9,562,500
Beazer Homes USA, Inc. 8.375% 4/15/2012 10,000 10,450,000
Standard Pacific Corp. 7.00% 8/15/2015 16,600 15,396,500
William Lyon Homes, Inc. 10.75% 4/1/2013 10,000 10,375,000
---------------
TOTAL 45,784,000
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 0.62%
American Standard Cos., Inc. 8.25% 6/1/2009 $ 20,000 $ 21,774,760
Builders FirstSource, Inc. 8.59%# 2/15/2012 17,400 17,791,500
Jacuzzi Brands, Inc. 9.625% 7/1/2010 10,000 10,675,000
---------------
TOTAL 50,241,260
---------------
CHEMICALS 2.96%
Airgas, Inc. 6.25% 7/15/2014 10,000 9,875,000
Crompton Corp. 9.875% 8/1/2012 29,000 33,241,250
Equistar Chemicals, L.P. 7.55% 2/15/2026 26,000 24,797,500
Hercules, Inc. 6.75% 10/15/2029 25,000 24,187,500
Huntsman LLC 11.50% 7/15/2012 5,181 5,893,387
IMC Global, Inc. 11.25% 6/1/2011 35,000 37,800,000
Lyondell Chemical Co. 9.625% 5/1/2007 9,100 9,543,625
Nalco Co. 8.875% 11/15/2013 12,000 12,630,000
NOVA Chemicals Corp.(b) 6.50% 1/15/2012 12,000 11,685,000
PQ Corp.+ 7.50% 2/15/2013 8,450 7,900,750
Rhodia S.A.(b) 8.875% 6/1/2011 26,825 27,629,750
Rockwood Specialties Group, Inc 7.50% 11/15/2014 18,250 18,272,813
Rockwood Specialties Group, Inc 10.625% 5/15/2011 2,916 3,211,245
Terra Capital, Inc. 11.50% 6/1/2010 13,000 14,560,000
---------------
TOTAL 241,227,820
---------------
CONSUMER - PRODUCTS 1.02%
Elizabeth Arden, Inc. 7.75% 1/15/2014 25,000 25,375,000
Playtex Products, Inc. 9.375% 6/1/2011 17,000 17,892,500
Rayovac Corp. 8.50% 10/1/2013 30,750 26,983,125
Spectrum Brands, Inc. 7.375% 2/1/2015 15,000 12,600,000
---------------
TOTAL 82,850,625
---------------
DIVERSIFIED CAPITAL GOODS 0.79%
J.B. Poindexter & Co., Inc. 8.75% 3/15/2014 19,000 16,150,000
Park-Ohio Industries, Inc. 8.375% 11/15/2014 10,700 9,416,000
Sensus Metering Systems, Inc. 8.625% 12/15/2013 21,000 18,690,000
Trinity Industries, Inc. 6.50% 3/15/2014 20,000 19,800,000
---------------
TOTAL 64,056,000
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
ELECTRIC - GENERATION 2.41%
AES Corp. (The) 9.50% 6/1/2009 $ 10,000 $ 10,850,000
Dynegy Holdings Inc. 6.875% 4/1/2011 22,000 21,780,000
Dynegy Holdings Inc.+ 10.125% 7/15/2013 40,000 45,400,000
Mirant North America LLC+ 7.375% 12/31/2013 13,225 13,439,906
Mission Energy Holding Co. 13.50% 7/15/2008 16,000 18,640,000
NRG Energy, Inc. 8.00% 12/15/2013 18,796 21,051,520
Reliant Resources, Inc. 6.75% 12/15/2014 17,500 15,356,250
Reliant Resources, Inc. 9.50% 7/15/2013 38,200 38,486,500
Texas Genco Holdings, Inc.+ 6.875% 12/15/2014 10,575 11,500,313
---------------
TOTAL 196,504,489
---------------
ELECTRIC - INTEGRATED 1.57%
Duke Energy Corp. 5.375% 1/1/2009 12,000 12,092,976
Midwest Generation, LLC 8.75% 5/1/2034 25,000 27,656,250
Nevada Power Co. 5.875% 1/15/2015 15,000 14,959,830
PG&E Corp. 4.80% 3/1/2014 10,000 9,761,500
PPL Energy Supply LLC 6.40% 11/1/2011 12,000 12,663,804
PSEG Energy Holdings, Inc. 8.50% 6/15/2011 22,500 24,187,500
PSEG Energy Holdings, Inc. 8.625% 2/15/2008 15,000 15,675,000
TECO Energy, Inc. 7.50% 6/15/2010 10,000 10,700,000
---------------
TOTAL 127,696,860
---------------
ELECTRONICS 0.76%
Avago Technologies, Inc.+(b) 10.125% 12/1/2013 7,000 7,227,500
Communications & Power Industries. Inc. 8.00% 2/1/2012 9,675 9,699,187
Corning, Inc. 8.30% 4/4/2025 15,000 15,594,570
Freescale Semiconductor, Inc.^ 7.125% 7/15/2014 16,000 17,120,000
SBA Communications Corp.** 0.00%/9.75% 12/15/2007 & 2011 13,041 12,160,733
---------------
TOTAL 61,801,990
---------------
ENERGY - EXPLORATION & PRODUCTION 3.60%
Chesapeake Energy Corp. 6.25% 1/15/2018 50,000 49,250,000
Chesapeake Energy Corp.+ 6.50% 8/15/2017 14,000 14,140,000
Chesapeake Energy Corp. 7.00% 8/15/2014 25,750 26,780,000
Clayton Williams Energy, Inc. 7.75% 8/1/2013 6,825 6,586,125
El Paso Production Holding Co. 7.75% 6/1/2013 35,000 36,487,500
Energy Partners, Ltd. 8.75% 8/1/2010 15,000 15,450,000
EXCO Resources, Inc. 7.25% 1/15/2011 6,800 6,936,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
Forest Oil Corp. 7.75% 5/1/2014 $ 7,000 $ 7,297,500
Forest Oil Corp. 8.00% 6/15/2008 15,000 15,712,500
Harvest Operations Corp.(b) 7.875% 10/15/2011 10,000 10,000,000
Houston Exploration Co. 7.00% 6/15/2013 21,120 20,380,800
KCS Energy Services, Inc. 7.125% 4/1/2012 24,900 24,962,250
Kerr-McGee Corp. 6.95% 7/1/2024 15,000 15,985,230
Magnum Hunter Resources Corp. 9.60% 3/15/2012 4,500 4,905,000
Pogo Producing Co. 6.625% 3/15/2015 15,000 14,700,000
Range Resources Corp. 7.375% 7/15/2013 22,925 23,842,000
---------------
TOTAL 293,414,905
---------------
ENVIRONMENTAL 0.95%
Allied Waste North America, Inc. 5.75% 2/15/2011 15,000 14,287,500
Allied Waste North America, Inc.^ 6.125% 2/15/2014 35,000 33,162,500
Allied Waste North America, Inc. 7.25% 3/15/2015 29,800 30,247,000
---------------
TOTAL 77,697,000
---------------
FOOD & DRUG RETAILERS 1.59%
Ingles Markets, Inc. 8.875% 12/1/2011 25,000 26,000,000
Jean Coutu Group (PJC) Inc. (The)(b) 8.50% 8/1/2014 15,600 14,352,000
Rite Aid Corp. 6.875% 8/15/2013 34,000 28,560,000
Rite Aid Corp. 8.125% 5/1/2010 35,150 35,940,875
Stater Bros. Holdings, Inc. 8.125% 6/15/2012 25,000 24,875,000
---------------
TOTAL 129,727,875
---------------
FOOD - WHOLESALE 1.16%
American Seafoods Holdings LLC 10.125% 4/15/2010 $ 10,000 $ 10,537,500
Chiquita Brands Int'l., Inc. 7.50% 11/1/2014 25,000 22,125,000
Corn Products Int'l., Inc. 8.25% 7/15/2007 15,000 15,678,345
Dole Food Co. 8.75% 7/15/2013 20,000 20,700,000
Land O'Lakes, Inc. 9.00% 12/15/2010 15,000 16,350,000
Pinnacle Foods Holdings Corp. 8.25% 12/1/2013 9,950 9,527,125
---------------
TOTAL 94,917,970
---------------
FORESTRY/PAPER 2.97%
Abitibi-Consolidated, Inc.(b) 8.55% 8/1/2010 13,606 13,844,105
Ainsworth Lumber Co. Ltd.(b) 7.25% 10/1/2012 19,470 17,620,350
Boise Cascade, LLC 7.125% 10/15/2014 10,000 9,375,000
Bowater, Inc. 6.50% 6/15/2013 25,000 22,500,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
Buckeye Technologies, Inc. 8.00% 10/15/2010 $ 21,000 $ 20,055,000
Jefferson Smurfit Corp. 7.50% 6/1/2013 20,000 18,500,000
Jefferson Smurfit Corp. 8.25% 10/1/2012 10,000 9,650,000
JSG Funding plc(b) 7.75% 4/1/2015 18,000 15,030,000
JSG Funding plc(b) 9.625% 10/1/2012 14,500 14,572,500
JSG Holding plc PIK+(a) 11.50% 10/1/2015 10,781 11,511,072
Longview Fibre Co. 10.00% 1/15/2009 11,500 12,132,500
Newark Group, Inc. (The) 9.75% 3/15/2014 11,500 10,177,500
Norske Skog Canada Ltd.(b) 7.375% 3/1/2014 18,925 16,654,000
Stone Container Corp. 8.375% 7/1/2012 6,000 5,835,000
Stone Container Corp. 9.75% 2/1/2011 17,000 17,255,000
Tembec Industries, Inc.(b) 7.75% 3/15/2012 15,000 8,100,000
Tembec Industries, Inc.(b) 8.625% 6/30/2009 33,500 19,262,500
---------------
TOTAL 242,074,527
---------------
GAMING 4.89%
Aztar Corp. 7.875% 6/15/2014 10,000 10,525,000
Boyd Gaming Corp. 8.75% 4/15/2012 8,650 9,320,375
Hard Rock Hotel, Inc. 8.875% 6/1/2013 32,000 34,640,000
Harrah's Operating Co., Inc. 5.375% 12/15/2013 10,000 9,773,240
Harrah's Operating Co., Inc. 7.50% 1/15/2009 25,000 26,497,025
Isle of Capri Casinos, Inc. 7.00% 3/1/2014 34,250 33,565,000
Isle of Capri Casinos, Inc.^ 9.00% 3/15/2012 15,000 15,937,500
Las Vegas Sands Corp. 6.375% 2/15/2015 35,000 33,862,500
Mandalay Resort Group^ 9.375% 2/15/2010 20,000 22,000,000
MGM Mirage, Inc. 6.75% 9/1/2012 32,000 32,600,000
Caesars Entertainment, Inc. 8.125% 5/15/2011 15,000 16,631,250
Caesars Entertainment, Inc. 9.375% 2/15/2007 23,500 24,528,125
Penn National Gaming, Inc. 6.875% 12/1/2011 14,000 14,210,000
Premier Entertainment Biloxi LLC 10.75% 2/1/2012 10,000 9,700,000
River Rock Entertainment Authority 9.75% 11/1/2011 15,700 16,995,250
Scientific Games Corp. 6.25% 12/15/2012 10,000 9,887,500
Seneca Gaming Corp. 7.25% 5/1/2012 4,500 4,550,625
Station Casinos, Inc. 6.50% 2/1/2014 30,500 30,957,500
Turning Stone Casino Resort+ 9.125% 12/15/2010 12,800 13,248,000
Wynn Las Vegas LLC/
Wynn Las Vegas Capital Corp. 6.625% 12/1/2014 30,000 29,325,000
---------------
TOTAL 398,753,890
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
GAS DISTRIBUTION 2.73%
El Paso Corp.^ 7.00% 5/15/2011 $ 72,500 $ 72,318,750
El Paso Corp. 7.75% 1/15/2032 28,250 28,461,875
Ferrellgas Partners, L.P. 6.75% 5/1/2014 15,950 15,152,500
Ferrellgas Partners, L.P. 8.75% 6/15/2012 15,625 15,546,875
MarkWest Energy Partners, L.P.+ 6.875% 11/1/2014 23,050 21,321,250
Sonat Inc.^ 7.625% 7/15/2011 18,000 18,405,000
Suburban Propane Partners, L.P. 6.875% 12/15/2013 12,725 11,961,500
Williams Cos., Inc. (The) 7.875% 9/1/2021 36,000 39,150,000
---------------
TOTAL 222,317,750
---------------
HEALTH SERVICES 3.98%
Alliance Imaging, Inc. 7.25% 12/15/2012 12,000 10,050,000
AmeriPath, Inc. 10.50% 4/1/2013 22,500 23,962,500
Bio-Rad Laboratories, Inc. 6.125% 12/15/2014 11,700 11,612,250
CDRV Investors, Inc.** 0.00%/9.625% 1/1/2010 & 2015 15,000 9,262,500
DaVita, Inc. 7.25% 3/15/2015 10,500 10,683,750
Fresenius Medical Care Capital Trust II 7.875% 2/1/2008 15,000 15,525,000
Hanger Orthopedic Group, Inc. 10.375% 2/15/2009 15,000 15,075,000
HCA Inc 6.375% 1/15/2015 22,250 22,602,306
HealthSouth Corp. 8.375% 10/1/2011 9,225 9,432,562
HealthSouth Corp. 10.75% 10/1/2008 15,000 15,075,000
National Mentor, Inc. 9.625% 12/1/2012 12,000 12,600,000
National Nephrology Assoc. Inc+ 9.00% 11/1/2011 9,000 10,012,500
Omnicare, Inc. 6.875% 12/15/2015 9,525 9,715,500
PacifiCare Health Systems, Inc. 10.75% 6/1/2009 22,750 24,399,375
Senior Housing Properties Trust 8.625% 1/15/2012 5,000 5,500,000
Stewart Enterprises, Inc.+ 7.75% 2/15/2013 7,500 7,237,500
Tenet Healthcare Corp. 7.375% 2/1/2013 40,000 37,100,000
Tenet Healthcare Corp.+ 9.25% 2/1/2015 28,700 28,628,250
Tenet Healthcare Corp. 9.875% 7/1/2014 10,000 10,175,000
Triad Hospitals, Inc. 7.00% 11/15/2013 16,650 16,774,875
Vanguard Health Holdings Co. II LLC 9.00% 10/1/2014 18,125 19,348,438
---------------
TOTAL 324,772,306
---------------
HOTELS 1.17%
FelCor Lodging Trust Inc. 9.00% 6/1/2011 15,000 16,500,000
Gaylord Entertainment Co. 6.75% 11/15/2014 15,000 14,775,000
Host Marriott L.P. 6.375% 3/15/2015 17,250 17,293,125
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
Host Marriott L.P. 7.00% 8/15/2012 $ 20,000 $ 20,600,000
Host Marriott L.P. 9.25% 10/1/2007 25,000 26,500,000
---------------
TOTAL 95,668,125
---------------
HOUSEHOLD & LEISURE PRODUCTS 0.12%
ACCO Brands Corp. 7.625% 8/15/2015 10,000 9,475,000
---------------
INVESTMENTS & MISC. FINANCIAL SERVICES 0.62%
Dow Jones CDX HY+ 7.75% 12/29/2009 49,500 50,242,500
---------------
LEISURE 0.62%
Gaylord Entertainment Co. 8.00% 11/15/2013 31,000 32,627,500
Six Flags, Inc. 9.625% 6/1/2014 8,750 8,553,125
Universal City Development Partners, Ltd. 11.75% 4/1/2010 8,000 9,010,000
---------------
TOTAL 50,190,625
---------------
MACHINERY 0.95%
Briggs & Stratton Corp. 8.875% 3/15/2011 10,000 11,253,620
Case New Holland Inc. 9.25% 8/1/2011 10,000 10,750,000
Dresser, Inc. 9.375% 4/15/2011 15,000 15,862,500
Gardner Denver, Inc. 8.00% 5/1/2013 12,675 13,372,125
JLG Industries, Inc. 8.25% 5/1/2008 15,000 15,787,500
Manitowoc Co., Inc. (The) 7.125% 11/1/2013 10,000 10,325,000
---------------
TOTAL 77,350,745
---------------
MEDIA - BROADCAST 1.65%
Allbritton Communications Co. 7.75% 12/15/2012 65,000 65,650,000
Clear Channel Communications, Inc. 7.65% 9/15/2010 10,000 10,714,830
Lin Television Corp. 6.50% 5/15/2013 10,075 9,709,781
Paxson Communications Corp.+ 10.777%# 1/15/2013 10,000 9,662,500
Radio One, Inc. 6.375% 2/15/2013 10,000 9,762,500
Sinclair Broadcast Group, Inc. 8.00% 3/15/2012 17,832 18,456,120
Sinclair Broadcast Group, Inc. 8.75% 12/15/2011 10,000 10,575,000
---------------
TOTAL 134,530,731
---------------
MEDIA - CABLE 3.46%
Century Communications Corp.(c) 8.375% 12/15/2007 8,000 7,680,000
Century Communications Corp. 9.50% 3/1/2005(g) 40,000 38,800,000
Charter Communications Holdings, LLC I+ 11.00% 10/1/2015 52,000 43,940,000
Charter Communication Holdings, LLC II 10.25% 9/15/2010 20,000 20,000,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
DirecTV Holdings LLC 6.375% 6/15/2015 $ 25,000 $ 24,562,500
DirecTV Holdings LLC 8.375% 3/15/2013 16,900 18,252,000
Echostar DBS Corp. 6.375% 10/1/2011 20,000 19,350,000
Echostar DBS Corp. 9.125% 1/15/2009 10,000 10,487,500
Frontiervision L.P.(c) 11.875% 9/15/2007 20,000 21,125,000
Frontiervision L.P. Series B(c) 11.875% 9/15/2007 10,000 10,562,500
Insight Communications Co., Inc.** 0.00%/12.25% 2/15/2006 & 2011 11,700 12,285,000
Mediacom Broadband LLC+ 8.50% 10/15/2015 14,400 13,410,000
Mediacom Communications Corp.^ 9.50% 1/15/2013 42,500 41,703,125
---------------
TOTAL 282,157,625
---------------
MEDIA - SERVICES 0.64%
Interpublic Group of Cos., Inc. (The) 6.25% 11/15/2014 14,820 12,819,300
Interpublic Group of Cos., Inc. (The)^ 7.25% 8/15/2011 10,000 9,450,000
Warner Music Group Corp. 7.375% 4/15/2014 30,000 29,925,000
---------------
TOTAL 52,194,300
---------------
METALS/MINING EXCLUDING STEEL 0.83%
Century Aluminum Co. 7.50% 8/15/2014 7,550 7,474,500
Foundation PA Coal Co. 7.25% 8/1/2014 10,000 10,387,500
Massey Energy Co.+ 6.875% 12/15/2013 11,175 11,328,656
Novelis Inc.+(b) 7.50% 2/15/2015 15,000 14,062,500
Peabody Energy Corp. 5.875% 4/15/2016 15,000 14,681,250
Timken Co. (The) 5.75% 2/15/2010 10,000 10,040,990
---------------
TOTAL 67,975,396
---------------
NON-ELECTRIC UTILITIES 0.20%
SEMCO Energy, Inc. 7.125% 5/15/2008 1,820 1,858,702
SEMCO Energy, Inc. 7.75% 5/15/2013 14,050 14,802,041
---------------
TOTAL 16,660,743
---------------
NON-FOOD & DRUG RETAILERS 0.58%
Couche-Tard U.S. L.P. 7.50% 12/15/2013 14,000 14,490,000
GSC Holdings Corp.+ 8.00% 10/1/2012 6,500 6,142,500
Neiman Marcus Group, Inc. (The) PIK+ 9.00% 10/15/2015 14,150 14,539,125
Toys "R" Us, Inc. 7.625% 8/1/2011 15,000 12,375,000
---------------
TOTAL 47,546,625
---------------
OFFICE EQUIPMENT 0.18%
Xerox Corp. 6.875% 8/15/2011 14,000 14,560,000
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
OIL FIELD EQUIPMENT & SERVICES 0.55%
Grant Prideco, Inc.+ 6.125% 8/15/2015 $ 5,000 $ 5,012,500
Hanover Compressor Co. 8.625% 12/15/2010 12,075 12,829,688
Hanover Compressor Co. 9.00% 6/1/2014 6,150 6,734,250
J. Ray McDermott, S.A.+ 11.50% 12/15/2013 10,000 11,850,000
Pride Int'l., Inc. 7.375% 7/15/2014 8,000 8,620,000
---------------
TOTAL 45,046,438
---------------
PACKAGING 1.86%
Crown Cork & Seal Co. 7.375% 12/15/2026 45,000 41,400,000
Graham Packaging Co., Inc. 8.50% 10/15/2012 17,795 17,617,050
Owens-Brockway Glass Container Inc. 7.75% 5/15/2011 25,000 26,218,750
Owens-Brockway Glass Container Inc. 8.875% 2/15/2009 35,000 36,706,250
Owens Illinois, Inc. 7.50% 5/15/2010 23,000 23,460,000
Vitro Envases Norteamerica S.A. de C.V.+(b) 10.75% 7/23/2011 6,000 6,150,000
---------------
TOTAL 151,552,050
---------------
PHARMACEUTICALS 1.06%
Alpharma Inc. 8.625% 5/1/2011 25,000 27,281,250
Mylan Laboratories Inc.+ 6.375% 8/15/2015 20,000 20,125,000
Warner Chilcott Corp.+ 8.75% 2/1/2015 42,000 38,850,000
---------------
TOTAL 86,256,250
---------------
PRINTING & PUBLISHING 1.88%
Clarke American Corp.+ 11.75% 12/15/2013 9,625 9,673,125
Dex Media, Inc.** 0.00%/9.00% 11/15/2008 & 2013 15,000 12,000,000
Dex Media West 9.875% 8/15/2013 25,394 28,314,310
Houghton Mifflin Co.** 0.00%/11.50% 10/15/2008 & 2013 25,000 19,750,000
Houghton Mifflin Co. 9.875% 2/1/2013 35,000 37,581,250
PRIMEDIA, Inc. 8.875% 5/15/2011 15,000 13,912,500
R.H. Donnelley Corp. 6.875% 1/15/2013 22,150 20,516,438
R.H. Donnelley Inc. 10.875% 12/15/2012 10,000 11,325,000
---------------
TOTAL 153,072,623
---------------
RAILROADS 0.35%
Union Pacific Corp. 3.625% 6/1/2010 30,500 28,798,466
---------------
RESTAURANTS 0.56%
Denny's Corp./Denny's Holdings Inc. 10.00% 10/1/2012 15,500 15,810,000
Friendly Ice Cream Corp. 8.375% 6/15/2012 14,000 12,530,000
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
Landry's Restaurants, Inc. 7.50% 12/15/2014 $ 10,000 $ 9,400,000
O'Charley's, Inc. 9.00% 11/1/2013 7,550 7,701,000
---------------
TOTAL 45,441,000
---------------
SOFTWARE/SERVICES 1.21%
Electronic Data Systems Corp. 6.50% 8/1/2013 35,000 36,023,470
SunGard Data Systems Inc.+ 9.125% 8/15/2013 23,000 23,920,000
SunGard Data Systems Inc.+ 10.25% 8/15/2015 20,000 20,100,000
Unisys Corp. 6.875% 3/15/2010 10,000 9,300,000
Unisys Corp. 8.00% 10/15/2012 10,000 9,300,000
---------------
TOTAL 98,643,470
---------------
STEEL PRODUCERS/PRODUCTS 0.35%
AK Steel Holding Corp. 7.75% 6/15/2012 15,000 13,612,500
Allegheny Ludlum Corp. 6.95% 12/15/2025 15,000 14,775,000
---------------
TOTAL 28,387,500
---------------
SUPPORT - SERVICES 1.84%
Hertz Corp. (The)+ 8.875% 1/1/2014 19,000 19,451,250
Hertz Corp. (The)+ 10.50% 1/1/2016 5,000 5,175,000
Iron Mountain Inc. 6.625% 1/1/2016 37,000 34,595,000
Iron Mountain Inc. 7.75% 1/15/2015 50,000 50,625,000
Iron Mountain, Inc. 8.625% 4/1/2013 15,000 15,712,500
United Rentals (North America) Inc. 7.75% 11/15/2013 16,830 16,493,400
Williams Scotsman, Inc. 8.50% 10/1/2015 8,000 8,320,000
---------------
Total 150,372,150
---------------
TELECOM - FIXED LINE 0.37%
Level 3 Communications, Inc. 11.25% 3/15/2010 15,000 12,712,500
Level 3 Financing, Inc. 10.75% 10/15/2011 20,000 17,850,000
---------------
Total 30,562,500
---------------
TELECOM - INTEGRATED/SERVICES 2.49%
Cincinnati Bell, Inc. 8.375% 1/15/2014 42,500 42,021,875
Intelsat, Ltd.+(b) 8.25% 1/15/2013 22,750 23,091,250
MCI, Inc. 8.735% 5/1/2014 15,500 17,185,625
Qwest Capital Funding, Inc. 7.90% 8/15/2010 75,000 78,000,000
Qwest Communications Int'l. Inc. 7.25% 2/15/2011 30,000 30,750,000
Syniverse Technologies Inc. 7.75% 8/15/2013 12,000 12,150,000
---------------
TOTAL 203,198,750
---------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
TELECOM - WIRELESS 2.29%
Airgate PCS, Inc. 7.90%# 10/15/2011 $ 12,000 $ 12,450,000
Airgate PCS, Inc.+^ 9.375% 9/1/2009 5,000 5,250,000
Airgate PCS, Inc. 9.375% 9/1/2009 9,200 9,659,895
Alamosa Delaware, Inc. 11.00% 7/31/2010 15,000 16,987,500
Centennial Communications Corp. 10.125% 6/15/2013 33,000 36,052,500
Dobson Communications Corp. 8.875% 10/1/2013 5,775 5,789,438
Nextel Partners, Inc. 8.125% 7/1/2011 27,200 29,206,000
Rogers Wireless Inc.(b) 9.625% 5/1/2011 5,000 5,775,000
Rural Cellular Corp. 9.75% 1/15/2010 20,225 20,528,375
Triton PCS, Inc. 9.375% 2/1/2011 24,000 17,640,000
UbiquiTel Operating Co. 9.875% 3/1/2011 15,000 16,687,500
Wind Acquisition Finance S.A.+(b) 10.75% 12/1/2015 10,000 10,375,000
---------------
TOTAL 186,401,208
---------------
TELECOMMUNICATIONS EQUIPMENT 0.16%
Lucent Technologies Inc. 6.45% 3/15/2029 15,000 12,937,500
---------------
THEATERS & ENTERTAINMENT 0.64%
AMC Entertainment, Inc. 8.00% 3/1/2014 25,000 22,750,000
Carmike Cinemas, Inc. Class A^ 7.50% 2/15/2014 11,325 10,659,656
Cinemark USA, Inc. 9.00% 2/1/2013 10,000 10,625,000
LCE Acquisition Corp. 9.00% 8/1/2014 8,100 8,221,500
---------------
TOTAL 52,256,156
---------------
TRANSPORTATION EXCLUDING AIR/RAIL 0.58%
CHC Helicopter Corp. Class A(b) 7.375% 5/1/2014 15,000 15,243,750
Hornbeck Offshore Services, Inc.+ 6.125% 12/1/2014 3,000 2,940,000
Hornbeck Offshore Services, Inc. 6.125% 12/1/2014 12,790 12,534,200
Offshore Logistics, Inc. 6.125% 6/15/2013 17,525 16,473,500
---------------
TOTAL 47,191,450
---------------
TOTAL HIGH YIELD CORPORATE NOTES & BONDS (cost $5,386,682,766) 5,370,143,110
===============
NON-AGENCY COMMERCIAL
MORTGAGE-BACKED SECURITY 0.25%
Credit Suisse First Boston
Mortgage Securities Corp. Series
1998-C2 Class A2 (cost $19,521,341) 6.30% 11/11/2030 20,000 20,642,310
===============
U.S. TREASURY OBLIGATIONS 3.30%
U.S. Treasury Note 4.25% 8/15/2015 25,000 24,684,575
U.S. Treasury Note 4.375% 5/15/2007 40,000 39,979,720
U.S. Treasury Note 4.625% 5/15/2006 50,000 50,066,450
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<Page>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2005
<Table>
<Caption>
PRINCIPAL
INTEREST MATURITY AMOUNT U.S. $
INVESTMENTS RATE DATE (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note 5.00% 2/15/2011 $ 150,000 $ 154,541,100
---------------
TOTAL U.S. TREASURY OBLIGATIONS (cost $271,582,589) 269,271,845
===============
<Caption>
SHARES
(000)
------
WARRANT 0.00%
SOFTWARE/SERVICES 0.00%
Interpath Communications Warrant
Expiring 5/21/2007* (cost $0) -(d) -(h)
===============
TOTAL LONG-TERM INVESTMENTS (cost $7,713,647,567) $ 7,786,967,972
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
SCHEDULE OF INVESTMENTS (CONCLUDED)
DECEMBER 31, 2005
<Table>
<Caption>
SHARES U.S. $
INVESTMENTS (000) VALUE
- -----------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 3.18%
COLLATERAL FOR SECURITIES ON LOAN 0.25%
State Street Navigator Securities Lending
Prime Portfolio 4.22%(f) 20,046 $ 20,045,545
---------------
<Caption>
PRINCIPAL
AMOUNT
(000)
---------
REPURCHASE AGREEMENT 2.93%
REPURCHASE AGREEMENT DATED 12/30/2005,
3.60% DUE 1/3/2006 WITH STATE STREET
BANK & TRUST CO. COLLATERALIZED BY
$6,600,000 OF FEDERAL HOME LOAN BANK
AT 4.06% DUE 3/23/2009; AND $38,390,000
OF FEDERAL HOME LOAN MORTGAGE CORP.
AT 2.875% DUE 9/18/2007; AND $200,000,000
OF FEDERAL NATIONAL MORTGAGE ASSOCIATION
AT 3.875% DUE 2/1/2008; VALUE:
$244,063,972; PROCEEDS: $239,373,060 $ 239,277 $ 239,277,349
---------------
TOTAL SHORT-TERM INVESTMENTS (cost $259,322,894) 259,322,894
===============
TOTAL INVESTMENTS IN SECURITIES 98.71% (cost $7,972,970,461) 8,046,290,866
===============
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES 1.29% 105,206,117
---------------
NET ASSETS 100.00% $ 8,151,496,983
===============
</Table>
* Non-income producing security.
** Deferred-interest debentures pay no interest for a stipulated number of
years, after which they pay a predetermined interest rate.
+ Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions exempt from
registration normally to qualified institutional buyers.
# Variable rate security. The interest rate represents the rate at December
31, 2005.
^ All (or a portion of security) on loan. See Note 2(h).
(a) Bond issued by a foreign entity, denominated in Euros and converted to U.S.
dollars at period-end exchange rate. The value of this security is 0.14% of
total net assets. The remaining securities, 99.86% of total net assets, are
invested in U.S. dollar-denominated securities.
(b) Foreign security traded in U.S. dollars.
(c) Defaulted security.
(d) Amount represents less than 1,000 shares.
(e) Private placement.
(f) Rate shown reflects 7-day yield as of December 31, 2005.
(g) Security in default. Maturity date represents original maturity date.
(h) Value is less than $1,000.
PIK Payment-in-kind.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2005
<Table>
ASSETS:
Investment in securities, at value (cost $7,972,970,461) $ 8,046,290,866
Cash 26,871,648
Receivables:
Interest and dividends 121,569,588
Capital shares sold 6,693,144
Prepaid expenses and other assets 269,973
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS 8,201,695,219
- ------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable upon return of securities on loan 20,045,545
Payables:
Investment securities purchased 2,029,660
Capital shares reacquired 16,964,316
Management fee 3,135,232
12b-1 distribution fees 4,585,930
Fund administration 278,927
Directors' fees 1,048,483
To affiliate (See Note 3) 62,547
Accrued expenses and other liabilities 2,047,596
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 50,198,236
======================================================================================================
NET ASSETS $ 8,151,496,983
======================================================================================================
COMPOSITION OF NET ASSETS:
Paid-in capital $ 8,661,963,262
Distributions in excess of net investment income (25,173,806)
Accumulated net realized loss on investments and foreign
currency related transactions (558,609,633)
Net unrealized appreciation on investments and
translation of assets and liabilities
denominated in foreign currency 73,317,160
- ------------------------------------------------------------------------------------------------------
NET ASSETS $ 8,151,496,983
======================================================================================================
NET ASSETS BY CLASS:
Class A Shares $ 4,815,148,417
Class B Shares $ 1,473,890,759
Class C Shares $ 1,423,140,787
Class P Shares $ 134,591,618
Class Y Shares $ 304,725,402
OUTSTANDING SHARES BY CLASS:
Class A Shares (740 million shares of common shares authorized, $.001 par value) 617,564,805
Class B Shares (500 million shares of common shares authorized, $.001 par value) 188,910,666
Class C Shares (300 million shares of common shares authorized, $.001 par value) 182,286,907
Class P Shares (160 million shares of common shares authorized, $.001 par value) 17,006,797
Class Y Shares (300 million shares of common shares authorized, $.001 par value) 39,191,409
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
(NET ASSETS DIVIDED BY OUTSTANDING SHARES):
Class A Shares-Net asset value $ 7.80
Class A Shares-Maximum offering price
(Net asset value plus sales charge of 4.75%) $ 8.19
Class B Shares-Net asset value $ 7.80
Class C Shares-Net asset value $ 7.81
Class P Shares-Net asset value $ 7.91
Class Y Shares-Net asset value $ 7.78
======================================================================================================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
<Table>
INVESTMENT INCOME:
Dividends $ 26,210,176
Interest 524,232,025
Securities lending-net 1,224,704
Foreign withholding tax (6,750)
- ------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 551,660,155
- ------------------------------------------------------------------------------------------------------
EXPENSES:
Management fee 38,811,365
12b-1 distribution plan-Class A 17,530,652
12b-1 distribution plan-Class B 16,255,671
12b-1 distribution plan-Class C 15,600,626
12b-1 distribution plan-Class P 565,870
Shareholder servicing 9,837,322
Professional 134,106
Reports to shareholders 1,065,162
Fund administration 3,427,677
Custody 320,824
Directors' fees 460,349
Registration 242,626
Subsidy (See Note 3) 566,606
Other 175,483
- ------------------------------------------------------------------------------------------------------
Gross expenses 104,994,339
Expense reductions (See Note 7) (216,395)
- ------------------------------------------------------------------------------------------------------
NET EXPENSES 104,777,944
- ------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 446,882,211
======================================================================================================
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments and foreign currency related transactions 131,223,692
Net change in unrealized appreciation (depreciation)on investments and
translation of assets and liabilities denominated in foreign currencies (475,701,766)
======================================================================================================
NET REALIZED AND UNREALIZED LOSS (344,478,074)
======================================================================================================
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 102,404,137
======================================================================================================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS DECEMBER 31, 2005 DECEMBER 31, 2004
OPERATIONS:
Net investment income $ 446,882,211 $ 461,636,138
Net realized gain (loss) on
investments and foreign
currency related transactions 131,223,692 163,913,812
Net change in unrealized appreciation (depreciation)
on investments and translation of assets and liabilities
denominated in foreign currencies (475,701,766) 48,862,743
- ------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 102,404,137 674,412,693
======================================================================================================
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (325,559,605) (304,259,218)
Class B (95,747,886) (105,827,104)
Class C (92,010,995) (94,625,703)
Class P (8,006,271) (5,402,678)
Class Y (20,020,997) (15,911,837)
- ------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (541,345,754) (526,026,540)
======================================================================================================
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares 1,206,658,233 1,952,137,115
Reinvestment of distributions 405,952,005 380,570,154
Cost of shares reacquired (2,020,188,152) (1,678,331,223
- ------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM CAPITAL SHARE TRANSACTIONS (407,577,914) 654,376,046
======================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS (846,519,531) 802,762,199
======================================================================================================
NET ASSETS:
Beginning of year 8,998,016,514 8,195,254,315
- ------------------------------------------------------------------------------------------------------
END OF YEAR $ 8,151,496,983 $ 8,998,016,514
======================================================================================================
DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME $ (25,173,806) $ (10,224,834)
======================================================================================================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED 12/31
--------------------------------------------------------------------------------
2005 2004 2003 2002 2001
PER SHARE OPERATING PERFORMANCE (CLASS A SHARES)
NET ASSET VALUE, BEGINNING OF YEAR $ 8.20 $ 8.06 $ 7.19 $ 7.91 $ 8.23
============ ============ ============ ============ ============
Investment operations:
Net investment income(a) .43 .46 .48 .55 .65
Net realized and unrealized gain (loss) (.31) .20 .92 (.64) (.26)
------------ ------------ ------------ ------------ ------------
Total from investment operations .12 .66 1.40 (.09) .39
------------ ------------ ------------ ------------ ------------
Distributions to shareholders from:
Net investment income (.52) (.52) (.50) (.58) (.67)
Paid-in capital - - (.03) (.05) (.04)
------------ ------------ ------------ ------------ ------------
Total distributions (.52) (.52) (.53) (.63) (.71)
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF YEAR $ 7.80 $ 8.20 $ 8.06 $ 7.19 $ 7.91
============ ============ ============ ============ ============
Total Return(b) 1.56% 8.56% 20.28% (1.08)% 4.86%
RATIOS TO AVERAGE NET ASSETS:
Expenses, including expense
reductions .99% .99% 1.00% 1.00% 1.02%
Expenses, excluding expense
reductions 1.00% .99% 1.00% 1.00% 1.02%
Net investment income 5.45% 5.71% 6.31% 7.51% 7.96%
<Caption>
YEAR ENDED 12/31
--------------------------------------------------------------------------------
SUPPLEMENTAL DATA: 2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $ 4,815,148 $ 5,093,236 $ 4,497,233 $ 3,048,301 $ 2,500,544
Portfolio turnover rate 46.63% 42.02% 40.96% 37.03% 55.44%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<Page>
FINANCIAL HIGHLIGHTS (CONTINUED)
<Table>
<Caption>
YEAR ENDED 12/31
--------------------------------------------------------------------------------
2005 2004 2003 2002 2001
PER SHARE OPERATING PERFORMANCE (CLASS B SHARES)
NET ASSET VALUE, BEGINNING OF YEAR $ 8.20 $ 8.06 $ 7.20 $ 7.92 $ 8.23
============ ============ ============ ============ ============
Investment operations:
Net investment income(a) .38 .41 .43 .51 .60
Net realized and unrealized gain (loss) (.31) .20 .92 (.65) (.25)
------------ ------------ ------------ ------------ ------------
Total from investment operations .07 .61 1.35 (.14) .35
------------ ------------ ------------ ------------ ------------
Distributions to shareholders from:
Net investment income (.47) (.47) (.46) (.53) (.63)
Paid-in capital - - (.03) (.05) (.03)
------------ ------------ ------------ ------------ ------------
Total distributions (.47) (.47) (.49) (.58) (.66)
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF YEAR $ 7.80 $ 8.20 $ 8.06 $ 7.20 $ 7.92
============ ============ ============ ============ ============
Total Return(b) .88% 7.86% 19.43% (1.67)% 4.29%
RATIOS TO AVERAGE NET ASSETS:
Expenses, including expense
reductions 1.64% 1.64% 1.64% 1.65% 1.63%
Expenses, excluding expense
reductions 1.64% 1.64% 1.64% 1.65% 1.63%
Net investment income 4.80% 5.07% 5.67% 6.86% 7.35%
<Caption>
YEAR ENDED 12/31
--------------------------------------------------------------------------------
SUPPLEMENTAL DATA: 2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $ 1,473,891 $ 1,803,609 $ 1,861,920 $ 1,294,955 $ 1,105,501
Portfolio turnover rate 46.63% 42.02% 40.96% 37.03% 55.44%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
31
<Page>
FINANCIAL HIGHLIGHTS (CONTINUED)
<Table>
<Caption>
YEAR ENDED 12/31
--------------------------------------------------------------------------------
2005 2004 2003 2002 2001
PER SHARE OPERATING PERFORMANCE (CLASS C SHARES)
NET ASSET VALUE, BEGINNING OF YEAR $ 8.21 $ 8.07 $ 7.21 $ 7.93 $ 8.24
============ ============ ============ ============ ============
Investment operations:
Net investment income(a) .38 .41 .43 .51 .60
Net realized and unrealized gain (loss) (.31) .20 .92 (.64) (.25)
------------ ------------ ------------ ------------ ------------
Total from investment operations .07 .61 1.35 (.13) .35
------------ ------------ ------------ ------------ ------------
Distributions to shareholders from:
Net investment income (.47) (.47) (.46) (.54) (.63)
Paid-in capital - - (.03) (.05) (.03)
------------ ------------ ------------ ------------ ------------
Total distributions (.47) (.47) (.49) (.59) (.66)
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF YEAR $ 7.81 $ 8.21 $ 8.07 $ 7.21 $ 7.93
============ ============ ============ ============ ============
Total Return(b) .89% 7.86% 19.43% (1.58)% 4.29%
RATIOS TO AVERAGE NET ASSETS:
Expenses, including expense
reductions 1.64% 1.64% 1.64% 1.59% 1.62%
Expenses, excluding expense
reductions 1.64% 1.64% 1.64% 1.59% 1.62%
Net investment income 4.80% 5.07% 5.67% 6.92% 7.36%
<Caption>
YEAR ENDED 12/31
--------------------------------------------------------------------------------
SUPPLEMENTAL DATA: 2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $ 1,423,141 $ 1,703,329 $ 1,593,650 $ 905,629 $ 662,848
Portfolio turnover rate 46.63% 42.02% 40.96% 37.03% 55.44%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
32
<Page>
FINANCIAL HIGHLIGHTS (CONTINUED)
<Table>
<Caption>
YEAR ENDED 12/31
--------------------------------------------------------------------------------
2005 2004 2003 2002 2001
PER SHARE OPERATING PERFORMANCE (CLASS P SHARES)
NET ASSET VALUE, BEGINNING OF YEAR $ 8.31 $ 8.17 $ 7.29 $ 8.02 $ 8.33
============ ============ ============ ============ ============
Investment operations:
Net investment income(a) .43 .45 .48 .55 .64
Net realized and unrealized gain (loss) (.32) .20 .93 (.65) (.24)
------------ ------------ ------------ ------------ ------------
Total from investment operations .11 .65 1.41 (.10) .40
------------ ------------ ------------ ------------ ------------
Distributions to shareholders from:
Net investment income (.51) (.51) (.50) (.58) (.67)
Paid-in capital - - (.03) (.05) (.04)
------------ ------------ ------------ ------------ ------------
Total distributions (.51) (.51) (.53) (.63) (.71)
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF YEAR $ 7.91 $ 8.31 $ 8.17 $ 7.29 $ 8.02
============ ============ ============ ============ ============
Total Return(b) 1.45% 8.37% 20.10% (1.19)% 4.90%
RATIOS TO AVERAGE NET ASSETS:
Expenses, including expense
reductions 1.09% 1.09% 1.09% 1.10% 1.08%
Expenses, excluding expense
reductions 1.09% 1.09% 1.09% 1.10% 1.08%
Net investment income 5.35% 5.62% 6.22% 7.41% 7.88%
<Caption>
YEAR ENDED 12/31
--------------------------------------------------------------------------------
SUPPLEMENTAL DATA: 2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $ 134,592 $ 113,216 $ 60,848 $ 18,736 $ 7,017
Portfolio turnover rate 46.63% 42.02% 40.96% 37.03% 55.44%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
33
<Page>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<Table>
<Caption>
YEAR ENDED 12/31
--------------------------------------------------------------------------------
2005 2004 2003 2002 2001
PER SHARE OPERATING PERFORMANCE (CLASS Y SHARES)
NET ASSET VALUE, BEGINNING OF YEAR $ 8.18 $ 8.04 $ 7.18 $ 7.90 $ 8.21
============ ============ ============ ============ ============
Investment operations:
Net investment income(a) .46 .48 .51 .58 .68
Net realized and unrealized gain (loss) (.31) .21 .91 (.64) (.24)
------------ ------------ ------------ ------------ ------------
Total from investment operations .15 .69 1.42 (.06) .44
------------ ------------ ------------ ------------ ------------
Distributions to shareholders from:
Net investment income (.55) (.55) (.53) (.61) (.71)
Paid-in capital - - (.03) (.05) (.04)
------------ ------------ ------------ ------------ ------------
Total distributions (.55) (.55) (.56) (.66) (.75)
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF YEAR $ 7.78 $ 8.18 $ 8.04 $ 7.18 $ 7.90
============ ============ ============ ============ ============
Total Return(b) 1.93% 8.97% 20.58% (.66)% 5.44%
RATIOS TO AVERAGE NET ASSETS:
Expenses, including expense
reductions .64% .64% .64% .65% .63%
Expenses, excluding expense
reductions .64% .64% .64% .65% .63%
Net investment income 5.80% 6.07% 6.67% 7.86% 8.36%
<Caption>
YEAR ENDED 12/31
--------------------------------------------------------------------------------
SUPPLEMENTAL DATA: 2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $ 304,725 $ 284,627 $ 181,603 $ 68,691 $ 44,931
Portfolio turnover rate 46.63% 42.02% 40.96% 37.03% 55.44%
</Table>
(a) Calculated using average shares outstanding during the year.
(b) Total return does not consider the effects of sales loads and assumes the
reinvestment of all distributions.
SEE NOTES TO FINANCIAL STATEMENTS.
34
<Page>
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Lord Abbett Bond-Debenture Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 (the "Act") as a diversified open-end management
investment company. The Fund was incorporated under Maryland law on January 23,
1976.
The Fund's investment objective is to seek high current income and the
opportunity for capital appreciation to produce a high total return. The Fund
offers five classes of shares: Classes A, B, C, P and Y, each with different
expenses and dividends. A front-end sales charge is normally added to the Net
Asset Value ("NAV") for Class A shares. There is no front-end sales charge in
the case of the Classes B, C, P and Y shares, although there may be a contingent
deferred sales charge ("CDSC") as follows: certain redemptions of Class A shares
made within 24 months (12 months if shares were purchased on or after November
1, 2004) following certain purchases made without a sales charge; Class B shares
redeemed before the sixth anniversary of purchase; and Class C shares redeemed
before the first anniversary of purchase. Class B shares will convert to Class A
shares on the eighth anniversary of the original purchase of Class B shares.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results could
differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) INVESTMENT VALUATION-Securities traded on any recognized U.S. or non-U.S.
exchange or on NASDAQ, Inc. are valued at the last sale price or official
closing price on the exchange or system on which they are principally
traded. Unlisted equity securities are valued at the last quoted sale price
or, if no sale price is available, at the mean between the most recently
quoted bid and asked prices. Fixed income securities are valued at the mean
between the bid and asked prices on the basis of prices supplied by
independent pricing services, which reflect broker/dealer supplied
valuations and electronic data processing techniques. Exchange-traded
options and futures contracts are valued at the last sale price in the
market where they are principally traded. If no sale has occurred, the mean
between the most recently quoted bid and asked prices is used. Securities
for which market quotations are not readily available are valued at fair
value as determined by management and approved in good faith by the Board
of Directors. Short-term securities with 60 days or less remaining to
maturity are valued using the amortized cost method, which approximates
current market value.
(b) SECURITY TRANSACTIONS-Security transactions are recorded as of the date
that the securities are purchased or sold (trade date). Realized gains and
losses on sales of portfolio securities are calculated using the
identified-cost method. Realized and unrealized gains or losses are
allocated to each class of shares based upon the relative proportion of net
assets at the beginning of the day.
(c) INVESTMENT INCOME-Dividend income is recorded on the ex-dividend date.
Interest income is recorded on the accrual basis. Discounts are accreted
and premiums are amortized using
35
<Page>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the effective interest method. Investment income is allocated to each class
of shares based upon the relative proportion of net assets at the beginning
of the day.
(d) FEDERAL TAXES-It is the policy of the Fund to meet the requirements of
Subchapter M of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all taxable income and
capital gains to its shareholders. Therefore, no Federal income tax
provision is required.
(e) EXPENSES-Expenses, excluding class specific expenses, are allocated to each
class of shares based upon the relative proportion of net assets at the
beginning of the day. Classes A, B, C, and P shares bear all expenses and
fees relating to their respective 12b-1 Distribution Plans.
(f) FOREIGN TRANSACTIONS-The books and records of the Fund are maintained in
U.S. dollars and transactions denominated in foreign currencies are
recorded in the Fund's records at the rate prevailing when earned or
recorded. Asset and liability accounts that are denominated in foreign
currencies are adjusted to reflect current exchange rates. The resultant
exchange gains and losses are included as Net Realized Gain (Loss) on
Investments and Foreign Currency Related Transactions on the Statement of
Operations. The Fund does not isolate that portion of the results of
operations arising as a result of changes in the foreign exchange rates
from the changes in market prices of the securities.
(g) FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS-The Fund may enter into forward
foreign currency exchange contracts in order to reduce its exposure to
changes in foreign currency exchange rates on its foreign portfolio
holdings and to lock in the U.S. dollar cost of firm purchase and sale
commitments for securities denominated in foreign currencies. A forward
foreign currency exchange contract is a commitment to purchase or sell a
foreign currency at a future date at a negotiated rate. The contracts are
valued daily at forward exchange rates and any unrealized gain (loss) is
included in Net Change in Unrealized Appreciation (Depreciation) on
Investments and Translation of Assets and Liabilities Denominated in
Foreign Currencies on the Statement of Operations. The gain (loss) arising
from the difference between the U.S. dollar cost of the original contract
and the value of the foreign currency in U.S. dollars upon closing of such
contracts is included in Net Realized Gain (Loss) on Investments and
Foreign Currency Related Transactions on the Statement of Operations. As of
December 31, 2005, there were no open forward foreign currency exchange
contracts outstanding.
(h) SECURITIES LENDING-The Fund may lend its securities to member banks of the
Federal Reserve System and to registered broker/dealers approved by the
Fund. The loans are collateralized at all times by cash and/or U.S.
Government securities in an amount at least equal to 102% of the market
value of domestic securities loaned (105% in the case of foreign securities
loaned) as determined at the close of business on the preceding business
day. The dividend and interest income earned on the securities loaned is
accounted for in the same manner as other dividend and interest income.
Lending portfolio securities could result in a loss or delay in recovering
the Fund's securities if the borrower defaults. As of December 31, 2005,
the value of securities loaned was $19,590,839. These loans are
collateralized by cash of $20,045,545, which is invested in a restricted
money market account. State Street Bank & Trust Company ("SSB") received
fees of $524,873 for the year ended December 31, 2005, which are netted
against Securities Lending Income on the Statement of Operations.
36
<Page>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(i) REPURCHASE AGREEMENTS-The Fund may enter into repurchase agreements with
respect to securities. A repurchase agreement is a transaction in which the
Fund acquires a security and simultaneously commits to resell that security
to the seller (a bank or securities dealer) at an agreed-upon price on an
agreed-upon date. The Fund requires at all times that the repurchase
agreement be collateralized by cash or by securities of the U.S.
Government, its agencies, its instrumentalities, or U.S. Government
sponsored enterprises having a value equal to, or in excess of, the value
of the repurchase agreement (including accrued interest). If the seller of
the agreement defaults on its obligation to repurchase the underlying
securities at a time when the value of those securities has declined, the
Fund may incur a loss upon disposition of the securities.
(j) STRUCTURED SECURITIES-The Fund may invest in structured securities.
Structured securities are a type of derivative security whose value is
determined by reference to changes in the value of specific underlying
securities, currencies, interest rates, commodities, indices, credit
default swaps, or other indicators (the "Reference"), or to relative
changes in two or more References. The interest rate or principal amount
payable upon maturity or redemption may be increased (decreased) depending
upon changes in the applicable Reference or certain specified events.
Structured securities may be positively or negatively indexed with the
result that the appreciation of the Reference may produce an increase
(decrease) in the interest rate or the value of the security at maturity.
(k) WHEN-ISSUED OR FORWARD TRANSACTIONS-The Fund may purchase portfolio
securities on a when-issued or forward basis. When-issued or forward
transactions involve a commitment by the Fund to purchase securities, with
payment and delivery ("settlement") to take place in the future, in order
to secure what is considered to be an advantageous price or yield at the
time of entering into the transaction. The value of fixed income securities
to be delivered in the future will fluctuate as interest rates vary. During
the period between purchase and settlement, the value of the securities
will fluctuate and assets consisting of cash and/or marketable securities
(normally short-term U.S. Government or U.S. Government sponsored
enterprises securities) marked to market daily in an amount sufficient to
make payment at settlement will be segregated at the Fund's custodian in
order to pay for the commitment. There is a risk that market yields
available at settlement may be higher than yields obtained on the purchase
date which could result in depreciation of the value of fixed income
when-issued securities. At the time the Fund makes commitment to purchase a
security on a when-issued basis, it will record the transaction and reflect
the liability for the purchase and value of the security in determining its
net asset value. The Fund, generally, has the ability to close out a
purchase obligation on or before the settlement date rather than take
delivery of the security. Under no circumstances will settlement for such
securities take place more than 120 days after the purchase date.
3. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
MANAGEMENT FEE
The Fund has a management agreement with Lord, Abbett & Co. LLC ("Lord Abbett")
pursuant to which Lord Abbett supplies the Fund with investment management
services and executive and other personnel, pays the remuneration of officers,
provides office space and pays for ordinary and necessary office and clerical
expenses relating to research and statistical work and supervision of the Fund's
investment portfolio.
37
<Page>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The management fee is based on average daily net assets at the following annual
rates:
<Table>
First $500 million .50%
Over $500 million .45%
</Table>
Effective January 1, 2006, the annual management fee rate for the Fund was
changed from .50% of the first $500 million and .45% over $500 million to the
following annual rates:
..50% of the first $500 million of average daily net assets;
..45% of the next $9.5 billion of average daily net assets;
..40% of average daily net assets over $10 billion.
Lord Abbett provides certain administrative services to the Fund pursuant to an
Administrative Services Agreement at an annual rate of .04% of the Fund's
average daily net assets.
The Fund, along with certain other funds managed by Lord Abbett (the "Underlying
Funds"), have entered into a Servicing Arrangement with Balanced Strategy Fund
of Lord Abbett Investment Trust (the "Balanced Strategy Fund"), pursuant to
which each Underlying Fund pays a portion of the expenses (excluding management
fees and distribution and service fees) of the Balanced Strategy Fund in
proportion to the average daily value of Underlying Fund shares owned by the
Fund of Funds. Amounts paid pursuant to the Servicing Arrangement are included
in Subsidy Expense on the Fund's Statement of Operations.
12b-1 DISTRIBUTION PLAN
The Fund has adopted a distribution plan with respect to one or more classes of
shares pursuant to Rule 12b-1 of the Act, which provides for the payment of
ongoing distribution and service fees to Lord Abbett Distributor LLC
("Distributor"), an affiliate of Lord Abbett. The fees are accrued daily at
annual rates based upon average daily net assets as follows:
<Table>
<Caption>
FEE CLASS A CLASS B CLASS C CLASS P
- ---------------------------------------------------------
Service .25%(1) .25% .25% .20%
Distribution .10%(2) .75% .75% .25%
</Table>
(1) Annual service fee on shares sold prior to June 1, 1990 is .15% of the
average daily net asset value.
(2) The amount of CDSC collected by the Fund for the year ended December 31,
2005 was $99,019.
Class Y does not have a distribution plan.
COMMISSIONS
Distributor received the following commissions on sales of shares of the Fund,
after concessions were paid to authorized dealers, for the year ended December
31, 2005:
<Table>
<Caption>
DISTRIBUTOR DEALERS'
COMMISSIONS CONCESSIONS
- ----------------------------
$ 3,357,188 $ 16,984,639
</Table>
Distributor received CDSCs of $9,817 and $139,735 for Class A and Class C
shares, respectively, for the year ended December 31, 2005.
One Director and certain of the Fund's officers have an interest in Lord Abbett.
38
<Page>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DISTRIBUTIONS AND CAPITAL LOSS CARRYFORWARD
Dividends from net investment income, if any, are declared and paid monthly.
Taxable net realized gains from investment transactions, reduced by capital loss
carryforwards, if any, are declared and distributed to shareholders at least
annually. The capital loss carryforward amount, if any, is available to offset
future net capital gains. Dividends and distributions to shareholders are
recorded on the ex-dividend date. The amount of dividends and distributions from
net investment income and net realized capital gains are determined in
accordance with Federal income tax regulations which may differ from accounting
principles generally accepted in the United States of America. These book/tax
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the components of net assets based on their federal tax basis treatment;
temporary differences do not require reclassification. Dividends and
distributions, which exceed earnings and profits for tax purposes, are reported
as a tax return of capital.
The tax character of distributions paid during the years ended December 31, 2005
and 2004 are as follows:
<Table>
<Caption>
12/31/2005 12/31/2004
- ----------------------------------------------------------
Distributions paid from:
Ordinary income $ 541,345,754 $ 526,026,540
- ----------------------------------------------------------
Total distributions paid $ 541,345,754 $ 526,026,540
==========================================================
</Table>
As of December 31, 2005, the components of accumulated losses on a tax-basis are
as follows:
<Table>
Capital loss carryforwards* $ (522,621,897)
Temporary differences (4,038,963)
Unrealized gains - net 16,194,581
- ---------------------------------------------
Total accumulated
losses - net $ (510,466,279)
=============================================
</Table>
* As of December 31, 2005, the capital loss carryforwards along with the
related expiration dates were as follows:
<Table>
<Caption>
2009 2010 TOTAL
- ------------------------------------------------
$ 219,436,085 $ 303,185,812 $ 522,621,897
</Table>
Capital losses incurred after October 31 ("Post-October Losses"), within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
$2,990,480 during fiscal 2005.
As of December 31, 2005, the aggregate unrealized security gains and losses
based on cost for U.S. Federal income tax purposes are as follows:
<Table>
Tax cost $ 8,030,093,040
- --------------------------------------------------
Gross unrealized gain 273,713,053
Gross unrealized loss (257,515,227)
- --------------------------------------------------
Net unrealized security gain $ 16,197,826
==================================================
</Table>
The difference between book-basis and tax-basis unrealized gains (losses) is
attributable primarily to wash sales and other temporary tax adjustments.
39
<Page>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The permanent items identified during the year ended December 31, 2005, have
been reclassified among the components of net assets based on their tax-basis
treatment as follows:
<Table>
<Caption>
DISTRIBUTIONS
IN EXCESS OF ACCUMULATED
NET INVESTMENT NET REALIZED PAID-IN
INCOME LOSS CAPITAL
- ------------------------------------------------
$ 79,514,571 $ (25,692,216) $ (53,822,355)
</Table>
The permanent differences are primarily attributable to the tax treatment of
amortization, certain distributions, and paydown gains and losses.
5. PORTFOLIO SECURITIES TRANSACTIONS
Purchases and sales of investment securities (excluding short-term investments)
for the year ended December 31, 2005 were as follows:
<Table>
<Caption>
U.S. NON-U.S. U.S. NON-U.S.
GOVERNMENT GOVERNMENT GOVERNMENT GOVERNMENT
PURCHASES* PURCHASES SALES* SALES
- --------------------------------------------------------------------------
$ 1,387,972,080 $ 2,377,342,240 $ 746,548,666 $ 3,200,586,897
</Table>
* Includes U.S. Government sponsored enterprises securities
6. DIRECTORS' REMUNERATION
The Fund's officers and the one Director who are associated with Lord Abbett do
not receive any compensation from the Fund for serving in such capacities.
Outside Directors Fees are allocated among all Lord Abbett-sponsored funds based
on the net assets of each fund. There is an equity based plan available to all
outside Directors under which outside Directors must defer receipt of a portion
of, and may elect to defer receipt of an additional portion of Directors' fees.
The deferred amounts are treated as though equivalent dollar amounts have been
invested proportionately in the funds. Such amounts and earnings accrued thereon
are included in Directors' Fees on the Statement of Operations and in Directors'
Fees Payable on the Statement of Assets and Liabilities and are not deductible
for U.S. Federal income tax purposes until such amounts are paid.
7. EXPENSE REDUCTIONS
The Fund has entered into arrangements with its transfer agent and custodian
whereby credits realized as a result of uninvested cash balances are used to
reduce a portion of the Fund's expenses.
8. LINE OF CREDIT
The Fund, along with certain other funds managed by Lord Abbett, have available
a $250,000,000 unsecured revolving credit facility ("Facility") from a
consortium of banks, to be used for temporary or emergency purposes as an
additional source of liquidity to fund redemptions of investor shares. Effective
December 9, 2005, the amount available to the funds under the Facility was
increased from $200,000,000 to $250,000,000. Any borrowings under this Facility
will bear interest at current market rates as defined in the agreement. The fee
for this Facility is an annual
40
<Page>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
rate of .08%. At December 31, 2005, there were no loans outstanding pursuant to
this Facility nor was the Facility utilized at any time during the year ended
December 31, 2005.
9. CUSTODIAN AND ACCOUNTING AGENT
SSB is the Fund's custodian and accounting agent. SSB performs custodial,
accounting and recordkeeping functions relating to portfolio transactions and
calculating the Fund's NAV.
10. INVESTMENT RISKS
The Fund is subject to the general risks and considerations associated with
investing in debt securities. The value of an investment will change as interest
rates fluctuate and in response to market movements. When interest rates rise,
the prices of debt securities are likely to decline; when rates fall, such
prices tend to rise. Longer-term securities are usually more sensitive to
interest rate changes. There is also the risk that an issuer of a debt security
will fail to make timely payments of principal or interest to the Fund, a risk
that is greater with high yield securities (sometimes called "lower-rated debt
securities" or "junk bonds") in which the Fund may invest. Some issuers,
particularly of high yield securities, may default as to principal and/or
interest payments after the Fund purchases its securities. A default, or
concerns in the market about an increase in risk of default, may result in
losses to the Fund. High yield bonds are subject to greater price fluctuations,
as well as additional risks.
The mortgage-related securities in which the Fund may invest may be particularly
sensitive to changes in prevailing interest rates. When interest rates are
declining, the value of these securities with prepayment features may not
increase as much as other fixed income securities. Early principal repayment may
deprive the Fund of income payments above current market rates. The prepayment
rate also will affect the price and volatility of a mortgage-related security.
Some of these securities may be those of such Government sponsored enterprises
as Federal Home Loan Mortgage Corporation and Federal National Mortgage
Association. Such securities are guaranteed with respect to the timely payment
of interest and principal by the particular Government sponsored enterprise
involved, not by the U.S. Government.
The Fund may invest up to 5% of its net assets in structured securities. The
Fund typically may use these securities as a substitute for taking a position in
the underlying asset and/or as part of a strategy designed to reduce exposure to
other risk, such as interest rate or currency risk. Structured securities may
present additional risks that are different from those associated with a direct
investment in fixed-income or equity securities; they may be volatile, less
liquid and more difficult to price accurately and subject to additional credit
risks. Changes in the value of structured securities may not correlate perfectly
with the underlying asset, rate or index. The Fund that invests in structured
securities could lose more than the principal amount invested.
The Fund may invest up to 20% of its net assets in equity securities which may
subject it to the general risks and considerations associated with investing in
equity securities. The value of an investment will fluctuate in response to
movements in the stock market in general and to the changing prospects of
individual companies in which the Fund invests.
The Fund may invest up to 20% of its net assets in foreign securities which may
present market liquidity, currency, political, information, and other risks.
These factors can affect the Fund's performance.
41
<Page>
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
11. SUMMARY OF CAPITAL TRANSACTIONS
Transactions in shares of capital stock are as follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
- --------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------
CLASS A SHARES
Shares sold 103,259,218 $ 819,704,525 147,929,408 $ 1,185,674,948
Reinvestment of distributions 34,107,371 269,758,179 31,008,361 247,480,524
Shares reacquired (141,074,199) (1,115,061,375) (115,517,137) (922,609,162)
- --------------------------------------------------------------------------------------------------
Increase (decrease) (3,707,610) $ (25,598,671) 63,420,632 $ 510,546,310
- --------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 12,056,362 $ 95,866,400 25,859,473 $ 207,400,148
Reinvestment of distributions 7,695,860 60,953,657 7,984,642 63,768,740
Shares reacquired (50,763,239) (402,099,341) (44,808,623) (357,804,358)
- --------------------------------------------------------------------------------------------------
Decrease (31,011,017) $ (245,279,284) (10,964,508) $ (86,635,470)
- --------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 26,173,200 $ 208,457,988 50,931,432 $ 409,302,369
Reinvestment of distributions 6,274,518 49,726,801 6,223,475 49,748,678
Shares reacquired (57,703,905) (456,751,182) (47,075,813) (375,969,765)
- --------------------------------------------------------------------------------------------------
Increase (decrease) (25,256,187) $ (198,566,393) 10,079,094 $ 83,081,282
- --------------------------------------------------------------------------------------------------
CLASS P SHARES
Shares sold 7,799,188 $ 62,802,730 7,883,029 $ 64,117,842
Reinvestment of distributions 759,442 6,086,105 474,986 3,842,232
Shares reacquired (5,169,067) (41,599,722) (2,187,653) (17,785,973)
- --------------------------------------------------------------------------------------------------
Increase 3,389,563 $ 27,289,113 6,170,362 $ 50,174,101
- --------------------------------------------------------------------------------------------------
CLASS Y SHARES
Shares sold 2,511,586 $ 19,826,590 10,767,799 $ 85,641,808
Reinvestment of distributions 2,463,768 19,427,263 1,976,991 15,729,980
Shares reacquired (593,696) (4,676,532) (517,857) (4,161,965)
- --------------------------------------------------------------------------------------------------
Increase 4,381,658 $ 34,577,321 12,226,933 $ 97,209,823
- --------------------------------------------------------------------------------------------------
</Table>
42
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
LORD ABBETT BOND-DEBENTURE FUND, INC.:
We have audited the accompanying statement of assets and liabilities of Lord
Abbett Bond-Debenture Fund, Inc. (the "Fund"), including the schedule of
investments, as of December 31, 2005, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with 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. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included 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, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of December 31, 2005 by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. 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 Lord
Abbett Bond-Debenture Fund, Inc. as of December 31, 2005, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
February 27, 2006
43
<Page>
BASIC INFORMATION ABOUT MANAGEMENT
The Board of Directors (the "Board") is responsible for the management of the
business and affairs of the Fund in accordance with the laws of the State of
Maryland. The Board appoints officers who are responsible for the day-to-day
operations of the Fund and who execute policies authorized by the Board. The
Board also approves an investment adviser to the Fund and continues to monitor
the cost and quality of the services provided by the investment adviser, and
annually considers whether to renew the contract with the adviser. Generally,
each Director holds office until his/her successor is elected and qualified or
until his/her earlier resignation or removal, as provided in the Fund's
organizational documents.
Lord, Abbett & Co. LLC ("Lord Abbett"), a Delaware limited liability company, is
the Fund's investment adviser.
INTERESTED DIRECTOR
The following Director is the Managing Partner of Lord Abbett and is an
"interested person" as defined in the Act. Mr. Dow is also an officer, director,
or trustee of each of the fourteen Lord Abbett-sponsored funds, which consist of
54 portfolios or series.
<Table>
<Caption>
CURRENT POSITION
NAME, ADDRESS AND LENGTH OF SERVICE PRINCIPAL OCCUPATION OTHER
YEAR OF BIRTH WITH FUND DURING PAST FIVE YEARS DIRECTORSHIPS
- ----------------------------------------------------------------------------------------------------------------------------------
ROBERT S. DOW Director since Managing Partner and Chief Executive N/A
Lord, Abbett & Co. LLC 1989; Chairman Officer of Lord Abbett since 1996.
90 Hudson Street since 1996
Jersey City, NJ 07302
(1945)
</Table>
----------
INDEPENDENT DIRECTORS
The following independent or outside Directors are also directors or trustees of
each of the fourteen Lord Abbett-sponsored funds, which consist of 54 portfolios
or series.
<Table>
<Caption>
CURRENT POSITION
NAME, ADDRESS AND LENGTH OF SERVICE PRINCIPAL OCCUPATION OTHER
YEAR OF BIRTH WITH FUND DURING PAST FIVE YEARS DIRECTORSHIPS
- ----------------------------------------------------------------------------------------------------------------------------------
E. THAYER BIGELOW Director since 1994 Managing General Partner, Bigelow Media, Currently serves as director of Adelphia
Lord, Abbett & Co. LLC LLC (since 2000); Senior Adviser, Time Communications, Inc., Crane Co., and
c/o Legal Dept. Warner Inc. (1998 - 2000); Acting Chief Huttig Building Products Inc.
90 Hudson Street Executive Officer of Courtroom
Jersey City, NJ 07302 Television Network (1997 - 1998);
(1941) President and Chief Executive Officer of
Time Warner Cable Programming, Inc.
(1991 - 1997).
WILLIAM H.T. BUSH Director since 1998 Co-founder and Chairman of the Board of Currently serves as director of
Lord, Abbett & Co. LLC the financial advisory firm of WellPoint, Inc. (since 2002), and
c/o Legal Dept. Bush-O'Donnell & Company (since 1986). Engineered Support Systems, Inc. (since
90 Hudson Street 2000).
Jersey City, NJ 07302
(1938)
</Table>
44
<Page>
BASIC INFORMATION ABOUT MANAGEMENT (CONTINUED)
<Table>
<Caption>
CURRENT POSITION
NAME, ADDRESS AND LENGTH OF SERVICE PRINCIPAL OCCUPATION OTHER
YEAR OF BIRTH WITH FUND DURING PAST FIVE YEARS DIRECTORSHIPS
- ----------------------------------------------------------------------------------------------------------------------------------
ROBERT B. CALHOUN, JR. Director since 1998 Managing Director of Monitor Clipper Currently serves as director of
Lord, Abbett & Co. LLC Partners (since 1997) and President of Avondale, Inc. and Interstate Bakeries
c/o Legal Dept. Clipper Asset Management Corp. (since Corp.
90 Hudson Street 1991), both private equity investment
Jersey City, NJ 07302 funds.
(1942)
JULIE A. HILL Director since 2004 Owner and CEO of the Hillsdale Currently serves as director of
Lord, Abbett & Co. LLC Companies, a business consulting firm WellPoint, Inc.; Resources Connection
c/o Legal Dept. (since 1998); Founder, President and Inc.; and Holcim (US) Inc. (a subsidiary
90 Hudson Street Jersey Owner of the Hiram-Hill and Hillsdale of Holcim Ltd.).
City, NJ 07302 (1946) Development Companies (1998 - 2000).
FRANKLIN W. HOBBS Director since 2000 Former Chief Executive Officer of Currently serves as director of Adolph
Lord, Abbett & Co. LLC Houlihan Lokey Howard & Zukin, an Coors Company.
c/o Legal Dept. investment bank (January 2002 - April
90 Hudson Street Jersey 2003); Chairman of Warburg Dillon Read
City, NJ 07302 (1947) (1999 - 2001); Global Head of Corporate
Finance of SBC Warburg Dillon Read (1997
- 1999); Chief Executive Officer of
Dillon, Read & Co. (1994 - 1997).
C. ALAN MACDONALD Director since 1998 Retired - General Business and Currently serves as director of H.J.
Lord, Abbett & Co. LLC Governance Consulting (since 1992); Baker (since 2003).
c/o Legal Dept. formerly President and CEO of Nestle
90 Hudson Street Foods.
Jersey City, NJ 07302
(1933)
THOMAS J. NEFF Director since 1982 Chairman of Spencer Stuart (U.S.), an Currently serves as director of Ace,
Lord, Abbett & Co. LLC executive search consulting firm (since Ltd. (since 1997) and Hewitt Associates,
c/o Legal Dept. 1996); President of Spencer Stuart (1979 Inc.
90 Hudson Street - 1996).
Jersey City, NJ 07302
(1937)
</Table>
45
<Page>
BASIC INFORMATION ABOUT MANAGEMENT (CONTINUED)
OFFICERS
None of the officers listed below have received compensation from the Fund. All
the officers of the Fund may also be officers of the other Lord Abbett-sponsored
funds and maintain offices at 90 Hudson Street, Jersey City, NJ 07302.
<Table>
<Caption>
NAME AND CURRENT POSITION LENGTH OF SERVICE PRINCIPAL OCCUPATION
YEAR OF BIRTH WITH FUND OF CURRENT POSITION DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------------------------------------
ROBERT S. DOW Chief Executive Elected in 1996 Managing Partner and Chief Executive
(1945) Officer and Officer of Lord Abbett (since 1996).
President
CHRISTOPHER J. TOWLE Executive Vice Elected in 1995 Partner and Investment Manager, joined
(1957) President Lord Abbett in 1987.
JAMES BERNAICHE Chief Compliance Elected in 2004 Chief Compliance Officer, joined Lord
(1956) Officer Abbett in 2001; formerly Vice President
and Chief Compliance Officer with Credit
Suisse Asset Management.
JOAN A. BINSTOCK Chief Financial Elected in 1999 Partner and Chief Operations Officer,
(1954) Officer and Vice joined Lord Abbett in 1999.
President
JOHN K. FORST Vice President and Elected in 2005 Deputy General Counsel, joined Lord
(1960) Assistant Secretary Abbett in 2004; prior thereto Managing
Director and Associate General Counsel
at New York Life Investment Management
LLC (2002 - 2003); formerly Attorney at
Dechert LLP (2000 - 2002).
MICHAEL S. GOLDSTEIN Vice President Elected in 1998 Partner and Fixed Income Investment
(1968) Manager, joined Lord Abbett in 1997.
ELLEN G. ITSKOVITZ Vice President Elected in 2001 Partner and Senior Research Analyst,
(1957) joined Lord Abbett in 1998.
LAWRENCE H. KAPLAN Vice President and Elected in 1997 Partner and General Counsel, joined Lord
(1957) Secretary Abbett in 1997.
MAREN LINDSTROM Vice President Elected in 2000 Partner and Fixed Income Investment
(1962) Manager, joined Lord Abbett in 2000.
ROBERT G. MORRIS Vice President Elected in 1995 Partner and Chief Investment Officer,
(1944) joined Lord Abbett in 1991.
</Table>
46
<Page>
BASIC INFORMATION ABOUT MANAGEMENT (CONCLUDED)
<Table>
<Caption>
NAME AND CURRENT POSITION LENGTH OF SERVICE PRINCIPAL OCCUPATION
YEAR OF BIRTH WITH FUND OF CURRENT POSITION DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------------------------------------
A. EDWARD OBERHAUS, III Vice President Elected in 1996 Partner and Manager of Equity Trading,
(1959) joined Lord Abbett in 1983.
CHRISTINA T. SIMMONS Vice President and Elected in 2001 Assistant General Counsel, joined Lord
(1957) Assistant Secretary Abbett in 1999.
BERNARD J. GRZELAK Treasurer Elected in 2003 Director of Fund Administration, joined
(1971) Lord Abbett in 2003; formerly Vice
President, Lazard Asset Management LLC
(2000 - 2003); prior thereto Manager of
Deloitte & Touche LLP.
</Table>
Please call 888-522-2388 for a copy of the Statement of Additional Information
(SAI), which contains further information about the Fund's Directors. It is
available free upon request.
47
<Page>
APPROVAL OF ADVISORY CONTRACT
At meetings on December 7 and 8, 2005, the Board, including all Directors who
are not interested persons, considered whether to approve the continuation of
the existing management agreement between the Fund and Lord Abbett. In addition
to the materials the Board had reviewed throughout the course of the year, the
Board received materials relating to the management agreement before the meeting
and had the opportunity to ask questions and request further information in
connection with its consideration. The Board also took into account its
familiarity with Lord Abbett gained through its previous meetings and
discussions, and the examination of the portfolio management team conducted by
members of the Contract Committee during the year.
The materials received by the Board included, but were not limited to, (1)
information provided by Lipper Analytical Services, Inc. regarding the
investment performance of the Fund compared to the investment performance of a
group of funds with substantially similar investment objectives (the
"performance universe") and to the investment performance of an appropriate
securities index (if such an index existed), for various time periods each
ending September 30, 2005, (2) information on the effective management fee rates
and expense ratios for funds with similar objectives and similar size (the "peer
group"), (3) sales and redemption information for the Fund, (4) information
regarding Lord Abbett's financial condition, (5) an analysis of the relative
profitability of the management agreement to Lord Abbett, (6) information
regarding the distribution arrangements of the Fund, (7) information regarding
the personnel and other resources devoted by Lord Abbett to managing the Fund.
INVESTMENT MANAGEMENT SERVICES GENERALLY. The Board considered the investment
management services provided by Lord Abbett to the Fund, including investment
research, portfolio management, and trading, and Lord Abbett's commitment to
compliance with all relevant legal requirements. The Board also observed that
Lord Abbett was solely engaged in the investment management business and
accordingly did not experience the conflicts of interest resulting from being
engaged in other lines of business. The Board noted that Lord Abbett did not use
brokerage commissions to purchase third-party research. The Board also
considered the investment advisory services provided by Lord Abbett to other
clients, the fees charged for the services, and the differences in the nature of
the services provided to the Fund and other Lord Abbett Funds, on the one hand,
and the services provided to other clients, on the other.
INVESTMENT PERFORMANCE AND COMPLIANCE. The Board reviewed the Fund's investment
performance as well as the performance of the performance universe of funds,
both in terms of total return and in terms of other statistical measures. The
Board observed that the performance of the Class A shares of the Fund was in the
fourth quintile of its performance universe for the nine-month period, in the
third quintile for the one- and five-year periods, in the fifth quintile for the
three-year period, and in the second quintile for the ten-year period. The Board
also observed that the performance was below that of the Lipper High Current
Yield Bond Index for the nine-month, one-year, and three-year periods, and above
that of the Index for the five- and ten-year periods. The Board also observed
that the utility of the comparisons to the performance universe and the Index
was limited, because the Bond-Debenture Fund differed from many of the funds in
the performance universe and the Index in some material aspects, particularly in
that it it required to keep at least 20% of its assets in a combination of
investment grade securities, U.S. government securities, and cash. In addition,
the Board observed that historically the Lord Abbett Funds, in investing in
below investment-grade debt, have invested in relatively higher quality
48
<Page>
bonds compared to other funds that invest in below investment-grade debt, and
that in recent years such bonds have not performed as well as lower quality
bonds.
LORD ABBETT'S PERSONNEL AND METHODS. The Board considered the qualifications of
the personnel providing investment management services to the Fund, in light of
its investment objective and discipline. Among other things, they considered the
size, experience, and turnover rates of Lord Abbett's investment management
staff, Lord Abbett's investment methodology and philosophy, and Lord Abbett's
approach to recruiting, training, and retaining investment management personnel.
The Board determined that Lord Abbett had the expertise and resources to manage
the Fund effectively.
NATURE AND QUALITY OF OTHER SERVICES. The Board considered the nature, quality,
costs, and extent of administrative and other services performed by Lord Abbett
and Lord Abbett Distributor and the nature and extent of Lord Abbett supervision
of third party service providers, including the Fund's transfer agent and
custodian.
EXPENSES. The Board considered the expense ratio of the Fund and the expense
ratios of peer groups. It also considered the amount and nature of the fees paid
by shareholders. The Board observed that the contractual and actual management
and administrative services fees were approximately six basis points below the
median of the peer group. The Board also observed that the actual total expense
ratio of Class A was approximately the same as the median of the peer group,
that the actual total expense ratios of Classes B and C were approximately seven
basis points below the median of the peer group, that the actual total expense
ratio of Class P was approximately eleven basis points below the median of the
peer group, and the actual total expense ratio of Class Y was approximately
three basis points below the median of the peer group.
PROFITABILITY. The Board considered the level of Lord Abbett's profits in
managing the Fund, including a review of Lord Abbett's methodology for
allocating its costs to its management of the Fund. The Board concluded that the
allocation methodology had a reasonable basis and was appropriate. It considered
the profits realized by Lord Abbett in connection with the operation of the Fund
and whether the amount of profit was fair for the management of the Fund. The
Board also considered the profits realized from other businesses of Lord Abbett,
which may benefit from or be related to the Fund's business. The Board
considered Lord Abbett's profit margins in comparison with available industry
data, both accounting for and ignoring marketing and distribution expenses, and
how those profit margins could affect Lord Abbett's ability to recruit and
retain investment personnel. The Board recognized that Lord Abbett's
profitability was a factor in enabling it to attract and retain qualified
investment management personnel to provide services to the Fund. The Board noted
that Lord Abbett's profitability had increased, in part due to an increase in
assets under management, but concluded that Lord Abbett's profitability overall
and with respect to the Fund was not excessive.
ECONOMIES OF SCALE. The Board considered whether there had been any economies of
scale in managing the Fund, whether the Fund had appropriately benefited from
any such economies of scale, and whether there was potential for realization of
any further economies of scale. The Board concluded that the existing advisory
fee schedule adequately addressed any economies of scale in managing the Fund.
OTHER BENEFITS TO LORD ABBETT. The Board considered the character and amount of
fees paid by the Fund and the Fund's shareholders to Lord Abbett and Lord Abbett
Distributor for services other than investment advisory services. The Board also
considered the revenues and profitability of Lord Abbett's investment advisory
business apart from its mutual fund business, and the
49
<Page>
intangible benefits enjoyed by Lord Abbett by virtue of its relationship with
the Fund. The Board observed that Lord Abbett Distributor receives 12b-1 fees
from the Funds as to shares held in accounts for which there is no other broker
of record, may retain a portion of the 12b-1 fees from the Funds, and receives a
portion of the sales charges on sales and redemptions of some classes of shares.
In addition, Lord Abbett accrues certain benefits for its business of providing
investment advice to clients other than the Funds, but that that business also
benefits the Funds. The Board also noted that Lord Abbett, as disclosed in the
prospectus of each Fund, has entered into revenue sharing arrangements with
certain entities that distribute shares of the Funds.
ALTERNATIVE ARRANGEMENTS. The Board considered whether, instead of approving
continuation of the management agreement, employing one or more alternative
arrangements might be in the best interests of the Fund, such as continuing to
employ Lord Abbett, but on different terms.
In considering whether to approve the continuation of the management agreement,
the Board did not identify any single factor as paramount or controlling. This
summary does not discuss in detail all matters considered. After considering all
of the relevant factors, the Board unanimously found that continuation of the
existing management agreement was in the best interests of the Fund and its
shareholders and voted unanimously to approve the continuation of the management
agreement.
50
<Page>
HOUSEHOLDING
The Fund has adopted a policy that allows it to send only one copy of the Fund's
Prospectus, proxy material, annual report and semiannual report to certain
shareholders residing at the same "household." This reduces Fund expenses, which
benefits you and other shareholders. If you need additional copies or do not
want your mailings to be "householded," please call Lord Abbett at 800-821-5129
or send a written request with your name, the name of your fund or funds, and
your account number or numbers to Lord Abbett Family of Funds, P.O. Box 219336,
Kansas City, MO 64121.
PROXY VOTING POLICIES, PROCEDURES, AND RECORD
A description of the policies and procedures that Lord Abbett uses to vote
proxies related to the Fund's portfolio securities, and information on how Lord
Abbett voted the Fund's proxies during the 12-month period ended June 30, 2005,
are available without charge, upon request, (i) by calling 888-522-2388; (ii) on
Lord Abbett's website at www.LordAbbett.com; and (iii) on the Securities and
Exchange Commission's ("SEC") website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. Copies of the
filings are available without charge, upon request on the SEC's website at
www.sec.gov and may be available by calling Lord Abbett at 800-821-5129. You can
also obtain copies of Form N-Q by (i) visiting the SEC'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); (ii) sending your request and
duplicating fee to the SEC's Public Reference Room, Washington, DC 20549-0102;
or (iii) sending your request electronically to publicinfo@sec.gov.
TAX INFORMATION
2.73% of the ordinary income distribution paid by the Fund during fiscal 2005
is qualified dividend income. For corporate shareholders, only 2.73% of the
Fund's ordinary income distribution qualified for the dividends received
deduction.
Additionally, for foreign shareholders, of the distributions paid by the Fund
to shareholders during the fiscal year ended December 31, 2005, $434,823,928
represents interest related dividends.
51
<Page>
[LORD ABBETT(R) LOGO]
<Table>
This report when not used for the general
information of shareholders of the fund, is to
be distributed only if preceded or accompanied
by a current fund prospectus. LORD ABBETT BOND-DEBENTURE FUND, INC.
Lord Abbett mutual fund shares are distributed by LABD-2-1205
LORD ABBETT DISTRIBUTOR LLC (2/06)
</Table>
<Page>
ITEM 2: CODE OF ETHICS.
(a) In accordance with applicable requirements, the Registrant adopted
a Sarbanes-Oxley Code of Ethics on June 19, 2003 that applies to
the principal executive officer and senior financial officers of
the Registrant ("Code of Ethics"). The Code of Ethics was in effect
during the fiscal year ended December 31, 2005 (the "Period").
(b) Not applicable.
(c) The Registrant has not amended the Code of Ethics as described in
Form N-CSR during the Period.
(d) The Registrant has not granted any waiver, including an implicit
waiver, from a provision of the Code of Ethics as described in Form
N-CSR during the Period.
(e) Not applicable.
(f) See Item 12(a)(1) concerning the filing of the Code of Ethics. The
Registrant will provide a copy of the Code of Ethics to any person
without charge, upon request. To obtain a copy, please call Lord
Abbett at 800-821-5129.
ITEM 3: AUDIT COMMITTEE FINANCIAL EXPERT.
The Registrant's Board of Directors has determined that each of the
following independent Directors who are members of the audit
committee are audit committee financial experts: E. Thayer Bigelow,
Robert B. Calhoun, and Franklin W. Hobbs. Each of these persons is
independent within the meaning of the Form N-CSR.
ITEM 4: PRINCIPAL ACCOUNTANT FEES AND SERVICES.
In response to sections (a), (b), (c) and (d) of Item 4, the
aggregate fees billed to the Registrant for the fiscal years ended
December 31, 2005 and 2004 by the Registrant's principal accounting
firm, Deloitte & Touche LLP, the member firms of Deloitte Touche
Tohmatsu and their respective affiliates (collectively, "Deloitte")
were as follows:
<Table>
<Caption>
FISCAL YEAR ENDED:
---------------------
2005 2004
--------- ---------
Audit Fees {a} $ 59,000 $ 58,000
Audit-Related Fees {b} 1,123 1,448
--------- ---------
</Table>
<Page>
<Table>
Total audit and audit-related fees 60,123 59,448
--------- ---------
Tax Fees {c} 9,177 9,409
All Other Fees {d} - 0 - - 0 -
--------- ---------
Total Fees $ 69,300 $ 68,857
--------- ---------
</Table>
- ----------
{a} Consists of fees for audits of the Registrant's annual
financial statements.
{b} Consists of the Registrant's proportionate share of fees for
performing certain agreed-upon procedures regarding compliance with
the provisions of Rule 17a-7 of the Investment Company Act of 1940
and related Board approved procedures.
{c} Fees for the fiscal years ended December 31, 2005 and 2004
consist of fees for preparing the U.S. Income Tax Return for
Regulated Investment Companies, New Jersey Corporation Business Tax
Return, New Jersey Annual Report Form, U.S. Return of Excise Tax on
Undistributed Income of Investment Companies, IRS Forms 1099-MISC
and 1096 Annual Summary and Transmittal of U.S. Information
Returns.
{d} Not applicable.
(e)(1) Pursuant to Rule 2-01(c) (7) of Regulation S-X, the Registrant's
Audit Committee has adopted pre-approval policies and procedures.
Such policies and procedures generally provide that the Audit
Committee must pre-approve:
- any audit, audit-related, tax, and other services to be
provided to the Lord Abbett Funds, including the
Registrant, and
- any audit-related, tax, and other services to be
provided to the Registrant's investment adviser and any
entity controlling, controlled by or under common
control with the investment adviser that provides
ongoing services to one or more Funds comprising the
Registrant if the engagement relates directly to
operations and financial reporting of a Fund, by the
independent auditor to assure that the provision of such
services does not impair the auditor's independence.
The Audit Committee has delegated pre-approval authority to its
Chairman, subject to a fee limit of $10,000 per event, and not to
exceed $25,000 annually. The Chairman will report any pre-approval
decisions to the Audit Committee at its next scheduled meeting.
Unless a type of service to be provided by the independent auditor
has received general pre-approval, it must be pre-approved by the
Audit Committee. Any proposed services exceeding pre-approved cost
levels will require specific pre-approval by the Audit Committee.
<Page>
(e)(2) The Registrant's Audit Committee has approved 100% of the services
described in this Item 4 (b) through (d).
(f) Not applicable.
(g) The aggregate non-audit fees billed by Deloitte for services
rendered to the Registrant are shown above in the response to Item
4 (a), (b), (c) and (d) as "All Other Fees".
The aggregate non-audit fees billed by Deloitte for services
rendered to the Registrant's investment adviser, Lord, Abbett & Co.
LLC ("Lord Abbett"), for the fiscal years ended December 31, 2005
and 2004 were:
<Table>
<Caption>
FISCAL YEAR ENDED:
---------------------------
2005 2004
----------- ----------
All Other Fees {a} $ 105,500 $ 120,650
</Table>
- --------
{a} Consist of fees for Independent Services Auditors' Report on
Controls Placed in Operation and Tests of Operating Effectiveness
related to Lord Abbett's Asset Management Services ("SAS 70
Report").
The aggregate non-audit fees billed by Deloitte for services
rendered to entities under the common control of Lord Abbett (i.e.,
Lord Abbett Distributor LLC, the Registrant's principal underwriter)
for the fiscal years ended December 31, 2005 and 2004 were:
<Table>
<Caption>
FISCAL YEAR ENDED:
---------------------------
2005 2004
----------- ----------
All Other Fees $ - 0 - $ - 0 -
</Table>
(h) The Registrant's Audit Committee has considered the provision of
non-audit services that were rendered to the Registrant's
investment adviser, and any entity controlling, controlled by or
under common control with the investment adviser that provides
ongoing services to the Registrant, that were not pre-approved
pursuant to Rule 2-01 (c)(7)(ii) of Regulation S-X and has
determined that the provision of such services is compatible with
maintaining Deloitte's independence.
ITEM 5: AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
<Page>
ITEM 6: SCHEDULE OF INVESTMENTS.
Not applicable.
ITEM 7: DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8: PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9: PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 11: CONTROLS AND PROCEDURES.
(a) Based on their evaluation of the Registrant's disclosure controls
and procedures (as defined in Rule 30a-3(c) under the Investment
Company Act of 1940) as of a date within 90 days prior to the
filing date of this report, the Chief Executive Officer and Chief
Financial Officer of the Registrant have concluded that such
disclosure controls and procedures are reasonably designed and
effective to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known
to them by others within those entities.
(b) There were no significant changes in the Registrant's internal
control over financial reporting (as defined in Rule 30a-3(d) under
the Investment Company Act of 1940) that occurred during the second
fiscal quarter of the period covered by this report that have
materially affected, or are reasonably likely to materially affect,
the Registrant's internal control over financial reporting.
ITEM 12: EXHIBITS.
(a)(1) Amendments to Code of Ethics - Not applicable.
<Page>
(a)(2) Certification of each principal executive officer and principal
financial officer of the Registrant as required by Rule 30a-2 under
the Act (17 CFR 270.30a-2) is attached hereto as a part of
EX-99.CERT.
(a)(3) Not applicable.
(b) Certification of each principal executive officer and principal
financial officer of the Registrant as required by Section 906 of
the Sarbanes-Oxley Act of 2002 is attached hereto as a part of
EX-99.906CERT.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LORD ABBETT BOND-DEBENTURE FUND, INC.
/s/ Robert S. Dow
---------------------------
Robert S. Dow
Chief Executive Officer,
Chairman and President
/s/ Joan A. Binstock
---------------------------
Joan A. Binstock
Chief Financial Officer and Vice President
Date: February 23, 2006
<Page>
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
LORD ABBETT BOND-DEBENTURE FUND, INC.
/s/ Robert S. Dow
----------------------------
Robert S. Dow
Chief Executive Officer,
Chairman and President
/s/ Joan A. Binstock
----------------------------
Joan A. Binstock
Chief Financial Officer and Vice President
Date: February 23, 2006