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: 811-1018
Dreyfus Founders Funds, Inc.
---------------------------------------------------------------
(Exact name of registrant as specified in charter)
210 University Boulevard, Suite 800, Denver, Colorado 80206
---------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Kenneth R. Christoffersen, Esq.
210 University Boulevard, Suite 800, Denver, Colorado 80206
---------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 303-394-4404
Date of fiscal year end: December 31
Date of reporting period: December 31, 2005
ITEM 1. REPORTS TO STOCKHOLDERS
<Page>
ANNUAL REPORT
[GRAPHIC]
DREYFUS FOUNDERS
BALANCED FUND
INVESTMENT UPDATE
DECEMBER 31, 2005
[DREYFUS FOUNDERS FUNDS(R) LOGO]
THE GROWTH SPECIALISTS
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 10
Statement of Investments 12
Statement of Assets and Liabilities 17
Statement of Operations 19
Statements of Changes in Net Assets 20
Financial Highlights 21
Notes to Financial Statements 27
Report of Independent Registered Public Accounting Firm 37
Other Tax Information 38
Factors Considered in Renewing the Advisory Agreement 39
Your Board Representatives 47
</Table>
[GRAPHIC]
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INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
managers only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-9 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC-INSURED - NOT BANK-GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF JOHN B. JARES AND JOHN V. JOHNSON]
A DISCUSSION WITH PORTFOLIO MANAGER JOHN B. JARES, CFA, LEFT; AND ASSISTANT
PORTFOLIO MANAGER JOHN V. JOHNSON, CFA, REGARDING FUND PERFORMANCE FOR THE
12-MONTH PERIOD ENDED DECEMBER 31, 2005.
ECONOMIC BURDENS
Through 2005, investors endured a restrictive Federal Reserve monetary policy
and a continued contraction of corporate earnings multiples, despite the strong
operating results produced by the market. With what seemed to be an overly
volatile market in 2005, the Standard & Poor's 500 Index posted one of the most
narrow price ranges between the year's high and low in recent history.
Additionally, the economy continued to carry the burden of high materials and
energy prices through the period. In the latter part of the year, the market
began to positively discount the possibility of the Federal Reserve ending its
interest rate increases.
CONSERVATIVE ALLOCATION TO EQUITIES
The Fund's performance for the year was driven by our investment strategy to
fundamentally evaluate companies and industries on an individual basis. However,
that being said, the Dreyfus Founders Balanced Fund underperformed the 4.91%
return of its benchmark, the Standard & Poor's 500 Index, for the 12 months
ended December 31, 2005.
The Fund continued to search for companies exhibiting strong growth
potential, using fundamental analysis. Throughout most of the period, the Fund
maintained a conservative allocation to equities to mitigate risks to the
portfolio overall, with sector weightings biased toward the information
technology (IT) and consumer discretionary sectors. As our investment process
began to reveal improving fundamentals within the information technology sector,
we selected the stocks that we believed were most likely to exhibit
[SIDENOTE]
"THE FUND'S PERFORMANCE FOR THE PERIOD WAS DRIVEN BY OUR INVESTMENT STRATEGY TO
FUNDAMENTALLY EVALUATE COMPANIES AND INDUSTRIES ON AN INDIVIDUAL BASIS."
3
<Page>
strong earnings growth. Early in the period, the Fund's allocation in the energy
sector was decreased due to our adherence to our sell discipline upon reaching
our price targets. This hurt the Fund's relative performance for the year, as
energy was the strongest performing sector in the Index.
IT SHOWED STRONG PERFORMANCE
The most compelling growth opportunities came from the information technology
sector, where strong stock selection and a positive relative weighting boosted
the Fund's performance. APPLE COMPUTER, INC.'s stock price rose during the
period on strong demand for its iPod MP3 music players as well as a shift in
consumer preferences toward the company's Macintosh computers. ASM LITHOGRAPHY
HOLDING NV increased its market share with new lithography tools, and
International Business Machines Corporation experienced a strong mid-year
earnings report and improved value assignment from the market. Semiconductor
manufacturer Marvell Technology Group Limited also saw its stock price increase
during the period.
CONSUMER STAPLES AND MATERIALS AIDED FUND
The Fund held relative underweight positions in the materials and consumer
staples sectors, which, paired with positive stock selection in each respective
sector, benefited the Fund's relative performance as these sectors were not
strong performers in the Index.
Individual names within the healthcare sector boosted the Fund's
performance as well, including GENENTECH, INC. and MedImmune, Inc. Genentech's
stock price rose on the positive receptivity to its new drugs for the treatment
of multiple indications of cancer. MedImmune benefited as the market discounted
future potential revenues from its new human papilloma virus (HPV) vaccine.
Additionally, the company took numerous positive actions during the period to
restructure its product portfolio following an earlier misstep on its Flumist(R)
product.
Consumer staples name Gillette Company was another notable strong
performing stock for the period, as the company was purchased for a significant
premium by PROCTER & GAMBLE COMPANY.
[SIDENOTE]
SECTORS BENEFITING THE FUND
Information Technology
Materials
Consumer Staples
4
<Page>
ENERGY AND FINANCIALS WEIGHED ON PERFORMANCE
As was previously mentioned, the Fund's position reduction in the energy sector
proved the largest detriment to relative performance for the period.
A strong rally in the financials sector in the fourth quarter of the
period, in which the Fund had a significant underweight position, impeded the
Fund's performance, as did weak stock picking. Among the poor-performing
financials issues was First Marblehead Corporation. A provider of outsourcing
services for private education lending, First Marblehead's stock price declined
as investors were concerned about the company's long-term growth rate and
management issues. The company again delivered slower-than-expected facilitation
volume growth in the second quarter. Management issues involved the resignation
of First Marblehead's CEO over alleged improper gifts to an employee of a large
customer. The Fund sold its position in the company as we felt the monies may be
better deployed in other investments.
As we did not find any compelling growth opportunities within the utilities
sector, the Fund did not participate in this sector. However, utilities produced
a double-digit return in the Index, which negatively pressured the Fund's
relative performance.
LARGEST EQUITY HOLDINGS (ticker symbol)
<Table>
1. REGAL ENTERTAINMENT GROUP CLASS A (RGC) 4.73%
2. AMDOCS LIMITED (DOX) 4.45%
3. GENERAL ELECTRIC COMPANY (GE) 4.27%
4. HEWLETT-PACKARD COMPANY (HPQ) 3.85%
5. COLGATE-PALMOLIVE COMPANY (CL) 3.72%
6. SPRINT NEXTEL CORPORATION (S) 3.70%
7. WELLS FARGO & COMPANY (WFC) 3.50%
8. MGI PHARMA, INC. (MOGN) 3.34%
9. JPMORGAN CHASE & COMPANY (JPM) 3.18%
10. ASM LITHOGRAPHY HOLDING NV NY SHARES (ASML) 2.55%
</Table>
Holdings listed are a percentage of equity assets. Portfolio holdings are
subject to change, and should not be construed as a recommendation of any
security.
[SIDENOTE]
SECTORS DETRACTING FROM THE FUND
Energy
Financials
Utilities
5
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 1-800-525-2440 TO OBTAIN THE MOST
RECENT MONTH-END PERFORMANCE DATA.
[CHART]
Dreyfus Founders
Balanced Fund S&P 500 Lipper Balanced
Class F Shares Index Fund Index
12/31/1995 $10,000.00 $10,000.00 $10,000.00
12/31/1996 $11,875.56 $12,296.03 $11,301.76
12/31/1997 $13,885.03 $16,398.39 $13,567.71
12/31/1998 $15,823.59 $21,084.82 $15,608.01
12/31/1999 $15,471.88 $25,521.39 $17,012.21
12/29/2000 $13,856.37 $23,197.82 $17,421.83
12/31/2001 $12,479.41 $20,440.57 $16,856.49
12/31/2002 $10,300.57 $15,923.09 $15,053.57
12/31/2003 $12,254.06 $20,490.57 $18,055.16
12/31/2004 $13,305.78 $22,720.36 $19,676.72
12/30/2005 $13,671.91 $23,836.25 $20,699.15
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders Balanced Fund on 12/31/95 to a $10,000 investment made in unmanaged
securities indexes on that date. The Fund's performance assumes the reinvestment
of dividends and capital gain distributions, but does not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or redemption of
Fund shares. The Fund offers multiple classes of shares. Performance shown is
for Class F, which is open only to grandfathered investors. The Fund's
performance in the graph takes into account all applicable Class F fees and
expenses. THESE FIGURES DO NOT REFLECT THE MAXIMUM SALES CHARGES APPLICABLE TO
CLASS A, B, C, OR T SHARES OF THE FUND. FOR THESE SHARE CLASSES, APPLYING THESE
CHARGES WILL RESULT IN LOWER RETURNS FOR INVESTORS.
The Standard & Poor's (S&P) 500 Index is designed to be representative of the
U.S. equities market and consists of 500 leading companies in leading industries
of the U.S. economy. The total return figures cited for this index assume change
in security prices and reinvestment of dividends, but do not reflect the costs
of managing a mutual fund. The S&P 500 Index does not include a fixed-income
component, while the Fund does. The Lipper Balanced Fund Index is an equal
dollar weighted index of the largest mutual funds within the Balanced Fund
classification, as defined by Lipper. This index is adjusted for the
reinvestment of capital gains and income dividends, and reflects the management
expenses associated with the funds included in the index. Further information
related to Fund performance is contained elsewhere in this report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (INCEPTION DATE) YEAR YEARS YEARS INCEPTION
- --------------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) (3.43%) (1.76%) -- (3.23%)
Without sales charge 2.51% (0.60%) -- (2.27%)
B SHARES (12/31/99)
With redemption* (2.34%) (1.70%) -- (3.16%)
Without redemption 1.66% (1.30%) -- (3.00%)
C SHARES (12/31/99)
With redemption** 0.54% (1.65%) -- (3.34%)
Without redemption 1.54% (1.65%) -- (3.34%)
F SHARES (2/19/63) 2.75% (0.27%) 3.18% N/A
R SHARES (12/31/99) 3.01% (0.60%) -- (2.26%)
T SHARES (12/31/99)
With sales charge (4.50%) (2.40%) (1.32%) -- (2.94%)
Without sales charge 2.21% (0.41%) -- (2.20%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, fee
waivers for certain share classes, and adjustments for financial statement
purposes. Part of the Fund's historical performance is due to the purchase of
securities sold in initial public offerings (IPOs). There is no guarantee that
the Fund's investments in IPOs, if any, will continue to have a similar impact
on performance.
* The maximum contingent deferred sales charge for Class B shares is 4% and is
reduced to 0% after six years, at which time the Class B shares convert to
Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
INDIVIDUAL ISSUES IMPEDED PERFORMANCE
A primary negative impact on an individual stock basis came from the poor
performance of consumer discretionary holding ROYAL CARIBBEAN CRUISES LIMITED.
Royal Caribbean underperformed during the period as investors were concerned
with the effect high oil prices may have on the company's profits. The Fund held
Royal Caribbean at the end of the period as we believed robust demand for
cruises may help the company to continue strong pricing.
Healthcare names Abbott Laboratories, Inc. and MGI PHARMA, INC. also saw
drops in their stock prices. Abbott declined during the period after it reported
disappointing data on two potential new products, which were the basis for
future growth. MGI underperformed as concerns continued over the company's
chemo-induced anti-nausea drug, Aloxi(R). Additionally, a new product,
Dacogen(TM), was expected to be approved in the fall 2005 but has been delayed,
which put pressure on the stock.
Information technology names Xilinx, Inc. and MAXIM INTEGRATED PRODUCTS,
INC. also underperformed during the period.
FIXED-INCOME PERFORMANCE
In the first three quarters of 2005, higher oil prices, a strengthening dollar
and higher short-term interest rates were held accountable for any perceived
slowdown in the fixed-income markets. The housing market provided a considerable
offset to these factors, as well as stimulus to the economy. In
[CHART]
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
Consumer Discretionary 15.89%
Information Technology 13.34%
Financials 9.72%
Healthcare 9.71%
Consumer Staples 5.64%
Industrials 4.68%
Telecommunications Services 3.14%
Energy 2.18%
Materials 1.82%
Fixed-Income Investments 31.93%
Cash & Equivalents 1.95%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio
managers and are subject to change at any time, based on market and other
conditions, and should not be construed as a recommendation of any specific
security.
8
<Page>
the fourth quarter, the bond market was affected by a drop in oil prices,
indicating less inflationary pressure, and speculation that the Federal Reserve
was nearing the end of its tightening cycle. A flattening yield curve pervaded
the annual period, as the yield curve's short end, which is usually more
responsive to federal funds rate changes, experienced a lowering, causing an
overall flattening.
The Fund benefited from its high-quality bias as higher quality bonds
outperformed lower quality securities during the year.
An underweight position in mortgages and overweight position in corporate
bonds hurt the performance of the fixed-income portion of the portfolio;
mortgages outperformed corporates by almost 1.00% for the period. Additionally,
the Fund's shorter duration dampened performance as long-dated securities gained
more than shorter maturities in the bull market-flattening trend.
IN CONCLUSION
At the end of the period, we believe the Fund is well positioned for continued
economic improvement and earnings growth throughout 2006. We have searched for
companies in all sectors that we believe have the potential for earnings growth,
while being mindful of the potential impacts of monetary policy on the market in
general.
For the fixed-income portion of the Fund, we continue to be cautious but
believe we are nearing the end of the Federal Reserve's tightening cycle. We
will assess credit quality and spreads relative to our corporate bond holdings
should we begin to experience economic changes that might affect corporate
earnings.
As we move into 2006, we will continue to apply our investment process and
philosophy to picking stocks for the Fund that seek to take advantage of the
economic environment and that we believe will exhibit strong fundamental
earnings strength through the year. As always, we thank you for your continued
investment in the Fund.
/s/ John B. Jares, CFA /s/ John V. Johnson, CFA
John B. Jares, CFA John V. Johnson, CFA
Portfolio Manager Assistant Portfolio Manager
9
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
10
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- ------------------------------------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,019.15 $ 8.65
CLASS A HYPOTHETICAL 1,000.00 1,016.53 8.68
CLASS B ACTUAL 1,000.00 1,016.94 12.91
CLASS B HYPOTHETICAL 1,000.00 1,012.24 12.97
CLASS C ACTUAL 1,000.00 1,016.53 13.16
CLASS C HYPOTHETICAL 1,000.00 1,011.98 13.22
CLASS F ACTUAL 1,000.00 1,019.76 7.38
CLASS F HYPOTHETICAL 1,000.00 1,017.80 7.40
CLASS R ACTUAL 1,000.00 1,020.37 6.42
CLASS R HYPOTHETICAL 1,000.00 1,018.77 6.43
CLASS T ACTUAL 1,000.00 1,018.50 9.92
CLASS T HYPOTHETICAL 1,000.00 1,015.25 9.95
</Table>
*Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- --------------------------------------------------------------------------------
CLASS A 1.70%
CLASS B 2.54%
CLASS C 2.59%
CLASS F 1.45%
CLASS R 1.26%
CLASS T 1.95%
</Table>
11
<Page>
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------
COMMON STOCKS (DOMESTIC)--58.7%
AUTOMOTIVE RETAIL--1.3%
21,800 Advance Auto Parts, Inc.* $ 947,418
------------
BIOTECHNOLOGY--2.3%
7,800 Amgen, Inc.* 615,108
7,100 Cephalon, Inc.* 459,654
6,600 Genentech, Inc.* 610,500
------------
1,685,262
------------
BROADCASTING & CABLE TV--0.8%
21,700 Comcast Corporation Special Class A* 557,473
------------
COMPUTER & ELECTRONICS RETAIL--1.1%
17,550 Best Buy Company, Inc. 763,074
------------
COMPUTER HARDWARE--3.7%
10,800 Apple Computer, Inc.* 776,412
65,900 Hewlett-Packard Company 1,886,717
------------
2,663,129
------------
CONSUMER ELECTRONICS--1.4%
10,100 Harman International Industries, Inc. 988,285
------------
CONSUMER FINANCE--1.1%
14,900 SLM Corporation 820,841
------------
DEPARTMENT STORES--1.6%
9,400 J.C. Penney Company, Inc. 522,640
12,600 Kohl's Corporation* 612,360
------------
1,135,000
------------
DIVERSIFIED BANKS--3.2%
12,600 Bank of America Corporation 581,490
27,300 Wells Fargo & Company 1,715,259
------------
2,296,749
------------
GENERAL MERCHANDISE STORES--1.8%
33,000 Family Dollar Stores, Inc. 818,070
9,200 Target Corporation 505,724
------------
1,323,794
------------
HEALTHCARE EQUIPMENT--0.5%
10,200 Biomet, Inc. 373,014
------------
HEALTHCARE SUPPLIES--0.7%
9,800 DENTSPLY International, Inc. 526,162
------------
HOME ENTERTAINMENT SOFTWARE--0.3%
3,600 Electronic Arts, Inc.* 188,316
------------
HOME IMPROVEMENT RETAIL--0.8%
15,100 Home Depot, Inc. 611,248
------------
</Table>
12
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS--4.6%
11,200 Clorox Company $ 637,168
33,250 Colgate-Palmolive Company 1,823,763
14,235 Procter & Gamble Company 823,922
------------
3,284,853
------------
INDUSTRIAL CONGLOMERATES--2.9%
59,700 General Electric Company 2,092,485
------------
INTEGRATED OIL & GAS--2.2%
9,800 Chevron Corporation 556,346
18,000 ExxonMobil Corporation 1,011,060
------------
1,567,406
------------
INTEGRATED TELECOMMUNICATION SERVICES--3.1%
7,100 Alltel Corporation 448,010
77,700 Sprint Nextel Corporation 1,815,072
------------
2,263,082
------------
INTERNET SOFTWARE & SERVICES--0.7%
12,100 Yahoo!, Inc.* 474,078
------------
INVESTMENT BANKING & BROKERAGE--1.3%
38,600 Charles Schwab Corporation 566,262
6,700 Morgan Stanley 380,158
------------
946,420
------------
LEISURE FACILITIES--0.4%
6,700 Royal Caribbean Cruises Limited 301,902
------------
METAL & GLASS CONTAINERS--1.2%
21,400 Ball Corporation 850,008
------------
MOVIES & ENTERTAINMENT--5.8%
16,500 Pixar, Inc.* 869,880
121,800 Regal Entertainment Group Class A 2,316,636
55,300 Time Warner, Inc. 964,432
------------
4,150,948
------------
OTHER DIVERSIFIED FINANCIAL SERVICES--2.2%
39,300 JPMorgan Chase & Company 1,559,817
------------
PACKAGED FOODS & MEATS--1.1%
14,000 Hershey Foods Corporation 773,500
------------
PHARMACEUTICALS--5.4%
11,200 Covance, Inc.* 543,760
11,100 Eli Lilly and Company 628,149
95,400 MGI Pharma, Inc.* 1,637,064
15,975 Pfizer, Inc. 372,537
16,000 Wyeth 737,120
------------
3,918,630
------------
RAILROADS--1.0%
9,100 Union Pacific Corporation 732,641
------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
13
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------
SEMICONDUCTORS--1.3%
25,600 Maxim Integrated Products, Inc. $ 927,744
------------
SPECIALTY CHEMICALS--0.6%
7,300 Sigma-Aldrich Corporation 462,017
------------
SPECIALTY STORES--0.9%
17,400 Tiffany & Company 666,246
------------
SYSTEMS SOFTWARE--1.6%
43,100 Microsoft Corporation 1,127,065
------------
THRIFTS & MORTGAGE FINANCE--1.0%
17,100 The PMI Group, Inc. 702,297
------------
TRADING COMPANIES & DISTRIBUTORS--0.8%
7,700 W.W. Grainger, Inc. 547,470
------------
TOTAL COMMON STOCKS (DOMESTIC)
(COST--$39,938,770) 42,228,374
------------
COMMON STOCKS (FOREIGN)--7.4%
APPLICATION SOFTWARE--3.0%
79,400 Amdocs Limited (CI)* 2,183,500
------------
PHARMACEUTICALS--0.7%
11,400 Teva Pharmaceutical Industries Limited
Sponsored ADR (IS) 490,314
------------
PROPERTY & CASUALTY INSURANCE--0.9%
10,000 XL Capital Limited Class A (BD) 673,800
------------
SEMICONDUCTOR EQUIPMENT--1.7%
62,175 ASM Lithography Holding NV NY Shares (NE)* 1,248,474
------------
SEMICONDUCTORS--1.1%
46,825 ATI Technologies, Inc. (CA)* 795,557
------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$4,824,023) 5,391,645
------------
<Caption>
PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------------------------------------------------------
CORPORATE BONDS (DOMESTIC)--9.2%
AUTOMOBILE MANUFACTURERS--1.4%
$ 1,000,000 Toyota Motor Credit Corporation
5.65% 1/15/07 $ 1,003,990
------------
DIVERSIFIED BANKS--2.4%
1,540,000 Washington Mutual, Inc.
8.25% 4/1/10 1,714,728
------------
GENERAL MERCHANDISE STORES--1.1%
750,000 Target Corporation
5.875% 3/1/12 787,853
------------
</Table>
14
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS--2.2%
$ 1,500,000 Colgate-Palmolive Company
5.98% 4/25/12 $ 1,590,825
------------
PHARMACEUTICALS--2.1%
1,500,000 Abbott Laboratories
5.625% 7/1/06 1,506,975
------------
TOTAL CORPORATE BONDS (DOMESTIC)
(COST--$6,436,621) 6,604,371
------------
U.S. GOVERNMENT OBLIGATIONS--22.8%
AGENCY PASS THROUGH--2.3%
1,604,698 U.S. Small Business Administration Series 10-A
6.64% 2/1/11 1,678,450
------------
GOVERNMENT SPONSORED ENTERPRISES--11.6%
Federal Farm Credit Bank:
1,040,000 4.26% 9/30/10 1,017,775
700,000 4.70% 12/10/14 694,442
Federal Home Loan Bank
800,000 4.50% 11/15/12 787,496
Federal Home Loan Mortgage Corporation:
1,000,000 4.125% 7/12/10 975,150
800,000 4.875% 11/15/13 803,784
900,000 5.125% 7/15/12 916,452
Federal National Mortgage Association:
700,000 5.00% 4/6/10 699,391
800,000 5.375% 11/15/11 823,488
Tennessee Valley Authority:
800,000 5.375% 11/13/08 814,288
800,000 5.625% 1/18/11 829,672
------------
8,361,938
------------
MORTGAGE-BACKED SECURITIES: GNMA/GUARANTEED--1.6%
1,090,504 Government National Mortgage Association
6.00% 1/15/33 Pool #563709 1,117,854
------------
U.S. TREASURY NOTES--7.3%
U.S. Treasury Inflation Index Note
607,280 3.875% 1/15/09 637,965
U.S. Treasury Note:
900,000 4.25% 8/15/14 890,154
1,000,000 4.375% 8/15/12 999,880
800,000 5.00% 2/15/11 823,968
900,000 5.00% 8/15/11 928,935
900,000 5.75% 8/15/10 952,137
------------
5,233,039
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST--$16,546,859) 16,391,281
------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- -------------------------------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--2.9%
SPECIAL PURPOSE ENTITY--2.9%
$ 2,100,000 CAFCO LLC
4.12% 1/3/06~ $ 2,099,519
------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$2,099,519) 2,099,519
------------
TOTAL INVESTMENTS--101.0%
(TOTAL COST--$69,845,792) 72,715,190
------------
OTHER ASSETS AND LIABILITIES--(1.0%) (699,897)
------------
NET ASSETS--100.0% $ 72,015,293
============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
* NON-INCOME PRODUCING.
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$2,099,519, OR 2.9%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
BD - BERMUDA
CA - CANADA
CI - CHANNEL ISLANDS
IS - ISRAEL
NE - NETHERLANDS
SEE NOTES TO FINANCIAL STATEMENTS.
16
<Page>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 69,845,792
---------------
Investment securities, at market 72,715,190
Cash 113,742
Receivables:
Investment securities sold 690,619
Capital shares sold 23,840
Dividends and interest 388,299
Other assets 66,344
---------------
Total Assets 73,998,034
---------------
LIABILITIES
Payables and other accrued liabilities:
Investment securities purchased 568,478
Capital shares redeemed 1,198,435
Advisory fees 42,597
Shareholder servicing fees 5,054
Accounting fees 3,932
Distribution fees 10,468
Transfer agency fees 15,977
Custodian fees 906
Directors' Deferred Compensation 66,344
Other 70,550
---------------
Total Liabilities 1,982,741
---------------
Net Assets $ 72,015,293
===============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 252,943,017
Undistributed net investment income 670,753
Accumulated net realized loss from security and
foreign currency transactions (184,467,875)
Net unrealized appreciation on investments
and foreign currency translation 2,869,398
---------------
Total $ 72,015,293
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
<Table>
CLASS A
Net Assets $ 1,759,754
Shares Outstanding 205,144
Net Asset Value, Redemption Price Per Share $ 8.58
Maximum offering price per share
(net asset value plus sales charge of 5.75% of offering price) $ 9.10
CLASS B
Net Assets $ 1,052,670
Shares Outstanding 123,872
Net Asset Value, Offering and Redemption Price Per Share
(excluding applicable contingent deferred sales charge) $ 8.50
CLASS C
Net Assets $ 188,534
Shares Outstanding 22,539
Net Asset Value, Offering and Redemption Price Per Share
(excluding applicable contingent deferred sales charge) $ 8.36
CLASS F
Net Assets $ 68,925,898
Shares Outstanding 8,025,785
Net Asset Value, Offering and Redemption Price Per Share $ 8.59
CLASS R
Net Assets $ 53,831
Shares Outstanding 6,291
Net Asset Value, Offering and Redemption Price Per Share $ 8.56
CLASS T
Net Assets $ 34,606
Shares Outstanding 3,927
Net Asset Value, Redemption Price Per Share $ 8.81
Maximum offering price per share
(net asset value plus sales charge of 4.50% of offering price) $ 9.23
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<Page>
STATEMENT OF OPERATIONS
For the year ended December 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 552,588
Interest 1,567,896
Foreign taxes withheld (398)
---------------
Total Investment Income 2,120,086
---------------
EXPENSES
Advisory fees--Note 2 542,501
Shareholder servicing fees--Note 2 66,309
Accounting fees--Note 2 50,077
Distribution fees--Note 2 212,162
Transfer agency fees--Note 2 127,172
Registration fees 60,860
Postage and mailing expenses 18,606
Custodian fees and expenses--Note 2 6,388
Printing expenses 52,645
Legal and audit fees 27,058
Directors' fees and expenses--Note 2 16,360
Other expenses 33,315
---------------
Total Expenses 1,213,453
Earnings Credits (5,516)
Reimbursed/Waived Expenses (3,731)
Expense Offset to Broker Commissions (13,318)
---------------
Net Expenses 1,190,888
---------------
Net Investment Income 929,198
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITY
TRANSACTIONS AND FOREIGN CURRENCY TRANSACTIONS
Net Realized Gain on:
Security Transactions 10,634,687
Foreign Currency Transactions 13,237
---------------
Net Realized Gain 10,647,924
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation (9,571,705)
---------------
Net Realized and Unrealized Gain 1,076,219
---------------
Net Increase in Net Assets Resulting from Operations $ 2,005,417
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2005 2004
OPERATIONS
Net Investment Income $ 929,198 $ 1,165,048
Net Realized Gain on Security and
Foreign Currency Transactions 10,647,924 8,838,969
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation (9,571,705) (2,078,931)
--------------- ---------------
Net Increase in Net Assets Resulting from Operations 2,005,417 7,925,086
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From Net Investment Income
Class A (16,241) (16,533)
Class B (1,226) (4,861)
Class C (165) (659)
Class F (925,766) (1,146,498)
Class R (776) (763)
Class T (240) (243)
--------------- ---------------
Net Decrease from Dividends and Distributions (944,414) (1,169,557)
--------------- ---------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A 52,147 (2,547)
Class B (587,816) (135,764)
Class C (77,456) (49,827)
Class F (21,792,363) (36,636,581)
Class R (5,724) (16,844)
Class T (856) (3,452)
--------------- ---------------
Net Decrease from Capital Share Transactions (22,412,068) (36,845,015)
--------------- ---------------
Net Decrease in Net Assets (21,351,065) (30,089,486)
--------------- ---------------
NET ASSETS
Beginning of Year $ 93,366,358 $ 123,455,844
--------------- ---------------
End of Year $ 72,015,293 $ 93,366,358
=============== ===============
Undistributed (Accumulated) Net Investment
Income (Loss) $ 670,753 $ (31,472)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 8.45 $ 7.88 $ 6.68 $ 8.18 $ 9.24
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.08 0.08 0.05 0.05 0.06
Net realized and unrealized gains
(losses) on securities 0.13 0.57 1.20 (1.51) (1.03)
----------------------------------------------------------------------
Total from investment operations 0.21 0.65 1.25 (1.46) (0.97)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.08) (0.08) (0.05) (0.04) (0.09)
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions (0.08) (0.08) (0.05) (0.04) (0.09)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 8.58 $ 8.45 $ 7.88 $ 6.68 $ 8.18
======================================================================
TOTAL RETURN(a) 2.51% 8.31% 18.81% (17.85%) (10.46%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,760 $ 1,682 $ 1,572 $ 1,243 $ 1,227
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 1.69% 1.49% 1.83% 1.89% 1.87%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.66% 1.48% 1.83% 1.89% 1.87%
Net investment income 0.90% 0.96% 0.63% 0.56% 0.51%
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 181% 134% 108% 122% 111%
</Table>
(a) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 8.37 $ 7.80 $ 6.63 $ 8.11 $ 9.18
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.01(a) 0.01 0.01 (0.01) 0.01
Net realized and unrealized gains
(losses) on securities 0.13 0.58 1.17 (1.47) (1.03)
----------------------------------------------------------------------
Total from investment operations 0.14 0.59 1.18 (1.48) (1.02)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.01) (0.02) (0.01) 0.00(b) (0.05)
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions (0.01) (0.02) (0.01) 0.00 (0.05)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 8.50 $ 8.37 $ 7.80 $ 6.63 $ 8.11
======================================================================
TOTAL RETURN(c) 1.66% 7.63% 17.76% (18.21%) (11.13%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,053 $ 1,625 $ 1,647 $ 1,181 $ 1,484
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(d) 2.47% 2.21% 2.53% 2.54% 2.50%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.45% 2.21% 2.53% 2.54% 2.49%
Net investment income (loss) 0.08% 0.23% (0.08%) (0.10%) (0.13%)
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(e) 181% 134% 108% 122% 111%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) DISTRIBUTIONS FROM NET INVESTMENT INCOME FOR THE YEAR ENDED DECEMBER 31,
2002 AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(c) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(d) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(e) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
22
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 8.24 $ 7.69 $ 6.54 $ 8.04 $ 9.17
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.00(a),(b) 0.01(a) (0.01) (0.17) (0.05)
Net realized and unrealized gains
(losses) on securities 0.13 0.56 1.16 (1.33) (1.03)
-------------------------------------------------------------------------
Total from investment operations 0.13 0.57 1.15 (1.50) (1.08)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.01) (0.02) 0.00(c) 0.00 (0.05)
From net realized gains 0.00 0.00 0.00 0.00 0.00
-------------------------------------------------------------------------
Total distributions (0.01) (0.02) 0.00 0.00 (0.05)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 8.36 $ 8.24 $ 7.69 $ 6.54 $ 8.04
=========================================================================
TOTAL RETURN(d) 1.54% 7.42% 17.59% (18.66%) (11.80%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 189 $ 264 $ 295 $ 248 $ 496
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(e) 2.54% 2.35% 2.69% 3.48% 3.96%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.51% 2.34% 2.69% 3.48% 3.96%
Net investment income (loss) 0.02% 0.08% (0.17%) (1.05%) (1.64%)
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(f) 181% 134% 108% 122% 111%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) NET INVESTMENT INCOME FOR THE YEAR ENDED DECEMBER 31, 2005 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(c) DISTRIBUTIONS FROM NET INVESTMENT INCOME FOR THE YEAR ENDED DECEMBER 31,
2003 AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(d) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(e) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.54% (2005), 2.35% (2004), 2.69% (2003), 3.48% (2002), AND
4.24% (2001).
(f) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 8.46 $ 7.88 $ 6.69 $ 8.20 $ 9.22
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.09 0.08 0.06 0.07 0.10
Net realized and unrealized gains
(losses) on securities 0.14 0.59 1.20 (1.50) (1.02)
----------------------------------------------------------------------
Total from investment operations 0.23 0.67 1.26 (1.43) (0.92)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.10) (0.09) (0.07) (0.08) (0.10)
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions (0.10) (0.09) (0.07) (0.08) (0.10)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 8.59 $ 8.46 $ 7.88 $ 6.69 $ 8.20
======================================================================
TOTAL RETURN 2.75% 8.58% 18.96% (17.46%) (9.94%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 68,926 $ 89,701 $ 119,835 $ 130,314 $ 297,068
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(a) 1.43% 1.34% 1.54% 1.43% 1.23%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.40% 1.33% 1.54% 1.42% 1.22%
Net investment income 1.14% 1.08% 0.93% 0.99% 1.20%
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(b) 181% 134% 108% 122% 111%
</Table>
(a) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(b) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
24
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 8.43 $ 7.86 $ 6.68 $ 8.18 $ 9.22
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.11 0.09 0.16 (0.16) 0.09
Net realized and unrealized gains
(losses) on securities 0.14 0.58 1.05 (1.34) (1.02)
----------------------------------------------------------------------
Total from investment operations 0.25 0.67 1.21 (1.50) (0.93)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.12) (0.10) (0.03) 0.00 (0.11)
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions (0.12) (0.10) (0.03) 0.00 (0.11)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 8.56 $ 8.43 $ 7.86 $ 6.68 $ 8.18
======================================================================
TOTAL RETURN 3.01% 8.63% 18.12% (18.34%) (10.09%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 54 $ 59 $ 72 $ 11 $ 14
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(a) 1.19% 1.21% 2.37% 4.24% 3.07%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.17% 1.21% 2.37% 4.24% 3.07%
Net investment income (loss) 1.38% 1.21% 0.01% (1.77%) (0.75%)
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(b) 181% 134% 108% 122% 111%
</Table>
(a) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 1.36% (2005), 1.35% (2004), 2.62% (2003), 19.52% (2002), AND
272.77% (2001).
(b) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 8.68 $ 8.09 $ 6.88 $ 8.17 $ 9.21
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.05 0.03 0.21 (0.37) 0.08
Net realized and unrealized gains
(losses) on securities 0.14 0.62 1.00 (0.92) (1.04)
----------------------------------------------------------------------
Total from investment operations 0.19 0.65 1.21 (1.29) (0.96)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.06) (0.06) 0.00(a) 0.00 (0.08)
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions (0.06) (0.06) 0.00 0.00 (0.08)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 8.81 $ 8.68 $ 8.09 $ 6.88 $ 8.17
======================================================================
TOTAL RETURN(b) 2.21% 8.01% 17.65% (15.79%) (10.44%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 35 $ 35 $ 36 $ 13 $ 232
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.89% 1.77% 2.73% 2.60% 3.36%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.87% 1.77% 2.73% 2.59% 3.36%
Net investment income (loss) 0.69% 0.66% (0.29%) (0.31%) (1.12%)
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 181% 134% 108% 122% 111%
</Table>
(a) DISTRIBUTIONS FROM NET INVESTMENT INCOME FOR THE YEAR ENDED DECEMBER 31,
2003 AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.15% (2005), 2.02% (2004), 3.18% (2003), 14.63% (2002), AND
18.37% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<Page>
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders Balanced Fund (the "Fund"). The Fund offers Class A,
Class B, Class C, Class F, Class R and Class T shares. Class A and Class T
shares are subject to a sales charge imposed at the time of purchase, Class B
shares are subject to a contingent deferred sales charge ("CDSC") imposed on
Class B shares redeemed within six years of purchase, Class C shares are subject
to a CDSC imposed on Class C shares redeemed within one year of purchase and
Class F and Class R shares are sold at net asset value per share (with Class R
shares sold only to eligible institutional investors). Other differences between
the classes include services offered to and the expenses borne by each Class.
The following significant accounting policies have been consistently followed by
the Fund in the preparation of its financial statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair value as
27
<Page>
determined in good faith by the Company's board of directors or pursuant to
procedures approved by the board of directors. These situations may include
instances where an event occurs after the close of the market on which a
security is traded but before the Fund calculates its net asset value, and it is
determined that the event has materially affected the value of the security.
Fair value of foreign equity securities may be determined with the assistance of
a pricing service using correlations between the movement of prices of foreign
securities and indexes of domestic securities and other appropriate indicators,
such as closing market prices of relevant ADRs and futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
U.S. GOVERNMENT OBLIGATIONS--Some U.S. government obligations, such as
Government National Mortgage Association (GNMA) pass-through certificates, are
supported by the full faith and credit of the United States Treasury. Other
obligations, such as securities of the Federal Home Loan Bank (FHLB), are
supported by the right of the issuer to borrow from the United States Treasury;
and others, such as bonds issued by Federal National Mortgage Association (FNMA,
a private corporation), are supported only by the credit of the agency,
authority or instrumentality, although the Secretary of the Treasury has
discretionary authority, though not the obligation, to purchase obligations of
FNMA.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund may invest at least a
portion of its assets in foreign securities. Foreign securities carry more risk
than U.S. securities, such as political and currency risks. In the event the
Fund executes a foreign security transaction, the Fund may enter into a foreign
currency contract to settle the foreign security transaction. The Fund could be
exposed to risk if counterparties are unable to meet the terms of the contracts
or if the value of the currency changes unfavorably to the U.S. dollar. The
resultant foreign currency gain or loss from the contract is recorded as foreign
currency gain or loss and is presented as such in the Statement of Operations.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each
business day. Purchases and sales of investment securities and income and
expense items denominated in foreign currencies are translated into U.S. dollar
amounts on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net
28
<Page>
unrealized gain or loss from investments and foreign currency translations on
the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized appreciation or depreciation on investments and foreign
currency translation arises from changes in the values of assets and
liabilities, including investments in securities held at the date of the
financial statements, resulting from changes in the exchange rates and changes
in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) quarterly and from net realized capital gains (if
any) annually. Dividends and distributions, which are determined in accordance
with income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as
29
<Page>
this would involve future claims that may be made against the Fund that have not
yet occurred. However, based on experience, the Funds expect the risk of loss to
be remote.
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
Financial Corporation, a publicly-owned financial services company which
provides a comprehensive range of financial products and services in domestic
and selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
0.65% of the first $250 million of net assets, 0.60% of the next $250 million of
net assets, 0.55% of the next $250 million of net assets and 0.50% of net assets
in excess of $750 million.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $58,080 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $16,747 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $13.09 to $13.88, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency
30
<Page>
fees, including both the per account fees paid to DTI and out-of-pocket charges,
during the year ended December 31, 2005 were as follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
------------------------------------------------------------
Class A $ 5,823
Class B $ 5,226
Class C $ 1,065
Class R $ 145
Class T $ 191
</Table>
Founders has agreed to reimburse (or to cause its affiliates to reimburse) the
Class R and Class T share classes of the Fund for certain transfer agency
expenses pursuant to a written contractual commitment. This commitment will
extend through at least August 31, 2006, and will not be terminated without
prior notification to the Company's board of directors. For the year ended
December 31, 2005, Class R and Class T were each reimbursed $88, which reduced
the amounts paid to DTI to $57 and $103, respectively.
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the processing of shareholder transactions in the Funds.
During the year ended December 31, 2005, the Fund was charged $2,073 for cash
management fees, which are included in the out-of-pocket transfer agency charges
above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $97,975 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $200,291 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
31
<Page>
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
---------------------------------------------------------------------
Class A N/A $ 4,215
Class B $ 10,037 $ 3,346
Class C $ 1,749 $ 583
Class T $ 85 $ 85
</Table>
During the year ended December 31, 2005, DSC retained $1,081 in sales
commissions from the sales of Class A shares. DSC also retained $7,895 and $2 of
contingent deferred sales charges relating to redemptions of Class B and Class C
shares, respectively.
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance monitoring, regulatory and shareholder reporting, as well as related
facilities, equipment and clerical help. The fee is computed at the annual rate
of 0.06% of the average daily net assets of the Fund on the first $500 million,
0.04% of the average daily net assets of the Fund on the next $500 million and
0.02% of the average daily net assets of the Fund in excess of $1 billion, plus
reasonable out-of-pocket expenses. Founders has contractually agreed in writing
to waive any fees received for these services to the extent they exceed
Founders' costs in providing the services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits on the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
-----------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $3,555, which reduced the amount paid to
Mellon Bank to $2,833.
32
<Page>
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of one or more of the Funds. The amount paid to the director under the
plan will be determined based upon the performance of the selected Funds. The
current value of these amounts is included in Other Assets and Directors'
Deferred Compensation on the Statement of Assets and Liabilities. Changes in
market value are included in the Directors' fees and expenses and the net change
in unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally accepted in the United States of America. These differences
are due to differing treatments for items such as deferral of wash sale losses,
foreign currency transactions, deferred compensation, paydowns and capital loss
carryovers. Permanent differences identified during the year ended December 31,
2005 have been reclassified among the components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
---------------------------------------------------------------
$ 717,441 $ (717,441) $ 0
</Table>
The tax character of distributions paid during 2005 and 2004 was as follows:
<Table>
<Caption>
2005 2004
---------------------------
DISTRIBUTIONS PAID FROM:
Ordinary Income $ 944,414 $ 1,169,557
Long-Term Capital Gain $ 0 $ 0
---------------------------
$ 944,414 $ 1,169,557
===========================
</Table>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of
33
<Page>
December 31, 2005, represent capital loss carryovers that may be available to
offset future realized capital gains and thereby reduce future taxable gains
distributions. Post-October 31 foreign currency losses noted below, if any, may
be used to offset future net investment income and thereby reduce future
ordinary income distributions. Net capital loss carryovers utilized during 2005
by the Fund amounted to $9,232,479. Accumulated capital losses as of December
31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
---------------------------------------------------------
2008 $ 63,264,790
2009 $ 49,289,530
2010 $ 70,087,112
2011 $ 1,472,188
$ 184,113,620
===============
</Table>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The primary difference between book and tax appreciation or depreciation
is wash sale loss deferrals.
<Table>
Undistributed Ordinary Income $ 704,506
Other Book/Tax Differences $ (33,754)
Federal Tax Cost $ 70,200,046
Gross Tax Appreciation of Investments $ 3,818,260
Gross Tax Depreciation of Investments $ (1,303,116)
Net Tax Appreciation $ 2,515,144
</Table>
34
<Page>
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 850 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 57,061 $ 480,146 52,105 $ 413,025
Dividends or Distributions Reinvested 1,781 $ 15,071 1,969 $ 15,805
Redeemed (52,764) $ (443,070) (54,549) $ (431,377)
------------------------------------------------------------
Net Increase (Decrease) 6,078 $ 52,147 (475) $ (2,547)
============================================================
CLASS B
Sold 19,802 $ 163,928 53,204 $ 414,706
Dividends or Distributions Reinvested 109 $ 919 466 $ 3,759
Redeemed (90,247) $ (752,663) (70,543) $ (554,229)
------------------------------------------------------------
Net Decrease (70,336) $ (587,816) (16,873) $ (135,764)
============================================================
CLASS C
Sold 536 $ 4,356 16,072 $ 124,317
Dividends or Distributions Reinvested 12 $ 99 59 $ 475
Redeemed (10,020) $ (81,911) (22,428) $ (174,619)
------------------------------------------------------------
Net Decrease (9,472) $ (77,456) (6,297) $ (49,827)
============================================================
CLASS F
Sold 724,211 $ 6,098,334 1,100,066 $ 8,730,703
Dividends or Distributions Reinvested 106,167 $ 897,919 138,996 $ 1,116,482
Redeemed (3,407,950) $ (28,788,616) (5,836,747) $ (46,483,766)
------------------------------------------------------------
Net Decrease (2,577,572) $ (21,792,363) (4,597,685) $ (36,636,581)
============================================================
CLASS R
Sold 288 $ 2,500 0 $ 0
Dividends or Distributions Reinvested 92 $ 776 94 $ 751
Redeemed (1,074) $ (9,000) (2,224) $ (17,595)
------------------------------------------------------------
Net Decrease (694) $ (5,724) (2,130) $ (16,844)
============================================================
CLASS T
Sold 11 $ 100 4,985 $ 39,775
Dividends or Distributions Reinvested 15 $ 130 27 $ 223
Redeemed (127) $ (1,086) (5,430) $ (43,450)
------------------------------------------------------------
Net Decrease (101) $ (856) (418) $ (3,452)
============================================================
</Table>
35
<Page>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $124,838,140 and $152,276,648, respectively. Purchases and sales of
long-term U.S. government obligations were $10,762,757 and $10,071,278,
respectively.
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
36
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders Balanced Fund (one
of the portfolios constituting Dreyfus Founders Funds, Inc., hereafter referred
to as the "Fund") at 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 Sates of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where securities purchased had not been received, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
37
<Page>
OTHER TAX INFORMATION
(UNAUDITED)
CORPORATE DIVIDENDS RECEIVED DEDUCTION
Dividends paid by the Fund from net investment income and distributions of net
realized short-term capital gains are, for federal tax purposes, taxable as
ordinary income to shareholders. Of the ordinary income distributions declared
for the year ended December 31, 2005, 32.05% qualified for the dividends
received deduction available to the Fund's corporate shareholders.
QUALIFIED DIVIDEND INCOME
For the year ended December 31, 2005, the Fund designated 55% of the ordinary
income distributions paid as qualified dividend income subject to reduced income
tax rates for taxpayers with taxable accounts.
38
<Page>
FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
39
<Page>
The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services being
provided to the Funds are satisfactory, as evidenced in part by the recent
performance records of the Funds, to which the directors gave significant
attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to the
Funds, but also recognize that Founders or its affiliates have provided the
highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
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small group of funds selected by Lipper and a larger universe of funds also
selected by Lipper. The Lipper materials further included graphs depicting each
Fund's Class F one-year and annualized performance results for two-, three-,
four-, five-, and ten-year periods, if applicable, in comparison to the Fund's
performance group and performance universe.
Balanced Fund's performance for the one-year period ended December 31, 2004
placed it in the second quintile of its Lipper performance group, with the Fund
ranking sixth out of 15 Lipper-selected "peer funds," and in the third quintile
of its Lipper balanced fund performance universe, ranking 229th of 569 funds.
These relative performance results were similar to the Fund's relative
performance results in 2003, both of which represented an improvement in the
Fund's relative performance from the previous few years. The directors deemed
these relative performance results to be acceptable, but stressed the importance
to Founders of the need to continue to seek to improve the Fund's performance
record.(1)
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance
difficulties, more recent performance results generally have shown
significant improvement; Founders has focused its efforts upon improving the
performance records of the Funds and will continue to seek improvement; and
(1) PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS DO NOT REFLECT THE FRONT-END SALES
CHARGES THAT APPLY TO OTHER SHARE CLASSES.
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- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing in
the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY
FOUNDERS AND ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, Balanced Fund's
management fees ranked in the second best quintile of its Lipper competitive
expense group, with the Fund's fees the sixth lowest of 15 "peer funds." The
Fund's contractual management fees at a common asset level were determined by
Lipper to be lower than ten of the 15 funds in its group. The Fund's management
fees were in the third quintile of its Lipper expense universe, placing 69th
lowest of 139 funds.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain
efficiencies in performing the portfolio management, trading and operational
functions related to those accounts (the directors recognized that in
determining its profitability from
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providing investment management and other services to the Funds, Founders
allocated its expenses between the Funds and other accounts in a manner which
was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment
services to any of the clients it advises, not just the Funds. The directors
recognized that Founders' profitability would be lower if it did not receive
research and brokerage services in connection with these brokerage
transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders' management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the investment advisory fees received by
Founders. However, the directors noted that Founders' profitability is expected
to decline in 2005 as a result of declines in Fund
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asset levels. The directors also considered the risks assumed by Founders in
providing management services to the Funds, including the risk that the
management agreement can be terminated by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of
investment advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially
fees which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than fees
arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in recognition of the quality service
which Founders has provided and continues to provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of
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scale if the assets of the Funds were to increase. Among other information, the
directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into increased
profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of an
increase in the assets of a particular Fund or a group of Funds would not be
passed along on a dollar-for-dollar basis to the shareholders of other Funds
that did not experience increases in their assets to points above their
breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is
consistent with its objective of sharing its economies of scale with the
Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
restrictions. The directors determined that Founders is dedicated to compliance
with all applicable rules and regulations and that the systems of controls which
are in place to ensure that the service providers to the Funds, including
Founders, and the Funds themselves, maintain strict adherence to the law are
excellent.
OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years
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and that efforts are being and will continue to be made to enhance such
improvement and to maintain Fund expense ratios at reasonable and competitive
levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
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YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
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Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice
President--Compliance since 2002. Formerly, Founders' Manager of Compliance
(2000 to 2002) and Securities Compliance Examiner, Staff Accountant and Team
Leader for the U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
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DREYFUS FOUNDERS BALANCED FUND
PROXY VOTING INFORMATION
A description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities, and information regarding how
the Funds voted these proxies for the 12month period ended June 30, 2005, is
available through the Funds' website at www.founders.com and on the Securities
and Exchange Commission's (SEC) website at www.sec.gov. The description of the
policies and procedures is also available without charge, upon request, by
calling 1-800-525-2440.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available on the SEC's website at www.sec.gov and may be reviewed and copied
at the SEC's Public Reference Room in Washington, DC. Information on the
operation of the SEC's Public Reference Room may be obtained by calling
1-800-SEC-0330.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
Dreyfus Service Corporation, Distributor.
(C) 2006 Founders Asset Management LLC. 2/06
A-646-BAL-05
ANNUAL REPORT
[GRAPHIC]
DREYFUS FOUNDERS
DISCOVERY FUND
INVESTMENT UPDATE
DECEMBER 31, 2005
[DREYFUS FOUNDERS FUNDS(R) LOGO]
THE GROWTH SPECIALISTS
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 12
Statement of Investments 14
Statement of Assets and Liabilities 18
Statement of Operations 20
Statements of Changes in Net Assets 21
Financial Highlights 22
Notes to Financial Statements 28
Report of Independent Registered Public Accounting Firm 36
Factors Considered in Renewing the Advisory Agreement 37
Your Board Representatives 45
</Table>
PAPERLESS DELIVERY OF THIS REPORT
[GRAPHIC]
Did you know you can reduce your postal mail by accessing Dreyfus Founders Funds
regulatory material online? It's a simple, reliable process: when new documents
such as this financial report are available, we'll send you an e-mail
notification containing a convenient link that will take you directly to that
Fund information on our website.
To take advantage of this service, simply inform us online of your decision
to receive materials through the Founders E-Communications Program. Cut down on
mailbox clutter and help the Fund reduce printing and postage charges by
enrolling today at www.founders.com/ecommunications. If you own Funds through a
third party, enroll at www.icsdelivery.com.
INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
managers only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-11 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC-INSURED - NOT BANK-GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF BRADLEY C. ORR]
[PHOTO OF JAMES (J.D.) PADGETT]
A DISCUSSION WITH CO-PORTFOLIO MANAGERS BRADLEY C. ORR, CFA, LEFT; AND JAMES
(J.D.) PADGETT, CFA, REGARDING FUND PERFORMANCE FOR THE 12-MONTH PERIOD ENDED
DECEMBER 31, 2005.
ENDING THE YEAR POSITIVE
Following the strong advances registered by the domestic equity markets during
the fourth quarter of 2004, 2005 started on a far less positive note. Equity
markets declined broadly in the first quarter due to a persistent rise in oil
prices and the continuing efforts of the Federal Reserve to remain vigilant in
fighting potential inflationary pressures. The markets partially recovered
during the second quarter, as economic growth remained relatively strong,
evidenced by a robust gross domestic product (GDP). The third quarter closely
mirrored the second. Crude oil prices continued their ascent to historic levels,
driven equally by supply concerns and strong demand. In addition, the market
continued to dismiss the tightening campaign of the Federal Reserve, and GDP
remained solid. A modest rally hit in the fourth quarter of the period;
investors perhaps began to anticipate an end to the interest rate tightening
campaign by the Federal Reserve in early 2006, and economic indicators, in
general, remained positive.
After declining roughly 7% from the end of the first quarter to a low point
at the end of April, the small-cap equity market proved resilient through the
remainder of the period. The Russell 2000 Growth Index moved up nearly 20% from
the period's low through year-end, despite continued uncertainty over the
economy due to high and rising commodity pressures, faltering consumer
confidence, and the Federal Reserve's interest rate hikes.
[SIDENOTE]
"OUR INVESTMENT APPROACH IN MANAGING THE FUND REMAINED CONSISTENT DURING THE
PERIOD, WITH NO MAJOR CHANGES IN PORTFOLIO COMPOSITION OCCURRING."
3
<Page>
For the 12-month period ended December 31, 2005, Dreyfus Founders Discovery
Fund underperformed its benchmark, the Russell 2000 Growth Index, which posted a
4.15% return for the same period.
STOCK SELECTION HAD A NEGATIVE IMPACT
Our investment approach in managing the Fund remained consistent during the
period, with no major changes to portfolio composition. We continued to search
company by company, analyzing fundamentals and speaking with management teams
and industry experts in an attempt to pinpoint the best growth opportunities for
the Fund. That being said, our efforts in selecting Fund holdings did not pay
off as we would have liked. Weak stock picking was the main culprit in the
Fund's relative underperformance for the 12-month period.
ENERGY BOOSTED PERFORMANCE
For the period, the best performing sector in the Fund as well as the benchmark
was the energy sector. Rising commodity prices and the resulting impact on the
business of energy companies were the drivers for the dramatic outperformance in
this sector. Strong stock selection helped the Fund's return with energy names
GRANT PRIDECO, INC., Patterson-UTI Energy, Inc., National Oilwell Varco, Inc.,
and Spinnaker Exploration Company among the top performers for the Fund in this
sector and overall. Rising oil prices throughout the year led to increased
demand for drilling rigs and related products and services, the industry in
which Grant Prideco competes. The company turned revenue growth of roughly 37%
into earnings growth of over 200%, exhibiting the pricing leverage that
accompanied strong demand in this industry. Patterson-UTI Energy saw increasing
demand for its land-drilling rigs and related services. Again, rising oil prices
led to increased demand, therefore helping pricing and creating significant
earnings leverage. National Oilwell Varco was another beneficiary of a very
strong energy market. In addition, the company made a very accretive acquisition
during the period, following which the market capitalization exceeded $8
billion, taking it out of the small-cap category and causing the Fund to
gradually exit the
[SIDENOTE]
SECTORS BENEFITING THE FUND
Energy
Industrials
Consumer Staples
4
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position. In addition to exhibiting strong fundamentals throughout the year, oil
and gas exploration and production company Spinnaker was acquired by Norsk Hydro
ASA in the fourth quarter of the period. Overall, at the end of the period the
outlook for the oil services environment continued to be very robust as supply
concerns, both short- and long-term, continued and very strong global demand had
yet to be tempered by the high commodity price.
INDUSTRIALS AND CONSUMER STAPLES LIFTED FUND PERFORMANCE
Relative performance was also aided by a positive selection of industrials
stocks, and to a lesser extent, consumer staples stocks. Industrials holding
HUGHES SUPPLY, INC., a wholesale industrial and construction supply distributor,
exhibited strong outperformance due to both solid business fundamentals and an
announcement that the company's board of directors was reviewing strategic
alternatives, as it did not feel that the company's valuation in the market was
representative. It has been long speculated that Home Depot, Inc. was interested
in acquiring the company, and that this was the driver for the board taking
action. Home Depot announced its intent to acquire Hughes Supply in early
January of 2006.
LARGEST EQUITY HOLDINGS (ticker symbol)
<Table>
1. WMS INDUSTRIES, INC. (WMS) 3.20%
2. AFFILIATED MANAGERS GROUP, INC. (AMG) 2.72%
3. QUICKSILVER RESOURCES, INC. (KWK) 2.44%
4. EPICOR SOFTWARE CORPORATION (EPIC) 2.43%
5. GUITAR CENTER, INC. (GTRC) 2.37%
6. AEROFLEX, INC. (ARXX) 2.36%
7. DIGITAS, INC. (DTAS) 2.36%
8. MGI PHARMA, INC. (MOGN) 2.13%
9. KRONOS, INC. (KRON) 2.13%
10. HUGHES SUPPLY, INC. (HUG) 2.11%
</Table>
Portfolio holdings are subject to change, and should not be construed as a
recommendation of any security.
5
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 1-800-525-2440 TO OBTAIN THE MOST
RECENT MONTH-END PERFORMANCE DATA.
[CHART]
Dreyfus Founders
Discovery Fund Russell 2000
Class F Shares Growth Index
12/31/1995 $10,000.00 $10,000.00
12/31/1996 $12,120.49 $11,126.27
12/31/1997 $13,568.26 $12,566.59
12/31/1998 $15,493.82 $12,721.04
12/31/1999 $30,149.41 $18,202.92
12/29/2000 $27,659.92 $14,120.08
12/31/2001 $22,734.57 $12,817.06
12/31/2002 $15,214.98 $8,938.37
12/31/2003 $20,760.77 $13,277.36
12/31/2004 $22,990.28 $15,176.90
12/30/2005 $22,838.45 $15,807.20
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders Discovery Fund on 12/31/95 to a $10,000 investment made in an unmanaged
securities index on that date. The Fund's performance assumes the reinvestment
of dividends and capital gain distributions, but does not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or redemption of
Fund shares. The Fund offers multiple classes of shares. Performance shown is
for Class F, which is open only to grandfathered investors. The Fund's
performance in the graph takes into account all applicable Class F fees and
expenses. THESE FIGURES DO NOT REFLECT THE MAXIMUM SALES CHARGES APPLICABLE TO
CLASS A, B, C, OR T SHARES OF THE FUND. FOR THESE SHARE CLASSES, APPLYING THESE
CHARGES WILL RESULT IN LOWER RETURNS FOR INVESTORS.
The Russell 2000 Growth Index measures the performance of stocks of companies in
the Russell 2000 Index with higher price-to-book ratios and higher forecasted
growth values. The Russell 2000 Index is a widely recognized, unmanaged
small-cap index comprising common stocks of the 2,000 U.S. public companies next
in size after the largest 1,000 publicly traded U.S. companies. The total return
figures cited for the Russell 2000 Growth Index assume change in security prices
and reinvestment of dividends, but do not reflect the costs of managing a mutual
fund. Further information related to Fund performance is contained elsewhere in
this report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (INCEPTION DATE) YEAR YEARS YEARS INCEPTION
- --------------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) (6.38%) (4.88%) -- (5.44%)
Without sales charge (0.66%) (3.75%) -- (4.50%)
B SHARES (12/31/99)
With redemption* (5.57%) (5.02%) -- (5.51%)
Without redemption (1.63%) (4.64%) -- (5.36%)
C SHARES (12/31/99)
With redemption** (2.54%) (4.62%) -- (5.34%)
Without redemption (1.56%) (4.62%) -- (5.34%)
F SHARES (12/29/89) (0.66%) (3.76%) 8.61% 12.40%
R SHARES (12/31/99) (0.38%) (3.48%) -- (4.24%)
T SHARES (12/31/99)
With sales charge (4.50%) (5.42%) (5.06%) -- (5.63%)
Without sales charge (0.96%) (4.19%) -- (4.91%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, and
adjustments for financial statement purposes. Part of the Fund's historical
performance is due to the purchase of securities sold in initial public
offerings (IPOs). There is no guarantee that the Fund's investments in IPOs, if
any, will continue to have a similar impact on performance. Part of the Fund's
historical performance is due to amounts received from class action settlements
regarding prior Fund holdings. There is no guarantee that these settlement
distributions will occur in the future or have a similar impact on performance.
There are risks associated with small-cap investing such as limited product
lines, less liquidity, and small market share.
* The maximum contingent deferred sales charge for Class B shares is 4% and is
reduced to 0% after six years, at which time the Class B shares convert to
Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
SELECT HEALTHCARE NAMES PERFORMED STRONGLY
Although the Fund's position in the healthcare sector produced a minimal effect
overall on the Fund's relative return, select issues in this sector were among
the top-performing holdings for the period. Biotechnology company ALKERMES, INC.
benefited during the period from increasing sales of Risperdal Consta(R), a drug
manufactured and sold by Johnson & Johnson, which licenses technology from
Alkermes. More importantly, the company gained a conditional approval from the
Food and Drug Administration on an important new drug, VIVITROL(TM), which
addresses the $40 billion alcohol-dependency market. Endo Pharmaceuticals
Holdings, Inc., a branded and generic drug manufacturer specializing in the
pain-treatment market, was on the favorable side of a court ruling allowing the
company to begin selling into a previously patent-protected market for
Oxycontin, which is a roughly $2 billion market. The ruling increased the
company's estimated earnings for 2005 over 50%, and the stock rose 30%.
[CHART]
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
Information Technology 23.22%
Healthcare 21.99%
Consumer Discretionary 16.30%
Industrials 15.15%
Energy 7.86%
Financials 7.36%
Consumer Staples 1.72%
Materials 1.41%
Telecommunications Services 1.08%
Cash & Equivalents 3.91%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio
managers and are subject to change at any time, based on market and other
conditions, and should not be construed as a recommendation of any specific
security.
8
<Page>
IT AND CONSUMER DISCRETIONARY HURT RETURN
Although the Fund's underweight position in the poor-performing information
technology (IT) sector did prove beneficial, poor stock selection more than
offset this contribution. High valuations and stock-specific issues drove the
underperformance in this sector. Manufacturer of video, voice and data
teleconferencing solutions, Polycom, Inc., missed fourth quarter 2004 and first
quarter 2005 expectations, reducing forward expectations both times. The concern
over increased competition continued to weigh on this stock. Although the
stock's valuation was attractive, we believed that the company's numbers
continued to be at risk, as competitive issues continued; therefore, the Fund
exited its position in Polycom during the period.
Weak stock picking and a substantial overweight relative position in the
consumer discretionary sector also weighed heavily on the Fund's performance for
the period as declining consumer sentiment in the third quarter led to earnings
disappointments from companies in various industries within the sector.
Tempur-Pedic International, Inc., a visco-elastic foam-bedding manufacturer,
missed revenue and earnings expectations in the second and third quarters and
reduced guidance. Despite a low valuation, the Fund exited its position in the
stock during the period, as we believed that the earnings expectations the
company was supporting were too high. PETCO Animal Supplies, Inc., after a
period of 60 consecutive quarters of same-store sales growth exceeding 4%,
encountered problems with its merchandising efforts as well as intensifying
competition. In addition, a more difficult consumer-spending environment in the
second half of the period proved problematic for sales. As sales and earnings
growth results and forward estimates came in lower than expected, the valuation
of the stock came down and the stock sold off accordingly. The Fund no longer
owned PETCO at the end of the period, as we believed problems remained. Despite
WMS INDUSTRIES, INC.'s strong earnings performance, the slot-machine
manufacturer's stock sold off during the period due to a revenue shift from the
second quarter into the third quarter,
[SIDENOTE]
SECTORS DETRACTING FROM THE FUND
Information Technology
Consumer Discretionary
Financials
9
<Page>
as customers consolidated and orders were delayed. In addition, the company's
third quarter results were somewhat lower than investors expected. Compounding
the weakness in the stock has been a general lack of interest in the gaming
industry among investors, as most competitors are not seeing the robust business
that WMS has seen. The stock remained one of the Fund's largest positions at the
end of the year, however, and we remained positive on the company's outlook.
FINANCIALS WEIGHED ON PERFORMANCE
Fund holdings in the financials sector also suffered from sub-par performance.
Among the weakest financials holdings was First Marblehead Corporation, provider
of loans to the private education market. The stock's weakness was driven by
continued negative sentiment surrounding its competitive environment, but more
importantly, the announcement of the sudden resignation of the CEO following
alleged improper dealings with a customer. In addition, an important customer
announced that it would, in addition to continuing its strategic relationship
with First Marblehead, compete directly with the company in underwriting loans,
calling First Marblehead's value proposition into question. Although we believed
this would prove to be far less impactful than the market had priced into the
stock, the Fund sold its position in the company, as we believed it could take
years for the education loans to "season" and provide evidence either way.
OTHER UNDERPERFORMING STOCKS
There were other notable individual issues that weighed on the Fund's overall
relative performance across a variety of sectors, including those in which the
Fund outperformed its benchmark. For example, industrials holding Trex Company,
Inc. experienced softer demand in the first half of the year, but more harmful
to expectations and stock performance were the company's inventory issues within
its distribution network. Our concern was that there may be more inventory
de-stocking to come, and that demand trends may continue to fade. Therefore, the
Fund sold its position in this stock during the period.
10
<Page>
Healthcare holding MGI PHARMA, INC., an oncology-focused drug developer, saw
sales of its main product, Aloxi(R), which addresses the chemo-induced nausea
and vomiting (CINV) market, fall slightly below investor expectations in both
the third and fourth quarters, although the outlook continued to be strong. In
addition, the approval of a new key drug, Dacogen(TM), was delayed. The Fund
continued to hold a large position in MGI Pharma at the end of the period, as we
believed that Aloxi sales would continue to be strong, and that Dacogen would
gain approval. In addition, MGI Pharma's new drug pipeline remained robust, and
the valuation of the stock was attractive.
IN CONCLUSION
We remain cautious on the outlook for the equity markets and the economy in
general; the mixed economic data warrants continual monitoring.
Our strategy for the Fund as we enter 2006 remains consistent. We will
continue to utilize our bottom-up process to seek to identify high-quality
companies we believe are capable of posting strong future earnings growth and
that are valued attractively.
/s/ Bradley C. Orr /s/ James (J.D.) Padgett
Bradley C. Orr, CFA James (J.D.) Padgett, CFA
Co-Portfolio Manager Co-Portfolio Manager
11
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
12
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- -----------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,011.34 $ 7.35
CLASS A HYPOTHETICAL 1,000.00 1,017.80 7.40
CLASS B ACTUAL 1,000.00 1,008.72 12.20
CLASS B HYPOTHETICAL 1,000.00 1,012.90 12.30
CLASS C ACTUAL 1,000.00 1,008.87 11.80
CLASS C HYPOTHETICAL 1,000.00 1,013.31 11.89
CLASS F ACTUAL 1,000.00 1,011.19 7.45
CLASS F HYPOTHETICAL 1,000.00 1,017.70 7.50
CLASS R ACTUAL 1,000.00 1,012.04 5.98
CLASS R HYPOTHETICAL 1,000.00 1,019.18 6.02
CLASS T ACTUAL 1,000.00 1,010.49 8.87
CLASS T HYPOTHETICAL 1,000.00 1,016.27 8.93
</Table>
*Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- --------------------------------------------------------------------
CLASS A 1.45%
CLASS B 2.41%
CLASS C 2.33%
CLASS F 1.47%
CLASS R 1.18%
CLASS T 1.75%
</Table>
13
<Page>
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------
COMMON STOCKS (DOMESTIC)--92.8%
AIR FREIGHT & LOGISTICS--1.3%
159,872 Hub Group, Inc. Class A* $ 5,651,473
------------
AIRLINES--0.7%
203,362 JetBlue Airways Corporation* 3,127,708
------------
APPAREL RETAIL--1.7%
286,325 Pacific Sunwear of California, Inc.* 7,135,219
------------
APPLICATION SOFTWARE--5.9%
730,136 Epicor Software Corporation* 10,316,822
215,800 Kronos, Inc.* 9,033,388
281,236 Witness Systems, Inc.* 5,531,912
------------
24,882,122
------------
ASSET MANAGEMENT & CUSTODY BANKS--2.7%
143,775 Affiliated Managers Group, Inc.* 11,537,943
------------
BIOTECHNOLOGY--1.0%
222,396 Alkermes, Inc.* 4,252,212
------------
BUILDING PRODUCTS--1.8%
191,950 NCI Building Systems Systems, Inc.* 8,154,036
------------
CASINOS & GAMING--3.2%
540,850 WMS Industries, Inc.* 13,569,927
------------
COMMUNICATIONS EQUIPMENT--1.4%
414,506 Redback Networks, Inc.* 5,827,954
------------
CONSTRUCTION & ENGINEERING--3.6%
240,150 Foster Wheeler Limited* 8,832,717
274,876 Perini Corporation* 6,638,255
------------
15,470,972
------------
CONSTRUCTION, FARM MACHINERY & HEAVY TRUCKS--0.7%
55,900 Bucyrus International, Inc. Class A 2,945,930
------------
DIVERSIFIED METALS & MINING--0.5%
111,950 Alpha Natural Resources, Inc.* 2,150,559
------------
ELECTRONIC EQUIPMENT MANUFACTURERS--2.4%
929,640 Aeroflex, Inc.* 9,993,630
------------
ELECTRONIC MANUFACTURING SERVICES--0.9%
173,250 Plexus Corporation* 3,939,705
------------
FOOD DISTRIBUTORS--1.7%
181,500 Central European Distribution
Corporation* 7,285,410
------------
GOLD--0.9%
139,475 Glamis Gold Limited* 3,832,773
------------
HEALTHCARE DISTRIBUTORS--0.2%
42,329 PSS World Medical, Inc. 628,162
------------
</Table>
14
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------
HEALTHCARE EQUIPMENT--9.0%
202,200 ArthroCare Corporation* $ 8,520,708
543,197 ev3, Inc.* 8,006,724
612,764 I-Flow Corporation* 8,958,610
195,520 Integra LifeSciences Holdings* 6,933,139
138,524 Kyphon, Inc.* 5,655,935
------------
38,075,116
------------
HEALTHCARE FACILITIES--2.7%
107,925 LCA - Vision Inc. 5,127,517
200,496 United Surgical Partners
International, Inc.* 6,445,946
------------
11,573,463
------------
HEALTHCARE SERVICES--1.0%
300,650 Option Care, Inc. 4,016,684
------------
HEALTHCARE SUPPLIES--1.8%
154,275 Gen-Probe, Inc.* 7,527,077
------------
HOMEBUILDING--0.8%
145,825 Levitt Corporation Class A 3,316,061
------------
HOMEFURNISHING RETAIL--1.8%
360,124 Aaron Rents, Inc. 7,591,414
------------
HOTELS, RESORTS & CRUISE LINES--1.9%
188,815 Gaylord Entertainment Company* 8,230,446
------------
HUMAN RESOURCE & EMPLOYMENT SERVICES--1.3%
218,275 Resources Connection, Inc.* 5,688,247
------------
INTERNET SOFTWARE & SERVICES--6.8%
287,068 Digital River, Inc.* 8,537,402
797,627 Digitas, Inc.* 9,986,290
429,300 EarthLink Network, Inc.* 4,769,523
310,429 Openwave Systems, Inc.* 5,423,195
------------
28,716,410
------------
LEISURE FACILITIES--1.3%
146,200 Life Time Fitness, Inc.* 5,568,758
------------
LIFE & HEALTH INSURANCE--1.4%
461,093 American Equity Investment Life
Holding Company 6,017,264
------------
MANAGED HEALTHCARE--3.1%
466,205 Aveta, Inc. 144A*+# 6,293,768
266,900 Centene Corporation* 7,016,801
------------
13,310,569
------------
MULTI-LINE INSURANCE--1.5%
209,612 HCC Insurance Holdings, Inc. 6,221,284
------------
OIL & GAS EQUIPMENT & SERVICES--3.4%
192,800 Grant Prideco, Inc.* 8,506,336
275,325 Superior Energy Services, Inc.* 5,795,591
------------
14,301,927
------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------
OIL & GAS EXPLORATION & PRODUCTION--4.5%
507,975 KFx, Inc.* $ 8,691,452
246,050 Quicksilver Resources, Inc.* 10,336,561
------------
19,028,013
------------
PHARMACEUTICALS--3.3%
527,525 MGI Pharma, Inc.* 9,052,329
272,506 Salix Pharmaceuticals Limited* 4,790,655
------------
13,842,984
------------
RESTAURANTS--1.8%
149,519 Red Robin Gourmet Burgers, Inc.* 7,619,488
------------
SEMICONDUCTOR EQUIPMENT--1.8%
799,905 Entegris, Inc.* 7,535,105
------------
SEMICONDUCTORS--4.2%
186,175 Microsemi Corporation* 5,149,601
951,300 RF Micro Devices, Inc.* 5,146,533
407,700 Trident Microsystems, Inc.* 7,338,600
------------
17,634,734
------------
SPECIALTY STORES--2.4%
200,600 Guitar Center, Inc.* 10,032,006
------------
THRIFTS & MORTGAGE FINANCE--1.8%
510,075 NewAlliance Bancshares, Inc. 7,416,491
------------
TRADING COMPANIES & DISTRIBUTORS--2.1%
250,079 Hughes Supply, Inc. 8,965,332
------------
TRUCKING--1.4%
222,487 Old Dominion Freight Line, Inc.* 6,002,699
------------
WIRELESS TELECOMMUNICATION SERVICES--1.1%
526,575 InPhonic, Inc.* 4,575,937
------------
TOTAL COMMON STOCKS (DOMESTIC)
(COST--$371,906,299) 393,193,244
------------
COMMON STOCKS (FOREIGN)--3.3%
HOTELS, RESORTS & CRUISE LINES--1.4%
88,000 Kerzner International Limited (BA)* 6,050,000
------------
MARINE--1.9%
315,600 Diana Shipping, Inc. (GR) 4,058,616
342,468 Dryships, Inc. (GR) 4,184,925
------------
8,243,541
------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$17,501,479) 14,293,541
------------
</Table>
16
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- ----------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--1.0%
SPECIAL PURPOSE ENTITY--1.0%
$ 4,200,000 CAFCO LLC
4.12% 1/3/06~ $ 4,199,039
--------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$4,199,039) 4,199,039
--------------
TOTAL INVESTMENTS--97.1%
(TOTAL COST--$393,606,817) 411,685,824
--------------
OTHER ASSETS AND LIABILITIES--2.9% 12,350,006
--------------
NET ASSETS--100.0% $ 424,035,830
==============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
* NON-INCOME PRODUCING.
+ SECURITIES WERE ACQUIRED PURSUANT TO RULE 144A AND MAY BE DEEMED TO BE
RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO $6,293,768, OR 1.5%, OF
THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$4,199,039, OR 1.0%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
# FAIR VALUED SECURITY.
BA - BAHAMA ISLANDS
GR - GREECE
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 393,606,817
--------------
Investment securities, at market 411,685,824
Cash 479,931
Receivables:
Investment securities sold 14,200,533
Capital shares sold 426,051
Dividends and interest 15,721
Other assets 68,203
--------------
Total Assets 426,876,263
--------------
LIABILITIES
Payables and other accrued liabilities:
Investment securities purchased 818,146
Capital shares redeemed 1,117,872
Advisory fees 345,044
Shareholder servicing fees 35,685
Accounting fees 22,693
Distribution fees 106,447
Transfer agency fees 41,214
Custodian fees 2,331
Directors' deferred compensation 68,203
Other 282,798
--------------
Total Liabilities 2,840,433
--------------
Net Assets $ 424,035,830
==============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 691,273,464
Accumulated net investment loss (132,136)
Accumulated net realized loss from security transactions (285,184,505)
Net unrealized appreciation on investments 18,079,007
--------------
Total $ 424,035,830
==============
</Table>
18
<Page>
<Table>
CLASS A
Net Assets $ 45,092,023
Shares Outstanding 1,575,235
Net Asset Value, Redemption Price Per Share $ 28.63
Maximum offering price per share
(net asset value plus sales charge of 5.75% of offering price) $ 30.38
CLASS B
Net Assets $ 13,964,166
Shares Outstanding 515,250
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 27.10
CLASS C
Net Assets $ 4,390,568
Shares Outstanding 161,747
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 27.14
CLASS F
Net Assets $ 351,087,239
Shares Outstanding 12,285,296
Net Asset Value, Offering and Redemption Price Per Share $ 28.58
CLASS R
Net Assets $ 8,314,623
Shares Outstanding 285,655
Net Asset Value, Offering and Redemption Price Per Share $ 29.11
CLASS T
Net Assets $ 1,187,211
Shares Outstanding 42,534
Net Asset Value, Redemption Price Per Share $ 27.91
Maximum offering price per share
(net asset value plus sales charge of 4.50% of offering price) $ 29.23
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
STATEMENT OF OPERATIONS
For the year ended December 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 1,629,902
Interest 441,216
--------------
Total Investment Income 2,071,118
--------------
EXPENSES
Advisory fees--Note 2 4,965,602
Shareholder servicing fees--Note 2 464,012
Accounting fees--Note 2 325,807
Distribution fees--Note 2 1,086,090
Transfer agency fees--Note 2 611,549
Registration fees 52,910
Postage and mailing expenses 117,845
Custodian fees and expenses--Note 2 28,055
Printing expenses 142,400
Legal and audit fees 218,006
Directors' fees and expenses--Note 2 112,680
Other expenses 219,087
--------------
Total Expenses 8,344,043
Earnings Credits (28,055)
Reimbursed/Waived Expenses (16,736)
Expense Offset to Broker Commissions (19,084)
--------------
Net Expenses 8,280,168
--------------
Net Investment Loss (6,209,050)
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITY TRANSACTIONS
Net Realized Gain on Security Transactions 104,859,627
Net Change in Unrealized Appreciation/Depreciation of Investments (110,156,860)
--------------
Net Realized and Unrealized Loss (5,297,233)
--------------
Net Decrease in Net Assets Resulting from
Operations $ (11,506,283)
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
OPERATIONS
Net Investment Loss $ (6,209,050) $ (8,291,203)
Net Realized Gain on Security Transactions 104,859,627 74,597,741
Net Change in Unrealized
Appreciation/Depreciation of Investments (110,156,860) 5,007,548
----------------- -----------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (11,506,283) 71,314,086
----------------- -----------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A (19,962,138) (20,072,155)
Class B (4,382,098) (3,926,079)
Class C (2,118,101) (2,295,210)
Class F (190,412,627) (143,830,150)
Class R (62,960,862) 25,138
Class T (434,663) (302,253)
----------------- -----------------
Net Decrease from Capital Share Transactions (280,270,489) (170,400,709)
----------------- -----------------
Net Decrease in Net Assets (291,776,772) (99,086,623)
----------------- -----------------
NET ASSETS
Beginning of Year $ 715,812,602 $ 814,899,225
----------------- -----------------
End of Year $ 424,035,830 $ 715,812,602
================= =================
Accumulated Net Investment Loss $ (132,136) $ (125,444)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 28.82 $ 26.04 $ 19.09 $ 28.50 $ 34.79
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.28)(a) (0.64) (0.36) (0.31) (0.17)
Net realized and unrealized gains
(losses) on securities 0.09 3.42 7.31 (9.10) (6.02)
------------------------------------------------------------------------
Total from investment operations (0.19) 2.78 6.95 (9.41) (6.19)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 (0.10)
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 (0.10)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 28.63 $ 28.82 $ 26.04 $ 19.09 $ 28.50
========================================================================
TOTAL RETURN(b) (0.66%) 10.68% 36.41% (33.02%) (17.78%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 45,092 $ 65,763 $ 79,630 $ 67,184 $ 117,773
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.47% 1.38% 1.50% 1.35% 1.19%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.45% 1.37% 1.50% 1.35% 1.18%
Net investment loss (1.09%) (1.11%) (1.25%) (1.08%) (0.58%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 160% 98% 130% 128% 110%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
22
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 27.55 $ 25.12 $ 18.60 $ 28.03 $ 34.49
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.54)(a) (1.07) (0.81) (0.69) (0.45)
Net realized and unrealized gains
(losses) on securities 0.09 3.50 7.33 (8.74) (5.91)
------------------------------------------------------------------------
Total from investment operations (0.45) 2.43 6.52 (9.43) (6.36)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 (0.10)
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 (0.10)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 27.10 $ 27.55 $ 25.12 $ 18.60 $ 28.03
========================================================================
TOTAL RETURN(b) (1.63%) 9.67% 35.05% (33.64%) (18.43%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 13,964 $ 18,795 $ 21,009 $ 18,804 $ 35,845
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.44% 2.30% 2.56% 2.26% 1.97%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.43% 2.29% 2.56% 2.26% 1.96%
Net investment loss (2.06%) (2.03%) (2.31%) (1.98%) (1.35%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 160% 98% 130% 128% 110%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 27.57 $ 25.14 $ 18.60 $ 28.05 $ 34.51
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.50)(a) (1.53) (0.94) (0.86) (0.48)
Net realized and unrealized gains
(losses) on securities 0.07 3.96 7.48 (8.59) (5.88)
------------------------------------------------------------------------
Total from investment operations (0.43) 2.43 6.54 (9.45) (6.36)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 (0.10)
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 (0.10)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 27.14 $ 27.57 $ 25.14 $ 18.60 $ 28.05
========================================================================
TOTAL RETURN(b) (1.56%) 9.67% 35.16% (33.69%) (18.42%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 4,391 $ 6,668 $ 8,352 $ 7,794 $ 17,031
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.36% 2.28% 2.52% 2.27% 1.98%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.35% 2.27% 2.52% 2.26% 1.96%
Net investment loss (1.98%) (2.01%) (2.28%) (1.99%) (1.36%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 160% 98% 130% 128% 110%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
24
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 28.77 $ 25.98 $ 19.04 $ 28.45 $ 34.74
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.30)(a) (0.69) (0.35) (0.36) (0.20)
Net realized and unrealized gains
(losses) on securities 0.11 3.48 7.29 (9.05) (5.99)
------------------------------------------------------------------------
Total from investment operations (0.19) 2.79 6.94 (9.41) (6.19)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 (0.10)
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 (0.10)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 28.58 $ 28.77 $ 25.98 $ 19.04 $ 28.45
========================================================================
TOTAL RETURN (0.66%) 10.74% 36.45% (33.08%) (17.81%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 351,087 $ 550,622 $ 638,880 $ 498,970 $ 847,330
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 1.46% 1.35% 1.53% 1.41% 1.25%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.45% 1.34% 1.53% 1.40% 1.24%
Net investment loss (1.09%) (1.08%) (1.29%) (1.13%) (0.64%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 160% 98% 130% 128% 110%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 29.22 $ 26.32 $ 19.23 $ 28.64 $ 34.87
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.24)(a) (0.24) (0.17) (0.18) (0.08)
Net realized and unrealized gains
(losses) on securities 0.13 3.14 7.26 (9.23) (6.05)
------------------------------------------------------------------------
Total from investment operations (0.11) 2.90 7.09 (9.41) (6.13)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 (0.10)
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 (0.10)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 29.11 $ 29.22 $ 26.32 $ 19.23 $ 28.64
========================================================================
TOTAL RETURN (0.38%) 11.02% 36.87% (32.86%) (17.57%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 8,315 $ 72,317 $ 65,240 $ 42,872 $ 61,163
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 1.18% 1.11% 1.21% 1.10% 0.95%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.17% 1.10% 1.21% 1.10% 0.94%
Net investment loss (0.80%) (0.83%) (0.96%) (0.82%) (0.38%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 160% 98% 130% 128% 110%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
26
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 28.18 $ 25.55 $ 18.79 $ 28.24 $ 34.69
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.38)(a) (0.65) (0.31) (0.54) (0.33)
Net realized and unrealized gains
(losses) on securities 0.11 3.28 7.07 (8.91) (6.02)
------------------------------------------------------------------------
Total from investment operations (0.27) 2.63 6.76 (9.45) (6.35)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 (0.10)
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 (0.10)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 27.91 $ 28.18 $ 25.55 $ 18.79 $ 28.24
========================================================================
TOTAL RETURN(b) (0.96%) 10.29% 35.98% (33.46%) (18.30%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,187 $ 1,648 $ 1,788 $ 1,291 $ 2,341
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.77% 1.71% 1.91% 2.06% 1.83%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.76% 1.70% 1.90% 2.06% 1.82%
Net investment loss (1.40%) (1.44%) (1.66%) (1.79%) (1.24%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 160% 98% 130% 128% 110%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<Page>
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders Discovery Fund (the "Fund"). The Fund offers Class
A, Class B, Class C, Class F, Class R and Class T shares. Class A and Class T
shares are subject to a sales charge imposed at the time of purchase, Class B
shares are subject to a contingent deferred sales charge ("CDSC") imposed on
Class B shares redeemed within six years of purchase, Class C shares are subject
to a CDSC imposed on Class C shares redeemed within one year of purchase and
Class F and Class R shares are sold at net asset value per share (with Class R
shares sold only to eligible institutional investors). Other differences between
the classes include services offered to and the expenses borne by each Class.
The following significant accounting policies have been consistently followed by
the Fund in the preparation of its financial statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair value as determined in good faith by the Company's board of directors
or pursuant
28
<Page>
to procedures approved by the board of directors. These situations may include
instances where an event occurs after the close of the market on which a
security is traded but before the Fund calculates its net asset value, and it is
determined that the event has materially affected the value of the security.
Fair value of foreign equity securities may be determined with the assistance of
a pricing service using correlations between the movement of prices of foreign
securities and indexes of domestic securities and other appropriate indicators,
such as closing market prices of relevant ADRs and futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund may invest at least a
portion of its assets in foreign securities. Foreign securities carry more risk
than U.S. securities, such as political and currency risks. In the event the
Fund executes a foreign security transaction, the Fund may enter into a foreign
currency contract to settle the foreign security transaction. The Fund could be
exposed to risk if counterparties are unable to meet the terms of the contracts
or if the value of the currency changes unfavorably to the U.S. dollar. The
resultant foreign currency gain or loss from the contract is recorded as foreign
currency gain or loss and is presented as such in the Statement of Operations.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each
business day. Purchases and sales of investment securities and income and
expense items denominated in foreign currencies are translated into U.S. dollar
amounts on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net unrealized gain or loss from investments and foreign
currency translations on the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized appreciation or depreciation on investments and foreign
currency translation arises from changes in the values of assets and
liabilities, including investments in securities held at the date
29
<Page>
of the financial statements, resulting from changes in the exchange rates and
changes in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) and from net realized capital gains (if any)
annually. Dividends and distributions, which are determined in accordance with
income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
Financial Corporation, a publicly-owned financial services company which
provides
30
<Page>
a comprehensive range of financial products and services in domestic and
selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
1.00% of the first $250 million of net assets, 0.80% of the next $250 million of
net assets and 0.70% of net assets in excess of $500 million.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $285,079 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $105,280 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $12.58 to $13.36, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency fees, including both the per account fees paid to
DTI and out-of-pocket charges, during the year ended December 31, 2005 were as
follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
--------------------------------------------------------------
Class A $ 25,540
Class B $ 42,807
Class C $ 9,979
Class R $ 15,723
Class T $ 1,470
</Table>
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the processing of shareholder transactions in the Funds.
During the year ended
31
<Page>
December 31, 2005, the Fund was charged $14,289 for cash management fees, which
are included in the out-of-pocket transfer agency charges above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $410,750 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $927,299 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
--------------------------------------------------------
Class A N/A $ 123,723
Class B $ 117,233 $ 39,078
Class C $ 38,139 $ 12,713
Class T $ 3,419 $ 3,419
</Table>
During the year ended December 31, 2005, DSC retained $199 and $3 in sales
commissions from the sales of Class A and Class T shares, respectively. DSC also
retained $44, $53,549 and $1,127 of contingent deferred sales charges relating
to redemptions of Class A, Class B and Class C shares, respectively.
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance monitoring, regulatory and shareholder reporting, as well as related
facilities, equipment and clerical help. The fee is computed at the annual rate
of 0.06% of the average daily net assets of the Fund on the first $500 million,
0.04% of the average daily
32
<Page>
net assets of the Fund on the next $500 million and 0.02% of the average daily
net assets of the Fund in excess of $1 billion, plus reasonable out-of-pocket
expenses. Founders has contractually agreed in writing to waive any fees
received for these services to the extent they exceed Founders' costs in
providing the services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits on the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
--------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $16,736 which reduced the amount paid to
Mellon Bank to $11,319.
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of one or more of the Funds. The amount paid to the director under the
plan will be determined based upon the performance of the selected Funds. The
current value of these amounts is included in Other Assets and Directors'
Deferred Compensation on the Statement of Assets and Liabilities. Changes in
market value are included in the directors' fees and expenses and the net change
in unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally accepted in the United States of America. These differences
are due to differing treatments for items such as deferral of wash sale losses,
deferred compensation, net operating losses and capital loss carryovers.
Permanent differences identified during the year ended December 31, 2005 have
been reclassified among the components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
-------------------------------------------------------------------
$ 6,202,358 $ 0 $ (6,202,35)
</Table>
33
<Page>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of December 31, 2005, represent capital loss carryovers that may be
available to offset future realized capital gains and thereby reduce future
taxable gains distributions. Post-October 31 foreign currency losses noted
below, if any, may be used to offset future net investment income and thereby
reduce future ordinary income distributions. Net capital loss carryovers
utilized during 2005 by the Fund amounted to $100,604,612. Accumulated capital
losses as of December 31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
--------------------------------------------------------
2009 $ 38,219,881
2010 $ 230,439,968
2011 $ 14,100,467
--------------
$ 282,760,316
==============
</Table>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The primary difference between book and tax appreciation or depreciation
is wash sale loss deferrals.
<Table>
Other Book/Tax Differences $ (132,136)
Federal Tax Cost $ 396,031,006
Gross Tax Appreciation of Investments $ 39,443,883
Gross Tax Depreciation of Investments $ (23,789,065)
Net Tax Appreciation $ 15,654,818
</Table>
34
<Page>
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 450 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 608,634 $ 16,949,413 606,846 $ 16,285,433
Redeemed (1,315,511) $ (36,911,551) (1,383,103) $ (36,357,588)
----------------------------------------------------------------
Net Decrease (706,877) $ (19,962,138) (776,257) $ (20,072,155)
================================================================
CLASS B
Sold 6,784 $ 179,523 7,176 $ 180,419
Redeemed (173,781) $ (4,561,621) (161,266) $ (4,106,498)
----------------------------------------------------------------
Net Decrease (166,997) $ (4,382,098) (154,090) $ (3,926,079)
================================================================
CLASS C
Sold 7,954 $ 207,689 7,418 $ 188,358
Redeemed (88,042) $ (2,325,790) (97,877) $ (2,483,568)
----------------------------------------------------------------
Net Decrease (80,088) $ (2,118,101) (90,459) $ (2,295,210)
================================================================
CLASS F
Sold 1,487,909 $ 40,938,769 3,312,230 $ 88,403,785
Redeemed (8,342,143) $ (231,351,396) (8,760,046) $ (232,233,935)
----------------------------------------------------------------
Net Decrease (6,854,234) $ (190,412,627) (5,447,816) $ (143,830,150)
================================================================
CLASS R
Sold 348,073 $ 9,843,662 568,863 $ 15,239,651
Redeemed (2,537,460) $ (72,804,524) (572,087) $ (15,214,513)
----------------------------------------------------------------
Net Increase (Decrease) (2,189,387) $ (62,960,862) (3,224) $ 25,138
================================================================
CLASS T
Sold 8,141 $ 222,678 15,867 $ 408,647
Redeemed (24,068) $ (657,341) (27,379) $ (710,900)
----------------------------------------------------------------
Net Decrease (15,927) $ (434,663) (11,512) $ (302,253)
================================================================
</Table>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $882,940,874 and $1,186,955,496, respectively.
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
35
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders Discovery Fund
(one of the portfolios constituting Dreyfus Founders Funds, Inc., hereafter
referred to as the "Fund") at 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 Sates of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where securities purchased had not been received, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
36
<Page>
FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
37
<Page>
The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services being
provided to the Funds are satisfactory, as evidenced in part by the recent
performance records of the Funds, to which the directors gave significant
attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to the
Funds, but also recognize that Founders or its affiliates have provided the
highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
38
<Page>
small group of funds selected by Lipper and a larger universe of funds also
selected by Lipper. The Lipper materials further included graphs depicting each
Fund's Class F one-year and annualized performance results for two-, three-,
four-, five-, and ten-year periods, if applicable, in comparison to the Fund's
performance group and performance universe.
Discovery Fund's performance for the one-year period ended December 31, 2004
placed it in the third quintile of its Lipper performance group, with the Fund
ranking eighth out of 15 Lipper-selected "peer funds," and in the third quintile
of its Lipper small-cap growth fund performance universe, ranking 274th of 500
funds. The Fund's performance within its Lipper-selected group and universe had
been in the fourth quintiles for the two- and three-year periods ended December
31, 2004. The Fund's performance relative to its Lipper-selected peer group and
universe had, therefore, improved in the most recent calendar year from its
average performance results over the past two and three calendar years. The
directors deemed these relative performance results to be acceptable, but
stressed the importance to Founders of the need to continue to seek to improve
the Fund's performance record.(1)
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS DO NOT REFLECT THE FRONT-END SALES
CHARGES THAT APPLY TO OTHER SHARE CLASSES.
39
<Page>
After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance
difficulties, more recent performance results generally have shown
significant improvement; Founders has focused its efforts upon improving the
performance records of the Funds and will continue to seek improvement; and
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing in
the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY FOUNDERS AND
ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, Discovery
Fund's management fees ranked in the second best quintile of its Lipper
competitive expense group, with the Fund's fees the sixth lowest of 15 "peer
funds." The Fund's contractual management fees at a common asset level were
determined by Lipper to be lower than eight of the 15 funds in its group. The
Fund's management fees were in the second best quintile of its Lipper expense
universe, placing 58th lowest of 154 funds.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
40
<Page>
Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain
efficiencies in performing the portfolio management, trading and operational
functions related to those accounts (the directors recognized that in
determining its profitability from providing investment management and other
services to the Funds, Founders allocated its expenses between the Funds and
other accounts in a manner which was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment
services to any of the clients it advises, not just the Funds. The directors
recognized that Founders' profitability would be lower if it did not receive
research and brokerage services in connection with these brokerage
transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders' management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
41
<Page>
Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the investment advisory fees received by
Founders. However, the directors noted that Founders' profitability is expected
to decline in 2005 as a result of declines in Fund asset levels. The directors
also considered the risks assumed by Founders in providing management services
to the Funds, including the risk that the management agreement can be terminated
by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of
investment advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially
fees which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than fees
arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in
42
<Page>
recognition of the quality service which Founders has provided and continues to
provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of scale if the assets of the Funds were to increase. Among other information,
the directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into increased
profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of an
increase in the assets of a particular Fund or a group of Funds would not be
passed along on a dollar-for-dollar basis to the shareholders of other Funds
that did not experience increases in their assets to points above their
breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is
consistent with its objective of sharing its economies of scale with the
Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
43
<Page>
restrictions. The directors determined that Founders is dedicated to compliance
with all applicable rules and regulations and that the systems of controls which
are in place to ensure that the service providers to the Funds, including
Founders, and the Funds themselves, maintain strict adherence to the law are
excellent.
OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years and that efforts are being and will continue to be
made to enhance such improvement and to maintain Fund expense ratios at
reasonable and competitive levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
44
<Page>
YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
45
<Page>
Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice
President--Compliance since 2002. Formerly, Founders' Manager of Compliance
(2000 to 2002) and Securities Compliance Examiner, Staff Accountant and Team
Leader for the U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
46
<Page>
This page intentionally left blank.
<Page>
DREYFUS FOUNDERS DISCOVERY FUND
PROXY VOTING INFORMATION
A description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities, and information regarding how
the Funds voted these proxies for the 12-month period ended June 30, 2005, is
available through the Funds' website at www.founders.com and on the Securities
and Exchange Commission's (SEC) website at www.sec.gov. The description of the
policies and procedures is also available without charge, upon request, by
calling 1-800-525-2440.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available on the SEC's website at www.sec.gov and may be reviewed and copied
at the SEC's Public Reference Room in Washington, DC. Information on the
operation of the SEC's Public Reference Room may be obtained by calling
1-800-SEC-0330.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
Dreyfus Service Corporation, Distributor.
(C)2006 Founders Asset Management LLC. 2/06
A-646-DIS-05
[GRAPHIC]
ANNUAL REPORT
DREYFUS FOUNDERS
EQUITY GROWTH FUND
INVESTMENT UPDATE
DECEMBER 31, 2005
[DREYFUS FOUNDERS FUNDS LOGO]
THE GROWTH SPECIALISTS
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 10
Statement of Investments 12
Statement of Assets and Liabilities 17
Statement of Operations 19
Statements of Changes in Net Assets 20
Financial Highlights 21
Notes to Financial Statements 27
Report of Independent Registered Public Accounting Firm 36
Other Tax Information 37
Factors Considered in Renewing the Advisory Agreement 38
Your Board Representatives 46
</Table>
PAPERLESS DELIVERY OF THIS REPORT
[GRAPHIC]
Did you know you can reduce your postal mail by accessing Dreyfus Founders Funds
regulatory material online? It's a simple, reliable process: when new documents
such as this financial report are available, we'll send you an email
notification containing a convenient link that will take you directly to that
Fund information on our website.
To take advantage of this service, simply inform us online of your decision
to receive materials through the Founders E-Communications Program. Cut down on
mailbox clutter and help the Fund reduce printing and postage charges by
enrolling today at www.founders.com/ecommunications. If you own Funds through a
third party, enroll at www.icsdelivery.com.
INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
manager only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-9 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC-INSURED - NOT BANK-GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF JOHN B. JARES]
A DISCUSSION WITH PORTFOLIO MANAGER JOHN B. JARES, CFA, REGARDING FUND
PERFORMANCE FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2005.
ECONOMIC COUNTERBALANCE
2005 was a year of robust economic and corporate profit growth. Employment
levels improved, the housing market remained resilient, and consumer spending
continued to advance at a steady pace. However, the year also saw the Federal
Reserve raising the federal funds rate to end the period at 4.25%, and energy
prices skyrocketed, reaching record highs.
The stock market oscillated slightly for most of the period. Fortunately, a
fourth quarter rally enabled the market to finish the calendar year in positive
territory.
STOCK SELECTION DROVE PERFORMANCE
The Fund continued its pursuit of uncovering the best growth opportunities via
stock-by-stock research, meetings with company management and internal analysis.
Overall, this bottom-up stock picking approach benefited the Fund as strong
stock selection produced a positive contribution to relative performance. Strong
performers, particularly in the information technology (IT) sector, the
transportation industry within the industrials sector, and the consumer staples
sector, positively impacted the Fund's annual performance. However, this was not
enough for the Dreyfus Founders Equity Growth Fund to outperform its benchmark,
the Russell 1000 Growth Index, which returned 5.26% for the 12-month period
ended December 31, 2005.
[SIDENOTE]
"OUR BOTTOM-UP STOCK PICKING APPROACHED BENEFITED THE FUND AS STRONG STOCK
SELECTION PRODUCED A POSITIVE CONTRIBUTION TO RELATIVE PERFORMANCE."
3
<Page>
IT AND TRANSPORTATION STOCKS AIDED FUND PERFORMANCE
Strong stock selection in the information technology sector buoyed the Fund's
relative return for the period, with numerous stocks gaining double-and
triple-digit price increases for the period. The popularity of APPLE COMPUTER,
INC.'s iPod digital music products and Macintosh computers propelled the
company's stock. The iPod trend also pushed SanDisk, Inc.'s stock price up as
demand grew for the company's NAND flash memory used in iPod nano, as well as in
music-enabled cell phones. Broadcom Corporation, a provider of wired and
wireless broadband communications semiconductors, and AUTODESK, INC., a supplier
of advanced software including CAD/CAM drafting tools, both experienced strong
demand for their respective products. Autodesk also saw better-than-expected
revenue and earnings growth rates during the 12-month timeframe. ADOBE SYSTEMS,
INC. also outperformed during the period.
The transportation industry within the industrials sector also rallied
during the period as railroad and airline companies benefited from pricing power
driven by controlled capacity growth and the ability to pass along higher fuel
costs. Some of the top overall performing stocks in the Fund for the period
included transportation stocks such as AMR CORPORATION, US AIRWAYS GROUP, INC.
and UNION PACIFIC CORPORATION. Parent company of American Airlines, AMR
experienced better-than-expected financial returns due to improved pricing
driven by industry consolidation and company cost controls. US Airways saw
improved pricing due to its merger with America West Airlines, allowing for the
reduction of costs.
SELECT STOCKS CONTRIBUTED POSITIVELY
During the period, there were a few standout performers, which positively
contributed to the Fund's performance as well. PROCTER & GAMBLE COMPANY acquired
Gillette Company during the period for a significant premium, which boosted
Gillette's return, and healthcare issue GENENTECH, INC. showed solid revenue and
earnings growth.
[SIDENOTE]
SECTORS BENEFITING THE FUND
Information Technology
Industrials
Consumer Staples
4
<Page>
HEALTHCARE, ENERGY AND TELECOM DETRACTED
The healthcare, energy and telecommunications services sectors were the largest
drags on the Fund's relative return for the period, due to underweight relative
positions in these strong-performing sectors paired with weak stock picking.
Telecommunications services holding Avaya, Inc. hampered the Fund. A difficult
integration of a German acquisition and volatile growth trends led to the
company's poor performance. The Fund sold its position in this company, as we
felt the monies may be better deployed in other investments.
SELECT STOCKS IMPEDED PERFORMANCE
Although the information technology sector had the greatest positive
contribution to the Fund's relative performance of any sector, select IT stocks
fell short of our expectations. Favorable demand and growth trends for MAXIM
INTEGRATED PRODUCTS, INC.'s analog semiconductor offerings were offset by
concerns over the company's deteriorating gross margins.
LARGEST EQUITY HOLDINGS (ticker symbol)
<Table>
1. MICROSOFT CORPORATION (MSFT) 4.83%
2. GOOGLE, INC. CLASS A (GOOG) 3.23%
3. GENERAL ELECTRIC COMPANY (GE) 3.12%
4. COLGATE-PALMOLIVE COMPANY (CL) 2.51%
5. LINEAR TECHNOLOGY CORPORATION (LLTC) 1.96%
6. JOHNSON & JOHNSON (JNJ) 1.95%
7. TIME WARNER, INC. (TWX) 1.91%
8. APPLE COMPUTER, INC. (AAPL) 1.85%
9. WYETH (WYE) 1.85%
10. COMCAST CORPORATION SPECIAL CLASS A (CMCSK) 1.80%
</Table>
Portfolio holdings are subject to change, and should not be construed as a
recommendation of any security.
5
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 1-800-525-2440 TO OBTAIN THE MOST
RECENT MONTH-END PERFORMANCE DATA.
[CHART]
Dreyfus Founders
Equity Growth Fund S&P 500 Russell 1000
Class F Shares Index Growth Index
12/31/1995 $10,000.00 $10,000.00 $10,000.00
12/31/1996 $12,437.00 $12,296.03 $12,312.25
12/31/1997 $14,854.52 $16,398.39 $16,066.13
12/31/1998 $17,495.68 $21,084.82 $22,284.79
12/31/1999 $20,125.55 $25,521.39 $29,674.20
12/29/2000 $16,187.75 $23,197.82 $23,019.77
12/31/2001 $13,347.50 $20,440.57 $18,318.42
12/31/2002 $9,966.52 $15,923.09 $13,210.62
12/31/2003 $13,023.68 $20,490.57 $17,140.52
12/31/2004 $14,192.50 $22,720.36 $18,220.18
12/30/2005 $14,851.19 $23,836.25 $19,179.26
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders Equity Growth Fund on 12/31/95 to a $10,000 investment made in
unmanaged securities indexes on that date. The Fund's performance assumes the
reinvestment of dividends and capital gain distributions, but does not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or
redemption of Fund shares. The Fund offers multiple classes of shares.
Performance shown is for Class F, which is open only to grandfathered investors.
The Fund's performance in the graph takes into account all applicable Class F
fees and expenses. THESE FIGURES DO NOT REFLECT THE MAXIMUM SALES CHARGES
APPLICABLE TO CLASS A, B, C, OR T SHARES OF THE FUND. FOR THESE SHARE CLASSES,
APPLYING THESE CHARGES WILL RESULT IN LOWER RETURNS FOR INVESTORS.
The Russell 1000 Growth Index is an unmanaged index that measures the
performance of those Russell 1000 companies with higher price-to-book ratios and
higher forecasted growth values. The Standard & Poor's (S&P) 500 Index is
designed to be representative of the U.S. equities market and consists of 500
leading companies in leading industries of the U.S. economy. The total return
figures cited for these indexes assume change in security prices and
reinvestment of dividends, but do not reflect the costs of managing a mutual
fund. In future annual reports, the Fund's performance will no longer be
compared to the S&P 500 Index, as the Russell 1000 Growth Index is more
reflective of the Fund's growth style of investing. Further information related
to Fund performance is contained elsewhere in this report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (INCEPTION DATE) YEAR YEARS YEARS INCEPTION
- -----------------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) (1.62%) (3.48%) -- (6.26%)
Without sales charge 4.46% (2.33%) -- (5.34%)
B SHARES (12/31/99)
With redemption* (0.41%) (3.15%) -- (6.04%)
Without redemption 3.59% (2.76%) -- (5.89%)
C SHARES (12/31/99)
With redemption** 2.68% (3.11%) -- (6.15%)
Without redemption 3.68% (3.11%) -- (6.15%)
F SHARES (7/5/38) 4.64% (1.71%) 4.03% N/A
R SHARES (12/31/99) 4.78% (2.07%) -- (5.10%)
T SHARES (12/31/99)
With sales charge (4.50%) (1.82%) (4.00%) -- (6.81%)
Without sales charge 2.75% (3.10%) -- (6.09%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, fee
waivers for certain share classes, and adjustments for financial statement
purposes.
* The maximum contingent deferred sales charge for Class B shares is 4% and is
reduced to 0% after six years, at which time the Class B shares convert to
Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
SYMANTEC CORPORATION declined as a result of the acquisition of VERITAS Software
Corporation, which was seen as dilutive to the company's revenue and earnings
growth rates. This, combined with the fear that consumer demand for antivirus
software was waning, caused a drop in the company's stock price. Xilinx, Inc., a
manufacturer of digital programmable logic devices (PLD), and International
Business Machines Corporation also declined during the period.
Select consumer discretionary stocks did not fare well either. A slow
ramp-up into its cable telephony offering, combined with sluggish trends in
video services, resulted in COMCAST CORPORATION's stock declining during the
period. Sluggish sales trends hit WAL-MART STORES, INC. as rising energy prices
reduced the spending power of the company's main customer group. TIME Warner,
Inc.'s stock price also underperformed, dropping over ten percentage
PORTFOLIO COMPOSITION OF NET ASSETS
[CHART]
<Table>
Information Technology 30.42%
Consumer Discretionary 19.07%
Healthcare 12.53%
Industrials 9.60%
Financials 9.22%
Consumer Staples 8.43%
Telecommunications Services 1.60%
Materials 1.58%
Energy 1.28%
Other 4.43%
Cash & Equivalents 1.84%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio manager
and are subject to change at any time, based on market and other conditions, and
should not be construed as a recommendation of any specific security.
[SIDENOTE]
SECTORS DETRACTING FROM THE FUND
Healthcare
Energy
Telecommunications Services
8
<Page>
points in value during the Fund's holding period. The Fund, however, retained a
position in all three stocks at the end of the period, as we believed the
companies' respective growth opportunities remained viable.
IN CONCLUSION
We will watch the actions of the Federal Reserve and analyze the trends in
corporate profit growth. We will continue to rely on our bottom-up research
process to seek companies we believe are capable of posting strong future
revenues and earnings growth at attractive valuations.
/s/ John B. Jares
John B. Jares, CFA
Portfolio Manager
9
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
10
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- ------------------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,039.22 $ 6.84
CLASS A HYPOTHETICAL 1,000.00 1,018.42 6.79
CLASS B ACTUAL 1,000.00 1,036.34 11.34
CLASS B HYPOTHETICAL 1,000.00 1,013.92 11.28
CLASS C ACTUAL 1,000.00 1,037.11 10.12
CLASS C HYPOTHETICAL 1,000.00 1,015.15 10.06
CLASS F ACTUAL 1,000.00 1,039.83 5.76
CLASS F HYPOTHETICAL 1,000.00 1,019.49 5.72
CLASS R ACTUAL 1,000.00 1,039.62 5.50
CLASS R HYPOTHETICAL 1,000.00 1,019.74 5.46
CLASS T ACTUAL 1,000.00 1,039.22 7.35
CLASS T HYPOTHETICAL 1,000.00 1,017.91 7.30
</Table>
*Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- -------------------------------------
CLASS A 1.33%
CLASS B 2.21%
CLASS C 1.97%
CLASS F 1.12%
CLASS R 1.07%
CLASS T 1.43%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<Page>
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------
COMMON STOCKS (DOMESTIC)--95.7%
AIRLINES--2.2%
147,025 AMR Corporation* $ 3,268,366
44,575 US Airways Group, Inc.* 1,655,516
---------------
4,923,882
---------------
APPLICATION SOFTWARE--1.2%
63,050 Autodesk, Inc. 2,707,998
---------------
ASSET MANAGEMENT & CUSTODY BANKS--1.7%
50,250 Northern Trust Corporation 2,603,955
20,150 State Street Corporation 1,117,116
---------------
3,721,071
---------------
AUTOMOTIVE RETAIL--1.1%
56,375 Advance Auto Parts, Inc.* 2,450,058
---------------
BIOTECHNOLOGY--3.8%
21,350 Amgen, Inc.* 1,683,661
35,975 Genentech, Inc.* 3,327,688
15,475 Genzyme Corporation* 1,095,321
64,200 ImClone Systems, Inc.* 2,198,208
---------------
8,304,878
---------------
BROADCASTING & CABLE TV--2.1%
154,450 Comcast Corporation Special Class A* 3,967,821
21,150 XM Satellite Radio Holdings, Inc. Class A* 576,972
---------------
4,544,793
---------------
CASINOS & GAMING--0.9%
17,375 Harrah's Entertainment, Inc. 1,238,664
25,100 International Game Technology 772,578
---------------
2,011,242
---------------
COMMUNICATIONS EQUIPMENT--1.2%
31,788 Cisco Systems, Inc.* 544,211
90,875 Motorola, Inc. 2,052,866
---------------
2,597,077
---------------
COMPUTER & ELECTRONICS RETAIL--1.0%
51,000 Best Buy Company, Inc. 2,217,480
---------------
COMPUTER HARDWARE--2.9%
56,850 Apple Computer, Inc.* 4,086,947
80,325 Hewlett-Packard Company 2,299,705
---------------
6,386,652
---------------
COMPUTER STORAGE & PERIPHERALS--1.3%
217,525 EMC Corporation* 2,962,691
---------------
CONSUMER ELECTRONICS--0.5%
11,525 Harman International Industries, Inc. 1,127,721
---------------
CONSUMER FINANCE--1.3%
53,175 SLM Corporation 2,929,411
---------------
</Table>
12
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------
DATA PROCESSING & OUTSOURCED SERVICES--0.8%
38,075 Automatic Data Processing, Inc. $ 1,747,262
---------------
DEPARTMENT STORES--1.7%
21,075 J.C. Penney Company, Inc. 1,171,770
39,125 Kohl's Corporation* 1,901,475
20,325 Nordstrom, Inc. 760,155
---------------
3,833,400
---------------
ELECTRICAL COMPONENTS & EQUIPMENT--1.5%
42,975 Emerson Electric Company 3,210,233
---------------
ELECTRONIC EQUIPMENT MANUFACTURERS--0.6%
36,925 Agilent Technologies, Inc.* 1,229,233
---------------
EXCHANGE TRADED FUNDS--4.4%
68,700 iShares Russell 1000 Growth Index Fund 3,507,135
73,075 Nasdaq 100 Index Tracking Stock 2,953,692
26,625 SPDR Trust Series 1 3,312,948
---------------
9,773,775
---------------
GENERAL MERCHANDISE STORES--1.6%
96,375 Family Dollar Stores, Inc. 2,389,136
20,850 Target Corporation 1,146,125
---------------
3,535,261
---------------
HEALTHCARE EQUIPMENT--0.8%
30,625 Medtronic, Inc. 1,763,081
---------------
HEALTHCARE SERVICES--0.6%
24,950 Omnicare, Inc. 1,427,639
---------------
HEALTHCARE SUPPLIES--0.5%
20,925 DENTSPLY International, Inc. 1,123,463
---------------
HOME ENTERTAINMENT SOFTWARE--0.8%
35,600 Electronic Arts, Inc.* 1,862,236
---------------
HOME IMPROVEMENT RETAIL--1.5%
79,675 Home Depot, Inc. 3,225,244
---------------
HOTELS, RESORTS & CRUISE LINES--0.8%
31,925 Carnival Corporation 1,707,030
---------------
HOUSEHOLD PRODUCTS--5.5%
48,250 Clorox Company 2,744,943
100,850 Colgate-Palmolive Company 5,531,623
67,171 Procter & Gamble Company 3,887,857
---------------
12,164,423
---------------
HYPERMARKETS & SUPER CENTERS--0.5%
23,925 Wal-Mart Stores, Inc. 1,119,690
---------------
INDUSTRIAL CONGLOMERATES--3.1%
196,350 General Electric Company 6,882,068
---------------
INTEGRATED OIL & GAS--0.3%
10,950 ConocoPhillips 637,071
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
13
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------
INTEGRATED TELECOMMUNICATION SERVICES--1.6%
20,175 Alltel Corporation $ 1,273,043
96,200 Sprint Nextel Corporation 2,247,232
---------------
3,520,275
---------------
INTERNET SOFTWARE & SERVICES--4.9%
17,175 Google, Inc. Class A* 7,125,221
96,950 Yahoo!, Inc.* 3,798,501
---------------
10,923,722
---------------
INVESTMENT BANKING & BROKERAGE--2.8%
202,350 Charles Schwab Corporation 2,968,475
16,675 Goldman Sachs Group, Inc. 2,129,564
18,075 Morgan Stanley 1,025,576
---------------
6,123,615
---------------
IT CONSULTING & OTHER SERVICES--1.8%
136,500 Accenture Limited Class A 3,940,755
---------------
LEISURE FACILITIES--1.8%
87,709 Royal Caribbean Cruises Limited 3,952,168
---------------
MANAGED HEALTHCARE--0.6%
14,500 Aetna, Inc. 1,367,495
---------------
MOVIES & ENTERTAINMENT--4.9%
41,600 DreamWorks Animation SKG, Inc.* 1,021,696
63,725 Pixar, Inc.* 3,359,582
242,075 Time Warner, Inc. 4,221,788
68,474 Viacom, Inc. Class B 2,232,278
---------------
10,835,344
---------------
MULTI-LINE INSURANCE--0.4%
14,625 American International Group, Inc. 997,864
---------------
OIL & GAS EQUIPMENT & SERVICES--1.0%
22,575 Schlumberger Limited 2,193,161
---------------
OTHER DIVERSIFIED FINANCIAL SERVICES--1.1%
59,250 JPMorgan Chase & Company 2,351,633
---------------
PACKAGED FOODS & MEATS--0.8%
29,775 Hershey Foods Corporation 1,645,069
---------------
PERSONAL PRODUCTS--0.6%
36,125 Estee Lauder Companies, Inc. Class A 1,209,465
---------------
PHARMACEUTICALS--6.2%
30,075 Covance, Inc.* 1,460,141
15,750 Eli Lilly and Company 891,293
71,700 Johnson & Johnson 4,309,170
109,500 MGI Pharma, Inc.* 1,879,020
44,192 Pfizer, Inc. 1,030,557
88,475 Wyeth 4,076,043
---------------
13,646,224
---------------
PROPERTY & CASUALTY INSURANCE--1.0%
41,875 Allstate Corporation 2,264,181
---------------
</Table>
14
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------
RAILROADS--1.7%
47,250 Union Pacific Corporation $ 3,804,098
---------------
SEMICONDUCTOR EQUIPMENT--0.4%
15,525 KLA-Tencor Corporation 765,848
---------------
SEMICONDUCTORS--4.4%
109,278 Intel Corporation 2,727,579
120,000 Linear Technology Corporation 4,328,400
74,525 Maxim Integrated Products, Inc. 2,700,786
---------------
9,756,765
---------------
SOFT DRINKS--1.1%
41,625 PepsiCo, Inc. 2,459,205
---------------
SPECIALTY CHEMICALS--1.0%
34,000 Sigma-Aldrich Corporation 2,151,860
---------------
SPECIALTY STORES--1.2%
20,450 Office Depot, Inc.* 642,130
51,600 Tiffany & Company 1,975,764
---------------
2,617,894
---------------
STEEL--0.6%
19,850 Nucor Corporation 1,324,392
---------------
SYSTEMS SOFTWARE--7.6%
105,775 Adobe Systems, Inc. 3,909,444
407,541 Microsoft Corporation 10,657,197
66,000 Oracle Corporation* 805,860
75,300 Symantec Corporation* 1,317,750
---------------
16,690,251
---------------
THRIFTS & MORTGAGE FINANCE--0.9%
47,600 The PMI Group, Inc. 1,954,932
---------------
TRADING COMPANIES & DISTRIBUTORS--1.1%
32,975 W.W. Grainger, Inc. 2,344,523
---------------
TOTAL COMMON STOCKS (DOMESTIC)
(COST--$197,522,009) 210,966,802
---------------
COMMON STOCKS (FOREIGN)--2.5%
APPLICATION SOFTWARE--0.5%
24,350 SAP AG Sponsored ADR (GE) 1,097,455
---------------
SEMICONDUCTOR EQUIPMENT--1.2%
135,400 ASM Lithography Holding NV NY Shares (NE)* 2,718,832
---------------
SEMICONDUCTORS--0.8%
101,900 ATI Technologies, Inc. (CA)* 1,731,280
---------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$4,805,981) 5,547,567
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- ----------------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--3.0%
SPECIAL PURPOSE ENTITY--3.0%
$6,600,000 CAFCO LLC
4.12% 1/3/06~ $ 6,598,489
---------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$6,598,489) 6,598,489
---------------
TOTAL INVESTMENTS--101.2%
(TOTAL COST--$208,926,479) 223,112,858
---------------
OTHER ASSETS AND LIABILITIES--(1.2%) (2,548,214)
---------------
NET ASSETS--100.0% $ 220,564,644
===============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
* NON-INCOME PRODUCING.
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$6,598,489, OR 3.0%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
ADR - AMERICAN DEPOSITARY RECEIPT
SPDR - STANDARD AND POOR'S DEPOSITARY RECEIPT
CA - CANADA
GE - GERMANY
NE - NETHERLANDS
SEE NOTES TO FINANCIAL STATEMENTS.
16
<Page>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 208,926,479
---------------
Investment securities, at market 223,112,858
Cash 239,080
Receivables:
Investment securities sold 21,332,043
Capital shares sold 11,201
Dividends and interest 235,503
Other assets 15,478
---------------
Total Assets 244,946,163
---------------
LIABILITIES
Payables and other accrued liabilities:
Investment securities purchased 23,931,852
Capital shares redeemed 178,756
Advisory fees 123,958
Shareholder servicing fees 21,272
Directors' deferred compensation 15,478
Accounting fees 11,442
Distribution fees 20,331
Transfer agency fees 8,255
Custodian fees 358
Other 69,817
---------------
Total Liabilities 24,381,519
---------------
Net Assets $ 220,564,644
===============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 288,692,356
Undistributed net investment income 159,962
Accumulated net realized loss from security transactions (82,474,053)
Net unrealized appreciation on investments 14,186,379
---------------
Total $ 220,564,644
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
<Table>
CLASS A
Net Assets $ 1,265,880
Shares Outstanding 249,868
Net Asset Value, Redemption Price Per Share $ 5.07
Maximum offering price per share
(net asset value plus sales charge of 5.75% of offering price) $ 5.38
CLASS B
Net Assets $ 1,452,806
Shares Outstanding 295,826
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 4.91
CLASS C
Net Assets $ 2,011,596
Shares Outstanding 417,568
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 4.82
CLASS F
Net Assets $ 215,556,228
Shares Outstanding 41,624,774
Net Asset Value, Offering and Redemption Price Per Share $ 5.18
CLASS R
Net Assets $ 270,102
Shares Outstanding 52,682
Net Asset Value, Offering and Redemption Price Per Share $ 5.13
CLASS T
Net Assets $ 8,032
Shares Outstanding 1,657
Net Asset Value, Redemption Price Per Share $ 4.85
Maximum offering price per share
(net asset value plus sales charge of 4.50% of offering price) $ 5.08
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<Page>
STATEMENT OF OPERATIONS
For the year ended December 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 2,356,966
Interest 376,652
Foreign taxes withheld (680)
---------------
Total Investment Income 2,732,938
---------------
EXPENSES
Advisory fees--Note 2 1,448,888
Shareholder servicing fees--Note 2 254,387
Accounting fees--Note 2 133,743
Distribution fees--Note 2 197,310
Transfer agency fees--Note 2 132,523
Registration fees 58,460
Postage and mailing expenses 34,390
Custodian fees and expenses--Note 2 11,981
Printing expenses 76,010
Legal and audit fees 80,349
Directors' fees and expenses--Note 2 47,535
Other expenses 82,969
---------------
Total Expenses 2,558,545
Earnings Credits (11,692)
Reimbursed/Waived Expenses (7,536)
Expense Offset to Broker Commissions (11,459)
---------------
Net Expenses 2,527,858
---------------
Net Investment Income 205,080
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
SECURITY TRANSACTIONS
Net Realized Gain on Security Transactions 22,014,185
Net Change in Unrealized Appreciation/Depreciation of Investments (12,580,203)
---------------
Net Realized and Unrealized Gain 9,433,982
---------------
Net Increase in Net Assets Resulting from Operations $ 9,639,062
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2005 2004
OPERATIONS
Net Investment Income $ 205,080 $ 1,263,861
Net Realized Gain on Security Transactions 22,014,185 20,710,093
Net Change in Unrealized Appreciation/Depreciation of Investments (12,580,203) (2,549,571)
--------------- ---------------
Net Increase in Net Assets Resulting from Operations 9,639,062 19,424,383
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From Net Investment Income
Class A (1,749) (3,007)
Class C (4,846) 0
Class F (428,422) (945,884)
Class R (786) (1,108)
--------------- ---------------
Net Decrease from Dividends and Distributions (435,803) (949,999)
--------------- ---------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A 28,615 174,433
Class B (702,149) 237,470
Class C 1,342,518 173,366
Class F (26,845,562) (18,116,372)
Class R 11,896 29,755
Class T (23,106) 0
Class T Payment by Service Provider 0 698
--------------- ---------------
Net Decrease from Capital Share Transactions (26,187,788) (17,500,650)
--------------- ---------------
Net Increase (Decrease) in Net Assets (16,984,529) 973,734
--------------- ---------------
NET ASSETS
Beginning of Year $ 237,549,173 $ 236,575,439
--------------- ---------------
End of Year $ 220,564,644 $ 237,549,173
=============== ===============
Undistributed Net Investment Income $ 159,962 $ 393,754
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.86 $ 4.49 $ 3.44 $ 4.66 $ 5.73
- -------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.00)(a) 0.02 0.03 (0.02) (0.07)
Net realized and unrealized gains (losses)
on securities 0.22 0.36 1.02 (1.20) (1.00)
-------------------------------------------------------------------------
Total from investment operations 0.22 0.38 1.05 (1.22) (1.07)
- -------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.01) (0.01) 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00(b)
-------------------------------------------------------------------------
Total distributions (0.01) (0.01) 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 5.07 $ 4.86 $ 4.49 $ 3.44 $ 4.66
=========================================================================
TOTAL RETURN(c) 4.46% 8.54% 30.52% (26.18%) (18.65%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,266 $ 1,180 $ 935 $ 378 $ 442
- -------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(d) 1.35% 1.26% 1.49% 1.87% 2.98%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.33% 1.25% 1.48% 1.87% 2.98%
Net investment income (loss) (0.09%) 0.38% (0.25%) (0.67%) (1.82%)
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(e) 126% 115% 123% 152% 144%
</Table>
(a) NET INVESTMENT LOSS FOR THE YEAR ENDED DECEMBER 31, 2005 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(b) DISTRIBUTIONS FROM NET REALIZED GAINS FOR THE YEAR ENDED DECEMBER 31, 2001
AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(c) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(d) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(e) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.74 $ 4.40 $ 3.40 $ 4.61 $ 5.65
- -------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.04)(b) (0.00)(a) (0.01) (0.05) (0.04)
Net realized and unrealized gains (losses)
on securities 0.21 0.34 1.01 (1.16) (1.00)
-------------------------------------------------------------------------
Total from investment operations 0.17 0.34 1.00 (1.21) (1.04)
- -------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00(c)
-------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.91 $ 4.74 $ 4.40 $ 3.40 $ 4.61
=========================================================================
TOTAL RETURN(d) 3.59% 7.73% 29.41% (26.25%) (18.38%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,453 $ 2,110 $ 1,709 $ 1,013 $ 1,599
- -------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(e) 2.19% 2.01% 2.30% 2.14% 2.20%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.18% 2.00% 2.30% 2.14% 2.19%
Net investment loss (0.97%) (0.34%) (1.08%) (0.95%) (1.03%)
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(f) 126% 115% 123% 152% 144%
</Table>
(a) NET INVESTMENT LOSS FOR THE YEAR ENDED DECEMBER 31, 2004 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(b) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(c) DISTRIBUTIONS FROM NET REALIZED GAINS FOR THE YEAR ENDED DECEMBER 31, 2001
AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(d) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(e) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(f) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
22
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.66 $ 4.32 $ 3.34 $ 4.55 $ 5.66
- -------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.03)(a) 0.04 0.04 (0.07) (0.13)
Net realized and unrealized gains (losses)
on securities 0.20 0.30 0.94 (1.14) (0.98)
-------------------------------------------------------------------------
Total from investment operations 0.17 0.34 0.98 (1.21) (1.11)
- -------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.01) 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00(b)
-------------------------------------------------------------------------
Total distributions (0.01) 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.82 $ 4.66 $ 4.32 $ 3.34 $ 4.55
=========================================================================
TOTAL RETURN(c) 3.68% 7.87% 29.34% (26.59%) (19.58%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 2,012 $ 571 $ 357 $ 186 $ 270
- -------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(d) 1.98% 1.99% 2.29% 2.77% 3.17%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.96% 1.99% 2.28% 2.76% 3.16%
Net investment loss (0.72%) (0.24%) (1.04%) (1.55%) (2.01%)
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(e) 126% 115% 123% 152% 144%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) DISTRIBUTIONS FROM NET REALIZED GAINS FOR THE YEAR ENDED DECEMBER 31, 2001
AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(c) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(d) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 1.98% (2005), 1.99% (2004), 2.29% (2003), 3.02% (2002), AND
3.56% (2001).
(e) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD. SEE NOTES TO FINANCIAL
STATEMENTS.
23
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.96 $ 4.57 $ 3.50 $ 4.69 $ 5.69
- -------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.00(a) 0.02 0.00(a) 0.00(a) 0.00(a)
Net realized and unrealized gains (losses)
on securities 0.23 0.39 1.07 (1.19) (1.00)
-------------------------------------------------------------------------
Total from investment operations 0.23 0.41 1.07 (1.19) (1.00)
- -------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.01) (0.02) 0.00(b) 0.00(b) 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00(b)
-------------------------------------------------------------------------
Total distributions (0.01) (0.02) 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 5.18 $ 4.96 $ 4.57 $ 3.50 $ 4.69
=========================================================================
TOTAL RETURN 4.64% 8.97% 30.67% (25.33%) (17.55%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 215,556 $ 233,410 $ 233,333 $ 191,701 $ 288,752
- -------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(c) 1.13% 1.06% 1.13% 1.08% 1.14%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.12% 1.06% 1.13% 1.08% 1.14%
Net investment income 0.11% 0.56% 0.06% 0.11% 0.02%
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 126% 115% 123% 152% 144%
</Table>
(a) NET INVESTMENT INCOME FOR THE YEARS ENDED DECEMBER 31, 2005, 2003, 2002, AND
2001 AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(b) DISTRIBUTIONS FROM NET INVESTMENT INCOME FOR THE YEARS ENDED DECEMBER 31,
2003 AND 2002 AND DISTRIBUTIONS FROM NET REALIZED GAINS FOR THE YEAR ENDED
DECEMBER 31, 2001 AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
24
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.91 $ 4.53 $ 3.47 $ 4.74 $ 5.74
- -------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.01 0.03 0.06 (0.08) (0.01)
Net realized and unrealized gains (losses)
on securities 0.22 0.37 1.00 (1.19) (0.99)
-------------------------------------------------------------------------
Total from investment operations 0.23 0.40 1.06 (1.27) (1.00)
- -------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.01) (0.02) 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00(a)
-------------------------------------------------------------------------
Total distributions (0.01) (0.02) 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 5.13 $ 4.91 $ 4.53 $ 3.47 $ 4.74
=========================================================================
TOTAL RETURN 4.78% 8.88% 30.55% (26.79%) (17.39%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 270 $ 247 $ 211 $ 57 $ 51
- -------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(b) 1.10% 1.00% 1.35% 2.95% 2.73%
Expenses with reimbursements, earnings
credits and brokerage offsets 1.09% 1.00% 1.35% 2.95% 2.72%
Net investment income (loss) 0.15% 0.54% (0.12%) (1.78%) (1.68%)
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 126% 115% 123% 152% 144%
</Table>
(a) DISTRIBUTIONS FROM NET REALIZED GAINS FOR THE YEAR ENDED DECEMBER 31, 2001
AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(b) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 1.10% (2005), 1.00% (2004), 1.35% (2003), 4.68% (2002), AND
82.23% (2001).
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.72 $ 4.38 $ 3.39 $ 4.60 $ 5.68
- -------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.05)(a) (0.01) (0.23) (0.30) (0.09)
Net realized and unrealized gains (losses)
on securities 0.18 0.25 1.22 (0.91) (0.99)
-------------------------------------------------------------------------
Total from investment operations 0.13 0.24 0.99 (1.21) (1.08)
- -------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00(b)
-------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------
Other:
Payment by Service Provider 0.00 0.10(c) 0.00 0.00 0.00
Net Asset Value, end of year $ 4.85 $ 4.72 $ 4.38 $ 3.39 $ 4.60
=========================================================================
TOTAL RETURN(d) 2.75% 7.76% 29.20% (26.30%) (18.99%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 8 $ 32 $ 30 $ 33 $ 127
- -------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(e) 2.16% 1.90% 2.27% 2.47% 3.14%
Expenses with reimbursements, earnings
credits and brokerage offsets 2.15% 1.90% 2.26% 2.46% 3.13%
Net investment loss (0.98%) (0.29%) (1.11%) (1.29%) (1.96%)
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(f) 126% 115% 123% 152% 144%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) DISTRIBUTIONS FROM NET REALIZED GAINS FOR THE YEAR ENDED DECEMBER 31, 2001
AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(c) A SERVICE PROVIDER REIMBURSED THE FUND'S CLASS T SHARES FOR LOSSES RESULTING
FROM CERTAIN SHAREHOLDER ADJUSTMENTS WHICH OTHERWISE WOULD HAVE REDUCED
TOTAL RETURN BY 2.28%.
(d) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(e) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.59% (2005), 1.90% (2004), 2.27% (2003), 3.71% (2002), AND
6.32% (2001).
(f) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<Page>
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders Equity Growth Fund (the "Fund"). The Fund offers
Class A, Class B, Class C, Class F, Class R and Class T shares. Class A and
Class T shares are subject to a sales charge imposed at the time of purchase,
Class B shares are subject to a contingent deferred sales charge ("CDSC")
imposed on Class B shares redeemed within six years of purchase, Class C shares
are subject to a CDSC imposed on Class C shares redeemed within one year of
purchase and Class F and Class R shares are sold at net asset value per share
(with Class R shares sold only to eligible institutional investors). Other
differences between the classes include services offered to and the expenses
borne by each Class. The following significant accounting policies have been
consistently followed by the Fund in the preparation of its financial
statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair value as
27
<Page>
determined in good faith by the Company's board of directors or pursuant to
procedures approved by the board of directors. These situations may include
instances where an event occurs after the close of the market on which a
security is traded but before the Fund calculates its net asset value, and it is
determined that the event has materially affected the value of the security.
Fair value of foreign equity securities may be determined with the assistance of
a pricing service using correlations between the movement of prices of foreign
securities and indexes of domestic securities and other appropriate indicators,
such as closing market prices of relevant ADRs and futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund may invest at least a
portion of its assets in foreign securities. Foreign securities carry more risk
than U.S. securities, such as political and currency risks. In the event the
Fund executes a foreign security transaction, the Fund may enter into a foreign
currency contract to settle the foreign security transaction. The Fund could be
exposed to risk if counterparties are unable to meet the terms of the contracts
or if the value of the currency changes unfavorably to the U.S. dollar. The
resultant foreign currency gain or loss from the contract is recorded as foreign
currency gain or loss and is presented as such in the Statement of Operations.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each day.
Purchases and sales of investment securities and income and expense items
denominated in foreign currencies are translated into U.S. dollar amounts on the
respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net unrealized gain or loss from investments and foreign
currency translations on the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized appreciation or depreciation on investments and foreign
currency translation arises from changes in
28
<Page>
the values of assets and liabilities, including investments in securities held
at the date of the financial statements, resulting from changes in the exchange
rates and changes in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) and from net realized capital gains (if any)
annually. Dividends and distributions, which are determined in accordance with
income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
29
<Page>
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
Financial Corporation, a publicly-owned financial services company which
provides a comprehensive range of financial products and services in domestic
and selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
0.65% of the first $250 million of net assets, 0.60% of the next $250 million of
net assets, 0.55% of the next $250 million of net assets and 0.50% of net assets
in excess of $750 million.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $242,834 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $105,473 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $12.58 to $13.36, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency fees, including both the per account fees paid to
DTI and out-of-pocket charges, during the year ended December 31, 2005 were as
follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
---------------------------------------------------------
Class A $ 2,522
Class B $ 5,100
Class C $ 1,322
Class R $ 518
Class T $ 128
</Table>
30
<Page>
Founders has agreed to reimburse (or to cause its affiliates to reimburse) the
Class T share class of the Fund for certain transfer agency expenses pursuant to
a written contractual commitment. This commitment will extend through at least
August 31, 2006, and will not be terminated without prior notification to the
Company's board of directors. For the year ended December 31, 2005, Class T was
reimbursed $44, which reduced the amount paid to DTI to $84.
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the processing of shareholder transactions in the Funds.
During the year ended December 31, 2005, the Fund was charged $5,449 for cash
management fees, which are included in the out-of-pocket transfer agency charges
above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $17,460 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $172,072 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
-------------------------------------------------------------
Class A N/A $ 3,123
Class B $ 12,764 $ 4,255
Class C $ 12,449 $ 4,150
Class T $ 25 $ 25
</Table>
31
<Page>
During the year ended December 31, 2005, DSC retained $1,232 and $35 in sales
commissions from the sales of Class A and Class T shares, respectively. DSC also
retained $6,210 and $2 of contingent deferred sales charges relating to
redemptions of Class B and Class C shares, respectively.
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance monitoring, regulatory and shareholder reporting, as well as related
facilities, equipment and clerical help. The fee is computed at the annual rate
of 0.06% of the average daily net assets of the Fund on the first $500 million,
0.04% of the average daily net assets of the Fund on the next $500 million and
0.02% of the average daily net assets of the Fund in excess of $1 billion, plus
reasonable out-of-pocket expenses. Founders has contractually agreed in writing
to waive any fees received for these services to the extent they exceed
Founders' costs in providing the services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits on the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
---------------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $7,492, which reduced the amount paid to
Mellon Bank to $4,489.
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of one or more of the Funds. The amount paid to the director under the
plan will be determined based upon the performance of the selected Funds. The
current value of these amounts is included in Other Assets and Directors'
Deferred Compensation on the Statement of Assets and Liabilities. Changes in
market value are included in the Directors' fees and expenses and the net change
in unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
32
<Page>
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally accepted in the United States of America. These differences
are due to differing treatments for items such as deferral of wash sale losses,
deferred compensation and capital loss carryovers. Permanent differences
identified during the year ended December 31, 2005 have been reclassified among
the components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
---------------------------------------------------------
$ (3,069) $ 3,069 $ 0
</Table>
The tax character of distributions paid during 2005 and 2004 was as follows:
<Table>
<Caption>
2005 2004
-----------------------------
DISTRIBUTIONS PAID FROM:
Ordinary Income $ 435,803 $ 949,999
Long-Term Capital Gain $ 0 $ 0
-----------------------------
$ 435,803 $ 949,999
=============================
</Table>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of December 31, 2005, represent capital loss carryovers that may be
available to offset future realized capital gains and thereby reduce future
taxable gains distributions. Post-October 31 foreign currency losses noted
below, if any, may be used to offset future net investment income and thereby
reduce future ordinary income distributions. Net capital loss carryovers
utilized during 2005 by the Fund amounted to $20,044,046. Accumulated capital
losses as of December 31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
--------------------------------------------------------------
2009 $ 29,494,922
2010 $ 50,083,635
---------------
$ 79,578,557
===============
</Table>
33
<Page>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The primary difference between book and tax appreciation or depreciation
is wash sale loss deferrals.
<Table>
Post-October Capital Loss Deferral $ (555,661)
Undistributed Ordinary Income $ 209,198
Other Book/Tax Differences $ (49,237)
Federal Tax Cost $ 211,266,313
Gross Tax Appreciation of Investments $ 16,901,507
Gross Tax Depreciation of Investments $ (5,054,962)
Net Tax Appreciation $ 11,846,545
</Table>
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 750 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 133,918 $ 645,347 167,335 $ 765,894
Dividends or Distributions Reinvested 258 $ 1,321 404 $ 1,961
Redeemed (127,183) $ (618,053) (133,430) $ (593,422)
-----------------------------------------------------------------
Net Increase 6,993 $ 28,615 34,309 $ 174,433
=================================================================
CLASS B
Sold 13,761 $ 63,612 215,457 $ 939,503
Redeemed (162,888) $ (765,761) (159,027) $ (702,033)
-----------------------------------------------------------------
Net Increase (Decrease) (149,127) $ (702,149) 56,430 $ 237,470
=================================================================
CLASS C
Sold 331,465 $ 1,510,039 63,935 $ 278,992
Dividends or Distributions Reinvested 275 $ 1,336 0 $ 0
Redeemed (36,722) $ (168,857) (24,034) $ (105,626)
-----------------------------------------------------------------
Net Increase 295,018 $ 1,342,518 39,901 $ 173,366
=================================================================
</Table>
34
<Page>
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS F
Sold 587,677 $ 2,884,040 1,109,016 $ 5,075,748
Dividends or Distributions Reinvested 71,482 $ 373,127 165,648 $ 819,960
Redeemed (6,113,337) $ (30,102,729) (5,197,897) $ (24,012,080)
-----------------------------------------------------------------
Net Decrease (5,454,178) $ (26,845,562) (3,923,233) $ (18,116,372)
=================================================================
CLASS R
Sold 4,796 $ 23,193 36,325 $ 170,596
Dividends or Distributions Reinvested 150 $ 778 223 $ 1,096
Redeemed (2,559) $ (12,075) (32,838) $ (141,937)
-----------------------------------------------------------------
Net Increase 2,387 $ 11,896 3,710 $ 29,755
=================================================================
CLASS T
Sold 1,538 $ 7,232 14 $ 65
Redeemed (6,655) $ (30,338) (14) $ (65)
-----------------------------------------------------------------
Net Increase (Decrease) (5,117) $ (23,106) 0 $ 0
=================================================================
</Table>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $268,939,916 and $293,530,183, respectively.
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
35
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders Equity Growth Fund
(one of the portfolios constituting Dreyfus Founders Funds, Inc., hereafter
referred to as the "Fund") at 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 Sates of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where securities purchased had not been received, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
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OTHER TAX INFORMATION
(UNAUDITED)
CORPORATE DIVIDENDS RECEIVED DEDUCTION
Dividends paid by the Fund from net investment income and distributions of net
realized short-term capital gains are, for federal tax purposes, taxable as
ordinary income to shareholders. Of the ordinary income distributions declared
for the year ended December 31, 2005, 100% qualified for the dividends received
deduction available to the Fund's corporate shareholders.
QUALIFIED DIVIDEND INCOME
For the year ended December 31, 2005, the Fund designated 100% of the ordinary
income distributions paid as qualified dividend income subject to reduced income
tax rates for taxpayers with taxable accounts.
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FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
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The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services being
provided to the Funds are satisfactory, as evidenced in part by the recent
performance records of the Funds, to which the directors gave significant
attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to the
Funds, but also recognize that Founders or its affiliates have provided the
highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
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small group of funds selected by Lipper and a larger universe of funds also
selected by Lipper. The Lipper materials further included graphs depicting each
Fund's Class F one-year and annualized performance results for two-, three-,
four-, five-, and ten-year periods, if applicable, in comparison to the Fund's
performance group and performance universe.
Equity Growth Fund's performance for the one-year period ended December 31, 2004
placed it in the second quintile of its Lipper performance group, with the Fund
ranking fourth out of 15 Lipper-selected "peer funds," and in the second
quintile of its Lipper large-cap growth fund performance universe, ranking 184th
of 640 funds. The Fund's performance within its Lipper-selected group and
universe for the three-year period ended December 31, 2004 had placed it in the
first quintile, with the Fund having placed in the second quintile of its
Lipper-selected group and in the first quintile of its Lipper-selected universe
for the two-year period ended December 31, 2004. The directors deemed these
relative performance results to be very satisfactory and stressed the importance
to Founders of the need to seek to maintain a strong performance record.(1)
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance
difficulties, more recent performance results generally have shown
significant improvement;
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS DO NOT REFLECT THE FRONT-END SALES
CHARGES THAT APPLY TO OTHER SHARE CLASSES.
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Founders has focused its efforts upon improving the performance records of
the Funds and will continue to seek improvement; and
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing in
the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY
FOUNDERS AND ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, Equity Growth
Fund's management fees ranked in the first (best) quintile of its Lipper
competitive expense group, with the Fund's fees the second lowest of 15 "peer
funds." The Fund's contractual management fees at a common asset level were
determined by Lipper to be lower than 13 of the 15 funds in its group. The
Fund's management fees were in the second best quintile of its Lipper expense
universe, placing 49th lowest of 171 funds.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain
efficiencies in performing the
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portfolio management, trading and operational functions related to those
accounts (the directors recognized that in determining its profitability
from providing investment management and other services to the Funds,
Founders allocated its expenses between the Funds and other accounts in a
manner which was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment
services to any of the clients it advises, not just the Funds. The directors
recognized that Founders' profitability would be lower if it did not receive
research and brokerage services in connection with these brokerage
transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the investment advisory fees received by
Founders. However, the directors noted that
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Founders' profitability is expected to decline in 2005 as a result of declines
in Fund asset levels. The directors also considered the risks assumed by
Founders in providing management services to the Funds, including the risk that
the management agreement can be terminated by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of
investment advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially
fees which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than fees
arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in recognition of the quality service
which Founders has provided and continues to provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
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ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of scale if the assets of the Funds were to increase. Among other information,
the directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into increased
profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of an
increase in the assets of a particular Fund or a group of Funds would not be
passed along on a dollar-for-dollar basis to the shareholders of other Funds
that did not experience increases in their assets to points above their
breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is
consistent with its objective of sharing its economies of scale with the
Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
restrictions. The directors determined that Founders is dedicated to compliance
with all applicable rules and regulations and that the systems of controls which
are in place to ensure that the service providers to the Funds, including
Founders, and the Funds themselves, maintain strict adherence to the law are
excellent.
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OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years and that efforts are being and will continue to be
made to enhance such improvement and to maintain Fund expense ratios at
reasonable and competitive levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
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YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
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Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice
President--Compliance since 2002. Formerly, Founders' Manager of Compliance
(2000 to 2002) and Securities Compliance Examiner, Staff Accountant and Team
Leader for the U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
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DREYFUS FOUNDERS EQUITY GROWTH FUND
PROXY VOTING INFORMATION
A description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities, and information regarding how
the Funds voted these proxies for the 12-month period ended June 30, 2005, is
available through the Funds' website at www.founders.com and on the Securities
and Exchange Commission's (SEC) website at www.sec.gov. The description of the
policies and procedures is also available without charge, upon request, by
calling 1-800-525-2440.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available on the SEC's website at www.sec.gov and may be reviewed and copied
at the SEC's Public Reference Room in Washington, DC. Information on the
operation of the SEC's Public Reference Room may be obtained by calling
1-800-SEC-0330.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
Dreyfus Service Corporation, Distributor.
(C)2006 Founders Asset Management LLC. 2/06
A-646-EQG-05
ANNUAL REPORT
[GRAPHIC]
DREYFUS FOUNDERS
GOVERNMENT SECURITIES FUND
DREYFUS FOUNDERS
MONEY MARKET FUND
INVESTMENT UPDATE
DECEMBER 31, 2005
[DREYFUS FOUNDERS FUNDS(R) LOGO]
THE GROWTH SPECIALISTS
<Page>
TABLE OF CONTENTS
<Table>
Government Securities Fund Management Overview 3
Fund Expenses 8
Government Securities Fund Statement of Investments 10
Money Market Fund Statement of Investments* 12
Statements of Assets and Liabilities 14
Statements of Operations 15
Statements of Changes in Net Assets 16
Government Securities Fund Financial Highlights 17
Money Market Fund Financial Highlights 18
Notes to Financial Statements 19
Report of Independent Registered Public Accounting Firm 27
Other Tax Information 28
Factors Considered in Renewing the Advisory Agreement 29
Your Board Representatives 37
</Table>
PAPERLESS DELIVERY OF THIS REPORT
[GRAPHIC]
Did you know you can reduce your postal mail by accessing Dreyfus Founders
Funds regulatory material online? It's a simple, reliable process: when new
documents such as this financial report are available, we'll send you an e-mail
notification containing a convenient link that will take you directly to that
Fund information on our website.
To take advantage of this service, simply inform us online of your decision
to receive materials through the Founders E-Communications Program. Cut down on
mailbox clutter and help the Funds reduce printing and postage charges by
enrolling today at www.founders.com/ecommunications. If you own Funds through a
third party, enroll at www.icsdelivery.com.
INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
*This report includes financial information for the Money Market Fund as of
December 31, 2005, but does not include a discussion of that Fund's performance.
The views expressed in the Government Securities Fund management overview
reflect those of the portfolio manager only through the end of the period
covered and do not necessarily represent the views of Founders or any other
person in the Founders organization. Any such views are subject to change at any
time based upon market or other conditions and Founders disclaims any
responsibility to update such views. These views may not be relied on as
investment advice and, because investment decisions for a Dreyfus Founders Fund
are based on numerous factors, may not be relied on as an indication of trading
intent on behalf of any Dreyfus Founders Fund. The amounts of the Funds'
holdings as of December 31, 2005 are included in the Statements of Investments.
NOT FDIC-INSURED - NOT BANK-GUARANTEED - MAY LOSE VALUE
<Page>
GOVERNMENT SECURITIES FUND
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF MARGARET DANUSER]
A DISCUSSION WITH PORTFOLIO MANAGER MARGARET DANUSER, REGARDING FUND PERFORMANCE
FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2005.
HIGH OIL PRICES, HURRICANES AND THE FEDERAL FUNDS RATE
In the first three quarters of 2005, increasingly higher oil prices, a
strengthening dollar and higher short-term interest rates were held accountable
for the perceived slowdown in the fixed-income markets, although the housing
market provided a considerable offset to these factors, as well as stimulus to
the economy. The third quarter was hit hard economically, with record crude oil
prices, two devastating Gulf Coast hurricanes, and two Federal Reserve rate
hikes, all of which significantly influenced the bond market. Rising energy
prices sparked fears of inflation. Massive rebuilding plans financed through
fiscal spending for the areas hit by the hurricanes were expected to boost
growth; however, the concern over how this may affect the bond market became
pervasive. The situation was somewhat tempered by the Federal Reserve's actions
and statements demonstrating its determination to remain vigilant on inflation,
and by the fact that it raised short-term rates by 50 basis points in the third
quarter. The fourth quarter saw a bond market affected by a drop in oil prices,
indicating less inflationary pressures, a slowing in housing market activity,
and speculation that the Federal Reserve was nearing the end of its tightening
cycle, although the federal funds rate was raised to 4.25% by the period's end,
the eighth 25 basis point hike during 2005.
[SIDENOTE]
"THE FUND HELD ALMOST 30% OF ASSETS IN TREASURIES, WHICH PROVED TO BE A POSITIVE
SHIFT IN COMPOSITION, AS TREASURIES PERFORMED STRONGLY."
3
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 1-800-525-2440 TO OBTAIN THE MOST
RECENT MONTH END PERFORMANCE DATA.
[CHART]
Dreyfus Founders
Government Securities Lehman Brothers U.S.
Fund Class F Shares Gov't Comp. Index
12/31/1995 $10,000.00 $10,000.00
12/31/1996 $10,233.79 $10,277.27
12/31/1997 $11,040.50 $11,261.64
12/31/1998 $12,118.28 $12,371.03
12/31/1999 $11,660.73 $12,093.68
12/29/2000 $12,893.62 $13,694.88
12/31/2001 $13,714.58 $14,686.01
12/31/2002 $15,203.81 $16,374.74
12/31/2003 $15,511.64 $16,763.40
12/31/2004 $15,950.07 $17,346.69
12/30/2005 $16,164.58 $17,805.61
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders Government Securities Fund on 12/31/95 to a $10,000 investment made in
an unmanaged securities index on that date. The Fund's performance assumes the
reinvestment of dividends and capital gain distributions, but does not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or
redemption of Fund shares. The Fund's performance in the graph takes into
account all applicable Class F fees and expenses, subject to applicable fee
waivers.
The Lehman Brothers U.S. Government Composite Index reflects the performance of
public obligations of the U.S. Treasury with a remaining maturity of one year or
more and publicly issued debt of U.S. Government agencies and quasi-federal
corporations. The total return figures cited for this index do not reflect the
costs of managing a mutual fund. Further information related to Fund performance
is contained elsewhere in this report.
4
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
CLASS F SHARES 1 5 10 SINCE
INCEPTION DATE YEAR YEARS YEARS INCEPTION
- -------------------------------------------------------------------
3/1/88 1.35% 4.63% 4.92% 5.69%
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distribut ions, fee
waivers, and adjustments for financial statement purposes.
FLATTENING YIELD CURVE
Throughout the 12-month period, a flattening yield curve, which indicates
slowing economic growth, was the dominant theme in the bond market. The long end
of the curve, which typically reacts to inflation expectations, rallied during
most of the period in the belief that the Federal Reserve is anticipatory in its
move to contain inflation. The yield curve's short end, which is usually more
responsive to federal funds rate changes, saw yields move higher, causing an
overall flattening. However, the yield curve actually inverted at the end of
December, with 10-year yields dropping slightly below 2-year Treasury yields, as
traders anticipated another federal funds rate hike in January 2006 and held
expectations that higher rates would contain inflation. The bond market gained
2.65% as measured by the Lehman Brothers U.S. Government Composite Index for the
12-month period ended December 31, 2005, while the Dreyfus Founders Government
Securities Fund underperformed, returning 1.35% for the same timeframe.
LONGER DURATION AND TREASURIES AIDED PERFORMANCE
The Fund's duration was lengthened slightly throughout the period, helping
relative performance, as the longer-dated sectors gained more than the
shorter-dated maturities for the 12-month period. The Fund used cash and
reallocated the proceeds from some of its shorter-dated maturities to buy into
the 5- to 10-year maturity range.
5
<Page>
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
Government Sponsored Enterprises 53.20%
Treasuries 29.00%
Domestic Mortgage 5.50%
Foreign Government 2.90%
Domestic Corporate 3.50%
Cash 5.90%
</Table>
Government Sponsored Enterprises (GSEs) are not backed by the full faith and
credit of the U.S. Government, but only by their ability to borrow from the
Treasury, other forms of governmental support, or by their own credit. The
Fund's portfolio composition is subject to change, and there is no assurance the
Fund will continue to hold any particular security. Opinions regarding sectors,
industries, companies, and/or themes are those of the portfolio manager and are
subject to change at any time, based on market and other conditions, and should
not be construed as a recommendation of any specific security.
A fairly high weighting in Treasuries for most of the year also benefited
the Fund's relative performance. By the end of the second quarter, the Fund had
invested 25.4% of assets in Treasuries. In the fourth quarter, the Fund held
almost 30% of assets in Treasuries, which proved to be a positive shift in Fund
composition, as Treasuries performed strongly for the period.
UNDERWEIGHT POSITION IN MORTGAGES HURT RETURN
The Fund's relative underweight position in mortgages hindered the Fund's
performance, as mortgages were the second-best performing asset class behind
Treasuries for the year. However, exposure to mortgage securities issued by
Ginnie Mae in the latter half of the year helped the Fund, as these outperformed
other mortgage bonds.
The Fund's heavy weighting in Agency securities also served to dampen
performance, as Agencies lagged during the year due to widening spreads.
6
<Page>
IN CONCLUSION
The bond market faced some uncertainty with the retirement of Federal Reserve
Chairman Alan Greenspan and the introduction of a new Chairman in the first
quarter of 2006. Treasury borrowing needs are nearing record levels and are
expected to continue to grow, leading many observers to wonder how much longer
yields can stay low given the amount of issuance expected to flood the market in
the first quarter.
At the end of the period, we continue to be cautious on the bond market,
but believe we are nearing the end of the Federal Reserve's tightening cycle. We
also believe a flattening of the yield curve will be maintained in the near
term, but will likely reverse course when it becomes clear the Federal Reserve
is finished with its campaign to raise rates and the effect of prior rate hikes
is fully absorbed by the economy. We will continue to monitor data for signs of
economic health or deterioration and will adjust the Fund's portfolio
accordingly, and will continue to maintain our high quality and liquidity bias
and look for value in individual security selection.
/s/ Margaret Danuser
Margaret Danuser
Portfolio Manager
7
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of a Fund, you incur ongoing costs, including management fees,
Rule 12b-1 fees (Government Securities Fund only), shareholder services fees,
and other expenses. The expense examples shown below are intended to help you
understand your ongoing costs (in dollars) of investing in the Funds and to
compare these costs with the ongoing costs of investing in other mutual funds.
The expense examples are based on an investment of $1,000 on July 1, 2005
and held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense examples in the rows with
the word "Actual" in the title provide information about actual account values
and actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" to estimate the expenses you paid on your
account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense examples in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Funds' actual expense ratios, and an assumed rate of return of 5% per year
before expenses, which is not the Funds' 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 Funds and other funds. To do so,
compare the hypothetical expenses in the expense examples with the hypothetical
expenses that appear in the shareholder reports of other funds.
8
<Page>
GOVERNMENT SECURITIES FUND EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- ------------------------------------------------------------------------
ACTUAL $ 1,000.00 $ 998.23 $ 5.69
HYPOTHETICAL 1,000.00 1,019.44 5.77
</Table>
*Expenses are equal to the Fund's annualized expense ratio of 1.13%, multiplied
by the average account value over the period, multiplied by 184/365 (to reflect
the one-half year period). The expense ratio reflects reimbursements and/or
waivers of expenses by the Fund's investment adviser or its affiliates and
earnings credits.
MONEY MARKET FUND EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- ------------------------------------------------------------------------
ACTUAL $ 1,000.00 $ 1,006.86 $ 5.16
HYPOTHETICAL 1,000.00 1,020.00 5.21
</Table>
*Expenses are equal to the Fund's annualized expense ratio of 1.02%, multiplied
by the average account value over the period, multiplied by 184/365 (to reflect
the one-half year period). The expense ratio reflects reimbursements and/or
waivers of expenses by the Fund's investment adviser or its affiliates and
earnings credits.
9
<Page>
GOVERNMENT SECURITIES FUND
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--87.3%
AGENCY PASS THROUGH--1.9%
$ 160,470 U.S. Small Business Administration Series 10-A
6.64% 2/1/11 $ 167,845
---------------
GOVERNMENT SPONSORED ENTERPRISES--52.9%
225,000 Federal Agricultural Mortgage Corporation
6.865% 8/10/09 240,608
Federal Farm Credit Bank:
300,000 4.70% 12/10/14 297,618
300,000 4.85% 10/25/12 301,788
285,000 5.35% 6/16/14 295,579
Federal Home Loan Bank:
200,000 4.50% 11/15/12 196,874
495,000 5.625% 2/15/08 503,870
Federal Home Loan Mortgage Corporation:
200,000 4.50% 1/15/15 196,190
200,000 4.875% 11/15/13 200,946
400,000 5.625% 3/15/11 415,776
Federal National Mortgage Association:
300,000 6.625% 10/15/07 309,489
250,000 7.125% 6/15/10 273,460
100,000 Sallie Mae 7.35% 8/1/10 110,539
Tennessee Valley Authority:
500,000 4.75% 8/1/13 500,425
500,000 5.375% 11/13/08 508,930
350,000 7.125% 5/1/30 454,794
---------------
4,806,886
---------------
MORTGAGE-BACKED SECURITIES: FHLMC/FNMA/SPONSORED--1.1%
10,936 Federal Home Loan Mortgage Corporation
7.50% 11/1/29 Pool #C32819 11,487
Federal National Mortgage Association:
24,461 6.50% 10/1/31 Pool #596063 25,144
64,312 7.00% 3/1/12 Pool #373543 66,836
---------------
103,467
---------------
MORTGAGE-BACKED SECURITIES: GNMA/GUARANTEED--2.5%
Government National Mortgage Association:
129,646 6.00% 1/15/33 Pool #563709 132,898
85,873 6.50% 5/15/26 Pool #417388 89,922
---------------
222,820
---------------
</Table>
10
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES--28.9%
U.S. Treasury Inflation Index Note:
$ 252,398 3.375% 1/15/12 $ 271,274
457,784 3.50% 1/15/11 489,036
U.S. Treasury Note:
250,000 4.25% 8/15/13 247,765
200,000 4.25% 8/15/14 197,812
300,000 4.25% 8/15/15 296,121
200,000 5.00% 2/15/11 205,992
200,000 5.00% 8/15/11 206,430
500,000 6.25% 2/15/07 509,610
200,000 7.00% 7/15/06 202,648
---------------
2,626,688
---------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST--$7,845,379) 7,927,706
---------------
GOVERNMENT BONDS (FOREIGN)--2.9%
CAD 305,000 Province of Saskatchewan
6.00% 6/1/06 (CA) 264,853
---------------
TOTAL GOVERNMENT BONDS (FOREIGN)
(COST--$202,014) 264,853
---------------
CORPORATE BONDS (DOMESTIC)--3.5%
$ 300,000 Stanford University
6.16% 4/30/11 317,915
---------------
TOTAL CORPORATE BONDS (DOMESTIC)
(COST--$299,998) 317,915
---------------
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--4.4%
SPECIAL PURPOSE ENTITY--4.4%
$ 400,000 CAFCO LLC
4.12% 1/3/06~ $ 399,908
---------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$399,908) 399,908
---------------
TOTAL INVESTMENTS--98.1%
(TOTAL COST--$8,747,299) 8,910,382
---------------
OTHER ASSETS AND LIABILITIES--1.9% 169,195
---------------
NET ASSETS--100.0% $ 9,079,577
===============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$399,908, OR 4.4%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
CA - CANADA
SEE NOTES TO FINANCIAL STATEMENTS.
11
<Page>
MONEY MARKET FUND
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- -------------------------------------------------------------------------------------------------------------------------
U.S. AGENCY DISCOUNT NOTES--8.0%
GOVERNMENT SECURITIES--8.0%
Federal Home Loan Mortgage Corporation:
$ 635,000 4.09% 1/3/06 $ 634,853
539,000 4.17% 1/9/06 538,500
1,300,000 Federal National Mortgage Association
4.44% 6/14/06 1,273,705
---------------
2,447,058
---------------
TOTAL U.S. AGENCY DISCOUNT NOTES
(COST--$2,447,058) 2,447,058
---------------
CORPORATE SHORT-TERM NOTES--91.7%
AGRICULTURAL PRODUCTS--5.2%
1,600,000 Golden Peanut Company LLC
4.15% 1/18/06 1,596,864
---------------
AUTOMOBILE MANUFACTURERS--3.6%
1,100,000 Toyota Motor Credit Corporation
4.27% 1/30/06 1,096,216
---------------
BREWERS--3.6%
1,100,000 Anheuser-Busch Company
4.33% 3/23/06~ 1,089,283
---------------
CONSTRUCTION, FARM MACHINERY & HEAVY TRUCKS--3.2%
1,000,000 Paccar Financial Corporation
4.35% 3/24/06 990,092
---------------
CONSUMER ELECTRONICS--4.2%
1,300,000 Sharp Electronics Corporation
4.21% 1/19/06 1,297,264
---------------
DIVERSIFIED BANKS--4.2%
1,300,000 HSBC Finance Corporation
4.26% 1/12/06 1,298,308
---------------
ELECTRONIC EQUIPMENT MANUFACTURERS--4.9%
1,500,000 Hitachi America Capital Limited
4.25% 1/10/06 1,498,406
---------------
HEALTHCARE EQUIPMENT--2.9%
900,000 Becton Dickinson & Company
4.23% 1/13/06 898,731
---------------
HOUSEHOLD APPLIANCES--3.6%
1,100,000 Stanley Works, Inc.
4.29% 1/26/06~ 1,096,723
---------------
HOUSEHOLD PRODUCTS--4.4%
1,361,000 Procter & Gamble Company
4.18% 1/5/06~ 1,360,368
---------------
MULTI-LINE INSURANCE--8.3%
American Family Financial Services:
750,000 3.96% 1/20/06 748,433
800,000 4.28% 3/31/06 791,535
1,000,000 American General Finance Corporation
4.28% 1/25/06 997,147
---------------
2,537,115
---------------
</Table>
12
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- -------------------------------------------------------------------------------------------------------------------------
OTHER DIVERSIFIED FINANCIAL SERVICES--7.8%
$ 1,300,000 American Express Company
4.23% 1/11/06 $ 1,298,473
1,100,000 National Rural Utilities Cooperative Finance
4.23% 1/6/06 1,099,354
---------------
2,397,827
---------------
PHARMACEUTICALS--4.2%
1,300,000 Novartis Finance Corporation
4.15% 1/5/06~ 1,299,401
---------------
PROPERTY & CASUALTY INSURANCE--4.3%
1,300,000 General RE Corporation
4.02% 1/17/06 1,297,678
---------------
PUBLISHING--5.1%
1,565,000 Gannett Company
4.13% 1/4/06 1,564,461
---------------
SPECIAL PURPOSE ENTITY--22.2%
CAFCO LLC:
1,200,000 4.27% 1/13/06~ 1,198,292
300,000 4.30% 2/16/06~ 298,352
1,300,000 Ciesco LLC
4.24% 1/23/06~ 1,296,608
1,300,000 Metlife Funding, Inc.
4.20% 1/4/06 1,299,545
1,200,000 Nestle Capital Corporation
4.12% 1/9/06~ 1,198,901
1,500,000 Prudential Funding
4.26% 1/24/06 1,495,918
---------------
6,787,616
---------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$28,106,353) 28,106,353
---------------
TOTAL INVESTMENTS--99.7%
(TOTAL COST--$30,553,411) 30,553,411
---------------
OTHER ASSETS AND LIABILITIES--0.3% 86,587
---------------
NET ASSETS--100.0% $ 30,639,998
===============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$8,837,928, OR 28.8%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
<Caption>
CATEGORY VALUE (%)
- -------------------------------------------------------------------------------------------------------------------------
U.S. Agency Discount Notes 8.00%
Corporate Short-Term Notes 91.70%
Other 0.30%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<Page>
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 2005
<Table>
<Caption>
GOVERNMENT MONEY
SECURITIES FUND MARKET FUND
ASSETS
Investment securities, at cost $ 8,747,299 $ 30,553,411
----------------- -----------------
Investment securities, at market 8,910,382 30,553,411
Cash 80,238 124,958
Receivables:
Capital shares sold 26,569 58,640
Dividends and interest 116,473 0
Other assets 104,895 53,842
----------------- -----------------
Total Assets 9,238,557 30,790,851
----------------- -----------------
LIABILITIES
Payables and other accrued liabilities:
Capital shares redeemed 39,024 59,549
Advisory fees 2,761 11,783
Shareholder servicing fees 1,669 4,990
Accounting fees 250 920
Distribution fees 283 0
Transfer agency fees 597 2,492
Custodian fees 129 326
Directors' deferred compensation 104,895 53,842
Other 7,846 16,239
Dividends 1,526 712
----------------- -----------------
Total Liabilities 158,980 150,853
----------------- -----------------
Net Assets $ 9,079,577 $ 30,639,998
================= =================
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 9,025,201 $ 30,636,332
Undistributed net investment income 66,699 24,819
Accumulated net realized loss from security
and foreign currency transactions (176,800) (21,153)
Net unrealized appreciation on investments
and foreign currency translation 164,477 0
----------------- -----------------
Total $ 9,079,577 $ 30,639,998
================= =================
CLASS F
Net Assets $ 9,079,577 $ 30,639,998
Shares Outstanding 932,818 30,639,998
Net Asset Value, Offering and Redemption Price Per Share $ 9.73 $ 1.00
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<Page>
STATEMENTS OF OPERATIONS
For the year ended December 31, 2005
<Table>
<Caption>
GOVERNMENT MONEY
SECURITIES FUND MARKET FUND
INVESTMENT INCOME
Interest $ 474,672 $ 1,068,853
----------------- -----------------
Total Investment Income 474,672 1,068,853
----------------- -----------------
EXPENSES
Advisory fees--Note 2 63,965 166,919
Shareholder servicing fees--Note 2 18,400 60,629
Accounting fees--Note 2 3,154 10,783
Distribution fees--Note 2 24,602 0
Transfer agency fees--Note 2 8,178 23,331
Registration fees 13,769 19,923
Postage and mailing expenses 823 8,653
Custodian fees and expenses--Note 2 2,362 2,913
Printing expenses 5,219 23,481
Legal and audit fees 2,859 11,736
Directors' fees and expenses--Note 2 3,038 6,987
Other expenses 12,375 24,410
----------------- -----------------
Total Expenses 158,744 359,765
Earning Credits (2,084) (2,842)
Reimbursed/Waived Expenses (52,141) (17,825)
----------------- -----------------
Net Expenses 104,519 339,098
----------------- -----------------
Net Investment Income 370,153 729,755
----------------- -----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITY
TRANSACTIONS AND FOREIGN CURRENCY TRANSACATIONS
Net Realized Gain on:
Security Transactions 19,878 0
Foreign Currency Transactions 1,407 0
----------------- -----------------
Net Realized Gain 21,285 0
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation (267,196) 0
----------------- -----------------
Net Realized and Unrealized Loss (245,911) 0
----------------- -----------------
Net Increase in Net Assets Resulting from Operations $ 124,242 $ 729,755
================= =================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
GOVERNMENT MONEY
SECURITIES FUND MARKET FUND
-------------------------------- --------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
OPERATIONS
Net Investment Income $ 370,153 $ 386,716 $ 729,755 $ 193,011
Net Realized Gain
on Security and Foreign
Currency Transactions 21,285 75,280 0 0
Net Change in Unrealized
Appreciation/Depreciation
of Investments and Foreign
Currency Translation (267,196) (144,437) 0 0
-------------- -------------- -------------- --------------
Net Increase in Net Assets
Resulting from Operations 124,242 317,559 729,755 193,011
-------------- -------------- -------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From Net Investment
Income Class F (371,480) (386,716) (729,755) (193,011)
-------------- -------------- -------------- --------------
Net Decrease from Dividends
and Distributions (371,480) (386,716) (729,755) (193,011)
-------------- -------------- -------------- --------------
CAPITAL SHARE TRANSACTIONS
Net Decrease from Capital
Share Transactions--
Class F Note 4 (809,502) (2,603,251) (5,417,713) (9,036,232)
-------------- -------------- -------------- --------------
Net Decrease in Net Assets (1,056,740) (2,672,408) (5,417,713) (9,036,232)
-------------- -------------- -------------- --------------
NET ASSETS
Beginning of year $ 10,136,317 $ 12,808,725 $ 36,057,711 $ 45,093,943
-------------- -------------- -------------- --------------
End of year $ 9,079,577 $ 10,136,317 $ 30,639,998 $ 36,057,711
============== ============== ============== ==============
Undistributed Net
Investment Income $ 66,699 $ 4,005 $ 24,819 $ 21,324
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<Page>
GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 9.97 $ 10.04 $ 10.18 $ 9.55 $ 9.41
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.37 0.35 0.34 0.38 0.45
Net realized and unrealized gains
(losses) on securities (0.24) (0.07) (0.14) 0.63 0.14
----------------------------------------------------------------------
Total from investment operations 0.13 0.28 0.20 1.01 0.59
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.37) (0.35) (0.34) (0.38) (0.45)
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions (0.37) (0.35) (0.34) (0.38) (0.45)
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 9.73 $ 9.97 $ 10.04 $ 10.18 $ 9.55
======================================================================
TOTAL RETURN 1.35% 2.83% 2.03% 10.86% 6.37%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 9,080 $ 10,136 $ 12,809 $ 15,318 $ 11,967
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(a) 1.08% 0.89% 0.95% 0.93% 1.00%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.06% 0.88% 0.94% 0.92% 0.98%
Net investment income 3.76% 3.47% 3.36% 3.90% 4.67%
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(b) 29% 13% 52% 28% 73%
</Table>
(a) CERTAIN FEES WERE WAIVED BY THE MANAGEMENT COMPANY OR ITS AFFILIATES. HAD
THESE FEES NOT BEEN WAIVED, THE EXPENSE RATIOS WOULD HAVE BEEN 1.61% (2005),
1.45% (2004), 1.50% (2003), 1.48% (2002), AND 1.50% (2001).
(b) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.02 0.00(a),(b) 0.00(a),(b) 0.01 0.03
Net realized and unrealized gains
(losses) on securities 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------------------------
Total from investment operations 0.02 0.00 0.00 0.01 0.03
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.02) 0.00(c) 0.00(c) (0.01) (0.03)
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------------------------
Total distributions (0.02) 0.00 0.00 (0.01) (0.03)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
==============================================================================
TOTAL RETURN 2.23% 0.50% 0.34% 0.98% 3.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 30,640 $ 36,058 $ 45,094 $ 60,086 $ 75,928
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(d) 1.03% 0.88% 0.83% 0.80% 0.79%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.02% 0.87% 0.83% 0.80% 0.79%
Net investment income 2.19% 0.48% 0.35% 0.98% 3.38%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) NET INVESTMENT INCOME FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(c) DISTRIBUTIONS FROM NET INVESTMENT INCOME FOR THE YEARS ENDED DECEMBER 31,
2004 AND 2003 AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(d) CERTAIN FEES WERE WAIVED BY THE MANAGEMENT COMPANY OR ITS AFFILIATES. HAD
THESE FEES NOT BEEN WAIVED, THE EXPENSE RATIOS WOULD HAVE BEEN 1.08% (2005),
0.96% (2004), 0.91% (2003), 0.87% (2002), AND 0.84% (2001).
SEE NOTES TO FINANCIAL STATEMENTS.
18
<Page>
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds. All of the Company's
series Funds are diversified portfolios. The following notes pertain to Dreyfus
Founders Government Securities Fund and Dreyfus Founders Money Market Fund
(individually, a "Fund" and collectively, the "Funds"). The Funds offer Class F
shares. The following significant accounting policies have been consistently
followed by the Funds in the preparation of their financial statements.
SECURITY VALUATIONS--The Company's board of directors has adopted a policy that
requires that Money Market Fund use its best efforts, under normal
circumstances, to maintain a constant net asset value of $1.00 per share using
the amortized cost method. The amortized cost method involves valuing each
security at its cost and thereafter accruing any discount or premium at a
constant rate to maturity.
Debt securities held by Government Securities Fund with a remaining maturity
greater than 60 days at the time of purchase are valued in accordance with the
evaluated bid prices supplied by a pricing service approved by the Company's
board of directors or, if such prices are not available, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers. Debt securities with a remaining maturity of 60 days or less at the
time of purchase are valued at amortized cost, which approximates market value,
unless it is determined that amortized cost would not represent market value, in
which case the securities would be marked to market. Premiums and discounts are
amortized on all debt securities.
If market quotations are not readily available or are determined not to reflect
accurately fair value, securities will be valued at their fair value as
determined in good faith by the Company's board of directors or pursuant to
procedures approved by the board of directors. These situations may include
instances where an event occurs after the close of the market on which a
security is traded but before the Fund calculates its net asset value, and it is
determined that the event has materially affected the value of the security.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
Since February 22, 2005, New York closing exchange rates have been used to
convert foreign currencies to U.S. dollars. Previously, London closing exchange
rates were used to convert foreign currencies to U.S. dollars.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
19
<Page>
U.S. GOVERNMENT OBLIGATIONS--Some U.S. government obligations, such as
Government National Mortgage Association (GNMA) pass-through certificates, are
supported by the full faith and credit of the United States Treasury. Other
obligations, such as securities of the Federal Home Loan Bank (FHLB), are
supported by the right of the issuer to borrow from the United States Treasury;
and others, such as bonds issued by Federal National Mortgage Association (FNMA,
a private corporation), are supported only by the credit of the agency,
authority or instrumentality, although the Secretary of the Treasury has
discretionary authority, though not the obligation, to purchase obligations of
FNMA.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Funds may invest at least a
portion of their assets in foreign securities. Foreign securities carry more
risk than U.S. securities, such as political and currency risks. In the event a
Fund executes a foreign security transaction, the Fund may enter into a foreign
currency contract to settle the foreign security transaction. The Funds could be
exposed to risk if counterparties are unable to meet the terms of the contracts
or if the value of the currency changes unfavorably to the U.S. dollar. The
resultant foreign currency gain or loss from the contract is recorded as foreign
currency gain or loss and is presented as such in the Statement of Operations.
The accounting records of the Funds are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each
business day. Purchases and sales of investment securities and income and
expense items denominated in foreign currencies are translated into U.S. dollar
amounts on the respective dates of such transactions.
The Funds do not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net unrealized gain or loss from investments and foreign
currency translations on the Statements of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Funds' books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized appreciation or depreciation on investments and foreign
currency translation arise from changes in the values of assets and liabilities,
including investments in securities held at the date of the financial
statements, resulting from changes in the exchange rates and changes in market
prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Funds to comply with the requirements of subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve them
from all income taxes. The Funds are treated as separate tax entities for
federal income tax purposes.
20
<Page>
INVESTMENT INCOME--Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities.
DISTRIBUTIONS TO SHAREHOLDERS--Dividends are declared daily and distributed
monthly from net investment income, and net realized capital gains (if any) are
distributed annually. Dividends and distributions, which are determined in
accordance with income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Fund bears expenses incurred specifically on its behalf and, in
addition, each Fund bears a portion of the Company's general expenses based on
the relative net assets or the number of shareholder accounts of each Fund. The
type of expense determines the allocation method.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specific
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Funds. Founders is an indirect wholly-owned subsidiary of Mellon
Financial Corporation, a publicly-owned financial services company which
provides a comprehensive range of financial products and services in domestic
and selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Funds compensate Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the respective Fund's net assets.
The fee is 0.65% of the first $250 million of net assets, and 0.50% of the net
assets in excess of $250 million for Government Securities Fund and 0.50% of the
first $250 million of net assets, 0.45% of the next $250 million of net assets,
0.40% of the next $250 million of net assets and 0.35% of the net assets in
excess of $750 million for Money Market Fund.
Founders has contractually agreed in writing to waive the portion of its
management fee for the Government Securities Fund that exceeds 0.35% of the
first $250 million of average net assets and 0.20% of the average net assets in
excess of $250 million. Founders has also contractually agreed in writing to
waive the portion of its
21
<Page>
management fee for the Money Market Fund that exceeds 0.45% of the first $250
million of average net assets, 0.40% of the next $250 million of average net
assets, 0.35% of the next $250 million of average net assets, and 0.30% of
average net assets in excess of $750 million. These waivers will extend through
at least August 31, 2006, and will not be terminated without prior notice to the
Company's board of directors. During the year ended December 31, 2005, Founders
waived $29,522 and $16,692 for Government Securities Fund and Money Market Fund,
respectively.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES--The Company has a shareholder
services agreement with Dreyfus Service Corporation ("DSC"), the direct owner of
Founders and a wholly-owned subsidiary of The Dreyfus Corporation ("Dreyfus", an
affiliate of Founders), whereby the Funds have agreed to compensate DSC for
providing certain shareholder servicing functions to holders of Class F shares.
Each Fund paid DSC a monthly fee equal, on an annual basis, to $24.00 per Class
F shareholder account of the Fund considered to be an open account at any time
during a given month. During the year ended December 31, 2005, Government
Securities Fund and Money Market Fund were charged $18,400 and $60,629,
respectively, pursuant to this shareholder services agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for the Funds. With the exception of
out-of-pocket charges, the fees charged by DTI are paid by DSC. The
out-of-pocket charges from DTI are paid by the Funds. During the year ended
December 31, 2005, Government Securities Fund and Money Market Fund were charged
$7,501 and $23,331, respectively, for out-of-pocket transfer agent charges.
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the processing of shareholder transactions in the Funds.
During the year ended December 31, 2005, Government Securities Fund and Money
Market Fund were charged $241 and $822, respectively, for cash management fees,
which are included in the out-of-pocket transfer agency charges above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Funds, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, Government Securities Fund and Money Market Fund paid $677
and $0, respectively, to these entities for such services. These amounts are
included in the transfer agency fees shown on the Statement of Operations.
DISTRIBUTION PLAN--DSC also is the distributor of the Funds' shares. Government
Securities Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class F shares. Under the plan, Government Securities
Fund is authorized to reimburse DSC for expenses paid for distributing or
servicing its Class F shares at an annual rate of up to 0.25% of the value of
the average daily net assets of the Fund's Class F shares. During the year ended
December 31, 2005, $22,235 in expenses eligible for reimbursement under the plan
were absorbed by Founders, which resulted in the Fund paying 0.02% under this
plan. The 12b-1 fees for
22
<Page>
Government Securities Fund in excess of those needed to compensate third parties
for distributing the Fund or servicing Fund shareholders will continue to be
absorbed by Founders through at least August 31, 2006. This written contractual
commitment will not be terminated without prior notice to the Company's board of
directors.
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance monitoring, regulatory and shareholder reporting, as well as related
facilities, equipment and clerical help. The fee for each fund is its respective
pro rata share (based on the relative average daily net assets of all ten of the
Company's series) of a fee computed at the annual rate of 0.06% of the average
daily net assets of the ten series, taken as a whole, from $0 to $500 million
and 0.02% of the net assets of the ten series, taken as a whole, in excess of
$500 million. The Funds also reimburse Founders for reasonable out-of-pocket
expenses. Founders has contractually agreed in writing to waive any fees
received for these services to the extent they exceed Founders' costs in
providing the services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Funds. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Funds held by the custodian, which are shown as earnings credits on the
Statements of Operations. The Funds could have employed these assets elsewhere
to produce income had they not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Company during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
-------------------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among all series funds of the Company in proportion
to their respective shares of the total custodian fee. For the year ended
December 31, 2005, the fee waivers for Government Securities Fund and Money
Market Fund were $384 and $1,133, respectively, which reduced the amounts paid
to Mellon Bank to $1,978 and $1,780, respectively.
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of one or more of the Company's ten series. The amount paid to the
director under the plan will be determined based upon the performance of the
selected series. The current value of these amounts is included in Other Assets
and Directors' Deferred Compensation on the Statement of Assets and Liabilities.
Changes in market value are included in the Directors' fees and expenses and the
net change in unrealized appreciation/depreciation of investments on the
Statements of Operations. Deferral of directors' fees under the plan does not
affect the net assets of the Funds.
23
<Page>
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Funds, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally accepted in the United States of America. These differences
are due to differing treatments for items such as foreign currency transactions,
paydowns, excise tax paid, deferred compensation and capital loss carryovers.
Permanent differences identified during the year ended December 31, 2005 have
been reclassified among the components of net assets as follows:
<Table>
<Caption>
GOVERNMENT MONEY
SECURITIES FUND MARKET FUND
---------------------------------------------------------------------------------------
Undistributed Net Investment Income $ 64,021 $ 3,495
Undistributed Net Realized Gains
and Losses $ (64,021) $ (1,720)
---------------------------------------------------------------------------------------
Paid-In Capital $ 0 $ (1,775)
---------------------------------------------------------------------------------------
</Table>
The tax character of distributions paid during 2005 and 2004 was as follows:
<Table>
<Caption>
2005 2004
----------------------------------
GOVERNMENT SECURITIES FUND:
DISTRIBUTIONS PAID FROM:
Ordinary Income $ 371,480 $ 386,716
Long-Term Capital Gain $ 0 $ 0
----------------------------------
$ 371,480 $ 386,716
==================================
MONEY MARKET FUND:
DISTRIBUTIONS PAID FROM:
Ordinary Income $ 729,755 $ 193,011
Long-Term Capital Gain $ 0 $ 0
----------------------------------
$ 729,755 $ 193,011
==================================
</Table>
The tax components of capital represent distribution requirements the Funds must
satisfy under the income tax regulations and losses or tax deductions the Funds
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of December 31,
24
<Page>
2005, represent capital loss carryovers that may be available to offset future
realized capital gains and thereby reduce future taxable gains distributions.
Post-October 31 foreign currency losses noted below, if any, may be used to
offset future net investment income and thereby reduce future ordinary income
distributions. Net capital loss carryovers utilized during 2005 by the
Government Securities Fund and Money Market Fund amounted to $0 and $0,
respectively. Accumulated capital losses as of December 31, 2005 were:
GOVERNMENT SECURITIES FUND
<Table>
<Caption>
EXPIRATION AMOUNT
------------------------------------------------------------------------------
2008 $ 134,064
2013 17,045
-----------
$ 151,109
===========
</Table>
MONEY MARKET FUND
<Table>
<Caption>
EXPIRATION AMOUNT
------------------------------------------------------------------------------
2007 $ 5,448
2008 $ 11,357
2009 $ 2,628
2013 $ 191
-----------
$ 19,624
===========
</Table>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The primary difference between book and tax appreciation or depreciation
is wash sale loss deferrals.
<Table>
<Caption>
GOVERNMENT MONEY
SECURITIES FUND MARKET FUND
---------------------------------------------------------------------------------------
Post-October Capital Loss Deferral $ (25,691) $ (1,529)
Undistributed Ordinary Income $ 71,571 $ 34,067
Other Book/Tax Differences $ (3,478) $ (9,248)
Federal Tax Cost $ 8,747,299 $ 30,553,411
Gross Tax Appreciation of Investments $ 259,867 $ 0
Gross Tax Depreciation of Investments $ (96,784) $ 0
Net Tax Appreciation $ 163,083 $ 0
</Table>
25
<Page>
4. CAPITAL SHARE TRANSACTIONS
Government Securities Fund is authorized to issue 100 million shares of $0.01
par value capital stock. Money Market Fund is authorized to issue 2 billion
shares of $0.01 par value capital stock. Transactions in shares of the Funds for
the periods indicated were as follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
GOVERNMENT SECURITIES FUND--CLASS F:
Sold 189,954 $ 1,875,877 129,420 $ 1,294,299
Dividends or Distributions Reinvested 35,516 $ 349,654 36,368 $ 362,947
Redeemed (308,891) $ (3,035,033) (425,657) $ (4,260,497)
--------------------------------------------------------------------
Net Decrease (83,421) $ (809,502) (259,869) $ (2,603,251)
====================================================================
MONEY MARKET FUND--CLASS F:
Sold 12,274,691 $ 12,274,691 18,101,032 $ 18,101,032
Dividends or
Distributions Reinvested 714,857 $ 714,857 188,293 $ 188,293
Redeemed (18,407,261) $ (18,407,261) (27,325,557) $ (27,325,557)
--------------------------------------------------------------------
Net Decrease (5,417,713) $ (5,417,713) (9,036,232) $ (9,036,232)
====================================================================
</Table>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $0 and $261,421, respectively, for Government Securities Fund. Purchases
and sales of long-term U.S. government obligations were $2,527,027 and
$2,463,403, respectively, for Government Securities Fund.
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Funds did not have any borrowings under the
LOC.
26
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders Government
Securities Fund and Dreyfus Founders Money Market Fund (two of the portfolios
constituting Dreyfus Founders Funds, Inc., hereafter referred to as the "Funds")
at December 31, 2005, the results of each of their operations for the year then
ended, the changes in each of their 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. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
27
<Page>
OTHER TAX INFORMATION
(UNAUDITED)
CORPORATE DIVIDENDS RECEIVED DEDUCTION
Dividends paid by the Funds from net investment income and distributions of net
realized short-term capital gains are, for federal tax purposes, taxable as
ordinary income to shareholders. Of the ordinary income distributions declared
for the year ended December 31, 2005, 0% qualified for the dividends received
deduction available to the Fund's corporate shareholders.
QUALIFIED DIVIDEND INCOME
For the year ended December 31, 2005, the Funds designated 0% of the ordinary
income distributions paid as qualified dividend income subject to reduced income
tax rates for taxpayers with taxable accounts.
28
<Page>
FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
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The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services being
provided to the Funds are satisfactory, as evidenced in part by the recent
performance records of the Funds, to which the directors gave significant
attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to the
Funds, but also recognize that Founders or its affiliates have provided the
highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively small group of funds selected by Lipper and a larger
universe of funds also selected by Lipper. The Lipper materials further included
graphs depicting each Fund's Class F
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one-year and annualized performance results for two-, three-, four-, five-, and
ten-year periods, if applicable, in comparison to the Fund's performance group
and performance universe.
GOVERNMENT SECURITIES FUND. The Fund's performance for the one-year period ended
December 31, 2004 placed it in the second quintile of its Lipper performance
group, with the Fund ranking fourth out of 11 Lipper-selected "peer funds," and
in the second quintile of its Lipper intermediate U.S. government fund
performance universe, ranking 34th of 90 funds. The Fund's performance within
its Lipper-selected group and universe had been in the second quintile for the
two-year period ended December 31, 2004. For the three-year period ended on that
date, the Fund's performance within its Lipper-selected group had been in the
first quintile, and had been in the second quintile within its Lipper-selected
universe. The Fund's performance relative to its Lipper-selected group and
universe had, therefore, remained relatively stable throughout the past three
years. The directors deemed these relative performance results to be very
satisfactory, and stressed the importance to Founders of the need to seek to
maintain a strong performance record.(1)
MONEY MARKET FUND. The Fund's performance for the one-year period ended December
31, 2004 placed it in the fourth quintile of its Lipper performance group, with
the Fund ranking 12th out of 15 Lipper-selected "peer funds," and in the fourth
quintile of its Lipper money market fund performance universe, ranking 230th of
377 funds. For the two- and three-year periods ended on December 31, 2004, the
Fund's performance within its Lipper-selected group and universe had placed it
in the fourth quintile. Although the directors stressed the importance to
Founders of the need for the Fund to provide its investors with a satisfactory
yield, the directors further recognized that the Fund is managed in a
conservative manner to minimize the risk to investors of a loss of any of their
investment capital. They further were aware that the Fund primarily serves as a
vehicle to shareholders in other Funds who wish to maintain their investments in
a money market fund for defensive purposes during periods of market volatility
or for other investment-related reasons. Accordingly, the directors deemed the
Fund's relative performance results to be acceptable.(1)
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THESE RANKINGS REFLECT
APPLICABLE FEE WAIVERS.
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At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance
difficulties, more recent performance results generally have shown
significant improvement; Founders has focused its efforts upon improving the
performance records of the Funds and will continue to seek improvement; and
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing in
the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY
FOUNDERS AND ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
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GOVERNMENT SECURITIES FUND. The directors noted that for the period ended
December 31, 2004, Government Securities Fund's management fees ranked in the
first (best) quintile of its Lipper competitive expense group, with the Fund's
fees the third lowest of 11 "peer funds." The Fund's contractual management fees
at a common asset level were determined by Lipper to be higher than all but two
of the 11 funds in its group. The Fund's management fees were in the first
(best) quintile of its Lipper expense universe, placing fifth lowest of 30
funds.
Although the directors observed that the Fund's contractual management fee level
was higher than most of the funds in its expense group, they further recognized
that Founders had agreed to waive the portion of the management fee for
Government Securities Fund that would exceed 0.35% of the first $250,000,000 of
the Fund's average net assets and 0.20% of the Fund's average net assets in
excess of $250,000,000 through at least August 31, 2006.
MONEY MARKET FUND. The directors noted that for the period ended December 31,
2004, Money Market Fund's management fees ranked in the fourth quintile of its
Lipper competitive expense group, with the Fund's fees placing 10th of 15 "peer
funds." The Fund's contractual management fees at a common asset level were
determined by Lipper to be lower than 10 of the 15 in its group. The Fund's
management fees were in the fourth quintile of its Lipper expense universe,
placing 90th lowest of 138 funds.
Although the directors recognized that Money Market Fund's management fees were
higher than many of its peer funds selected by Lipper, the directors further
noted that Founders had agreed to waive the portion of its management fee for
the Fund that exceeds 0.45% of the first $250,000,000 of the Fund's average net
assets, 0.40% of the next $250,000,000 of the Fund's average net assets, 0.35%
of the next $250,000,000 of such assets, and 0.30% of the Fund's average net
assets in excess of $750,000,000 through at least August 31, 2006.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain
efficiencies in performing the portfolio management, trading and operational
functions related to those accounts (the directors recognized that in
determining its profitability from providing investment management and other
services to the Funds, Founders allocated its expenses between the Funds and
other accounts in a manner which was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment
services to any of the clients it advises, not just the Funds. The directors
recognized that Founders'
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profitability would be lower if it did not receive research and brokerage
services in connection with these brokerage transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors observed that
this Fund, Dreyfus Founders Money Market Fund, had experienced increased overall
expenses due to a decline in the Fund's assets. The directors were advised that
in all probability, the Funds' 2005 expense ratios will be higher than their
expense ratios in 2004, primarily due to a decline in the asset levels of the
Funds.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders' management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the investment advisory fees received by
Founders. However, the directors noted that Founders' profitability is expected
to decline in 2005 as a result of declines in Fund asset levels. The directors
also considered the risks assumed by Founders in providing management services
to the Funds, including the risk that the management agreement can be terminated
by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of
investment advisory fees paid by the Funds are competitive;
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- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially
fees which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than fees
arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in recognition of the quality service
which Founders has provided and continues to provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of scale if the assets of the Funds were to increase. Among other information,
the directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into increased
profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
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- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of an
increase in the assets of a particular Fund or a group of Funds would not be
passed along on a dollar-for-dollar basis to the shareholders of other Funds
that did not experience increases in their assets to points above their
breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is
consistent with its objective of sharing its economies of scale with the
Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
restrictions. The directors determined that Founders is dedicated to compliance
with all applicable rules and regulations and that the systems of controls which
are in place to ensure that the service providers to the Funds, including
Founders, and the Funds themselves, maintain strict adherence to the law are
excellent.
OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years and that efforts are being and will continue to be
made to enhance such improvement and to maintain Fund expense ratios at
reasonable and competitive levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
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YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
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Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice
President--Compliance since 2002. Formerly, Founders' Manager of Compliance
(2000 to 2002) and Securities Compliance Examiner, Staff Accountant and Team
Leader for the U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
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DREYFUS FOUNDERS FUNDS
PROXY VOTING INFORMATION
A description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities, and information regarding how
the Funds voted these proxies for the 12-month period ended June 30, 2005, is
available through the Funds' website at www.founders.com and on the Securities
and Exchange Commission's (SEC) website at www.sec.gov. The description of the
policies and procedures is also available without charge, upon request, by
calling 1-800-525-2440.
PORTFOLIO HOLDINGS
The Funds file their complete schedule of portfolio holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q. The Funds' Forms
N-Q are available on the SEC's website at www.sec.gov and may be reviewed and
copied at the SEC's Public Reference Room in Washington, DC. Information on the
operation of the SEC's Public Reference Room may be obtained by calling
1-800-SEC-0330.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
Dreyfus Service Corporation, Distributor.
(C)2006 Founders Asset Management LLC. 2/06
A-646-GMM-05
ANNUAL REPORT
[GRAPHIC]
DREYFUS FOUNDERS
GROWTH FUND
INVESTMENT UPDATE
DECEMBER 31, 2005
[DREYFUS FOUNDERS FUNDS(R) LOGO]
THE GROWTH SPECIALISTS
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 10
Statement of Investments 12
Statement of Assets and Liabilities 17
Statement of Operations 19
Statements of Changes in Net Assets 20
Financial Highlights 21
Notes to Financial Statements 27
Report of Independent Registered Public Accounting Firm 36
Other Tax Information 37
Factors Considered in Renewing the Advisory Agreement 38
Your Board Representatives 46
</Table>
PAPERLESS DELIVERY OF THIS REPORT
{GRAPHIC]
Did you know you can reduce your postal mail by accessing Dreyfus Founders Funds
regulatory material online? It's a simple, reliable process: when new documents
such as this financial report are available, we'll send you an email
notification containing a convenient link that will take you directly to that
Fund information on our website.
To take advantage of this service, simply inform us online of your decision
to receive materials through the Founders E-Communications Program. Cut down on
mailbox clutter and help the Fund reduce printing and postage charges by
enrolling today at www.founders.com/ecommunications. If you own Funds through a
third party, enroll at www.icsdelivery.com.
INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
manager only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-9 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC-INSURED - NOT BANK-GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF JOHN B. JARES]
A DISCUSSION WITH PORTFOLIO MANAGER JOHN B. JARES, CFA, REGARDING FUND
PERFORMANCE FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2005.
ECONOMIC COUNTERBALANCE
2005 was a year of robust economic and corporate profit growth. Employment
levels improved, the housing market remained resilient, and consumer spending
continued to advance at a steady pace. However, the year also saw the Federal
Reserve raising the federal funds rate to end the period at 4.25%, and
skyrocketing energy prices reaching record highs.
The stock market oscillated slightly for most of the period. Fortunately, a
fourth quarter rally enabled the market to finish the calendar year in positive
territory.
STOCK SELECTION DROVE PERFORMANCE
The period saw no investment strategy shifts in the Fund, as we continued to
search for growth-stock opportunities using a fundamental-based, bottom-up
approach. We continued to explore investment theses and meet with company
management teams in an attempt to assemble the greatest growth potential for
Fund shareholders. This approach led to positive stock picking overall for the
period, although relative weightings partially offset this gain. For the
12-month period ended December 31, 2005, the Dreyfus Founders Growth Fund
underperformed its benchmark, the Russell 1000 Growth Index, which returned
5.26%.
[SIDENOTE]
"OUR INVESTMENT APPROACH LED TO POSITIVE STOCK PICKING OVERALL FOR THE PERIOD,
ALTHOUGH RELATIVE WEIGHTINGS PARTIALLY OFFSET THIS GAIN."
3
<Page>
IT, INDUSTRIALS AND CONSUMER STAPLES BOOSTED FUND PERFORMANCE
The Fund's relative performance was driven by strong selection of investments in
the information technology (IT) sector, the transportation industry within the
industrials sector, and the consumer staples sector.
The information technology sector offered numerous growth opportunities.
Driven by the popularity of the company's line of iPod digital music players and
the increased popularity of its Macintosh computers, APPLE COMPUTER, INC. had a
triple-digit stock price increase for the period. Broadcom Corporation saw
excellent demand for its semiconductors used in wireless networking,
communications and industrial applications. AUTODESK, INC., driven by demand and
market share for its CAD/CAM software products, combined with improving
operating margins, experienced better-than-expected revenue and earnings growth
rates. SanDisk, inc. and ADOBE SYSTEMS, INC. were other notable strong
performers in the information technology sector.
Railroad and airline companies within the industrials sector's
transportation industry began to see pricing power, partially driven by the
ability to pass along higher fuel costs, but primarily as a result of controlled
capacity growth. UNION PACIFIC CORPORATION had a double-digit stock price
increase during the period. AMR CORPORATION, parent company of American
Airlines, experienced better-than-expected financial returns due to improved
pricing driven by industry consolidation and the company management's ability to
reign in costs. US AIRWAYS GROUP, INC. saw improved pricing due to industry
consolidation and its merger with America West Airlines, allowing for the
elimination of duplicate costs.
[SIDENOTE]
SECTORS BENEFITING THE FUND
Information Technology
Industrials
Consumer Staples
4
<Page>
Consumer staples holding Gillette Company was acquired during the period by
PROCTER & GAMBLE COMPANY for a significant premium, which aided the Fund's
return. Healthcare issue GENENTECH, INC. had solid revenue and earnings growth
driven by the sales of its cancer treatment, Avastin(R).
UNDERWEIGHT POSITIONS DRAINED RELATIVE PERFORMANCE
Relative underweight positions and poor stock picking in both the healthcare and
energy sectors produced the largest drain on the Fund's relative performance.
One stock that underperformed for the Fund during the period was healthcare
issue MGI PHARMA, INC. Uneven sales trends for the company's chemotherapy drug,
Aloxi(R), paired with a FDA approval delay for one of the company's new drugs
drove the stock price lower.
In the telecommunications services sector, weak individual performers such
as Avaya, Inc. hampered the Fund. A difficult integration of a German
acquisition combined with volatile growth trends led to Avaya's sub-par
performance. The Fund exited its position in this company during the period.
LARGEST EQUITY HOLDINGS (ticker symbol)
<Table>
1. MICROSOFT CORPORATION (MSFT) 5.24%
2. GENERAL ELECTRIC COMPANY (GE) 3.32%
3. GOOGLE, INC. CLASS A (GOOG) 3.24%
4. COLGATE-PALMOLIVE COMPANY (CL) 2.52%
5. ACCENTURE LIMITED CLASS A (ACN) 2.15%
6. LINEAR TECHNOLOGY CORPORATION (LLTC) 2.05%
7. JOHNSON & JOHNSON (JNJ) 2.04%
8. APPLE COMPUTER, INC. (AAPL) 1.91%
9. COMCAST CORPORATION SPECIAL CLASS A (CMCSK) 1.90%
10. PROCTER & GAMBLE COMPANY (PG) 1.87%
</Table>
Portfolio holdings are subject to change, and should not be construed as a
recommendation of any security.
5
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 1-800-525-2440 TO OBTAIN THE MOST
RECENT MONTH-END PERFORMANCE DATA.
[CHART]
Dreyfus Founders
Growth Fund S&P 500 Russell 1000
Class F Shares Index Growth Index
12/31/1995 $10,000.00 $10,000.00 $10,000.00
12/31/1996 $11,656.55 $12,296.03 $12,312.25
12/31/1997 $14,755.97 $16,398.39 $16,066.13
12/31/1998 $18,449.98 $21,084.82 $22,284.79
12/31/1999 $25,656.94 $25,521.39 $29,674.20
12/29/2000 $18,670.73 $23,197.82 $23,019.77
12/31/2001 $14,013.03 $20,440.57 $18,318.42
12/31/2002 $9,954.17 $15,923.09 $13,210.62
12/31/2003 $13,081.49 $20,490.57 $17,140.52
11/30/2004 $13,533.95 $21,972.70 $17,533.00
12/30/2005 $14,653.45 $23,836.25 $19,179.26
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders Growth Fund on 12/31/95 to a $10,000 investment made in unmanaged
securities indexes on that date. The Fund's performance assumes the reinvestment
of dividends and capital gain distributions, but does not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or redemption of
Fund shares. The Fund offers multiple classes of shares. Performance shown is
for Class F, which is open only to grandfathered investors. The Fund's
performance in the graph takes into account all applicable Class F fees and
expenses. THESE FIGURES DO NOT REFLECT THE MAXIMUM SALES CHARGES APPLICABLE TO
CLASS A, B, C, OR T SHARES OF THE FUND. FOR THESE SHARE CLASSES, APPLYING THESE
CHARGES WILL RESULT IN LOWER RETURNS FOR INVESTORS.
The Russell 1000 Growth Index is an unmanaged index that measures the
performance of those Russell 1000 companies with higher price-to-book ratios and
higher forecasted growth values. The Standard & Poor's (S&P) 500 Index is
designed to be representative of the U.S. equities market and consists of 500
leading companies in leading industries of the U.S. economy. The total return
figures cited for these indexes assume change in security prices and
reinvestment of dividends, but do not reflect the costs of managing a mutual
fund. In future annual reports, the Fund's performance will no longer be
compared to the S&P 500 Index, as the Russell 1000 Growth Index is more
reflective of the Fund's growth style of investing. Further information related
to Fund performance is contained elsewhere in this report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (INCEPTION DATE) YEAR YEARS YEARS INCEPTION
- ----------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) (1.98%) (5.95%) -- (9.90%)
Without sales charge 3.98% (4.82%) -- (9.00%)
B SHARES (12/31/99)
With redemption* (0.84%) (5.92%) -- (9.80%)
Without redemption 3.16% (5.54%) -- (9.67%)
C SHARES (12/31/99)
With redemption** 2.16% (5.57%) -- (9.69%)
Without redemption 3.16% (5.57%) -- (9.69%)
F SHARES (1/5/62) 4.08% (4.73%) 3.90% N/A
R SHARES (12/31/99) 4.54% (4.50%) -- (8.70%)
T SHARES (12/31/99)
With sales charge (4.50%) (1.50%) (6.47%) -- (10.34%)
Without sales charge 3.15% (5.61%) -- (9.64%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, and
adjustments for financial statement purposes. Part of the Fund's historical
performance is due to amounts received from class action settlements regarding
prior Fund holdings. There is no guarantee that these settlement distributions
will occur in the future or have a similar impact on performance.
* The maximum contingent deferred sales charge for Class B shares is 4% and is
reduced to 0% after six years, at which time the Class B shares convert to
Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
SELECT IT AND CONSUMER STOCKS CREATED A NEGATIVE IMPACT
Some of the Fund's best-performing stocks and some of its worst performers were
found in the information technology sector. Select IT names that were a drag on
the Fund's relative return included MAXIM INTEGRATED PRODUCTS, INC. and SYMANTEC
CORPORATION. The favorable demand and growth trends for Maxim's analog
semiconductor offerings were offset by concerns over the company's deteriorating
gross margins. Symantec declined as a result of the acquisition of VERITAS
Software Corporation, which was seen as dilutive to the company's revenue and
earnings growth rates. This, combined with the fear that consumer demand for
anti-virus software was waning, caused a drop in the company's stock price.
Xilinx, Inc., a manufacturer of digital programmable logic devices (PLD), and
International Business Machines Corporation also declined during the period.
Select consumer discretionary stocks did not fare well either. COMCAST
CORPORATION experienced a slow ramp-up into its cable telephony offering. This,
paired with sluggish trends in video services, resulted in the cable
[CHART]
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
Information Technology 31.41%
Consumer Discretionary 19.81%
Healthcare 12.65%
Industrials 10.07%
Financials 9.82%
Consumer Staples 9.00%
Telecommunications Services 1.68%
Materials 1.65%
Energy 1.32%
Other 2.59%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio manager
and are subject to change at any time, based on market and other conditions, and
should not be construed as a recommendation of any specific security.
[SIDENOTE]
SECTORS DETRACTING FROM THE FUND
Healthcare
Energy
Telecommunications Services
8
<Page>
company's stock losing substantial ground during the period. WAL-MART STORES,
INC. experienced sluggish sales trends as rising energy prices crimped the
spending power of bargain-conscious consumers, its target market. DREAMWORKS
ANIMATION SKG, INC. had a revenue shortfall from DVD sales of its follow-up
blockbuster movie, SHREK 2. In addition, higher spending levels resulted in
materially lower earnings-per-share results than were originally expected by
Wall Street analysts. The Fund, however, retained a position in all three stocks
at the end of the period as we believed the companies' respective growth
opportunities remained viable.
IN CONCLUSION
As we move into 2006, we will continue to monitor the Federal Reserve's actions
in seeking to contain inflation and how these may affect corporate profit
growth. In addition, we will continue to employ a bottom-up research approach to
selecting growth stocks that we believe have the potential to post superior
revenue and earnings growth.
/s/ John B. Jares
John B. Jares, CFA
Portfolio Manager
9
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
10
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- ---------------------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,038.61 $ 7.50
CLASS A HYPOTHETICAL 1,000.00 1,017.75 7.45
CLASS B ACTUAL 1,000.00 1,036.70 11.76
CLASS B HYPOTHETICAL 1,000.00 1,013.52 11.69
CLASS C ACTUAL 1,000.00 1,036.19 11.39
CLASS C HYPOTHETICAL 1,000.00 1,013.87 11.33
CLASS F ACTUAL 1,000.00 1,038.51 7.09
CLASS F HYPOTHETICAL 1,000.00 1,018.16 7.04
CLASS R ACTUAL 1,000.00 1,040.18 5.25
CLASS R HYPOTHETICAL 1,000.00 1,020.00 5.21
CLASS T ACTUAL 1,000.00 1,036.04 11.75
CLASS T HYPOTHETICAL 1,000.00 1,013.52 11.69
</Table>
*Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- ----------------------------------------------------------------
CLASS A 1.46%
CLASS B 2.29%
CLASS C 2.22%
CLASS F 1.38%
CLASS R 1.02%
CLASS T 2.29%
</Table>
11
<Page>
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (DOMESTIC)--98.0%
AIRLINES--2.2%
234,275 AMR Corporation* $ 5,207,906
71,025 US Airways Group, Inc.* 2,637,869
--------------
7,845,775
--------------
APPLICATION SOFTWARE--1.2%
100,575 Autodesk, Inc. 4,319,696
--------------
ASSET MANAGEMENT & CUSTODY BANKS--1.8%
84,725 Northern Trust Corporation 4,390,450
34,050 State Street Corporation 1,887,732
--------------
6,278,182
--------------
AUTOMOTIVE RETAIL--1.2%
94,475 Advance Auto Parts, Inc.* 4,105,884
--------------
BIOTECHNOLOGY--3.8%
35,675 Amgen, Inc.* 2,813,331
57,375 Genentech, Inc.* 5,307,188
26,100 Genzyme Corporation* 1,847,358
102,400 ImClone Systems, Inc.* 3,506,176
--------------
13,474,053
--------------
BROADCASTING & CABLE TV--2.2%
258,508 Comcast Corporation Special Class A* 6,641,071
35,700 XM Satellite Radio Holdings, Inc. Class A* 973,896
--------------
7,614,967
--------------
CASINOS & GAMING--1.0%
29,375 Harrah's Entertainment, Inc. 2,094,144
41,550 International Game Technology 1,278,909
--------------
3,373,053
--------------
COMMUNICATIONS EQUIPMENT--1.0%
150,475 Motorola, Inc. 3,399,230
--------------
COMPUTER & ELECTRONICS RETAIL--1.0%
81,337 Best Buy Company, Inc. 3,536,533
--------------
COMPUTER HARDWARE--3.0%
92,850 Apple Computer, Inc.* 6,674,987
133,575 Hewlett-Packard Company 3,824,252
--------------
10,499,239
--------------
COMPUTER STORAGE & PERIPHERALS--1.4%
358,400 EMC Corporation* 4,881,408
--------------
CONSUMER ELECTRONICS--0.5%
19,300 Harman International Industries, Inc. 1,888,505
--------------
CONSUMER FINANCE--1.4%
89,000 SLM Corporation 4,903,010
--------------
DATA PROCESSING & OUTSOURCED SERVICES--0.8%
62,525 Automatic Data Processing, Inc. 2,869,272
--------------
</Table>
12
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- --------------------------------------------------------------------------------
DEPARTMENT STORES--1.8%
33,625 J.C. Penney Company, Inc. $ 1,869,550
65,450 Kohl's Corporation* 3,180,870
33,925 Nordstrom, Inc. 1,268,795
--------------
6,319,215
--------------
ELECTRICAL COMPONENTS & EQUIPMENT--1.6%
73,550 Emerson Electric Company 5,494,185
--------------
ELECTRONIC EQUIPMENT MANUFACTURERS--0.9%
92,650 Agilent Technologies, Inc.* 3,084,319
--------------
EXCHANGE TRADED FUNDS--3.2%
113,825 iShares Russell 1000 Growth Index Fund 5,810,766
60,850 Nasdaq 100 Index Tracking Stock 2,459,557
21,200 SPDR Trust Series 1 2,637,916
--------------
10,908,239
--------------
GENERAL MERCHANDISE STORES--1.6%
153,825 Family Dollar Stores, Inc. 3,813,322
33,250 Target Corporation 1,827,753
--------------
5,641,075
--------------
HEALTHCARE EQUIPMENT--0.8%
48,825 Medtronic, Inc. 2,810,855
--------------
HEALTHCARE SERVICES--0.7%
42,025 Omnicare, Inc. 2,404,671
--------------
HEALTHCARE SUPPLIES--0.5%
34,875 DENTSPLY International, Inc. 1,872,439
--------------
HOME ENTERTAINMENT SOFTWARE--0.9%
56,825 Electronic Arts, Inc.* 2,972,516
--------------
HOME IMPROVEMENT RETAIL--1.5%
133,350 Home Depot, Inc. 5,398,008
--------------
HOTELS, RESORTS & CRUISE LINES--0.8%
50,975 Carnival Corporation 2,725,633
--------------
HOUSEHOLD PRODUCTS--5.6%
76,950 Clorox Company 4,377,686
160,825 Colgate-Palmolive Company 8,821,251
113,221 Procter & Gamble Company 6,553,231
--------------
19,752,168
--------------
HYPERMARKETS & SUPER CENTERS--0.5%
39,900 Wal-Mart Stores, Inc. 1,867,320
--------------
INDUSTRIAL CONGLOMERATES--3.3%
331,434 General Electric Company 11,616,762
--------------
INTEGRATED OIL & GAS--0.3%
19,200 ConocoPhillips 1,117,056
--------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
13
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- --------------------------------------------------------------------------------
INTEGRATED TELECOMMUNICATION SERVICES--1.7%
34,025 Alltel Corporation $ 2,146,978
160,225 Sprint Nextel Corporation 3,742,856
--------------
5,889,834
--------------
INTERNET SOFTWARE & SERVICES--5.0%
27,325 Google, Inc. Class A* 11,336,050
154,625 Yahoo!, Inc.* 6,058,208
--------------
17,394,258
--------------
INVESTMENT BANKING & BROKERAGE--2.9%
322,450 Charles Schwab Corporation 4,730,342
28,150 Goldman Sachs Group, Inc. 3,595,037
30,675 Morgan Stanley 1,740,500
--------------
10,065,879
--------------
IT CONSULTING & OTHER SERVICES--2.2%
260,800 Accenture Limited Class A 7,529,296
--------------
LEISURE FACILITIES--1.8%
139,769 Royal Caribbean Cruises Limited 6,297,991
--------------
MANAGED HEALTHCARE--0.7%
24,000 Aetna, Inc. 2,263,440
--------------
MOVIES & ENTERTAINMENT--4.9%
68,500 DreamWorks Animation SKG, Inc.* 1,682,360
101,650 Pixar, Inc.* 5,358,988
356,475 Time Warner, Inc. 6,216,924
116,270 Viacom, Inc. Class B 3,790,452
--------------
17,048,724
--------------
MULTI-LINE INSURANCE--0.5%
25,049 American International Group, Inc. 1,709,093
--------------
OIL & GAS EQUIPMENT & SERVICES--1.0%
36,000 Schlumberger Limited 3,497,400
--------------
OTHER DIVERSIFIED FINANCIAL SERVICES--1.1%
98,525 JPMorgan Chase & Company 3,910,457
--------------
PACKAGED FOODS & MEATS--0.8%
47,450 Hershey Foods Corporation 2,621,613
--------------
PERSONAL PRODUCTS--0.6%
60,100 Estee Lauder Companies, Inc. Class A 2,012,148
--------------
PHARMACEUTICALS--6.1%
48,000 Covance, Inc.* 2,330,400
26,700 Eli Lilly and Company 1,510,953
118,700 Johnson & Johnson 7,133,870
174,475 MGI Pharma, Inc.* 2,993,991
73,594 Pfizer, Inc. 1,716,212
125,700 Wyeth 5,790,999
--------------
21,476,425
--------------
PROPERTY & CASUALTY INSURANCE--1.2%
77,150 Allstate Corporation 4,171,501
--------------
</Table>
14
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- --------------------------------------------------------------------------------
RAILROADS--1.8%
78,575 Union Pacific Corporation $ 6,326,073
--------------
SEMICONDUCTORS--4.5%
174,134 Intel Corporation 4,346,385
198,800 Linear Technology Corporation 7,170,716
118,950 Maxim Integrated Products, Inc. 4,310,748
--------------
15,827,849
--------------
SOFT DRINKS--1.5%
89,025 PepsiCo, Inc. 5,259,597
--------------
SPECIALTY CHEMICALS--1.0%
56,550 Sigma-Aldrich Corporation 3,579,050
--------------
SPECIALTY STORES--1.5%
67,950 Office Depot, Inc.* 2,133,630
85,475 Tiffany & Company 3,272,838
--------------
5,406,468
--------------
STEEL--0.6%
32,725 Nucor Corporation 2,183,412
--------------
SYSTEMS SOFTWARE--8.0%
168,700 Adobe Systems, Inc. 6,235,152
701,376 Microsoft Corporation 18,340,982
108,200 Oracle Corporation* 1,321,122
125,725 Symantec Corporation* 2,200,188
--------------
28,097,444
--------------
THRIFTS & MORTGAGE FINANCE--1.0%
81,350 The PMI Group, Inc. 3,341,045
--------------
TRADING COMPANIES & DISTRIBUTORS--1.1%
55,675 W.W. Grainger, Inc. 3,958,493
--------------
TOTAL COMMON STOCKS (DOMESTIC)
(COST--$320,921,735) 342,840,758
--------------
COMMON STOCKS (FOREIGN)--2.6%
APPLICATION SOFTWARE--0.5%
38,825 SAP AG Sponsored ADR (GE) 1,749,843
--------------
SEMICONDUCTOR EQUIPMENT--1.3%
226,900 ASM Lithography Holding NV NY Shares (NE)* 4,556,152
--------------
SEMICONDUCTORS--0.8%
166,600 ATI Technologies, Inc. (CA)* 2,830,534
--------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$7,899,934) 9,136,529
--------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- --------------------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--0.7%
SPECIAL PURPOSE ENTITY--0.7%
$ 2,600,000 CAFCO LLC
4.12% 1/3/06~ $ 2,599,405
--------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$2,599,405) 2,599,405
--------------
TOTAL INVESTMENTS--101.3%
(TOTAL COST--$331,421,074) 354,576,692
--------------
OTHER ASSETS AND LIABILITIES--(1.3%) (4,468,736)
--------------
NET ASSETS--100.0% $ 350,107,956
==============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
* NON-INCOME PRODUCING.
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$2,599,405, OR 0.7%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
ADR - AMERICAN DEPOSITARY RECEIPT
SPDR - STANDARD AND POOR'S DEPOSITARY RECEIPT
CA - CANADA
GE - GERMANY
NE - NETHERLANDS
SEE NOTES TO FINANCIAL STATEMENTS.
16
<Page>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 331,421,074
---------------
Investment securities, at market 354,576,692
Cash 449,327
Receivables:
Investment securities sold 34,841,034
Capital shares sold 225,775
Dividends and interest 375,793
Other assets 21,369
---------------
Total Assets 390,489,990
---------------
LIABILITIES
Payables and other accrued liabilities:
Investment securities purchased 38,777,279
Capital shares redeemed 1,015,169
Advisory fees 234,401
Shareholder servicing fees 32,239
Accounting fees 18,453
Distribution fees 101,952
Transfer agency fees 33,170
Custodian fees 2,076
Directors' deferred compensation 21,369
Other 145,926
---------------
Total Liabilities 40,382,034
---------------
Net Assets $ 350,107,956
===============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 1,021,281,32
Accumulated net investment loss (107,913)
Accumulated net realized loss from security transactions (694,221,070)
Net unrealized appreciation on investments 23,155,618
---------------
Total $ 350,107,956
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
<Table>
CLASS A
Net Assets $ 5,505,440
Shares Outstanding 504,634
Net Asset Value, Redemption Price Per Share $ 10.91
Maximum offering price per share
(net asset value plus sales charge of 5.75% of
offering price) $ 11.58
CLASS B
Net Assets $ 9,603,001
Shares Outstanding 918,489
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales
charge) Per Share $ 10.46
CLASS C
Net Assets $ 1,361,755
Shares Outstanding 130,325
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales
charge) Per Share $ 10.45
CLASS F
Net Assets $ 331,585,062
Shares Outstanding 30,221,128
Net Asset Value, Offering and Redemption Price Per Share $ 10.97
CLASS R
Net Assets $ 1,982,182
Shares Outstanding 178,342
Net Asset Value, Offering and Redemption Price Per Share $ 11.11
CLASS T
Net Assets $ 70,516
Shares Outstanding 6,721
Net Asset Value, Redemption Price Per Share $ 10.49
Maximum offering price per share
(net asset value plus sales charge of 4.50% of
offering price) $ 10.98
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<Page>
STATEMENT OF OPERATIONS
For the year ended December 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 4,099,887
Interest 500,132
Foreign taxes withheld (1,220)
---------------
Total Investment Income 4,598,799
---------------
EXPENSES
Advisory fees--Note 2 2,929,053
Shareholder servicing fees--Note 2 401,247
Accounting fees--Note 2 231,776
Distribution fees--Note 2 987,452
Transfer agency fees--Note 2 317,636
Registration fees 40,415
Postage and mailing expenses 71,040
Custodian fees and expenses--Note 2 19,507
Printing expenses 102,585
Legal and audit fees 128,635
Directors' fees and expenses--Note 2 77,450
Other expenses 110,244
---------------
Total Expenses 5,417,040
Earnings Credits (19,507)
Reimbursed/Waived Expenses (12,315)
Expense Offset to Broker Commissions (13,288)
---------------
Net Expenses 5,371,930
---------------
Net Investment Loss (773,131)
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITY TRANSACTIONS
Net Realized Gain on Security Transactions 38,521,459
Net Change in Unrealized Appreciation/Depreciation
of Investments (24,451,397)
---------------
Net Realized and Unrealized Gain 14,070,062
---------------
Net Increase in Net Assets Resulting from Operations $ 13,296,931
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2005 2004
OPERATIONS
Net Investment Income (Loss) $ (773,131) $ 1,291,564
Net Realized Gain on Security Transactions 38,521,459 52,095,404
Net Change in Unrealized
Appreciation/Depreciation of Investments (24,451,397) (21,249,162)
---------------- ----------------
Net Increase in Net Assets Resulting
from Operations 13,296,931 32,137,806
---------------- ----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From Net Investment Income
Class A (19,905) 0
Class F (1,261,946) 0
Class R (13,251) 0
---------------- ----------------
Net Decrease from Dividends and Distributions (1,295,102) 0
---------------- ----------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A (1,032,110) (520,803)
Class B (3,049,516) (2,029,596)
Class C (552,479) (15,393)
Class F (86,019,465) (108,174,647)
Class R (9,087,141) 967,838
Class T (31,280) (130,287)
---------------- ----------------
Net Decrease from Capital Share Transactions (99,771,991) (109,902,888)
---------------- ----------------
Net Decrease in Net Assets (87,770,162) (77,765,082)
---------------- ----------------
NET ASSETS
Beginning of Year $ 437,878,118 $ 515,643,200
---------------- ----------------
End of Year $ 350,107,956 $ 437,878,118
---------------- ----------------
Undistributed (Accumulated) Net
Investment Income (Loss) $ (107,913) $ 1,178,792
================ ================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
---------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 10.53 $ 9.79 $ 7.46 $ 10.53 $ 14.02
- --------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.03)(a) 0.02(a) (0.06) (0.06) (0.05)
Net realized and unrealized gains
(losses) on securities 0.45 0.72 2.39 (3.01) (3.44)
---------------------------------------------------------------
Total from investment operations 0.42 0.74 2.33 (3.07) (3.49)
- --------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.04) 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
---------------------------------------------------------------
Total distributions (0.04) 0.00 0.00 0.00 0.00
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 10.91 $ 10.53 $ 9.79 $ 7.46 $ 10.53
===============================================================
TOTAL RETURN(b) 3.98% 7.56% 31.23% (29.15%) (24.89%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 5,505 $ 6,356 $ 6,452 $ 5,149 $ 7,795
- --------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.49% 1.42% 1.66% 1.48% 1.21%
Expenses with reimbursements, earnings credits
and brokerage offsets 1.47% 1.41% 1.66% 1.48% 1.20%
Net investment income (loss) (0.28%) 0.22% (0.59%) (0.56%) (0.47%)
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 107% 124% 139% 152%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 10.14 $ 9.50 $ 7.30 $ 10.38 $ 13.91
----------------------------------------------------------------
Income from investment operations:
Net investment loss (0.11)(a) (0.06)(a) (0.17) (0.18) (0.13)
Net realized and unrealized gains
(losses) on securities 0.43 0.70 2.37 (2.90) (3.40)
----------------------------------------------------------------
Total from investment operations 0.32 0.64 2.20 (3.08) (3.53)
- ---------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 10.46 $ 10.14 $ 9.50 $ 7.30 $ 10.38
================================================================
TOTAL RETURN(b) 3.16% 6.74% 30.14% (29.67%) (25.38%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 9,603 $ 12,406 $ 13,664 $ 11,603 $ 19,829
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(c) 2.31% 2.22% 2.48% 2.22% 1.93%
Expenses with reimbursements, earnings
credits and brokerage offsets 2.30% 2.22% 2.48% 2.22% 1.92%
Net investment loss (1.11%) (0.58%) (1.41%) (1.30%) (1.20%)
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 107% 124% 139% 152%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
22
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 10.13 $ 9.48 $ 7.29 $ 10.36 $ 13.92
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.10)(a) (0.05)(a) (0.19) (0.26) (0.18)
Net realized and unrealized
gains (losses) on securities 0.42 0.70 2.38 (2.81) (3.38)
----------------------------------------------------------------
Total from investment operations 0.32 0.65 2.19 (3.07) (3.56)
- ---------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 10.45 $ 10.13 $ 9.48 $ 7.29 $ 10.36
================================================================
TOTAL RETURN(b) 3.16% 6.86% 30.04% (29.63%) (25.58%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,362 $ 1,881 $ 1,774 $ 1,528 $ 2,979
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(c) 2.24% 2.16% 2.49% 2.37% 2.11%
Expenses with reimbursements, earnings
credits and brokerage offsets 2.22% 2.16% 2.49% 2.37% 2.10%
Net investment loss (1.03%) (0.49%) (1.42%) (1.46%) (1.38%)
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 107% 124% 139% 152%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 10.58 $ 9.83 $ 7.48 $ 10.53 $ 14.03
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.02)(a) 0.03(a) (0.17) (0.22) (0.15)
Net realized and unrealized gains
(losses) on securities 0.45 0.72 2.52 (2.83) (3.35)
----------------------------------------------------------------
Total from investment operations 0.43 0.75 2.35 (3.05) (3.50)
- ---------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.04) 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------
Total distributions (0.04) 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 10.97 $ 10.58 $ 9.83 $ 7.48 $ 10.53
================================================================
TOTAL RETURN 4.08% 7.63% 31.42% (28.96%) (24.95%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 331,585 $ 406,550 $ 484,742 $ 443,307 $ 865,425
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(b) 1.38% 1.33% 1.47% 1.38% 1.31%
Expenses with reimbursements, earnings
credits and brokerage offsets 1.37% 1.33% 1.47% 1.37% 1.30%
Net investment income (loss) (0.18%) 0.30% (0.41%) (0.46%) (0.58%)
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 120% 107% 124% 139% 152%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
24
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 10.69 $ 9.89 $ 7.50 $ 10.57 $ 14.07
- ------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.02(a) 0.07 0.01 0.01 (0.02)
Net realized and unrealized gains
(losses) on securities 0.47 0.73 2.38 (3.08) (3.48)
-------------------------------------------------------------
Total from investment operations 0.49 0.80 2.39 (3.07) (3.50)
- ------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.07) 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
-------------------------------------------------------------
Total distributions (0.07) 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 11.11 $ 10.69 $ 9.89 $ 7.50 $ 10.57
=============================================================
TOTAL RETURN 4.54% 8.09% 31.87% (29.04%) (24.88%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,982 $ 10,584 $ 8,792 $ 4,333 $ 2,023
- ------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(b) 1.05% 1.03% 1.13% 1.30% 1.46%
Expenses with reimbursements, earnings
credits and brokerage offsets 1.04% 1.03% 1.13% 1.30% 1.46%
Net investment income (loss) 0.15% 0.65% (0.04%) (0.34%) (0.72%)
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 120% 107% 124% 139% 152%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 10.17 $ 9.48 $ 7.27 $ 10.38 $ 14.00
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.10)(a) (0.02)(a) (0.30) (0.56) (0.19)
Net realized and unrealized gains
(losses) on securities 0.42 0.71 2.51 (2.55) (3.43)
----------------------------------------------------------------
Total from investment operations 0.32 0.69 2.21 (3.11) (3.62)
- ---------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 10.49 $ 10.17 $ 9.48 $ 7.27 $ 10.38
================================================================
TOTAL RETURN(b) 3.15% 7.28% 30.40% (29.96%) (25.86%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 71 $ 100 $ 220 $ 208 $ 621
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(c) 2.21% 1.79% 2.22% 2.78% 2.56%
Expenses with reimbursements, earnings
credits and brokerage offsets 2.20% 1.79% 2.22% 2.78% 2.55%
Net investment loss (1.01%) (0.17%) (1.15%) (1.89%) (1.83%)
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 107% 124% 139% 152%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<Page>
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders Growth Fund (the "Fund"). The Fund offers Class A,
Class B, Class C, Class F, Class R and Class T shares. Class A and Class T
shares are subject to a sales charge imposed at the time of purchase, Class B
shares are subject to a contingent deferred sales charge ("CDSC") imposed on
Class B shares redeemed within six years of purchase, Class C shares are subject
to a CDSC imposed on Class C shares redeemed within one year of purchase and
Class F and Class R shares are sold at net asset value per share (with Class R
shares sold only to eligible institutional investors). Other differences between
the classes include services offered to and the expenses borne by each Class.
The following significant accounting policies have been consistently followed by
the Fund in the preparation of its financial statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
27
<Page>
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair value as determined in good faith by the Company's board of directors
or pursuant to procedures approved by the board of directors. These situations
may include instances where an event occurs after the close of the market on
which a security is traded but before the Fund calculates its net asset value,
and it is determined that the event has materially affected the value of the
security. Fair value of foreign equity securities may be determined with the
assistance of a pricing service using correlations between the movement of
prices of foreign securities and indexes of domestic securities and other
appropriate indicators, such as closing market prices of relevant ADRs and
futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund may invest at least a
portion of its assets in foreign securities. Foreign securities carry more risk
than U.S. securities, such as political and currency risks. In the event the
Fund executes a foreign security transaction, the Fund may enter into a foreign
currency contract to settle the foreign security transaction. The Fund could be
exposed to risk if counterparties are unable to meet the terms of the contracts
or if the value of the currency changes unfavorably to the U.S. dollar. The
resultant foreign currency gain or loss from the contract is recorded as foreign
currency gain or loss and is presented as such in the Statement of Operations.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each
business day. Purchases and sales of investment securities and income and
expense items denominated in foreign currencies are translated into U.S. dollar
amounts on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net unrealized gain or loss from investments and foreign
currency translations on the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar
28
<Page>
equivalent of the amounts actually received or paid. Net unrealized appreciation
or depreciation on investments and foreign currency translation arises from
changes in the values of assets and liabilities, including investments in
securities held at the date of the financial statements, resulting from changes
in the exchange rates and changes in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) and from net realized capital gains (if any)
annually. Dividends and distributions, which are determined in accordance with
income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
29
<Page>
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
Financial Corporation, a publicly-owned financial services company which
provides a comprehensive range of financial products and services in domestic
and selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
1.00% of the first $30 million of net assets, 0.75% of the next $270 million of
net assets, 0.70% of the next $200 million of net assets and 0.65% of net assets
in excess of $500 million.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $356,535 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $140,595 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $12.58 to $13.36, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency fees, including both the per account fees paid to
DTI and out-of-pocket charges, during the year ended December 31, 2005 were as
follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
----------------------------------------------------------------
Class A $ 13,901
Class B $ 33,685
Class C $ 3,729
Class R $ 5,712
Class T $ 604
</Table>
30
<Page>
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the processing of shareholder transactions in the Funds.
During the year ended December 31, 2005, the Fund was charged $9,532 for cash
management fees, which are included in the out-of-pocket transfer agency charges
above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $119,410 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $896,642 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
------------------------------------------------------------------
Class A N/A $ 14,302
Class B $ 79,219 $ 26,406
Class C $ 11,380 $ 3,793
Class T $ 211 $ 211
</Table>
During the year ended December 31, 2005, DSC retained $1,062 and $9 in sales
commissions from the sales of Class A and Class T shares, respectively. DSC also
retained $34,881 and $151 of contingent deferred sales charges relating to
redemptions of Class B and Class C shares, respectively.
31
<Page>
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance monitoring, regulatory and shareholder reporting, as well as related
facilities, equipment and clerical help. The fee is computed at the annual rate
of 0.06% of the average daily net assets of the Fund on the first $500 million,
0.04% of the average daily net assets of the Fund on the next $500 million and
0.02% of the average daily net assets of the Fund in excess of $1 billion, plus
reasonable out-of-pocket expenses. Founders has contractually agreed in writing
to waive any fees received for these services to the extent they exceed
Founders' costs in providing the services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits in the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
---------------------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $12,315, which reduced the amount paid to
Mellon Bank to $7,192.
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of one or more of the Funds. The amount paid to the director under the
plan will be determined based upon the performance of the selected Funds. The
current value of these amounts is included in Other Assets and Directors'
Deferred Compensation on the Statement of Assets and Liabilities. Changes in
market value are included in the Directors' fees and expenses and the net change
in unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally
32
<Page>
accepted in the United States of America. These differences are due to differing
treatments for items such as deferral of wash sale losses, deferred
compensation, net operating losses and capital loss carryovers. Permanent
differences identified during the year ended December 31, 2005 have been
reclassified among the components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
-------------------------------------------------------------
$ 781,528 $ 5,945 $ (787,473)
</Table>
The tax character of distributions paid during 2005 and 2004 was as follows:
<Table>
<Caption>
2005 2004
--------------- -------------
DISTRIBUTIONS PAID FROM:
Ordinary Income $ 1,295,102 $ 0
Long-Term Capital Gain $ 0 $ 0
--------------- -------------
$ 1,295,102 $ 0
=============== =============
</Table>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of December 31, 2005, represent capital loss carryovers that may be
available to offset future realized capital gains and thereby reduce future
taxable gains distributions. Post-October 31 foreign currency losses noted
below, if any, may be used to offset future net investment income and thereby
reduce future ordinary income distributions. Net capital loss carryovers
utilized during 2005 by the Fund amounted to $35,361,125. Accumulated capital
losses as of December 31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
-------------------------------------------
2009 $ 481,174,758
2010 $ 209,975,954
-------------
$ 691,150,712
=============
</Table>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The
33
<Page>
primary difference between book and tax appreciation or depreciation is wash
sale loss deferrals.
<Table>
Post-October Capital Loss Deferral $ (974,792)
Other Book/Tax Differences $ (107,912)
Federal Tax Cost $ 333,516,64
Gross Tax Appreciation of Investments $ 28,561,273
Gross Tax Depreciation of Investments $ (7,501,222)
Net Tax Appreciation $ 21,060,051
</Table>
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 750 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 56,086 $ 588,334 105,906 $ 1,056,250
Dividends or Distributions Reinvested 1,577 $ 17,366 0 $ 0
Redeemed (156,471) $ (1,637,810) (161,536) $ (1,577,053)
----------------------------------------------------------------
Net Decrease (98,808) $ (1,032,110) (55,630) $ (520,803)
================================================================
CLASS B
Sold 13,206 $ 130,840 30,813 $ 293,687
Redeemed (317,903) $ (3,180,356) (246,029) $ (2,323,283)
----------------------------------------------------------------
Net Decrease (304,697) $ (3,049,516) (215,216) $ (2,029,596)
================================================================
CLASS C
Sold 7,980 $ 80,497 38,619 $ 368,762
Redeemed (63,320) $ (632,976) (40,060) $ (384,155)
----------------------------------------------------------------
Net Decrease (55,340) $ (552,479) (1,441) $ (15,393)
================================================================
</Table>
34
<Page>
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS F
Sold 1,864,857 $ 19,477,463 2,973,891 $ 29,284,630
Dividends or Distributions Reinvested 107,799 $ 1,193,334 0 $ 0
Redeemed (10,161,82) $ (106,690,262) (13,900,368) $ (137,459,277)
----------------------------------------------------------------
Net Decrease (8,189,172) $ (86,019,456) (10,926,477) $ (108,174,647)
================================================================
CLASS R
Sold 323,673 $ 3,445,896 381,438 $ 3,739,499
Dividends or Distributions Reinvested 1,182 $ 13,251 0 $ 0
Redeemed (1,136,441) $ (12,546,288) (280,086) $ (2,771,661)
----------------------------------------------------------------
Net Increase (Decrease) (811,586) $ (9,087,141) 101,352 $ 967,838
================================================================
CLASS T
Sold 189 $ 1,893 136 $ 1,307
Redeemed (3,345) $ (33,173) (13,405) $ (131,594)
----------------------------------------------------------------
Net Decrease (3,156) $ (31,280) (13,269) $ (130,287)
================================================================
</Table>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $446,397,340 and $544,019,252, respectively.
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
35
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders Growth Fund (one
of the portfolios constituting Dreyfus Founders Funds, Inc., hereafter referred
to as the "Fund") at 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 Sates of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where securities purchased had not been received, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
36
<Page>
OTHER TAX INFORMATION
(UNAUDITED)
CORPORATE DIVIDENDS RECEIVED DEDUCTION
Dividends paid by the Fund from net investment income and distributions of net
realized short-term capital gains are, for federal tax purposes, taxable as
ordinary income to shareholders. Of the ordinary income distributions declared
for the year ended December 31, 2005, 100% qualified for the dividends received
deduction available to the Fund's corporate shareholders.
QUALIFIED DIVIDEND INCOME
For the year ended December 31, 2005, the Fund designated 100% of the ordinary
income distributions paid as qualified dividend income subject to reduced income
tax rates for taxpayers with taxable accounts.
37
<Page>
FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
38
<Page>
The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services being
provided to the Funds are satisfactory, as evidenced in part by the recent
performance records of the Funds, to which the directors gave significant
attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to the
Funds, but also recognize that Founders or its affiliates have provided the
highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
39
<Page>
small group of funds selected by Lipper and a larger universe of funds also
selected by Lipper. The Lipper materials further included graphs depicting each
Fund's Class F one-year and annualized performance results for two-, three-,
four-, five-, and ten-year periods, if applicable, in comparison to the Fund's
performance group and performance universe.
Growth Fund's performance for the one-year period ended December 31, 2004 placed
it in the third quintile of its Lipper performance group, with the Fund ranking
sixth out of 13 Lipper-selected "peer funds," and in the third quintile of its
Lipper large-cap growth fund performance universe, ranking 274th of 640 funds.
The directors noted that the Fund's longer-term performance rankings were
significantly better, with the Fund ranking in the first performance quintile of
its Lipper performance group and universe in calendar year 2003. The Fund's
three-year performance results ended December 31, 2004 placed it in the first
quintile of its respective Lipper performance group and in the second quintile
of its Lipper performance universe. The directors deemed these relative
performance results to be very satisfactory, and stressed the importance to
Founders of the need to seek to maintain a strong performance record.(1)
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance
difficulties, more recent performance results generally have shown
significant improvement;
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS DO NOT REFLECT THE FRONT-END SALES
CHARGES THAT APPLY TO OTHER SHARE CLASSES.
40
<Page>
Founders has focused its efforts upon improving the performance records of
the Funds and will continue to seek improvement; and
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing in
the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY FOUNDERS AND
ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, Growth Fund's
management fees ranked in the second best quintile of its Lipper competitive
expense group, with the Fund's fees the sixth lowest of 15 "peer funds." The
Fund's contractual management fees at a common asset level were determined by
Lipper to be lower than 10 of the 15 funds in its group. The Fund's management
fees were in the third quintile of its Lipper expense universe, placing 84th
lowest of 171 funds.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain
efficiencies in performing
41
<Page>
the portfolio management, trading and operational functions related to those
accounts (the directors recognized that in determining its profitability
from providing investment management and other services to the Funds,
Founders allocated its expenses between the Funds and other accounts in a
manner which was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment
services to any of the clients it advises, not just the Funds. The directors
recognized that Founders' profitability would be lower if it did not receive
research and brokerage services in connection with these brokerage
transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders' management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the
42
<Page>
investment advisory fees received by Founders. However, the directors noted that
Founders' profitability is expected to decline in 2005 as a result of declines
in Fund asset levels. The directors also considered the risks assumed by
Founders in providing management services to the Funds, including the risk that
the management agreement can be terminated by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of
investment advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially
fees which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than fees
arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in recognition of the quality service
which Founders has provided and continues to provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
43
<Page>
ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of scale if the assets of the Funds were to increase. Among other information,
the directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into increased
profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of an
increase in the assets of a particular Fund or a group of Funds would not be
passed along on a dollar-for-dollar basis to the shareholders of other Funds
that did not experience increases in their assets to points above their
breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is
consistent with its objective of sharing its economies of scale with the
Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
restrictions. The directors determined that Founders is dedicated to compliance
with all applicable rules and regulations and that the systems of controls which
are in place to ensure that the service providers to the Funds, including
Founders, and the Funds themselves, maintain strict adherence to the law are
excellent.
44
<Page>
OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years and that efforts are being and will continue to be
made to enhance such improvement and to maintain Fund expense ratios at
reasonable and competitive levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
45
<Page>
YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
46
<Page>
Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice
President--Compliance since 2002. Formerly, Founders' Manager of Compliance
(2000 to 2002) and Securities Compliance Examiner, Staff Accountant and Team
Leader for the U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
47
<Page>
DREYFUS FOUNDERS GROWTH FUND
PROXY VOTING INFORMATION
A description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities, and information regarding how
the Funds voted these proxies for the 12-month period ended June 30, 2005, is
available through the Funds' website at www.founders.com and on the Securities
and Exchange Commission's (SEC) website at www.sec.gov. The description of the
policies and procedures is also available without charge, upon request, by
calling 1-800-525-2440.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available on the SEC's website at www.sec.gov and may be reviewed and copied
at the SEC's Public Reference Room in Washington, DC. Information on the
operation of the SEC's Public Reference Room may be obtained by calling
1-800-SEC-0330.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
Dreyfus Service Corporation, Distributor.
(C)2006 Founders Asset Management LLC. 2/06
A-646-GRO-05
ANNUAL REPORT
[GRAPHIC]
DREYFUS FOUNDERS
INTERNATIONAL EQUITY
FUND
INVESTMENT UPDATE
DECEMBER 31, 2005
[DREYFUS FOUNDERS FUNDS(R) LOGO]
THE GROWTH SPECIALISTS
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 10
Statement of Investments 12
Statement of Assets and Liabilities 17
Statement of Operations 19
Statements of Changes in Net Assets 20
Financial Highlights 21
Notes to Financial Statements 27
Report of Independent Registered Public Accounting Firm 36
Other Tax Information 37
Factors Considered in Renewing the Advisory Agreement 38
Your Board Representatives 46
</Table>
PAPERLESS DELIVERY OF THIS REPORT
[GRAPHIC]
Did you know you can reduce your postal mail by accessing Dreyfus Founders Funds
regulatory material online? It's a simple, reliable process: when new documents
such as this financial report are available, we'll send you an email
notification containing a convenient link that will take you directly to that
Fund information on our website.
To take advantage of this service, simply inform us online of your decision
to receive materials through the Founders E-Communications Program. Cut down on
mailbox clutter and help the Fund reduce printing and postage charges by
enrolling today at www.founders.com/ecommunications. If you own Funds through a
third party, enroll at www.icsdelivery.com.
INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
managers only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-9 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC INSURED - NOT BANK GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF REMI J. BROWNE]
[PHOTO OF DANIEL B. LEVAN]
[PHOTO OF JEFFREY R. SULLIVAN]
A DISCUSSION WITH CO-PORTFOLIO MANAGERS REMI J. BROWNE, CFA, LEFT; DANIEL B.
LEVAN, CFA, CENTER; AND JEFFREY R. SULLIVAN, CFA, RIGHT, REGARDING FUND
PERFORMANCE FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2005.
STRONG INTERNATIONAL EQUITY MARKETS
Markets were strong around the world in 2005 as 20 of 22 countries and 9 of 10
sectors posted gains in the Morgan Stanley Capital International (MSCI) World ex
U.S. Index. Japan was one of the best performing markets during the year with a
25.6% return as investors became increasingly convinced that the Japanese
economy was on a sustained growth path, following years of deflation and a
prolonged period of underperformance in the international equity markets. Among
sectors, materials was the best performer in the Index with a 27% return driven
primarily by strong demand for metals. The lone weak spot was found in the
telecommunications services sector, which declined nearly 11%, as investors grew
impatient with the size of investments telecom companies were making and the
lack of returns they were providing.
CONSISTENT INVESTMENT APPROACH
The positioning of the Fund was not substantially altered during the 12-month
period, as we continued to seek companies whose valuations were attractive and
growth potential was high. Overall, this process produced good stock selection;
however, allocations in various sectors resulted in a sub-par relative return.
For the 12-month period ended December 31, 2005, Dreyfus Founders International
Equity Fund underperformed its benchmark, the MSCI World ex U.S. Index, which
returned 14.47%.
[SIDENOTE]
"OUR BOTTOM-UP INVESTMENT PROCESS PRODUCED STRONG STOCK SELECTION; HOWEVER,
ALLOCATIONS IN VARIOUS SECTORS RESULTED IN A SUB-PAR RELATIVE RETURN."
3
<Page>
OVERALL MARKET DRIVERS
The energy, materials and industrials sectors each exhibited strong performance
during the period. Performance was driven by surging commodity prices--crude oil
prices topped $70 a barrel, copper rose above $2 a pound and gold increased to
over $500 an ounce--and robust demand in emerging markets such as China and
India. Drilling companies in the energy sector, miners in the materials sector,
and trading companies in the industrials sector all performed exceptionally well
for the year.
IMPACT OF COUNTRY PERFORMANCE
As mentioned above, Japan was one of the best performing markets in 2005. Other
countries that performed well were Canada and Norway, both rich in natural
resources, which benefited from strong positions in the energy and materials
sectors.
Stock selection also produced positive results for the Fund on the country
level. Spain, Hong Kong and Australia were the strongest positive contributors
to the Fund's relative performance, while Japan, the Netherlands and Belgium
weighed on the Fund's return. The Fund benefited from its Hong Kong-listed
telecom holding, and Australia's return was boosted by its exposure to the
energy sector. In Japan, an underweight position in the recovering financials
sector had a negative impact on the Fund's overall performance.
INDUSTRIALS, CONSUMER DISCRETIONARY AND TELECOM OUTPERFORMED
The benchmark's industrials holdings produced a 25% return; however, through a
slight relative overweight position and strong stock selection in this sector,
the Fund's holdings gained nearly 41%. Japanese commodity trading company,
MITSUBISHI CORPORATION, performed extremely well with a 71% price increase
during the Fund's holding period.
Solid stock picking in the consumer discretionary sector added a boost to
the Fund's relative return for the period. Stock price increases in Japanese
consumer electronics retailer YAMADA DENKI, German tire producer, CONTINENTAL
AG, and Swiss luxury goods firm COMPAGNIE FINANCIERIE RICHEMONT AG benefited the
Fund. Yamada Denki's stock price advanced after the firm reported strong
earnings results. Continental's stock rose following strong demand for the
company's tires and electronic stability-control products. Richemont posted a
solid gain as the high-end watch export market recovered nicely.
4
<Page>
As stated earlier, the telecommunications services sector experienced a
10.8% decline during the period. However portfolio holding CHINA MOBILE (HONG
KONG) LIMITED, the Hong Kong-listed Chinese mobile phone operator, provided a
large boost to the Fund's annual relative return, as the company repeatedly beat
subscriber growth numbers throughout the year.
SELECT ENERGY AND MATERIALS STOCKS BOOSTED RETURN
Although the Fund's underweight position hurt relative performance in both the
materials and energy sectors, individual holdings were among the top performers
for the period. BHP BILLITON LIMITED's exposure to many strong commodities,
including oil, copper and iron ore, helped the company's earnings increase.
Australian oil company OIL SEARCHLIMITED had a strong year as its Yemeni oil
field increased production and its Papua New Guinea gas pipeline project came to
fruition. Finally, XSTRATA PLC, the U.K.-based coal and base metals company,
also benefited from rising commodity prices, specifically the strong increase in
coal prices.
IT AND CONSUMER STAPLES WEIGHED ON PERFORMANCE
The Fund's overweight position coupled with weak stock selection caused the
information technology (IT) and consumer staples sectors to be the largest
detriments to annual performance. Casio Computer Company Limited's stock
LARGEST EQUITY HOLDINGS (country of origin; ticker symbol)
<Table>
1. MITSUBISHI CORPORATION (Japan; 8058) 2.56%
2. ASTRAZENECA GROUP PLC (United Kingdom; AZN) 2.55%
3. BP PLC (United Kingdom; BP) 2.48%
4. ING GROEP NV (Netherlands; ING.C) 2.11%
5. YAMADA DENKI (Japan; 9831) 1.95%
6. CANON, INC. (Japan; 7751) 1.77%
7. VOLVO AB CLASS B (Sweden; VOLVB) 1.72%
8. CREDIT SUISSE GROUP (Switzerland; CSG.N) 1.68%
9. XSTRATA PLC (United Kingdom; XTA) 1.68%
10. SANOFIAVENTIS (France; SAN) 1.67%
</Table>
Portfolio holdings are subject to change, and should not be construed as a
recommendation of any security.
[SIDENOTE]
SECTORS BENEFITING THE FUND
Industrials
Consumer Discretionary
Telecommunications Services
5
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 1-800-525-2440 TO OBTAIN THE MOST
RECENT MONTH-END PERFORMANCE DATA.
[CHART]
Dreyfus Founders
International Equity Fund MSCI World
Class F Shares ex U.S. Index
12/31/1995 $10,000.00 $10,000.00
12/31/1996 $11,860.00 $10,686.72
12/31/1997 $13,770.26 $10,929.58
12/31/1998 $16,112.19 $12,980.41
12/31/1999 $25,570.90 $16,605.29
12/29/2000 $21,056.98 $14,385.00
12/31/2001 $14,666.77 $11,307.02
12/31/2002 $10,516.12 $9,520.51
12/31/2003 $14,425.01 $13,273.68
12/31/2004 $17,699.41 $15,979.33
12/30/2005 $20,162.00 $18,291.60
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders International Equity Fund on 12/31/95 to a $10,000 investment made in
an unmanaged securities index on that date. The Fund's performance assumes the
reinvestment of dividends and capital gain distributions, but does not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or
redemption of Fund shares. The Fund offers multiple classes of shares.
Performance shown is for Class F, which is open only to grandfathered investors.
The Fund's performance in the graph takes into account all applicable Class F
fees and expenses, subject to fee waivers and expense limitations. THESE FIGURES
DO NOT REFLECT THE MAXIMUM SALES CHARGES APPLICABLE TO CLASS A, B, C, OR T
SHARES OF THE FUND. FOR THESE SHARE CLASSES, APPLYING THESE CHARGES WILL RESULT
IN LOWER RETURNS FOR INVESTORS.
The Morgan Stanley Capital International (MSCI) World ex U.S. Index measures
global developed market equity performance outside of the United States. The
total return figures cited for this index assume change in security prices and
reinvestment of dividends, but do not reflect the costs of managing a mutual
fund. Further information related to Fund performance is contained elsewhere in
this report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (Inception Date) YEAR YEARS YEARS INCEPTION
- ---------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) 7.35% (2.07%) -- (4.85%)
Without sales charge 13.93% (0.91%) -- (3.91%)
B SHARES (12/31/99)
With redemption* 9.02% (2.04%) -- (4.77%)
Without redemption 13.02% (1.64%) -- (4.63%)
C SHARES (12/31/99)
With redemption** 12.05% (1.66%) -- (4.66%)
Without redemption 13.05% (1.66%) -- (4.66%)
F SHARES (12/29/95) 13.91% (0.86%) 7.26% 7.26%
R SHARES (12/31/99) 14.22% (0.59%) -- (3.62%)
T SHARES (12/31/99)
With sales charge (4.50%) 8.52% (2.05%) -- (4.88%)
Without sales charge 13.65% (1.14%) -- (4.15%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, expense
limitations, and adjustments for financial statement purposes. Investments in
foreign securities entail unique risks, including political, market, and
currency risks.
* The maximum contingent deferred sales charge for Class B shares is 4% and is
reduced to 0% after six years, at which time the Class B shares convert to
Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
price fell after Casio Micronics, a 75%-owned subsidiary of Casio Computer,
lowered its 2005 estimates. This was enough to affect Casio Computer's 2005
operating profit estimate, causing the stock to drop. Trend Micro, Inc., a
Japanese developer of anti-virus software, experienced a decline on Microsoft's
announcement that it would be packaging a competitive product into its operating
system. The Fund sold off its positions in both companies during the period as
each firm's growth profile was no longer viable. In the consumer staples sector,
exposure to European food retailers TESCO PLC and Delhaize Group proved damaging
as oil price rises choked off consumer spending and both stocks underperformed
during the year.
INDIVIDUAL STOCKS HURT RETURN
Although the telecommunications services sector produced an overall positive
result for the Fund, select telecom holdings did not fare well during the
period. One of these was VODAFONE GROUP PLC, whose share price dropped after it
announced its commitment to the highly competitive Japanese market. Vodafone
emphasized its plan to increase market share in Japan through more aggressive
marketing, which was expected to cause further margin deterioration.
The Fund had bad timing with its holding of Toyota Motor Corporation's
stock in 2005. A holding for the first half of the year, the Fund sold its
position in the company as we believed Toyota was preparing to increase
[CHART]
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
Japan 23.98%
United Kingdom 19.98%
France 8.26%
Switzerland 7.88%
Germany 7.49%
Canada 5.71%
Australia 4.25%
Spain 3.66%
Other Countries 17.11%
Cash & EQUIVALENTS 1.68%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio
managers and are subject to change at any time, based on market and other
conditions, and should not be construed as a recommendation of any specific
security.
8
<Page>
spending in an effort to expand production capacity. We sold the company's stock
at the wrong time and watched it rally 40% as the Japanese economy and consumer
began to show signs of recovery.
Other detractors were Publishing and Broadcasting Limited, an Australian media
company, and Japanese healthcare holding Ono Pharmaceuticals Company Limited,
which both produced double-digit declines during the period.
The Fund sold many of the poor-performing individual issues listed in this
section of the commentary during the period, as we believed the company-specific
events surrounding each would negatively affect earnings growth going forward.
IN CONCLUSION
As we enter 2006, global growth appears to be strong and gaining traction as
monetary policies around the world continue to be accommodative. The nascent
Japanese economic recovery seems to be hitting its stride, and many economists
expect the European Union's gross domestic product growth to be significantly
higher in 2006 than in 2005. Additionally, the market is suggesting that the
next increase to the U.S. federal funds rate may be the last of this cycle,
lending further support to equity markets. Naturally, any gains in the equity
markets could be tempered as the geopolitical climate remains a wildcard.
We will continue to look for companies with strong growth rates, improving
business momentum and reasonable valuations.
/s/ Remi J. Browne /s/ Daniel B. LeVan /s/ Jeffrey R. Sullivan
Remi J. Browne, CFA Daniel B. LeVan, CFA Jeffrey R. Sullivan, CFA
Co-Portfolio Manager Co-Portfolio Manager Co-Portfolio Manager
[SIDENOTE]
SECTORS DETRACTING FROM THE FUND
Information Technology
Consumer Staples
Materials
9
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
10
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- -----------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,076.58 $ 7.33
CLASS A HYPOTHETICAL 1,000.00 1,018.06 7.15
CLASS B ACTUAL 1,000.00 1,074.56 11.24
CLASS B HYPOTHETICAL 1,000.00 1,014.23 10.97
CLASS C ACTUAL 1,000.00 1,074.76 11.24
CLASS C HYPOTHETICAL 1,000.00 1,014.23 10.97
CLASS F ACTUAL 1,000.00 1,076.48 7.33
CLASS F HYPOTHETICAL 1,000.00 1,018.06 7.15
CLASS R ACTUAL 1,000.00 1,077.53 6.02
CLASS R HYPOTHETICAL 1,000.00 1,019.34 5.87
CLASS T ACTUAL 1,000.00 1,076.17 8.63
CLASS T HYPOTHETICAL 1,000.00 1,016.78 8.42
</Table>
*Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- ---------------------------------
CLASS A 1.40%
CLASS B 2.15%
CLASS C 2.15%
CLASS F 1.40%
CLASS R 1.15%
CLASS T 1.65%
</Table>
11
<Page>
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
COMMON STOCKS (FOREIGN)--97.8%
AEROSPACE & DEFENSE--1.7%
47,400 BAE Systems PLC (UK) $ 311,338
49,000 Rolls-Royce Group PLC (UK) 360,418
---------------
671,756
---------------
APPAREL, ACCESSORIES & LUXURY GOODS--2.0%
9,300 Compagnie Financiere Richemont AG (SZ) 404,809
8,800 Gildan Activewear, Inc. (CA)* 378,495
---------------
783,304
---------------
APPLICATION SOFTWARE--1.3%
53,600 Sage Group PLC (UK) 237,935
1,450 SAP AG (GE) 262,947
---------------
500,882
---------------
ASSET MANAGEMENT & CUSTODY BANKS--0.5%
12,500 Schroder's PLC (UK) 204,319
---------------
AUTO PARTS & EQUIPMENT--0.7%
7,900 Denso Corporation (JA) 272,633
---------------
AUTOMOBILE MANUFACTURERS--2.1%
3,800 DaimlerChrysler AG (GE) 193,801
11,000 Honda Motor Company Limited (JA) 627,719
---------------
821,520
---------------
BREWERS--2.9%
71,800 Foster's Group Limited (AU) 293,706
12,600 InBev NV (BE) 548,481
7,800 Orkla ASA (NW) 323,011
---------------
1,165,198
---------------
BROADCASTING & CABLE TV--1.6%
15,600 Gestevision Telecinco SA (SP) 393,740
101 TV Asahi Corporation (JA) 250,926
---------------
644,666
---------------
COMMUNICATIONS EQUIPMENT--2.3%
30,200 Nokia Oyj (FI) 552,374
112,600 Telefonaktiebolaget LM Ericsson (SW) 386,932
---------------
939,306
---------------
COMPUTER & ELECTRONICS RETAIL--2.0%
6,200 Yamada Denki (JA) 775,953
---------------
</Table>
AU Australia
AT Austria
BE Belgium
CA Canada
CN China
DE Denmark
FI Finland
FR France
GE Germany
GR Greece
HK Hong Kong
IE Ireland
IT Italy
JA Japan
KR South Korea
NE Netherlands
NW Norway
PT Portugal
SG Singapore
SP Spain
SW Sweden
SZ Switzerland
UK United Kingdom
12
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
COMPUTER HARDWARE--1.6%
45,000 Fujitsu Limited (JA) $ 342,646
51,000 Toshiba Corporation (JA) 304,439
---------------
647,085
---------------
COMPUTER STORAGE & PERIPHERALS--0.5%
4,500 Logitech International SA (SZ)* 211,457
---------------
CONSTRUCTION & ENGINEERING--0.9%
11,100 ACS, Actividades de Construccion y Servicios SA (SP) 357,560
---------------
CONSTRUCTION MATERIALS--1.2%
40,100 Rinker Group Limited (AU) 483,575
---------------
CONSTRUCTION, FARM MACHINERY & HEAVY TRUCKS--1.7%
14,500 Volvo AB Class B (SW) 683,523
---------------
CONSUMER ELECTRONICS--1.1%
22,000 Matsushita Electric Industrial Company Limited (JA) 424,386
---------------
CONSUMER FINANCE--0.6%
3,200 Sanyo Shinpan Finance Company Limited (JA) 229,550
---------------
DISTILLERS & VINTNERS--1.2%
32,500 Diageo PLC (UK) 471,116
---------------
DIVERSIFIED BANKS--6.3%
82,600 Banca Intesa SPA (IT) 437,593
15,400 Banco Santander Central Hispano SA (SP) 203,279
19,919 Barclays PLC (UK) 209,403
5,607 BNP Paribas SA (FR) 453,698
34,300 Capitalia SPA (IT) 198,564
18,200 HBOS PLC (UK) 310,953
6,700 Royal Bank of Scotland Group PLC (UK) 202,314
3,900 Societe Generale (FR) 479,709
---------------
2,495,513
---------------
DIVERSIFIED CAPITAL MARKETS--2.3%
13,100 Credit Suisse Group (SZ) 667,910
2,470 UBS AG (SZ) 235,140
---------------
903,050
---------------
DIVERSIFIED CHEMICALS--1.5%
7,900 BASF AG (GE) 605,383
---------------
DIVERSIFIED METALS & MINING--4.1%
32,100 BHP Billiton Limited (AU) 535,353
7,700 Teck Cominco Limited Class B (CA) 410,998
28,500 Xstrata PLC (UK) 666,896
---------------
1,613,247
---------------
ELECTRIC UTILITIES--2.1%
4,900 E.ON AG (GE) 507,345
75,200 International Power PLC (UK) 309,883
---------------
817,228
---------------
</Table>
SEE NOTES TO STATEMENTS OF INVESTMENTS.
13
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
ELECTRICAL COMPONENTS & EQUIPMENT--2.0%
2,500 Schneider Electric SA (FR) $ 223,008
38,000 Sumitomo Electric Industries Limited (JA) 577,081
---------------
800,089
---------------
ELECTRONIC EQUIPMENT MANUFACTURERS--1.4%
15,600 Hoya Corporation (JA) 560,851
---------------
FOOD RETAIL--0.6%
42,000 Tesco PLC (UK) 239,556
---------------
HEAVY ELECTRICAL EQUIPMENT--0.5%
29,000 Mitsubishi Electric Corporation (JA) 205,325
---------------
INTEGRATED OIL & GAS--6.5%
92,619 BP PLC (UK) 986,427
7,300 Husky Energy, Inc. (CA) 370,495
17,100 Repsol YPF SA (SP) 499,416
7,400 Royal Dutch Shell PLC Class A (NE) 225,489
2,158 Total SA (FR) 542,119
---------------
2,623,946
---------------
INTEGRATED TELECOMMUNICATION SERVICES--2.4%
94,100 BT Group PLC (UK) 360,647
21,000 Telenor ASA (NW) 206,132
9,800 Telus Corporation (CA) 403,465
---------------
970,244
---------------
INVESTMENT BANKING & BROKERAGE--1.1%
22,000 Daiwa Securities Group, Inc. (JA) 249,409
3,900 Macquarie Bank Limited (AU) 194,843
---------------
444,252
---------------
LIFE & HEALTH INSURANCE--0.6%
87,900 Old Mutual PLC (UK) 249,166
---------------
MARINE--1.0%
38 AP Moller-Maersk AS (DE) 393,145
---------------
MOVIES & ENTERTAINMENT--1.5%
18,400 Vivendi Universal SA (FR) 576,375
---------------
MULTI-LINE INSURANCE--1.7%
16,200 Aviva PLC (UK) 196,507
3,900 Baloise Holding Limited (SZ) 227,779
1,100 Zurich Financial Services AG (SZ) 234,381
---------------
658,667
---------------
OFFICE ELECTRONICS--1.8%
12,000 Canon, Inc. (JA) 702,082
---------------
OIL & GAS EXPLORATION & PRODUCTION--1.9%
12,200 Eni SPA (IT) 338,399
2,200 Norsk Hydro ASA (NW) 225,890
67,800 Oil Search Limited (AU) 183,404
---------------
747,693
---------------
</Table>
14
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
OTHER DIVERSIFIED FINANCIAL SERVICES--2.8%
24,200 ING Groep NV (NE) $ 839,422
6,600 Sun Life Financial, Inc. (CA) 265,306
---------------
1,104,728
---------------
PACKAGED FOODS & MEATS--0.8%
1,090 Nestle SA Registered (SZ) 325,980
---------------
PHARMACEUTICALS--13.5%
8,500 Astellas Pharma, Inc. (JA) 331,539
20,800 AstraZeneca Group PLC (UK) 1,012,443
11,400 Eisai Company Limited (JA) 478,484
14,800 GlaxoSmithKline PLC (UK) 374,074
10,959 Novartis AG (SZ) 575,846
8,980 Novo Nordisk AS Class B (DE) 505,143
1,670 Roche Holding AG (SZ) 250,735
7,600 Sanofi-Aventis (FR) 665,799
9,500 Santen Pharmaceutical Company Limited (JA) 262,602
6,100 Schering AG (GE) 408,376
9,900 Takeda Pharmaceuticals Company Limited (JA) 535,566
---------------
5,400,607
---------------
PRECIOUS METALS & MINERALS--0.6%
11,500 ThyssenKrupp AG (GE) 240,156
---------------
RAILROADS--1.1%
5,500 Canadian National Railway Company (CA) 440,662
---------------
SEMICONDUCTOR EQUIPMENT--0.7%
4,100 Tokyo Electron Limited (JA) 257,608
---------------
SOFT DRINKS--1.0%
12,900 Coca-Cola Hellenic Bottling Company SA (GR) 379,960
---------------
STEEL--1.3%
14,900 JFE Holdings, Inc. (JA) 500,309
---------------
TIRES & RUBBER--2.1%
6,300 Continental AG (GE) 558,624
19,000 Sumitomo Rubber Industries Limited (JA) 270,658
---------------
829,282
---------------
TOBACCO--1.7%
29,700 British American Tobacco PLC (UK) 664,315
---------------
TRADING COMPANIES & DISTRIBUTORS--3.4%
46,000 Mitsubishi Corporation (JA) 1,018,018
28,000 Mitsui & Company Limited (JA) 359,690
---------------
1,377,708
---------------
WIRELESS TELECOMMUNICATION SERVICES--3.6%
7,000 Bouygues SA (FR) 342,252
118,900 China Mobile (Hong Kong) Limited (HK) 562,780
267,775 Vodafone Group PLC (UK) 578,213
---------------
1,483,245
---------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$28,444,835) 38,898,161
---------------
</Table>
SEE NOTES TO STATEMENTS OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
PREFERRED STOCKS (FOREIGN)--0.5%
HEALTHCARE EQUIPMENT--0.5%
1,500 Fresenius AG Preferred (GE) $ 203,149
---------------
TOTAL PREFERRED STOCKS (FOREIGN)
(COST--$185,201) 203,149
---------------
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- ----------------------------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--1.5%
SPECIAL PURPOSE ENTITY--1.5%
$ 600,000 CAFCO LLC
4.12% 1/3/06~ $ 599,863
---------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$599,863) 599,863
---------------
TOTAL INVESTMENTS--99.8%
(TOTAL COST--$29,229,899) 39,701,173
---------------
OTHER ASSETS AND LIABILITIES--0.2% 66,015
---------------
NET ASSETS--100.0% $ 39,767,188
===============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
* NON-INCOME PRODUCING.
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$599,863, OR 1.5%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
SEE NOTES TO STATEMENTS OF INVESTMENTS.
16
<Page>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 29,229,899
--------------
Investment securities, at market 39,701,173
Cash 132,990
Foreign currency (cost $993) 1,001
Receivables:
Capital shares sold 17,415
Dividends and interest 57,420
From adviser 15,881
Other assets 36,412
--------------
Total Assets 39,962,292
--------------
LIABILITIES
Payables and other accrued liabilities:
Capital shares redeemed 108,252
Advisory fees 25,340
Shareholder servicing fees 7,843
Accounting fees 3,379
Distribution fees 4,483
Transfer agency fees 13,564
Custodian fees 1,466
Directors' deferred compensation 8,178
Other 22,599
--------------
Total Liabilities 195,104
--------------
Net Assets $ 39,767,188
==============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 56,584,115
Accumulated net investment loss (4,110)
Accumulated net realized loss from security and
foreign currency transactions (27,282,847)
Net unrealized appreciation on investments
and foreign currency translation 10,470,030
--------------
Total $ 39,767,188
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
<Table>
CLASS A
Net Assets $ 25,519,479
Shares Outstanding 1,899,179
Net Asset Value, Redemption Price Per Share $ 13.44
Maximum offering price per share
(net asset value plus sales charge of 5.75% of offering price) $ 14.26
CLASS B
Net Assets $ 1,966,435
Shares Outstanding 149,885
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 13.12
CLASS C
Net Assets $ 584,456
Shares Outstanding 44,653
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 13.09
CLASS F
Net Assets $ 11,484,573
Shares Outstanding 853,208
Net Asset Value, Offering and Redemption Price Per Share $ 13.46
CLASS R
Net Assets $ 69,710
Shares Outstanding 5,137
Net Asset Value, Offering and Redemption Price Per Share $ 13.57
CLASS T
Net Assets $ 142,535
Shares Outstanding 10,664
Net Asset Value, Redemption Price Per Share $ 13.37
Maximum offering price per share
(net asset value plus sales charge of 4.50% of offering price) $ 14.00
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<Page>
STATEMENT OF OPERATIONS
For the year ended December 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 991,687
Interest 11,055
Foreign taxes withheld (115,173)
--------------
Total Investment Income 887,569
--------------
EXPENSES
Advisory fees--Note 2 380,617
Shareholder servicing fees--Note 2 93,921
Accounting fees--Note 2 38,062
Distribution fees--Note 2 45,631
Transfer agency fees--Note 2 73,709
Registration fees 56,415
Postage and mailing expenses 3,011
Custodian fees and expenses--Note 2 50,860
Printing expenses 41,124
Legal and audit fees 15,266
Directors' fees and expenses--Note 2 8,150
Other expenses 49,651
--------------
Total Expenses 856,417
Earning Credits (3,172)
Reimbursed/Waived Expenses (289,434)
Expense Offset to Broker Commissions (12,641)
--------------
Net Expenses 551,170
--------------
Net Investment Income 336,399
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITY
TRANSACTIONS AND FOREIGN CURRENCY TRANSACTIONS
Net Realized Gain (Loss) on:
Security Transactions 3,946,597
Foreign Currency Transactions (14,891)
--------------
Net Realized Gain 3,931,706
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation 683,031
--------------
Net Realized and Unrealized Gain 4,614,737
--------------
Net Increase in Net Assets Resulting from Operations $ 4,951,136
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2005 2004
OPERATIONS
Net Investment Income $ 336,399 $ 277,266
Net Realized Gain on Security and Foreign
Currency Transactions 3,931,706 8,483,384
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation 683,031 (886,438)
-------------- --------------
Net Increase in Net Assets Resulting from Operations 4,951,136 7,874,212
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From Net Investment Income
Class A (221,917) (185,495)
Class B (3,527) 0
Class C (1,574) 0
Class F (100,227) (72,290)
Class R (750) (11,405)
Class T (912) (511)
-------------- --------------
Net Decrease from Dividends and Distributions (328,907) (269,701)
-------------- --------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A (2,546,598) (2,078,483)
Class B (529,010) (527,506)
Class C 42,438 (94,599)
Class F (729,040) (980,705)
Class R (4,365) (3,373,718)
Class T (48,533) (31,098)
-------------- --------------
Net Decrease from Capital Share Transactions (3,815,108) (7,086,109)
-------------- --------------
Net Increase in Net Assets 807,121 518,402
-------------- --------------
NET ASSETS
Beginning of year $ 38,960,067 $ 38,441,665
-------------- --------------
End of year $ 39,767,188 $ 38,960,067
============== ==============
Undistributed (Accumulated) Net
Investment Income (Loss) $ (4,110) $ 3,289
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 11.90 $ 9.77 $ 7.19 $ 10.03 $ 14.42
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.12 0.08 0.06 0.01 0.00(a)
Net realized and unrealized gains
(losses) on securities 1.54 2.14 2.59 (2.84) (4.39)
----------------------------------------------------------------------
Total from investment operations 1.66 2.22 2.65 (2.83) (4.39)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.12) (0.09) (0.07) (0.01) 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions (0.12) (0.09) (0.07) (0.01) 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.44 $ 11.90 $ 9.77 $ 7.19 $ 10.03
======================================================================
TOTAL RETURN(b) 13.93% 22.69% 36.84% (28.19%) (30.44%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 25,519 $ 25,076 $ 22,432 $ 18,217 $ 29,151
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.44% 1.42% 1.41% 1.40% 1.46%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.40% 1.40% 1.40% 1.40% 1.44%
Net investment income (loss) 0.94% 0.74% 0.80% 0.13% (0.74%)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 54% 85% 144% 220% 213%
</Table>
(a) NET INVESTMENT LOSS FOR THE YEAR ENDED DECEMBER 31, 2001 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.15% (2005), 2.05% (2004), 2.48% (2003), 2.18% (2002), AND
1.78% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
---------------------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 11.63 $ 9.55 $ 7.03 $ 9.87 $ 14.29
- --------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.02(a) 0.00(a), (b) (0.08) (0.11) (0.12)
Net realized and unrealized gains
(losses) on securities 1.49 2.08 2.61 (2.73) (4.30)
---------------------------------------------------------------------------
Total from investment operations 1.51 2.08 2.53 (2.84) (4.42)
- --------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.02) 0.00 (0.01) 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
---------------------------------------------------------------------------
Total distributions (0.02) 0.00 (0.01) 0.00 0.00
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.12 $ 11.63 $ 9.55 $ 7.03 $ 9.87
===========================================================================
TOTAL RETURN(c) 13.02% 21.78% 35.95% (28.77%) (30.93%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,966 $ 2,281 $ 2,372 $ 2,201 $ 3,786
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(d) 2.19% 2.16% 2.16% 2.16% 2.28%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.15% 2.15% 2.15% 2.15% 2.26%
Net investment income (loss) 0.21% 0.00% 0.07% (0.61%) (1.03%)
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(e) 54% 85% 144% 220% 213%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) NET INVESTMENT INCOME FOR THE YEAR ENDED DECEMBER 31, 2004 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(c) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(d) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 3.04% (2005), 2.85% (2004), 3.32% (2003), 2.91% (2002), AND
2.67% (2001).
(e) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
22
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
---------------------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 11.61 $ 9.53 $ 7.02 $ 9.86 $ 14.27
- --------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.02(a) 0.00(a), (b) (0.26) (0.29) (0.16)
Net realized and unrealized gains
(losses) on securities 1.50 2.08 2.77 (2.55) (4.25)
---------------------------------------------------------------------------
Total from investment operations 1.52 2.08 2.51 (2.84) (4.41)
- --------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.04) 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
---------------------------------------------------------------------------
Total distributions (0.04) 0.00 0.00 0.00 0.00
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.09 $ 11.61 $ 9.53 $ 7.02 $ 9.86
===========================================================================
TOTAL RETURN(c) 13.05% 21.83% 35.76% (28.80%) (30.90%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 584 $ 476 $ 482 $ 532 $ 1,429
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(d) 2.20% 2.16% 2.16% 2.16% 2.29%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.15% 2.15% 2.15% 2.15% 2.26%
Net investment income (loss) 0.14% 0.03% 0.08% (0.63%) (0.99%)
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(e) 54% 85% 144% 220% 213%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) NET INVESTMENT INCOME FOR THE YEAR ENDED DECEMBER 31, 2004 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(c) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(d) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.94% (2005), 2.87% (2004), 3.25% (2003), 3.11% (2002), AND
2.85% (2001).
(e) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
--------------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 11.92 $ 9.78 $ 7.18 $ 10.03 $ 14.40
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.11(a) 0.08(a) (0.01) (0.05) (0.07)
Net realized and unrealized gains
(losses) on securities 1.55 2.14 2.68 (2.79) (4.30)
--------------------------------------------------------------------------
Total from investment operations 1.66 2.22 2.67 (2.84) (4.37)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.12) (0.08) (0.07) (0.01) 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------
Total distributions (0.12) (0.08) (0.07) (0.01) 0.00
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.46 $ 11.92 $ 9.78 $ 7.18 $ 10.03
==========================================================================
TOTAL RETURN 13.91% 22.70% 37.17% (28.30%) (30.35%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 11,485 $ 10,885 $ 9,837 $ 9,321 $ 16,640
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 1.44% 1.41% 1.40% 1.40% 1.55%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.40% 1.40% 1.40% 1.40% 1.52%
Net investment income (loss) 0.92% 0.76% 0.80% 0.12% (0.26%)
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 54% 85% 144% 220% 213%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.28% (2005), 2.10% (2004), 2.52% (2003), 2.13% (2002), AND
1.99% (2001).
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
24
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
--------------------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 12.01 $ 9.82 $ 7.22 $ 10.08 $ 14.45
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.14(b) 0.13(b) 0.09 0.02 0.00(a)
Net realized and unrealized gains
(losses) on securities 1.57 2.17 2.60 (2.85) (4.37)
--------------------------------------------------------------------------
Total from investment operations 1.71 2.30 2.69 (2.83) (4.37)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.15) (0.11) (0.09) (0.03) 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------
Total distributions (0.15) (0.11) (0.09) (0.03) 0.00
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.57 $ 12.01 $ 9.82 $ 7.22 $ 10.08
==========================================================================
TOTAL RETURN 14.22% 23.45% 37.27% (28.10%) (30.24%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 70 $ 66 $ 3,146 $ 2,470 $ 6,102
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.20% 1.15% 1.15% 1.16% 1.28%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.15% 1.15% 1.15% 1.15% 1.26%
Net investment income (loss) 1.15% 1.21% 1.03% 0.27% (0.04%)
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 54% 85% 144% 220% 213%
</Table>
(a) NET INVESTMENT LOSS FOR THE YEAR ENDED DECEMBER 31, 2001 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(b) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(c) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 3.35% (2005), 1.65% (2004), 1.95% (2003), 1.71% (2002), AND
1.57% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 11.84 $ 9.70 $ 7.14 $ 9.97 $ 14.37
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.08(b) 0.06(b) 0.00(a) (0.10) (0.09)
Net realized and unrealized gains
(losses) on securities 1.54 2.11 2.61 (2.73) (4.31)
----------------------------------------------------------------------------
Total from investment operations 1.62 2.17 2.61 (2.83) (4.40)
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.09) (0.03) (0.05) 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------------
Total distributions (0.09) (0.03) (0.05) 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.37 $ 11.84 $ 9.70 $ 7.14 $ 9.97
============================================================================
TOTAL RETURN(c) 13.65% 22.42% 36.58% (28.39%) (30.62%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 143 $ 175 $ 172 $ 158 $ 343
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(d) 1.69% 1.66% 1.65% 1.65% 1.80%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.65% 1.65% 1.65% 1.65% 1.77%
Net investment income (loss) 0.67% 0.57% 0.67% (0.12%) (0.53%)
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(e) 54% 85% 144% 220% 213%
</Table>
(a) NET INVESTMENT INCOME FOR THE YEAR ENDED DECEMBER 31, 2003 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(b) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(c) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(d) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.81% (2005), 2.44% (2004), 2.88% (2003), 4.00% (2002), AND
2.86% (2001).
(e) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<Page>
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders International Equity Fund (the "Fund"). The Fund
offers Class A, Class B, Class C, Class F, Class R and Class T shares. Class A
and Class T shares are subject to a sales charge imposed at the time of
purchase, Class B shares are subject to a contingent deferred sales charge
("CDSC") imposed on Class B shares redeemed within six years of purchase, Class
C shares are subject to a CDSC imposed on Class C shares redeemed within one
year of purchase and Class F and Class R shares are sold at net asset value per
share (with Class R shares sold only to eligible institutional investors). Other
differences between the classes include services offered to and the expenses
borne by each Class. The following significant accounting policies have been
consistently followed by the Fund in the preparation of its financial
statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair value as
27
<Page>
determined in good faith by the Company's board of directors or pursuant to
procedures approved by the board of directors. These situations may include
instances where an event occurs after the close of the market on which a
security is traded but before the Fund calculates its net asset value, and it is
determined that the event has materially affected the value of the security.
Fair value of foreign equity securities may be determined with the assistance of
a pricing service using correlations between the movement of prices of foreign
securities and indexes of domestic securities and other appropriate indicators,
such as closing market prices of relevant ADRs and futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund normally will invest a
large portion of its assets in foreign securities. Foreign securities carry more
risk than U.S. securities, such as political and currency risks. In the event
the Fund executes a foreign security transaction, the Fund may enter into a
foreign currency contract to settle the foreign security transaction. The Fund
could be exposed to risk if counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably to the U.S.
dollar. The resultant foreign currency gain or loss from the contract is
recorded as foreign currency gain or loss and is presented as such in the
Statement of Operations. Foreign currency held at December 31, 2005 for settling
foreign trades is listed on the Statement of Assets and Liabilities.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each
business day. Purchases and sales of investment securities and income and
expense items denominated in foreign currencies are translated into U.S. dollar
amounts on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net unrealized gain or loss from investments and foreign
currency translations on the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized appreciation or depreciation on investments and foreign
currency translation arises from changes in
28
<Page>
the values of assets and liabilities, including investments in securities held
at the date of the financial statements, resulting from changes in the exchange
rates and changes in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) and from net realized capital gains (if any)
annually. Dividends and distributions, which are determined in accordance with
income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
29
<Page>
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
Financial Corporation, a publicly-owned financial services company which
provides a comprehensive range of financial products and services in domestic
and selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
1.00% of the first $250 million of net assets, 0.80% of the next $250 million of
net assets and 0.70% of net assets in excess of $500 million.
Founders has agreed to waive a portion of its management fee and to limit the
total expenses of the Fund. Founders agreed to waive that portion of its
management fee that exceeds 0.75% of the Fund's average net assets and to limit
the annual expenses of the Fund (net of credits received from the Fund's
custodian and expense offsets to broker commissions) to 1.40% for Class A and
Class F shares, 2.15% for Class B and Class C shares, 1.15% for Class R shares
and 1.65% for Class T shares. These reductions are made pursuant to a permanent
written contractual commitment. For the year ended December 31, 2005, $271,337
was reimbursed to the Fund by Founders pursuant to this provision.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $25,972 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $10,108 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $12.58 to $13.36, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency
30
<Page>
fees, including both the per account fees paid to DTI and out-of-pocket charges,
during the year ended December 31, 2005 were as follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
---------------------------------------------------
Class A $ 50,313
Class B $ 6,701
Class C $ 1,172
Class R $ 1,012
Class T $ 840
</Table>
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the processing of shareholder transactions in the Funds.
During the year ended December 31, 2005, the Fund was charged $930 for cash
management fees, which are included in the out-of-pocket transfer agency charges
above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $3,563 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $27,025 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
31
<Page>
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
-------------------------------------------------------
Class A N/A $ 61,518
Class B $ 14,400 $ 4,800
Class C $ 3,863 $ 1,288
Class T $ 343 $ 343
</Table>
During the year ended December 31, 2005, DSC retained $278 in sales commissions
from the sales of Class A shares. DSC also retained $9781 and $40 of contingent
deferred sales charges relating to redemptions of Class B and Class C shares,
respectively.
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance monitoring, regulatory and shareholder reporting, as well as related
facilities, equipment and clerical help. The fee is computed at the annual rate
of 0.10% of the average daily net assets of the Fund on the first $500 million,
0.065% of the average daily net assets of the Fund on the next $500 million and
0.02% of the average daily net assets of the Fund in excess of $1 billion, plus
reasonable out-of-pocket expenses. Founders has contractually agreed in writing
to waive any fees received for these services to the extent they exceed
Founders' costs in providing the services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits on the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
---------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $18,097, which reduced the amount paid to
Mellon Bank to $32,763.
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of
32
<Page>
one or more of the Funds. The amount paid to the director under the plan will be
determined based upon the performance of the selected Funds. The current value
of these amounts is included in Other Assets and Directors' Deferred
Compensation on the Statement of Assets and Liabilities. Changes in market value
are included in the Directors' fees and expenses and the net change in
unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally accepted in the United States of America. These differences
are due to differing treatments for items such as deferral of wash sale losses,
defered compensation, foreign currency transactions and capital loss carryovers.
Permanent differences identified during the year ended December 31, 2005 have
been reclassified among the components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
---------------------------------------------------------
$ (14,891) $ 14,891 $ 0
</Table>
The tax character of distributions paid during 2005 and 2004 was as follows:
<Table>
<Caption>
2005 2004
-----------------------
DISTRIBUTIONS PAID FROM:
Ordinary Income $ 328,907 $ 269,701
Long-Term Capital Gain $ 0 $ 0
-----------------------
$ 328,907 $ 269,701
=======================
</Table>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of December 31, 2005, represent capital loss carryovers that may be
available to offset future realized capital gains and thereby reduce future
taxable gains distributions. Post-October 31 foreign currency losses noted
below, if any, may be used to offset future net investment income and thereby
reduce future ordinary income distributions. Net capital loss
33
<Page>
carryovers utilized during 2005 by the Fund amounted to $3,946,147. Accumulated
capital losses as of December 31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
-----------------------------------------------------------------
2008 $ 3,805,803
2009 $ 10,099,981
2010 $ 5,986,171
2011 $ 7,339,094
----------------
$ 27,231,049
================
</Table>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The primary difference between book and tax appreciation or depreciation
is wash sale loss deferrals.
<Table>
Post-October Foreign Currency Loss Deferral $ (2,188)
Undistributed Ordinary Income $ 4,737
Other Book/Tax Differences $ (7,904)
Federal Tax Cost $ 29,281,696
Gross Tax Appreciation of Investments $ 10,468,302
Gross Tax Depreciation of Investments $ (48,825)
Net Tax Appreciation $ 10,419,477
</Table>
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 450 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 48,763 $ 599,013 111,208 $ 1,148,486
Dividends or Distributions Reinvested 15,907 $ 210,698 14,688 $ 174,191
Redeemed (272,133) $ (3,356,309) (315,412) $ (3,401,160)
------------ ---------------- ------------ ----------------
Net Decrease (207,463) $ (2,546,598) (189,516) $ (2,078,483)
============ ================ ============ ================
CLASS B
Sold 22,161 $ 266,981 11,870 $ 124,485
Dividends or Distributions Reinvested 212 $ 2,770 0 $ 0
Redeemed (68,649) $ (798,761) (64,211) $ (651,991)
------------ ---------------- ------------ ----------------
Net Decrease (46,276) $ (529,010) (52,341) $ (527,506)
============ ================ ============ ================
</Table>
34
<Page>
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS C
Sold 13,942 $ 162,011 6,433 $ 64,792
Dividends or Distributions Reinvested 52 $ 684 0 $ 0
Redeemed (10,373) $ (120,257) (15,944) $ (159,391)
------------ ---------------- ------------ ----------------
Net Increase (Decrease) 3,621 $ 42,438 (9,511) $ (94,599)
============ ================ ============ ================
CLASS F
Sold 129,124 $ 1,589,753 470,504 $ 4,815,790
Dividends or Distributions Reinvested 7,163 $ 95,978 5,843 $ 69,420
Redeemed (196,116) $ (2,414,771) (569,384) $ (5,865,911)
------------ ---------------- ------------ ----------------
Net Decrease (59,829) $ (729,040) (93,037) $ (980,705)
============ ================ ============ ================
CLASS R
Sold 75 $ 1,000 40,338 $ 419,337
Dividends or Distributions
Reinvested 55 $ 750 957 $ 11,405
Redeemed (518) $ (6,115) (355,989) $ (3,804,460)
------------ ---------------- ------------ ----------------
Net Decrease (388) $ (4,365) (314,694) $ (3,373,718)
============ ================ ============ ================
CLASS T
Sold 111 $ 1,276 1,431 $ 14,400
Dividends or Distributions Reinvested 66 $ 881 42 $ 492
Redeemed (4,290) $ (50,690) (4,460) $ (45,990)
------------ ---------------- ------------ ----------------
Net Decrease (4,113) $ (48,533) (2,987) $ (31,098)
============ ================ ============ ================
</Table>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $20,421,360 and $25,809,492, respectively.
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
35
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders International
Equity Fund (one of the portfolios constituting Dreyfus Founders Funds, Inc.,
hereafter referred to as the "Fund") at 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 Sates of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit 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, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 2005 by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
36
<Page>
OTHER TAX INFORMATION
(UNAUDITED)
CORPORATE DIVIDENDS RECEIVED DEDUCTION
Dividends paid by the Fund from net investment income and distributions of net
realized short-term capital gains are, for federal tax purposes, taxable as
ordinary income to shareholders. Of the ordinary income distributions declared
for the year ended December 31, 2005, 0.00% qualified for the dividends received
deduction available to the Fund's corporate shareholders.
QUALIFIED DIVIDEND INCOME
For the year ended December 31, 2005, the Fund designated 100% of the ordinary
income distributions paid as qualified dividend income subject to reduced income
tax rates for taxpayers with taxable accounts.
37
<Page>
FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
38
<Page>
The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services being
provided to the Funds are satisfactory, as evidenced in part by the recent
performance records of the Funds, to which the directors gave significant
attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to the
Funds, but also recognize that Founders or its affiliates have provided the
highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
39
<Page>
small group of funds selected by Lipper and a larger universe of funds also
selected by Lipper. The Lipper materials further included graphs depicting each
Fund's Class F one-year and annualized performance results for two-, three-,
four-, five-, and ten-year periods, if applicable, in comparison to the Fund's
performance group and performance universe.
International Equity Fund's performance for the one-year period ended December
31, 2004 placed it in the second quintile of its Lipper performance group, with
the Fund ranking fourth out of 14 Lipper-selected "peer funds," and in the first
quintile of its Lipper international multi-cap core fund performance universe,
ranking 31st of 259 funds. The directors noted that the Fund's performance had
improved significantly since the current portfolio management team assumed its
duties in March 2003, with the Fund placing in the first quintile of its
Lipper-selected group and universe for the two-year period ended December 31,
2004. The directors deemed these relative performance results to be very
satisfactory, and stressed the importance to Founders of the need to seek to
maintain a strong performance record.(1)
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance
difficulties, more recent performance results generally have shown
significant improvement;
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS REFLECT APPLICABLE FEE WAIVERS AND
EXPENSE LIMITATIONS, BUT DO NOT REFLECT THE FRONT-END SALES CHARGES THAT
APPLY TO OTHER SHARE CLASSES.
40
<Page>
Founders has focused its efforts upon improving the performance records of
the Funds and will continue to seek improvement; and
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing in
the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY FOUNDERS AND
ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, International
Equity Fund's management fees ranked in the first (best) quintile of its Lipper
competitive expense group, with the Fund's fees the second lowest of 14 "peer
funds." The Fund's contractual management fees at a common asset level were
determined by Lipper to be lower than 10 of the 14 funds in its group. The
Fund's management fees were in the first (best) quintile of its Lipper expense
universe, placing eighth lowest of 60 funds. The directors noted that Founders
has agreed to permanently waive the portion of its management fee for the Fund
that exceeds 0.75% of the Fund's average net assets, and has further agreed to a
permanent limitation upon the total expenses of each class of the Fund's shares.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
41
<Page>
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain
efficiencies in performing the portfolio management, trading and operational
functions related to those accounts (the directors recognized that in
determining its profitability from providing investment management and other
services to the Funds, Founders allocated its expenses between the Funds and
other accounts in a manner which was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment
services to any of the clients it advises, not just the Funds. The directors
recognized that Founders' profitability would be lower if it did not receive
research and brokerage services in connection with these brokerage
transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds. However, the International Equity Fund's 2005 expense ratios, net of
brokerage offsets and credits earned on cash balances held by the Fund's
custodian, are not expected to increase, due to Founders' commitment to
permanently limit such net expense ratios to certain levels.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders' management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
42
<Page>
Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the investment advisory fees received by
Founders. However, the directors noted that Founders' profitability is expected
to decline in 2005 as a result of declines in Fund asset levels. The directors
also considered the risks assumed by Founders in providing management services
to the Funds, including the risk that the management agreement can be terminated
by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of
investment advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially
fees which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than fees
arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in
43
<Page>
recognition of the quality service which Founders has provided and continues to
provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of scale if the assets of the Funds were to increase. Among other information,
the directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into increased
profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of an
increase in the assets of a particular Fund or a group of Funds would not be
passed along on a dollar-for-dollar basis to the shareholders of other Funds
that did not experience increases in their assets to points above their
breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is
consistent with its objective of sharing its economies of scale with the
Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
restrictions. The directors determined that Founders is dedicated to compliance
with
44
<Page>
all applicable rules and regulations and that the systems of controls which are
in place to ensure that the service providers to the Funds, including Founders,
and the Funds themselves, maintain strict adherence to the law are excellent.
OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years and that efforts are being and will continue to be
made to enhance such improvement and to maintain Fund expense ratios at
reasonable and competitive levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
45
<Page>
YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
46
<Page>
Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice
President--Compliance since 2002. Formerly, Founders' Manager of Compliance
(2000 to 2002) and Securities Compliance Examiner, Staff Accountant and Team
Leader for the U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
47
<Page>
DREYFUS FOUNDERS INTERNATIONAL EQUITY FUND
PROXY VOTING INFORMATION
A description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities, and information regarding how
the Funds voted these proxies for the 12-month period ended June 30, 2005, is
available through the Funds' website at www.founders.com and on the Securities
and Exchange Commission's (SEC) website at www.sec.gov. The description of the
policies and procedures is also available without charge, upon request, by
calling 1-800-525-2440.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available on the SEC's website at www.sec.gov and may be reviewed and copied
at the SEC's Public Reference Room in Washington, DC. Information on the
operation of the SEC's Public Reference Room may be obtained by calling
1-800-SEC-0330.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
Dreyfus Service Corporation, Distributor.
(C)2006 Founders Asset Management LLC. 2/06
A-646-INE-05
ANNUAL REPORT
[GRAPHIC]
DREYFUS FOUNDERS
MID-CAP GROWTH FUND
INVESTMENT UPDATE
DECEMBER 31, 2005
[DREYFUS FOUNDERS FUNDS(R) LOGO]
THE GROWTH SPECIALISTS
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 12
Statement of Investments 14
Statement of Assets and Liabilities 18
Statement of Operations 20
Statements of Changes in Net Assets 21
Financial Highlights 22
Notes to Financial Statements 28
Report of Independent Registered Public Accounting Firm 37
Factors Considered in Renewing the Advisory Agreement 38
Your Board Representatives 46
</Table>
PAPERLESS DELIVERY OF THIS REPORT
[GRAPHIC]
Did you know you can reduce your postal mail by accessing Dreyfus Founders Funds
regulatory material online? It's a simple, reliable process: when new documents
such as this financial report are available, we'll send you an email
notification containing a convenient link that will take you directly to that
Fund information on our website.
To take advantage of this service, simply inform us online of your decision to
receive materials through the Founders E-Communications Program. Cut down on
mailbox clutter and help the Fund reduce printing and postage charges by
enrolling today at www.founders.com/ecommunications. If you own Funds through a
third party, enroll at www.icsdelivery.com.
INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
managers only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-11 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC-INSURED - NOT BANK-GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF JOHN B. JARES]
[PHOTO OF DANIEL E. CROWE]
A DISCUSSION WITH CO-PORTFOLIO MANAGERS JOHN B. JARES, CFA, LEFT; AND DANIEL E.
CROWE, CFA, REGARDING FUND PERFORMANCE FOR THE 12-MONTH PERIOD ENDED DECEMBER
31, 2005.
COUNTERVAILING ECONOMIC FACTORS
The market struggled with countervailing forces throughout 2005. Continued
economic growth, benign core inflation, strong consumer spending, corporate
balance sheets flush with cash, and further housing price gains were favorable
to the market during the year. Offsetting this, however, were increases in
energy costs, the Federal Reserve's continued campaign of raising the federal
funds rate, catastrophic Gulf Coast hurricanes, terrorism in London, and
declining approval ratings for President Bush. These factors combined to lead to
robust earnings growth offset by declining valuations, which in turn produced
moderate increases in stock prices.
MODEST CHANGES IN COMPOSITION HELPED FUND
The number of holdings in the Fund remained consistent within the range of 50-60
positions, and cash levels and turnover rates were similar to 2004 levels.
However, the Fund transitioned its allocation from being overweight the consumer
discretionary sector and underweight the healthcare sector to holding an
overweight position in healthcare and an underweight position in consumer
discretionary. The Fund's consumer discretionary weighting declined as high
valuations, coupled with headwinds that were likely to slow consumer spending,
led us to find fewer investments within this sector. The number of healthcare
positions was increased as we found more opportunities at attractive valuations.
[SIDENOTE]
"PORTFOLIO COMPOSITION CHANGES POSITIVELY IMPACTED THE FUND'S RELATIVE
PERFORMANCE DURING THE PERIOD."
3
<Page>
Dreyfus Founders Mid-Cap Growth Fund's return for the 12-month period ended
December 31, 2005 was competitive(1) with its benchmark, the Russell Mid-Cap
Growth Index, which produced a 12.10% return. The Fund's relative performance
was primarily driven by strong stock picking overall, particularly in the
information technology (IT) and industrials sectors. However, some weak stock
choices in the financials and, to a lesser extent, energy sectors partially
offset the gains made by strong stock selection elsewhere.
COMPELLING OPPORTUNITIES
We found compelling growth opportunities in many sectors during the period,
including the information technology, healthcare and industrials sectors.
Information technology companies with strong cyclical demand for their products
presented attractive investment options for the Fund. Furthermore, companies
with industry-leading products in fast growing markets also presented prospects
for growth. Industrials companies in general benefited from continued economic
expansion and, to a lesser extent, increased corporate spending. The airline
industry within the industrials sector rose on a rationalization of capacity
within the industry due to the numerous recent bankruptcies. And although the
Fund's allocation and stock selection in the energy sector did not help its
relative performance, many energy companies in general continued to benefit from
large increases in the prices of oil and natural gas.
STRONG STOCK PICKING
The Fund's relative performance overall was mostly driven by strong stock
picking across a number of sectors. Solid selection of holdings in the
information technology sector provided outperformance relative to the Index.
Among the top performers in IT, and in the Fund overall, was SanDisk, Inc., a
leading supplier of NAND flash memory, which benefited from favorable supply and
demand characteristics. Apple Computer, Inc.'s use of SanDisk's flash memory
within the new iPod nano MP3 music player, as well as expected strong demand in
musicenabled cell phones, gave credence to the stock's growth. SanDisk's stock
was purchased during the period on the expectation
- ----------
(1) Excluding sales charges, which result in lower returns for certain share
classes. Please see page 7 for Average Annual Total Returns for all share
classes, including and excluding sales charges.
4
<Page>
that NAND flash memory demand would increase; however, the stock was later sold
due to concerns of increased supply entering the market. We purchased Cogent
Systems, Inc., a provider of biometric solutions including automated fingerprint
identification systems (AFIS), in the second quarter of the period after a
substantial pullback by the market over a secondary offering of shares. After
the secondary offering was completed, the company's strong fundamentals and
leading position in the AFIS industry led to strong share-price appreciation.
The position was sold later in the period over concerns about delays in
potential contract wins in Europe.
As was mentioned above, the airline industry within the industrials sector
saw many stocks realizing gains during the period, including AMR CORPORATION,
parent company of American Airlines. Recent bankruptcies accelerated the
reduction of capacity in the industry, resulting in a much-improved pricing
environment. In addition, aggressive cuts in operating costs compensated for the
period's higher price of fuel. For the first time in several years, American
Airlines is expected to be profitable in 2006. Other industrials players that
<Table>
LARGEST EQUITY HOLDINGS (ticker symbol)
1. HARMAN INTERNATIONAL INDUSTRIES, INC. (HAR) 3.54%
2. AMERICAN TOWER CORPORATION (AMT) 3.26%
3. R.H. DONNELLEY CORPORATION (RHD) 3.09%
4. BALL CORPORATION (BLL) 3.00%
5. OMNICARE, INC. (OCR) 2.73%
6. PERKINELMER, INC. (PKI) 2.73%
7. FLIR SYSTEMS, INC. (FLIR) 2.49%
8. COVANCE, INC. (CVD) 2.46%
9. THOMAS AND BETTS CORPORATION (TNB) 2.40%
10. SCIENTIFIC GAMES CORPORATION (SGMS) 2.24%
</Table>
Portfolio holdings are subject to change, and should not be construed as a
recommendation of any security.
[SIDENOTE]
SECTORS BENEFITING THE FUND
Information Technology
Industrials
Telecommunications Services
5
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 18005252440 TO OBTAIN THE MOST RECENT
MONTH-END PERFORMANCE DATA.
[CHART]
Dreyfus Founders
Mid-Cap Growth Fund Russell Midcap
Class F Shares Growth Index
12/31/1995 $10,000.00 $10,000.00
12/31/1996 $11,533.35 $11,747.64
12/31/1997 $13,428.42 $14,395.83
12/31/1998 $13,196.03 $16,967.47
12/31/1999 $18,774.16 $25,670.60
12/29/2000 $14,327.21 $22,654.49
12/31/2001 $11,402.62 $18,089.48
12/31/2002 $8,609.47 $13,131.93
12/31/2003 $11,764.08 $18,740.87
12/31/2004 $13,932.88 $21,641.84
12/30/2005 $15,707.35 $24,260.25
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders Mid-Cap Growth Fund on 12/31/95 to a $10,000 investment made in an
unmanaged securities index on that date. The Fund's performance assumes the
reinvestment of dividends and capital gain distributions, but does not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or
redemption of Fund shares. The Fund offers multiple classes of shares.
Performance shown is for Class F, which is open only to grandfathered investors.
The Fund's performance in the graph takes into account all applicable Class F
fees and expenses. THESE FIGURES DO NOT REFLECT THE MAXIMUM SALES CHARGES
APPLICABLE TO CLASS A, B, C, OR T SHARES OF THE FUND. FOR THESE SHARE CLASSES,
APPLYING THESE CHARGES WILL RESULT IN LOWER RETURNS FOR INVESTORS.
The Russell Mid-cap Growth Index measures the performance of the 800 smallest
companies in the Russell 1000 Index with higher price-to-book ratios and higher
forecasted growth values. The total return figures cited for this index assume
change in security prices and reinvestment of dividends, but do not reflect the
costs of managing a mutual fund. The Russell 1000 Index measures the performance
of the largest 1,000 publicly traded U.S. companies. Further information related
to Fund performance is contained elsewhere in this report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (INCEPTION DATE) YEAR YEARS YEARS INCEPTION
- ---------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) 6.36% 0.13% -- (4.23%)
Without sales charge 12.77% 1.33% -- (3.28%)
B SHARES (12/31/99)
With redemption* 7.72% 0.34% -- (4.03%)
Without redemption 11.72% 0.73% -- (3.92%)
C SHARES (12/31/99)
With redemption** 10.62% 0.46% -- (4.14%)
Without redemption 11.62% 0.46% -- (4.14%)
F SHARES (9/8/61) 12.74% 1.86% 4.62% N/A
R SHARES (12/31/99) 12.89% 1.50% -- (3.12%)
T SHARES (12/31/99)
With sales charge (4.50%) 6.49% (0.53%) -- (4.87%)
Without sales charge 11.59% 0.37% -- (4.14%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, fee
waivers for certain share classes, and adjustments for financial statement
purposes. Part of the Fund's historical performance is due to the purchase of
securities sold in initial public offerings (IPOs). There is no guarantee that
the Fund's investments in IPOs, if any, will continue to have a similar impact
on performance. Part of the Fund's historical performance is due to amounts
received from class action settlements regarding prior Fund holdings. There is
no guarantee that these settlement distributions will occur in the future or
have a similar impact on performance. There are risks associated with mid-cap
investing, such as limited product lines, less liquidity, and small market
share.
* The maximum contingent deferred sales charge for Class B shares is 4% and is
reduced to 0% after six years, at which time the Class B shares convert to
Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
aided the Fund's relative performance for the period included THOMAS AND BETTS
CORPORATION. A rebound in commercial construction from previous lows during 2002
and 2003, as well as a build-out of the utility transmission infrastructure,
drove double-digit revenue growth for the company. In addition, increased
capacity utilization and productivity improvements resulted in higher margins
for Thomas and Betts despite a higher raw material cost environment. The company
was also able to raise prices due to increased demand for its products.
Strong stock selection in the telecommunications services sector aided the
Fund's return; the Fund's relative overweight position during the period also
benefited the Fund's performance. Telecom issue AMERICAN TOWER CORPORATION's
stock price rose as investors continued to realize the attractive fundamentals
within the cellular tower industry. The industry recently consolidated to a
smaller number of financially strong players and has enjoyed stable price
increases, improving balance sheets and strong cash flow generation. The stock
remained a large holding in the Fund at the end of the period.
[CHART]
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
Healthcare 22.60%
Consumer Discretionary 20.69%
Information Technology 17.17%
Industrials 10.76%
Materials 8.36%
Financials 6.73%
Energy 6.65%
Telecommunications Services 3.26%
Consumer Staples 1.09%
Cash & Equivalents 2.69%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio
managers and are subject to change at any time, based on market and other
conditions, and should not be construed as a recommendation of any specific
security.
8
<Page>
OTHER STRONG PERFORMERS
Other notable strong performers during the period included Blackboard, Inc. and
CB RICHARD ELLIS GROUP, INC. A provider of educational software, Blackboard
continued to see strong demand for its academic suite of products and upgrades;
however, the Fund's position in this stock was sold during the year due to
concerns regarding valuation. CB Richard Ellis, a worldwide provider of
commercial real estate services, performed strongly as the company raised
earnings guidance multiple times throughout the period. Increased earnings were
driven by the strong recovery in the commercial real estate market; CB Richard
Ellis outperformed many other financial services companies, as the company was
not negatively impacted by the flattening yield curve experienced in 2005.
FINANCIALS AND ENERGY WEIGHED ON PERFORMANCE
The aforementioned flattening yield curve negatively impacted the growth
opportunities of many financial services companies, particularly banks, during
2005. Slowing growth in areas such as credit card receivables also had a
negative impact on financial companies. The Fund's slight relative overweight
position and weak stock selection in this sector was the largest weight on Fund
performance for the period. First Marblehead Corporation, a provider of
outsourcing services for private education lending, saw its stock price drop
during the period as investors became concerned over the company's long-term
growth rate and management issues: the company delivered slower-than-expected
facilitation volume growth in the second and third quarters, and management
issues arose involving the CEO's resignation for the alleged giving of improper
gifts to an employee at one of First Marblehead's larger customers. Ambac
Financial Group, Inc. also underperformed, as slower credit enhancement
production was a sign that future earnings growth was likely to slow. The Fund
exited its positions in these stocks by the end of the period, as we believed
stronger growth opportunities existed elsewhere.
Although energy was a strong-performing sector in the Index during the
period, the Fund's underweight allocation and poor selection of energy stocks
impeded the Fund's relative return.
9
<Page>
SELECT IT ISSUES HURT RETURN
As was previously mentioned, the information technology sector positively
impacted the Fund's return; however, select IT stocks did detract from the
Fund's performance in this sector. Zebra Technologies Corporation missed second
quarter earnings because of weak retail numbers and economic conditions in
Europe. A slower-than-expected adoption of radio frequency identification (RFID)
technologies also impacted the near-term growth of the company. CDW Corporation
underperformed as the company missed Financials earnings expectations and saw
revenue growth at slower-than-historical levels. Furthermore, management failed
to maximize investor returns by not deploying its significant cash position.
VERITAS Software Corporation declined in the first half of the period, as
investors were concerned over the strategic rationale of the acquisition of
VERITAS by Symantec. TIBCO Software, Inc. was another underperforming IT stock.
INDIVIDUAL ISSUES IMPEDED RETURN
Tempur-Pedic International, Inc. was a notable individual poor performer as the
company delivered slightly lower-than-expected revenue growth in the second
quarter of the period, and announced substantially lower-than-expected earnings
and revenue for the period's third quarter. Management credibility was
negatively impacted by a lack of identification of the underlying problems that
led to the large shortfall in the third quarter. Healthcare holding Biomet, Inc.
declined over increasing concerns on pricing pressure for the company's
orthopedic hips and knees, and worries regarding slowing procedures growth.
[SIDENOTE]
SECTORS DETRACTING FROM THE FUND
Financials
Energy
Utilities
10
<Page>
POSITIONED FOR 2006
At the end of the period, the Fund was comprised of companies we believed may
continue to grow through a slowing economic environment--this included many
healthcare companies and select stocks within the information technology sector.
The Fund was also positioned to benefit from increased spending within the
telecommunications services sector. The Fund held underweight positions in
sectors likely to be negatively impacted by slowing consumer spending. Finally,
the Fund held a reduced relative position in the energy sector as a slowing
economy may lead to lower demand for oil and natural gas. Furthermore, the
weighting of this sector in the Fund's benchmark, the Russell MidCap Growth
Index, has increased substantially due to changes in the composition in the
Index; we have not found a corresponding increase in the number of energy sector
investments that we find compelling.
We will continue to focus on our bottom-up investment process and will work
diligently to seek the most attractive mix of potential reward and limited risk.
/s/ John B. Jares /s/ Daniel E. Crowe
John B. Jares, CFA Daniel E. Crowe, CFA
Co-Portfolio Manager Co-Portfolio Manager
11
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
12
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- ---------------------------------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,069.92 $ 8.09
CLASS A HYPOTHETICAL 1,000.00 1,017.29 7.91
CLASS B ACTUAL 1,000.00 1,067.65 12.40
CLASS B HYPOTHETICAL 1,000.00 1,013.06 12.15
CLASS C ACTUAL 1,000.00 1,067.19 11.98
CLASS C HYPOTHETICAL 1,000.00 1,013.46 11.74
CLASS F ACTUAL 1,000.00 1,070.98 7.20
CLASS F HYPOTHETICAL 1,000.00 1,018.16 7.04
CLASS R ACTUAL 1,000.00 1,071.84 6.48
CLASS R HYPOTHETICAL 1,000.00 1,018.88 6.33
CLASS T ACTUAL 1,000.00 1,067.04 13.49
CLASS T HYPOTHETICAL 1,000.00 1,011.98 13.22
</Table>
* Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- --------------------------------------------------------------------------------
CLASS A 1.55%
CLASS B 2.38%
CLASS C 2.30%
CLASS F 1.38%
CLASS R 1.24%
CLASS T 2.59%
</Table>
13
<Page>
STATEMENT OF INVESTMENTS
DECEMBER 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (DOMESTIC)--90.3%
ADVERTISING--3.1%
57,375 R.H. Donnelley Corporation* $ 3,535,446
--------------
AIRLINES--1.9%
100,000 AMR Corporation* 2,223,000
--------------
APPLICATION SOFTWARE--1.5%
39,000 NAVTEQ* 1,710,930
--------------
AUTOMOTIVE RETAIL--2.2%
58,000 Advance Auto Parts, Inc.* 2,520,680
--------------
BIOTECHNOLOGY--3.8%
20,000 Cephalon, Inc.* 1,294,800
30,500 Neurocrine Biosciences, Inc.* 1,913,265
94,000 Senomyx, Inc.* 1,139,280
--------------
4,347,345
--------------
CASINOS & GAMING--3.4%
94,000 Scientific Games Corporation* 2,564,320
25,000 Wynn Resorts Limited* 1,371,250
--------------
3,935,570
--------------
COMMERCIAL PRINTING--1.7%
150,000 Cenveo, Inc.* 1,974,000
--------------
COMMUNICATIONS EQUIPMENT--1.3%
135,000 Tellabs, Inc.* 1,471,500
--------------
CONSUMER ELECTRONICS--3.5%
41,425 Harman International Industries, Inc. 4,053,436
--------------
DATA PROCESSING & OUTSOURCED SERVICES--2.3%
25,500 Fiserv, Inc.* 1,103,385
40,000 Paychex, Inc. 1,524,800
--------------
2,628,185
--------------
DEPARTMENT STORES--0.8%
18,550 Kohl's Corporation* 901,530
--------------
ELECTRICAL COMPONENTS & EQUIPMENT--4.0%
33,675 Genlyte Group, Inc.* 1,803,970
65,450 Thomas and Betts Corporation* 2,746,282
--------------
4,550,252
--------------
ELECTRONIC EQUIPMENT MANUFACTURERS--4.3%
60,500 Agilent Technologies, Inc.* 2,014,045
128,000 FLIR Systems, Inc.* 2,858,240
--------------
4,872,285
--------------
HEALTHCARE EQUIPMENT--2.7%
132,675 PerkinElmer, Inc. 3,125,823
--------------
HEALTHCARE SERVICES--2.7%
54,700 Omnicare, Inc. 3,129,934
--------------
</Table>
14
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- --------------------------------------------------------------------------------
HEALTHCARE SUPPLIES--3.9%
61,300 Dade Behring Holdings, Inc. $ 2,506,557
36,700 DENTSPLY International, Inc. 1,970,423
--------------
4,476,980
--------------
HOME ENTERTAINMENT SOFTWARE--1.0%
85,500 Activision, Inc.* 1,174,770
--------------
HOME FURNISHINGS--1.0%
13,475 Mohawk Industries, Inc.* 1,172,056
--------------
HOMEFURNISHING RETAIL--1.8%
55,475 Bed Bath & Beyond, Inc.* 2,005,421
--------------
HOUSEWARES & SPECIALTIES--1.8%
69,000 Jarden Corporation* 2,080,350
--------------
LEISURE FACILITIES--0.5%
13,175 Royal Caribbean Cruises Limited 593,666
--------------
LEISURE PRODUCTS--1.0%
28,500 Brunswick Corporation 1,158,810
--------------
MANAGED HEALTHCARE--1.5%
29,025 Coventry Health Care, Inc.* 1,653,264
--------------
METAL & GLASS CONTAINERS--3.0%
86,575 Ball Corporation 3,438,759
--------------
OIL & GAS EQUIPMENT & SERVICES--4.2%
61,400 BJ Services Company 2,251,538
30,150 FMC Technologies, Inc.* 1,294,038
35,000 Weatherford International Limited* 1,267,000
--------------
4,812,576
--------------
OIL & GAS EXPLORATION & PRODUCTION--1.3%
29,300 Newfield Exploration Company* 1,467,051
--------------
OIL & GAS REFINING & MARKETING--1.2%
26,000 Valero Energy Corporation 1,341,600
--------------
PACKAGED FOODS & MEATS--1.1%
28,500 J. M. Smucker Company 1,254,000
--------------
PHARMACEUTICALS--6.0%
58,000 Covance, Inc.* 2,815,900
100,000 MGI Pharma, Inc.* 1,716,000
105,125 Theravance, Inc.* 2,367,415
--------------
6,899,315
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT--2.1%
40,950 CB Richard Ellis Group, Inc.* 2,409,908
--------------
REGIONAL BANKS--1.0%
66,000 UCBH Holdings, Inc. 1,180,080
--------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- --------------------------------------------------------------------------------
SEMICONDUCTORS--4.8%
106,000 Cypress Semiconductor Corporation* $ 1,510,500
92,400 Freescale Semiconductor, Inc. Class B* 2,325,708
46,650 Maxim Integrated Products, Inc. 1,690,596
--------------
5,526,804
--------------
SPECIALTY CHEMICALS--1.7%
31,100 Sigma-Aldrich Corporation 1,968,319
--------------
STEEL--3.7%
68,000 Allegheny Technologies, Inc. 2,453,440
25,850 Nucor Corporation 1,724,712
--------------
4,178,152
--------------
SYSTEMS SOFTWARE--1.0%
23,000 MICROS Systems, Inc.* 1,111,360
--------------
THRIFTS & MORTGAGE FINANCE--1.0%
27,000 The PMI Group, Inc. 1,108,890
--------------
TRADING COMPANIES & DISTRIBUTORS--1.3%
20,750 W.W. Grainger, Inc. 1,475,325
--------------
TRUCKING--1.9%
93,100 J.B. Hunt Transport Services, Inc. 2,107,784
--------------
WIRELESS TELECOMMUNICATION SERVICES--3.3%
138,050 American Tower Corporation* 3,741,155
--------------
TOTAL COMMON STOCKS (DOMESTIC)
(COST--$93,942,162) 103,316,311
--------------
COMMON STOCKS (FOREIGN)--7.1%
AUTO PARTS & EQUIPMENT--1.5%
38,500 Autoliv, Inc. (SW) 1,748,670
--------------
HEALTHCARE EQUIPMENT--2.0%
40,975 Mettler-Toledo International, Inc. (SZ)* 2,261,820
--------------
INVESTMENT BANKING & BROKERAGE--1.8%
65,150 Lazard Limited Class A (BD) 2,078,285
--------------
MULTI-LINE INSURANCE--0.8%
17,000 Arch Capital Group Limited (BD)* 930,750
--------------
SEMICONDUCTORS--1.0%
69,125 ATI Technologies, Inc. (CA)* 1,174,435
--------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$6,981,107) 8,193,960
--------------
</Table>
16
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- --------------------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--2.4%
SPECIAL PURPOSE ENTITY--2.4%
$ 2,800,000 CAFCO LLC
4.12% 1/3/06~ $ 2,799,359
--------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$2,799,359) 2,799,359
--------------
TOTAL INVESTMENTS--99.8%
(TOTAL COST--$103,722,628) 114,309,630
--------------
OTHER ASSETS AND LIABILITIES--0.2% 281,109
--------------
NET ASSETS--100.0% $ 114,590,739
==============
</Table>
NOTES TO STATEMENTS OF INVESTMENTS
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$2,799,359, OR 2.4%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
* NON-INCOME PRODUCING.
BD - BERMUDA
CA - CANADA
SW - SWEDEN
SZ - SWITZERLAND
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 103,722,628
--------------
Investment securities, at market 114,309,630
Cash 167,613
Receivables:
Investment securities sold 356,639
Capital shares sold 31,945
Dividends and interest 39,364
Other assets 32,375
--------------
Total Assets 114,937,566
--------------
LIABILITIES
Payables and other accrued liabilities:
Capital shares redeemed 149,982
Advisory fees 80,537
Shareholder servicing fees 13,283
Accounting fees 5,933
Distribution fees 12,547
Transfer agency fees 8,650
Custodian fees 1,379
Directors' deferred compensation 32,375
Other 42,141
--------------
Total Liabilities 346,827
--------------
Net Assets $ 114,590,739
==============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 134,417,588
Accumulated net investment loss (21,525)
Accumulated net realized loss from security
and foreign currency transactions (30,392,326)
Net unrealized appreciation on investments
and foreign currency translation 10,587,002
--------------
Total $ 114,590,739
==============
</Table>
18
<Page>
<Table>
CLASS A
Net Assets $ 1,656,331
Shares Outstanding 353,936
Net Asset Value, Redemption Price Per Share $ 4.68
Maximum offering price per share
(net asset value plus sales charge of 5.75% of
offering price) $ 4.97
CLASS B
Net Assets $ 1,885,886
Shares Outstanding 421,009
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales
charge) Per Share $ 4.48
CLASS C
Net Assets $ 549,618
Shares Outstanding 124,333
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales
charge) Per Share $ 4.42
CLASS F
Net Assets $ 110,169,625
Shares Outstanding 23,056,571
Net Asset Value, Offering and Redemption Price Per Share $ 4.78
CLASS R
Net Assets $ 296,699
Shares Outstanding 62,746
Net Asset Value, Offering and Redemption Price Per Share $ 4.73
CLASS T
Net Assets $ 32,580
Shares Outstanding 7,360
Net Asset Value, Redemption Price Per Share $ 4.43
Maximum offering price per share
(net asset value plus sales charge of 4.50% of
offering price) $ 4.64
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 503,545
Interest 186,419
Foreign taxes withheld (460)
--------------
Total Investment Income 689,504
--------------
EXPENSES
Advisory fees--Note 2 900,119
Shareholder servicing fees--Note 2 157,519
Accounting fees--Note 2 66,009
Distribution fees--Note 2 138,955
Transfer agency fees--Note 2 84,207
Registration fees 56,220
Postage and mailing expenses 16,700
Custodian fees and expenses--Note 2 7,995
Printing expenses 48,790
Legal and audit fees 35,698
Directors' fees and expenses--Note 2 21,145
Other expenses 47,014
--------------
Total Expenses 1,580,371
Earnings Credits (7,875)
Reimbursed/Waived Expenses (3,773)
Expense Offset to Broker Commissions (12,440)
--------------
Net Expenses 1,556,283
--------------
Net Investment Loss (866,779)
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITY
TRANSACTIONS AND FOREIGN CURRENCY TRANSACTIONS
Net Realized Gain (Loss) on:
Security Transactions 19,689,375
Foreign Currency Transactions (2)
--------------
Net Realized Gain 19,689,373
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation (6,069,623)
--------------
Net Realized and Unrealized Gain 13,619,750
--------------
Net Increase in Net Assets Resulting from Operations $ 12,752,971
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2005 2004
OPERATIONS
Net Investment Loss $ (866,779) $ (1,149,129)
Net Realized Gain on Security
and Foreign Currency Transactions 19,689,373 32,490,110
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation (6,069,623) (10,271,293)
--------------- ---------------
Net Increase in Net Assets Resulting from Operations 12,752,971 21,069,688
--------------- ---------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A (86,979) 152,338
Class B (115,914) (32,488)
Class C 62,359 45,566
Class F (21,399,040) (60,416,547)
Class R 205,827 (51,768)
Class T (9,705) (76)
--------------- ---------------
Net Decrease from Capital Share Transactions (21,343,452) (60,302,975)
--------------- ---------------
Net Decrease in Net Assets (8,590,481) (39,233,287)
--------------- ---------------
NET ASSETS
Beginning of Year $ 123,181,220 $ 162,414,507
--------------- ---------------
End of Year $ 114,590,739 $ 123,181,220
=============== ===============
Accumulated Net Investment Loss $ (21,525) $ (19,633)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.15 $ 3.52 $ 2.58 $ 3.44 $ 4.38
- -------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.05) (0.03) 0.03 (0.04) (0.06)
Net realized and unrealized gains
(losses) on securities 0.58 0.66 0.91 (0.82) (0.88)
------------------------------------------------------------
Total from investment operations 0.53 0.63 0.94 (0.86) (0.94)
- -------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.68 $ 4.15 $ 3.52 $ 2.58 $ 3.44
============================================================
TOTAL RETURN(a) 12.77% 17.90% 36.43% (25.00%) (21.46%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,656 $ 1,546 $ 1,191 $ 476 $ 538
- -------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or
brokerage offsets(b) 1.58% 1.54% 1.87% 2.15% 2.47%
Expenses with reimbursements,
earnings credits and
brokerage offsets 1.55% 1.53% 1.86% 2.15% 2.46%
Net investment loss (0.92%) (1.07%) (1.38%) (1.81%) (1.93%)
- -------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 211% 147% 160% 216% 214%
</Table>
(a) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
22
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.01 $ 3.43 $ 2.54 $ 3.39 $ 4.32
- -------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.09) (0.07) (0.03) (0.05) (0.05)
Net realized and unrealized gains
(losses) on securities 0.56 0.65 0.92 (0.80) (0.88)
------------------------------------------------------------
Total from investment operations 0.47 0.58 0.89 (0.85) (0.93)
- -------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.48 $ 4.01 $ 3.43 $ 2.54 $ 3.39
============================================================
TOTAL RETURN(a) 11.72% 16.91% 35.04% (25.07%) (21.53%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,886 $ 1,823 $ 1,587 $ 969 $ 1,138
- -------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage
offsets(b) 2.43% 2.37% 2.65% 2.68% 2.59%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.41% 2.37% 2.64% 2.67% 2.58%
Net investment loss (1.78%) (1.90%) (2.16%) (2.33%) (2.06%)
- -------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 211% 147% 160% 216% 214%
</Table>
(a) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
--------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 3.96 $ 3.38 $ 2.50 $ 3.36 $ 4.32
- ---------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.02) (0.06)(a) (0.10) (0.08) (0.08)
Net realized and unrealized gains
(losses) on securities 0.48 0.64 0.98 (0.78) (0.88)
--------------------------------------------------------------
Total from investment operations 0.46 0.58 0.88 (0.86) (0.96)
- ---------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
--------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.42 $ 3.96 $ 3.38 $ 2.50 $ 3.36
==============================================================
TOTAL RETURN(b) 11.62% 17.16% 35.20% (25.60%) (22.22%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 550 $ 428 $ 323 $ 274 $ 380
- ---------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or
brokerage offsets(c) 2.35% 2.32% 2.51% 2.99% 3.94%
Expenses with reimbursements,
earnings credits and
brokerage offsets 2.32% 2.31% 2.51% 2.98% 3.93%
Net investment loss (1.69%) (1.83%) (2.02%) (2.65%) (3.41%)
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 211% 147% 160% 216% 214%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE
RATIOS WOULD HAVE BEEN 2.35% (2005), 2.32% (2004), 2.51% (2003), 3.04%
(2002), AND 4.25% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
24
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.24 $ 3.58 $ 2.62 $ 3.47 $ 4.36
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.12) (0.03)(a) 0.02 (0.04) (0.05)
Net realized and unrealized gains
(losses) on securities 0.66 0.69 0.94 (0.81) (0.84)
-------------------------------------------------------------------------
Total from investment operations 0.54 0.66 0.96 (0.85) (0.89)
- ---------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
-------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.78 $ 4.24 $ 3.58 $ 2.62 $ 3.47
=========================================================================
TOTAL RETURN 12.74% 18.44% 36.64% (24.50%) (20.41%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 110,170 $ 119,273 $ 159,161 $ 89,970 $ 119,708
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(b) 1.41% 1.33% 1.51% 1.56% 1.39%
Expenses with reimbursements, earnings
credits and brokerage offsets 1.39% 1.33% 1.50% 1.56% 1.37%
Net investment loss (0.77%) (0.87%) (1.01%) (1.22%) (0.84%)
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 211% 147% 160% 216% 214%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
---------------------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.19 $ 3.56 $ 2.61 $ 3.48 $ 4.39
- -----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.02)(a) (0.04)(a) (0.03) (0.04) 0.01
Net realized and unrealized gains
(losses) on securities 0.56 0.67 0.98 (0.83) (0.92)
---------------------------------------------------------------------------
Total from investment operations 0.54 0.63 0.95 (0.87) (0.91)
- -----------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
---------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.73 $ 4.19 $ 3.56 $ 2.61 $ 3.48
===========================================================================
TOTAL RETURN 12.89% 17.70% 36.40% (25.00%) (20.73%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 297 $ 71 $ 119 $ 77 $ 49
- -----------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(b) 1.38% 1.48% 1.64% 1.97% 2.91%
Expenses with reimbursements, earnings
credits and brokerage offsets 1.34% 1.48% 1.64% 1.97% 2.89%
Net investment loss (0.70%) (1.03%) (1.15%) (1.63%) (2.40%)
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 211% 147% 160% 216% 214%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 1.38% (2005), 1.48% (2004), 1.64% (2003), 3.49% (2002), AND
57.54% (2001).
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
26
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-----------------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 3.97 $ 3.39 $ 2.51 $ 3.39 $ 4.35
- -------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.17) (0.06) (0.02) (0.06) (0.11)
Net realized and unrealized gains
(losses) on securities 0.63 0.64 0.90 (0.82) (0.85)
-----------------------------------------------------------------------
Total from investment operations 0.46 0.58 0.88 (0.88) (0.96)
- -------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
-----------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.43 $ 3.97 $ 3.39 $ 2.51 $ 3.39
=======================================================================
TOTAL RETURN(a) 11.59% 17.11% 35.06% (25.96%) (22.07%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 33 $ 40 $ 34 $ 20 $ 20
- -------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(b) 2.59% 2.26% 2.76% 3.64% 3.13%
Expenses with reimbursements, earnings
credits and brokerage offsets 2.57% 2.25% 2.76% 3.63% 3.11%
Net investment loss (1.94%) (1.78%) (2.27%) (3.29%) (2.57%)
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 211% 147% 160% 216% 214%
</Table>
(a) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(b) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.59% (2005), 2.26% (2004), 2.76% (2003), 10.30% (2002), AND
28.91% (2001).
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<Page>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders Mid-Cap Growth Fund (the "Fund"). The Fund offers
Class A, Class B, Class C, Class F, Class R and Class T shares. Class A and
Class T shares are subject to a sales charge imposed at the time of purchase,
Class B shares are subject to a contingent deferred sales charge ("CDSC")
imposed on Class B shares redeemed within six years of purchase, Class C shares
are subject to a CDSC imposed on Class C shares redeemed within one year of
purchase and Class F and Class R shares are sold at net asset value per share
(with Class R shares sold only to eligible institutional investors). Other
differences between the classes include services offered to and the expenses
borne by each Class. The following significant accounting policies have been
consistently followed by the Fund in the preparation of its financial
statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair value as
28
<Page>
determined in good faith by the Company's board of directors or pursuant to
procedures approved by the board of directors. These situations may include
instances where an event occurs after the close of the market on which a
security is traded but before the Fund calculates its net asset value, and it is
determined that the event has materially affected the value of the security.
Fair value of foreign equity securities may be determined with the assistance of
a pricing service using correlations between the movement of prices of foreign
securities and indexes of domestic securities and other appropriate indicators,
such as closing market prices of relevant ADRs and futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund may invest at least a
portion of its assets in foreign securities. Foreign securities carry more risk
than U.S. securities, such as political and currency risks. In the event the
Fund executes a foreign security transaction, the Fund may enter into a foreign
currency contract to settle the foreign security transaction. The Fund could be
exposed to risk if counterparties are unable to meet the terms of the contracts
or if the value of the currency changes unfavorably to the U.S. dollar. The
resultant foreign currency gain or loss from the contract is recorded as foreign
currency gain or loss and is presented as such in the Statement of Operations.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each day.
Purchases and sales of investment securities and income and expense items
denominated in foreign currencies are translated into U.S. dollar amounts on the
respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net unrealized gain or loss from investments and foreign
currency translations on the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized appreciation or depreciation on investments and foreign
currency translation arises from changes in the values of assets and
liabilities, including investments in securities held at the date
29
<Page>
of the financial statements, resulting from changes in the exchange rates and
changes in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) and from net realized capital gains (if any)
annually. Dividends and distributions, which are determined in accordance with
income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
30
<Page>
Financial Corporation, a publicly-owned financial services company which
provides a comprehensive range of financial products and services in domestic
and selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
1.00% of the first $30 million of net assets, 0.75% of the next $270 million of
net assets, 0.70% of the next $200 million of net assets and 0.65% of net assets
in excess of $500 million.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $148,040 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $58,677 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $12.58 to $13.36, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency fees, including both the per account fees paid to
DTI and out-of-pocket charges, during the year ended December 31, 2005 were as
follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
----------------------------------------------------------------
Class A $ 3,461
Class B $ 5,664
Class C $ 1,143
Class R $ 319
Class T $ 288
</Table>
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the
31
<Page>
processing of shareholder transactions in the Funds. During the year ended
December 31, 2005, the Fund was charged $2,696 for cash management fees, which
are included in the out-of-pocket transfer agency charges above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $14,655 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $122,339 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
-------------------------------------------------------------------
Class A N/A $ 3,892
Class B $ 12,948 $ 4,316
Class C $ 3,595 $ 1,198
Class T $ 73 $ 73
</Table>
During the year ended December 31, 2005, DSC retained $2,891 in sales
commissions from the sales of Class A shares. DSC also retained $2,219 and $44
of contingent deferred sales charges relating to redemptions of Class B and
Class C shares, respectively.
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance
32
<Page>
monitoring, regulatory and shareholder reporting, as well as related facilities,
equipment and clerical help. The fee is computed at the annual rate of 0.06% of
the average daily net assets of the Fund on the first $500 million, 0.04% of the
average daily net assets of the Fund on the next $500 million and 0.02% of the
average daily net assets of the Fund in excess of $1 billion, plus reasonable
out-of-pocket expenses. Founders has contractually agreed in writing to waive
any fees received for these services to the extent they exceed Founders' costs
in providing the services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits on the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
------------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $3,773, which reduced the amount paid to
Mellon Bank to $4,222.
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of one or more of the Funds. The amount paid to the director under the
plan will be determined based upon the performance of the selected Funds. The
current value of these amounts is included in Other Assets and Directors'
Deferred Compensation on the Statement of Assets and Liabilities. Changes in
market value are included in the Directors' fees and expenses and the net change
in unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally
33
<Page>
accepted in the United States of America. These differences are due to differing
treatments for items such as deferral of wash sale losses, deferred
compensation, foreign currency transactions, net operating losses and capital
loss carryovers. Permanent differences identified during the year ended December
31, 2005 have been reclassified among the components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
-------------------------------------------------------------
$ 864,887 $ 2 $ (864,889)
</Table>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of December 31, 2005, represent capital loss carryovers that may be
available to offset future realized capital gains and thereby reduce future
taxable gains distributions. Post-October 31 foreign currency losses noted
below, if any, may be used to offset future net investment income and thereby
reduce future ordinary income distributions. Net capital loss carryovers
utilized during 2005 by the Fund amounted to $19,469,094. Accumulated capital
losses as of December 31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
-----------------------------------------------------------
2010 $ 30,227,567
===============
</Table>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The primary difference between book and tax appreciation or depreciation
is wash sale loss deferrals.
<Table>
Other Book/Tax Differences $ (21,524)
Federal Tax Cost $ 103,887,388
Gross Tax Appreciation of Investments $ 11,953,629
Gross Tax Depreciation of Investments $ (1,531,387)
Net Tax Appreciation $ 10,422,242
</Table>
34
<Page>
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 500 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 190,179 $ 807,085 226,896 $ 852,592
Redeemed (208,547) $ (894,064) (193,006) $ (700,254)
----------- --------------- ----------- ---------------
Net Increase (Decrease) (18,368) $ (86,979) 33,890 $ 152,338
=========== =============== =========== ===============
CLASS B
Sold 84,947 $ 353,630 89,684 $ 322,791
Redeemed (118,554) $ (469,544) (98,294) $ (355,279)
----------- --------------- ----------- ---------------
Net Decrease (33,607) $ (115,914) (8,610) $ (32,488)
=========== =============== =========== ===============
CLASS C
Sold 44,048 $ 176,957 110,256 $ 385,913
Redeemed (27,892) $ (114,598) (97,748) $ (340,347)
----------- --------------- ----------- ---------------
Net Increase 16,156 $ 62,359 12,508 $ 45,566
=========== =============== =========== ===============
CLASS F
Sold 1,291,586 $ 5,627,660 3,973,983 $ 14,909,282
Redeemed (6,397,317) $ (27,026,700) (20,268,328) $ (75,325,829)
----------- --------------- ----------- ---------------
Net Decrease (5,105,731) $ (21,399,040) (16,294,345) $ (60,416,547)
=========== =============== =========== ===============
CLASS R
Sold 57,080 $ 257,056 23,623 $ 90,989
Redeemed (11,295) $ (51,229) (40,138) $ (142,757)
----------- --------------- ----------- ---------------
Net Increase (Decrease) 45,785 $ 205,827 (16,515) $ (51,768)
=========== =============== =========== ===============
CLASS T
Sold 906 $ 4,021 1,380 $ 4,956
Redeemed (3,512) $ (13,726) (1,452) $ (5,032)
----------- --------------- ----------- ---------------
Net Decrease (2,606) $ (9,705) (72) $ (76)
=========== =============== =========== ===============
</Table>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $220,910,477 and $240,649,658, respectively.
35
<Page>
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
36
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders Mid-Cap Growth
Fund (one of the portfolios constituting Dreyfus Founders Funds, Inc., hereafter
referred to as the "Fund") at 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 Sates of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where securities purchased had not been received, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
37
<Page>
FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
38
<Page>
The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services being
provided to the Funds are satisfactory, as evidenced in part by the recent
performance records of the Funds, to which the directors gave significant
attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to the
Funds, but also recognize that Founders or its affiliates have provided the
highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
39
<Page>
small group of funds selected by Lipper and a larger universe of funds also
selected by Lipper. The Lipper materials further included graphs depicting each
Fund's Class F one-year and annualized performance results for two-, three-,
four-, five-, and ten-year periods, if applicable, in comparison to the Fund's
performance group and performance universe.
Mid-Cap Growth Fund's performance for the one-year period ended December 31,
2004 placed it in the first quintile of its Lipper performance group, with the
Fund ranking third out of 15 Lipper-selected "peer funds," and in the first
quintile of its Lipper mid-cap growth fund performance universe, ranking 69th of
527 funds. The Fund's performance within its Lipper-selected group and universe
for the two-year period ended December 31, 2004 had placed it in the second
quintile, with the Fund having placed in the third quintile of its
Lipper-selected group and in the first quintile of its Lipper-selected universe
for the three-year period ended December 31, 2004. The directors deemed these
relative performance results to be very satisfactory, and stressed the
importance to Founders of the need to seek to maintain a strong performance
record.(1)
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance difficulties,
more recent performance results generally have shown significant improvement;
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS DO NOT REFLECT THE FRONT-END SALES
CHARGES THAT APPLY TO OTHER SHARE CLASSES.
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Founders has focused its efforts upon improving the performance records of
the Funds and will continue to seek improvement; and
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing in
the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY FOUNDERS AND
ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, Mid-Cap Growth
Fund's management fees ranked in the third quintile of its Lipper competitive
expense group, with the Fund's fees the seventh lowest of 15 "peer funds." The
Fund's contractual management fees at a common asset level were determined by
Lipper to be lower than eight of the 15 funds in its group. The Fund's
management fees were in the third quintile of its Lipper expense universe,
placing 72nd lowest of 145 funds.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain efficiencies
in performing the
41
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portfolio management, trading and operational functions related to those
accounts (the directors recognized that in determining its profitability from
providing investment management and other services to the Funds, Founders
allocated its expenses between the Funds and other accounts in a manner which
was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment services
to any of the clients it advises, not just the Funds. The directors
recognized that Founders' profitability would be lower if it did not receive
research and brokerage services in connection with these brokerage
transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders' management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the investment advisory fees received by
Founders. However, the directors noted that
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Founders' profitability is expected to decline in 2005 as a result of declines
in Fund asset levels. The directors also considered the risks assumed by
Founders in providing management services to the Funds, including the risk that
the management agreement can be terminated by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of investment
advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially fees
which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than fees
arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in recognition of the quality service
which Founders has provided and continues to provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
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ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of scale if the assets of the Funds were to increase. Among other information,
the directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into increased
profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of an
increase in the assets of a particular Fund or a group of Funds would not be
passed along on a dollar-for-dollar basis to the shareholders of other Funds
that did not experience increases in their assets to points above their
breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is consistent
with its objective of sharing its economies of scale with the Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
restrictions. The directors determined that Founders is dedicated to compliance
with all applicable rules and regulations and that the systems of controls which
are in place to ensure that the service providers to the Funds, including
Founders, and the Funds themselves, maintain strict adherence to the law are
excellent.
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OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years and that efforts are being and will continue to be
made to enhance such improvement and to maintain Fund expense ratios at
reasonable and competitive levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
45
<Page>
YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
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Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice
President--Compliance since 2002. Formerly, Founders' Manager of Compliance
(2000 to 2002) and Securities Compliance Examiner, Staff Accountant and Team
Leader for the U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
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DREYFUS FOUNDERS MID-CAP GROWTH FUND
PROXY VOTING INFORMATION
A description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities, and information regarding how
the Funds voted these proxies for the 12-month period ended June 30, 2005, is
available through the Funds' website at www.founders.com and on the Securities
and Exchange Commission's (SEC) website at www.sec.gov. The description of the
policies and procedures is also available without charge, upon request, by
calling 1-800-525-2440.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form NQ. The Fund's Forms NQ are
available on the SEC's website at www.sec.gov and may be reviewed and copied at
the SEC's Public Reference Room in Washington, DC. Information on the operation
of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
Dreyfus Service Corporation, Distributor.
(C) 2006 Founders Asset Management LLC. 2/06
A-646-MCAP-05
ANNUAL REPORT
[GRAPHIC]
DREYFUS FOUNDERS
PASSPORT FUND
INVESTMENT UPDATE
DECEMBER 31, 2005
PASSPORT FUND IS CLOSED TO NEW INVESTORS.
PLEASE SEE THE PROSPECTUS FOR ADDITIONAL INFORMATION.
[DREYFUS FOUNDERS FUNDS(R) LOGO]
THE GROWTH SPECIALISTS
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 12
Statement of Investments 14
Statement of Assets and Liabilities 23
Statement of Operations 25
Statements of Changes in Net Assets 26
Financial Highlights 27
Notes to Financial Statements 33
Report of Independent Registered Public Accounting Firm 42
Factors Considered in Renewing the Advisory Agreement 43
Your Board Representatives 51
</Table>
PAPERLESS DELIVERY OF THIS REPORT
[GRAPHIC]
Did you know you can reduce your postal mail by accessing Dreyfus Founders Funds
regulatory material online? It's a simple, reliable process: when new documents
such as this financial report are available, we'll send you an email
notification containing a convenient link that will take you directly to that
Fund information on our website.
To take advantage of this service, simply inform us online of your decision
to receive materials through the Founders E-Communications Program. Cut down on
mailbox clutter and help the Fund reduce printing and postage charges by
enrolling today at www.founders.com/ecommunications. If you own Funds through a
third party, enroll at www.icsdelivery.com.
INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
managers only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-10 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC-INSURED - NOT BANK-GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF DANIEL B. LEVAN]
[PHOTO OF JOHN W. EVERS]
A DISCUSSION WITH CO-PORTFOLIO MANAGERS DANIEL B. LEVAN, CFA, LEFT; AND JOHN W.
EVERS, CFA, REGARDING FUND PERFORMANCE FOR THE 12-MONTH PERIOD ENDED
DECEMBER 31, 2005.
ROBUST RETURNS DESPITE OBSTACLES
Generally speaking, 2005 may be remembered as a year in which international
equity markets, burdened with a plethora of market obstacles including high
energy prices, rising raw material prices, increasing interest rates and
inflationary pressures, geopolitical tension and severe weather events, posted
broad-based and robust returns.
The most compelling growth opportunities overall were found in Japan and
South Korea. Confirmation concerning Japan's long-awaited emergence from
deflation finally surfaced as domestic economic activity ticked up in earnest,
while improving relations with the North bolstered South Korea's advance. Also
important to note is that the economies of both Japan and South Korea
significantly benefited from intra-Asian trade with China and India.
European markets offered the least compelling growth opportunities in 2005
as the Bank of England and the European Central Bank each reversed course on
monetary policy and began raising inter-bank borrowing rates in an effort to
ward off inflation. Other notable distractions to growth opportunities across
Europe included higher energy costs, continued high employment and overwhelming
lack of support for the European Union constitution. Nonetheless, European stock
prices continued to move higher despite these headwinds, as companies reported
improving profitability and continued to raise the bar on earnings forecasts.
3
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Nine out of ten economic sectors in the Morgan Stanley Capital
International (MSCI) World ex U.S. Small Cap Index posted double-digit returns
in 2005, with the energy sector posting the highest return of 67%. Several
sectors and countries posted returns above 20% in the MSCI World ex U.S. Small
Cap Index for the full-year period, with Japan a notable gainer.
For the 12-month period ended December 31, 2005, Dreyfus Founders Passport
Fund underperformed the MSCI World ex U.S. Small Cap Index, which gained 25.04%.
The Fund also underperformed the Standard & Poor's/Citigroup Extended Market
Index World ex U.S.(SM), which rose 22.09% for the same period.(1)
NEW MANAGEMENT TEAM MADE CHANGES
In November 2005, the Fund's new management team was put in place, and
instituted several changes to the Fund's composition. One major change was to
mitigate risk exposure to countries and sectors in order to focus exclusively on
bottom-up stock selection. To accomplish this, a large component of the
portfolio was replaced with securities exhibiting business momentum and
valuation metrics more consistent with the portfolio management team's
investment philosophy. Another shift instituted was the embedding of the stock
selection process within a quantitative framework, which is used to introduce
greater efficiency and discipline into the portfolio management process. These
changes, however, came late in the period and thus did not materially impact
Fund performance for the balance of 2005.
COUNTRIES AFFECTED PERFORMANCE
The Fund's relative overexposure to South Korea added value to its performance.
A relative overweight position and effective stock selection in oil-rich Norway
also benefited Fund performance for the period. The Fund's
- ----------
(1) The Morgan Stanley Capital International (MSCI) World ex U.S. Small Cap
Index measures global performance of small capitalization securities outside of
the United States. In connection with the management team change in November
2005, the Fund's benchmark index was changed from the MSCI World ex U.S. Small
Cap Index to the Standard & Poor's/Citigroup Extended Market Index World ex U.S.
(the "S&P/Citigroup EMI World ex U.S."). The total return figures cited for
these indexes assume change in share price and reinvestment of dividends after
the deduction of local taxes, but do not reflect the costs of managing a mutual
fund.
[SIDENOTE]
"ONE MAJOR CHANGE MADE TO THE FUND WAS TO MITIGATE RISK EXPOSURE TO COUNTRIES
AND SECTORS IN ORDER TO FOCUS EXCLUSIVELY ON BOTTOM-UP STOCK SELECTION."
4
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underweight position and solid selection of stocks in Austria allowed the Fund
to post an excellent return in this country, due in part to the strong
performance of alternative energy companies. Positions in the emerging markets
of India and Taiwan, which are not included in the MSCI World ex U.S. Small Cap
Index, also had a positive total effect on relative performance.
Strong-performing Japanese real-estate stocks such as URBAN CORPORATION and
KENEDIX, INC., however, did not counterbalance the negative effect the Fund's
underweight position in Japan had on annual relative performance.
Hong Kong, Italy and Australia hampered Fund performance for the period
through weak relative weightings and poor performance by select stocks within
each country. The Fund's position in Thailand, an emerging market not included
in the Index, also detracted from performance.
ENERGY GAINED GROUND
Some of the more compelling growth stories during the period were found in
sectors that historically have not been considered as such. For example,
commodity-driven sectors such as energy and materials reported record earnings
on the back of strong demand as well as historically high commodity prices.
These sustained high commodity prices were very favorable to small-cap energy
stocks in 2005. Companies such as independent exploration and development firms
benefited from high leverage to oil prices, while small-cap oil-services stocks
benefited from higher capital spending by the
<Table>
LARGEST EQUITY HOLDINGS (country of origin; ticker symbol)
1. TRICAN WELL SERVICE LIMITED (Canada; TCW) 1.62%
2. URBAN CORPORATION (Japan; 8868) 1.08%
3. NIPPON SHOKUBAI COMPANY LIMITED (Japan; 4114) 1.07%
4. INMET MINING CORPORATION (Canada; IMN) 1.01%
5. KEIHIN CORPORATION (Japan; 7251) 0.98%
6. MITSUBISHI GAS CHEMICAL COMPANY, INC. (Japan; 4182) 0.97%
7. IPSCO, INC. (Canada; IPS) 0.92%
8. KENEDIX, INC. (Japan; 4321) 0.92%
9. VALLOUREC SA (France; VK) 0.84%
10. SUMISHO LEASE COMPANY LIMITED (Japan; 8592) 0.83%
</Table>
Portfolio holdings are subject to change, and should not be construed as a
recommendation of any security.
5
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 1-800-525-2440 TO OBTAIN THE MOST
RECENT MONTH-END PERFORMANCE DATA.
[CHART]
Dreyfus Founders
Passport Fund Citigroup EMI MSCI World
Class F Shares World ex U.S. Index ex U.S. Index
12/31/1995 $10,000.00 $10,000.00 $10,000.00
12/31/1996 $12,004.64 $10,725.16 $10,686.72
12/31/1997 $12,205.93 $9,716.88 $10,929.58
12/31/1998 $13,731.38 $10,897.44 $12,980.41
12/31/1999 $25,737.55 $13,458.87 $16,605.29
12/29/2000 $18,106.66 $12,069.31 $14,385.00
12/31/2001 $12,356.49 $10,174.28 $11,307.02
12/31/2002 $10,388.65 $9,433.09 $9,520.51
12/31/2003 $18,196.11 $14,501.20 $13,273.68
12/31/2004 $21,416.21 $18,669.20 $15,979.33
12/30/2005 $25,696.90 $22,793.80 $18,291.60
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders Passport Fund on 12/31/95 to a $10,000 investment made in unmanaged
securities indexes on that date. The Fund's performance assumes the reinvestment
of dividends and capital gain distributions, but does not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or redemption of
Fund shares. The Fund offers multiple classes of shares. Performance shown is
for Class F, which is open only to grandfathered investors. The Fund's
performance in the graph takes into account all applicable Class F fees and
expenses, subject to applicable fee waivers. THESE FIGURES DO NOT REFLECT THE
MAXIMUM SALES CHARGES APPLICABLE TO CLASS A, B, C, OR T SHARES OF THE FUND. FOR
THESE SHARE CLASSES, APPLYING THESE CHARGES WILL RESULT IN LOWER RETURNS FOR
INVESTORS.
The S&P/Citigroup EMI World ex U.S. represents, on a country-by-country basis,
the small-capitalization component of the Citigroup Broad Market Index(SM),
which is a comprehensive float-weighted index of companies in 26 countries
(excluding the U.S.) with market capitalizations of at least $100 million. The
Morgan Stanley Capital International (MSCI) World ex U.S. Index measures global
developed market equity performance outside of the United States. The total
return figures cited for these indexes assume change in security prices and
reinvestment of dividends, but do not reflect the costs of managing a mutual
fund. In future shareholder reports, the Fund's performance will no longer be
compared to the MSCI World ex U.S. Index, as the S&P/Citigroup EMI World ex U.S.
is the benchmark used by the new portfolio management team in managing the Fund.
Further information related to Fund performance is contained elsewhere in this
report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (INCEPTION DATE) YEAR YEARS YEARS INCEPTION
- -----------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) 13.05% 5.96% -- (1.02%)
Without sales charge 19.93% 7.23% -- (0.04%)
B SHARES (12/31/99)
With redemption* 14.89% 6.01% -- (0.99%)
Without redemption 18.89% 6.32% -- (0.84%)
C SHARES (12/31/99)
With redemption** 17.98% 6.34% -- (0.85%)
Without redemption 18.98% 6.34% -- (0.85%)
F SHARES (11/6/93) 19.99% 7.25% 9.90% 9.54%
R SHARES (12/31/99) 20.17% 6.63% -- (0.46%)
T SHARES (12/31/99)
With sales charge (4.50%) 13.98% 5.29% -- (1.58%)
Without sales charge 19.38% 6.26% -- (0.83%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, fee
waivers, and adjustments for financial statement purposes. Part of the Fund's
historical performance is due to the purchase of securities sold in initial
public offerings (IPOs). There is no guarantee that the Fund's investments in
IPOs, if any, will continue to have a similar impact on performance. Part of the
Fund's historical performance is due to amounts received from class action
settlements regarding prior Fund holdings. There is no guarantee that these
settlement distributions will occur in the future or have a similar impact on
performance. There are risks associated with small-cap investments such as
limited product lines, less liquidity, and small market share. Investments in
foreign securities entail unique risks, including political, market, and
currency risks.
* The maximum contingent deferred sales charge for Class B shares is 4% and
is reduced to 0% after six years, at which time the Class B shares convert
to Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
major oil companies and a tight oil rig market. The Fund's overweight position
in the energy sector did buoy performance, as Norwegian offshore drillers, Ocean
Rig ASA and Sinvest ASA, and French oil-services company VALLOUREC SA were
positive contributors to Fund performance.
The Fund's positions in firms involved in the engineering and production of
alternative sources of energy, particularly solar, also outperformed, as high
oil prices pushed consumers to consider alternative energy sources. SolarWorld
AG, a solar products company, was the strongest performing individual issue in
the Fund for the period, and boosted the Fund's performance in its country of
domicile, Germany.
IT AND CONSUMER-RELATED STOCKS HELPED RETURN
The Fund's stock selection in the information technology (IT) sector created a
boon to performance as well, with issues such as CSR PLC. CSR, a Bluetooth
technology provider, advanced during the period as the attach rate for cell
phones with Bluetooth technology continued to accelerate, in addition to other
Bluetooth applications.
Consumer staples and consumer discretionary stocks also positively impacted
the Fund's performance through effective stock selection. An underweight
position in the consumer staples sector also proved fruitful.
[CHART]
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
Japan 23.35%
United Kingdom 16.80%
France 9.31%
Canada 8.00%
Germany 6.19%
Switzerland 4.44%
Netherlands 4.34%
Australia 4.15%
Other Countries 22.65%
Cash & Equivalents 0.77%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio
managers and are subject to change at any time, based on market and other
conditions, and should not be construed as a recommendation of any specific
security.
[SIDENOTE]
SECTORS BENEFITING THE FUND
Information Technology
Energy
Consumer Staples
8
<Page>
Consumer discretionary issue Ic Companys AS implemented a comprehensive
restructuring plan during the period, which has proven successful. Online gaming
stocks, such as Austrian-based BetandWin.com Interactive, also benefited the
consumer discretionary sector and contributed to the Fund's relative
outperformance in Austria.
An underweight position in the strong-performing materials sector, however,
weighed on the Fund's return for the period.
FINANCIALS PERFORMANCE WAS MIXED
Although stocks in the financials sector underperformed for the Fund, with an
underweight position and weak stock selection both culprits overall, the sector
provided mixed performance from individual holdings. Some holdings that greatly
benefited the Fund's return included aforementioned Japanese real estate
companies, Urban Corporation and Kenedix, Inc., while others, namely Upbest
Group Limited and Melco International Development Limited, produced a drag on
relative performance.
TELECOMMUNICATIONS SERVICES WEIGHED ON RETURN
Telecommunications services operators suffered in 2005 as wireless providers
spent more money on next-generation networks and attracting new customers.
Additionally, mobile number portability led to higher churn rates across
wireless operators, and wire-line operators lost customers to the mobile market.
A major detractor to Fund performance was its stock selection in this sector,
with holdings such as French telecommunications service company, 123 Multimedia
SA, underperforming. 123 Multimedia issued a profit warning in July after
reporting lower-than-expected sales figures.
SELECT ISSUES DETRACTED
The information technology sector had the greatest positive contribution to the
Fund's relative performance during the period; however, select IT issues also
realized declines, including Global Flex Holdings Limited, producer of flexible
printed circuit boards (FPCs), e-gaming software provider Boss Media
[SIDENOTE]
SECTORS DETRACTING FROM THE FUND
Financials
Telecommunications Services
Utilities
9
<Page>
AB and Taiwan-domiciled PC Home Online. PC Home Online's stock fell during the
period due to a change in the company's business model, resulting in lower
margins.
Although numerous alternative energy companies prospered in the high
oil-price environment, biodiesel manufacturer D1 Oils PLC's stock price faltered
during the period. Some consumer discretionary holdings also suffered, including
Korean record label S.M. Entertainment Company Limited and Japanese online ad
agency Cyber Agent Limited. Industrials firm Romag Holdings PLC, a manufacturer
of specialist transparent composites, also experienced a stock price drop during
the period.
IN CONCLUSION
We believe the aforementioned changes made to the Fund's composition positioned
the Fund well at the end of the period. Our plans to reduce the turnover rate of
holdings and focus on strong business momentum, and our withdrawal from
participation in emerging markets will, in our view, help the Fund perform more
in line with its new benchmark, the S&P/Citigroup EMI World ex U.S., and will
allow us to focus on stock selection.
At the end of the period, the Fund was broadly diversified across countries
and sectors, investing in all 10 major economic sectors and 21 of 26 benchmark
countries; the five countries without exposure in the Fund represented less than
1% of the new benchmark. Overall, we believe the Fund is more attractively
valued with higher earnings growth potential than its new benchmark.
We are excited by the opportunity to manage the Fund and appreciate the
support we have received during this management transition. We are optimistic as
we enter 2006 and committed to serving the Fund's shareholders with the highest
level of investment excellence.
/s/ Daniel B. LeVan /s/ John W. Evers
Daniel B. LeVan, CFA, John W. Evers, CFA
Co-Portfolio Manager Co-Portfolio Manager
10
<Page>
This page intentionally left blank.
11
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
12
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- ------------------------------------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,093.31 $ 11.45
CLASS A HYPOTHETI 1,000.00 1,014.13 11.08
CLASS B ACTUAL 1,000.00 1,090.79 15.81
CLASS B HYPOTHETICAL 1,000.00 1,009.89 15.31
CLASS C ACTUAL 1,000.00 1,090.84 15.60
CLASS C HYPOTHETICAL 1,000.00 1,010.10 15.11
CLASS F ACTUAL 1,000.00 1,093.26 11.40
CLASS F HYPOTHETICAL 1,000.00 1,014.18 11.03
CLASS R ACTUAL 1,000.00 1,093.97 9.98
CLASS R HYPOTHETICAL 1,000.00 1,015.56 9.65
CLASS T ACTUAL 1,000.00 1,092.10 13.50
CLASS T HYPOTHETICAL 1,000.00 1,012.14 13.07
</Table>
*Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- --------------------------------------------------------------------------------
CLASS A 2.17%
CLASS B 3.00%
CLASS C 2.96%
CLASS F 2.16%
CLASS R 1.89%
CLASS T 2.56%
</Table>
13
<Page>
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (FOREIGN)--98.1%
ADVERTISING--0.6%
9,300 Publicis Groupe (FR) $ 323,686
12,800 SR Teleperformance (FR) 400,047
---------------
723,733
---------------
AEROSPACE & DEFENSE--1.3%
22,339 Chemring Group PLC (UK) 282,120
26,000 Japan Aviation Electronics Industry Limited (JA) 365,964
25,500 Ultra Electronics Holdings PLC (UK) 435,237
6,000 Zodiac SA (FR) 385,344
---------------
1,468,665
---------------
AIR FREIGHT & LOGISTICS--0.3%
61,500 Wincanton PLC (UK) 359,773
---------------
AIRLINES--0.4%
80,100 British Airways PLC (UK)* 460,313
---------------
APPAREL RETAIL--0.4%
5,200 Charles Voegele Holding AG (SZ) 393,730
---------------
APPAREL, ACCESSORIES & LUXURY GOODS--0.6%
15,800 Gildan Activewear, Inc. (CA)* 679,570
---------------
ASSET MANAGEMENT & CUSTODY BANKS--1.0%
3,613 MPC Muenchmeyer Petersen Capital AG (GE) 282,727
6,000 Perpetual Trustees Australia Limited (AU) 299,098
29,100 Schroder's PLC (UK) 475,654
---------------
1,057,479
---------------
AUTO PARTS & EQUIPMENT--2.0%
14,700 Futaba Industrial Company Limited (JA) 352,745
42,300 Keihin Corporation (JA) 1,083,190
53,000 Koito Manufacturing Company Limited (JA) 814,313
---------------
2,250,248
---------------
BIOTECHNOLOGY--0.3%
4,000 Actelion Limited (SZ)* 330,873
---------------
BREWERS--0.3%
17,500 Wolverhampton & Dudley Breweries PLC (UK) 382,398
---------------
</Table>
AU Australia
AT Austria
BE Belgium
CA Canada
CN China
DE Denmark
FI Finland
FR France
GE Germany
GR Greece
HK Hong Kong
IE Ireland
IT Italy
JA Japan
KR South Korea
NE Netherlands
NW Norway
PT Portugal
SG Singapore
SP Spain
SW Sweden
SZ Switzerland
UK United Kingdom
14
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
BROADCASTING & CABLE TV--0.6%
14,100 Astral Media, Inc. (CA) $ 371,634
60,000 Television Broadcasts Limited (HK) 318,816
---------------
690,450
---------------
BUILDING PRODUCTS--0.3%
400 Geberit AG (SZ) 316,566
---------------
COMMODITY CHEMICALS--0.3%
7,300 Honam Petrochemical Corporation (KR) 361,082
---------------
COMMUNICATIONS EQUIPMENT--1.8%
171,300 Carphone Warehouse PLC (UK) 816,416
38,800 GN Store Nord AS (DE) 507,934
47,100 Tandberg Television ASA (NW)* 622,831
---------------
1,947,181
---------------
COMPUTER HARDWARE--0.3%
3,300 Wincor Nixdorf AG (GE) 347,658
---------------
COMPUTER STORAGE & PERIPHERALS--1.1%
523,000 Jurong Technologies Industrial Corporation Limited (SG) 569,333
12,700 Logitech International SA (SZ)* 596,777
---------------
1,166,110
---------------
CONSTRUCTION & ENGINEERING--5.8%
22,000 ACS, Actividades de Construccion y Servicios SA (SP) 708,678
86,900 Carillion PLC (UK) 457,526
7,300 Eiffage SA (FR) 789,026
8,700 Hyundai Development Company (KR) 394,183
26,145 Kier Group PLC (UK) 535,316
9,700 Koninklijke BAM Groep NV (NE) 814,171
65,000 Kyowa Exeo Corporation (JA) 849,324
27,600 Morgan Sindall PLC (UK) 441,401
11,531 Speedy Hire PLC (UK) 164,969
7,500 Vinci SA (FR) 645,051
14,100 YIT-Yhtyma Oyj (FI) 603,093
---------------
6,402,738
---------------
CONSTRUCTION MATERIALS--0.8%
3,700 Ciments Francais SA (FR) 480,952
5,300 Imerys SA (FR) 383,367
---------------
864,319
---------------
CONSTRUCTION, FARM MACHINERY & HEAVY TRUCKS--1.2%
5,500 Aker Yards AS (NW) 264,027
24,800 Hitachi Construction Machinery Company Limited (JA) 578,285
8,700 Hyundai Mipo Dockyard Company Limited (KR) 527,586
---------------
1,369,898
---------------
CONSUMER ELECTRONICS--0.3%
3,200 Bang & Olufsen Holding AS Class B (DE) 329,038
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE--1.4%
9,000 Sanyo Shinpan Finance Company Limited (JA) $ 645,610
18,100 Sumisho Lease Company Limited (JA) 925,450
---------------
1,571,060
---------------
DEPARTMENT STORES--1.0%
5,700 Hyundai Department Store Company Limited (KR) 482,683
19,100 Izumi Company Limited (JA) 652,673
---------------
1,135,356
---------------
DISTILLERS & VINTNERS--0.9%
107,900 C&C Group PLC (IE) 689,783
43,100 Davide Campari--Milano SPA (IT) 318,900
---------------
1,008,683
---------------
DISTRIBUTORS--0.8%
15,000 Inchcape PLC (UK) 588,696
173,700 Pacific Brands Limited (AU) 338,716
---------------
927,412
---------------
DIVERSIFIED BANKS--3.8%
83,400 Banco BPI SA (PT) 381,110
22,100 Banco de Sabadell SA (SP) 579,775
31,100 Banco Popolare di Verona e Novara Scrl (IT) 629,216
45,700 Banco Popolare di Milano (IT) 500,714
6,300 Deutsche Postbank AG (GE) 365,306
10,500 Jyske Bank AS (DE)* 515,670
4,000 Natexis Banques Populaires (FR) 666,272
17,100 OKO Bank (FI) 240,092
47,500 Wing Hang Bank Limited (HK) 341,837
---------------
4,219,992
---------------
DIVERSIFIED CAPITAL MARKETS--1.0%
45,000 Close Brothers Group PLC (UK) 702,641
61,100 Record Investments Limited (AU) 364,602
---------------
1,067,243
---------------
DIVERSIFIED CHEMICALS--1.0%
114,000 Mitsubishi Gas Chemical Company, Inc.(JA) 1,077,797
---------------
DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES--0.8%
5,700 Arrk Corporation (JA) 420,486
90,800 Downer EDI Limited (AU) 477,930
---------------
898,416
---------------
DIVERSIFIED METALS & MINING--2.5%
44,100 Inmet Mining Corporation (CA) 1,119,097
1,580,000 International Ferro Metals 144A (AU)+ 761,184
485,900 Oxiana Limited (AU)* 619,798
23,500 Sims Group Limited (AU) 302,514
---------------
2,802,593
---------------
DRUG RETAIL--0.3%
7,900 Tsuruha Holdings, Inc. (JA) 363,064
---------------
</Table>
16
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES--1.2%
131,000 International Power PLC (UK) $ 539,823
128,700 Terna SPA (IT) 317,674
32,900 Viridian Group PLC (UK) 506,350
---------------
1,363,847
---------------
ELECTRICAL COMPONENTS & EQUIPMENT--1.1%
57,000 Dainippon Screen Manufacturing Company Limited (JA) 477,034
13,700 Leoni AG (GE) 434,663
5,400 Nexans SA (FR) 256,543
---------------
1,168,240
---------------
ELECTRONIC EQUIPMENT MANUFACTURERS--1.9%
11,400 Axalto Holding NV (FR)* 314,185
39,400 CSR PLC (UK)* 634,522
14,200 Intops Company Limited (KR) 479,023
46,900 Laird Group PLC (UK) 338,919
35,000 Yaskawa Electric Corporation (JA) 353,161
---------------
2,119,810
---------------
ENVIRONMENTAL & FACILITIES SERVICES--0.4%
20,100 Asahi Pretec Corporation (JA) 487,438
---------------
FERTILIZERS & AGRICULTURAL CHEMICALS--0.5%
4,500 Syngenta AG (SZ)* 559,889
---------------
FOOD DISTRIBUTORS--0.3%
126,700 Fyffes PLC (IE) 344,986
---------------
FOOD RETAIL--0.3%
13,500 Kesko Oyj (FI) 382,769
---------------
GAS UTILITIES--0.2%
336,000 Xinao Gas Holdings Limited (CN) 266,505
---------------
GENERAL MERCHANDISE STORES--0.8%
9,600 Ryohin Keikaku Company Limited (JA) 837,614
---------------
HEALTHCARE DISTRIBUTORS--0.4%
30,700 Alliance Unichem PLC (UK) 422,838
---------------
HEALTHCARE EQUIPMENT--1.7%
15,700 Cochlear Limited (AU) 526,326
35,000 Elekta AB Class B (SW) 519,857
22,400 Sysmex Corporation (JA) 854,708
---------------
1,900,891
---------------
HEALTHCARE FACILITIES--0.5%
14,800 Generale de Sante (FR) 509,861
---------------
HEALTHCARE SERVICES--0.3%
41,000 iSOFT Group PLC (UK) 274,768
---------------
HOME IMPROVEMENT RETAIL--0.8%
37,700 Grafton Group PLC Units (IE)* 410,607
26,200 Nobia AB (SW) 530,959
---------------
941,566
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
17
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
HOMEBUILDING--1.8%
25,100 Barratt Developments PLC (UK) $ 425,819
18,100 Fadesa Inmobiliaria SA (SP) 596,548
15,200 Joint Corporation (JA) 525,849
20,300 Persimmon PLC (UK) 439,391
---------------
1,987,607
---------------
HOTELS, RESORTS & CRUISE LINES--0.6%
160,500 First Choice Holidays PLC (UK) 690,382
---------------
HOUSEHOLD APPLIANCES--0.4%
15,600 Makita Corporation (JA) 383,601
---------------
HUMAN RESOURCE & EMPLOYMENT SERVICES--0.4%
93,500 Michael Page International PLC (UK) 434,360
---------------
INDUSTRIAL CONGLOMERATES--0.9%
10,800 Aalberts Industries NV (NE) 573,434
6,100 Rheinmetall AG (GE) 383,245
---------------
956,679
---------------
INDUSTRIAL MACHINERY--5.2%
44,700 Charter PLC (UK)* 430,695
30,000 JTEKT Corporation (JA) 558,358
36,000 Makino Milling Machine Company Limited (JA) 396,829
8,900 Man AG (GE) 474,976
95,000 Nachi-Fujikoshi Corporation (JA) 507,483
52,000 NTN Corporation (JA) 410,938
33,500 OSG Corporation (JA) 694,514
1,000 Rieter Holding AG (SZ) 296,781
22,500 Sodick Company Limited (JA) 398,737
13,200 Stork NV (NE) 563,973
700 Sulzer AG (SZ) 370,748
67,000 Toshiba Machine Company Limited (JA) 662,984
---------------
5,767,016
---------------
INSURANCE BROKERS--0.3%
8,700 April Group (FR) 359,453
---------------
INTEGRATED OIL & GAS--0.4%
25,500 Enagas (SP) 476,974
---------------
INTERNET SOFTWARE & SERVICES--0.6%
10,900 Iliad SA (FR) 674,879
---------------
IT CONSULTING & OTHER SERVICES--2.1%
18,300 Alten (FR)* 548,112
17,600 Indra Sistemas, SA (SP) 343,999
176,200 Northgate Information Solutions PLC (UK)* 259,207
7,300 Otsuka Corporation (JA) 805,300
125,000 WM Data AB Class B (SW) 399,648
---------------
2,356,266
---------------
LEISURE PRODUCTS--0.3%
64,350 Sportingbet PLC (UK) 380,320
---------------
</Table>
18
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
LIFE & HEALTH INSURANCE--0.4%
5,300 CNP Assurances (FR) $ 417,876
---------------
MARINE--0.3%
102,000 Orient Overseas International Limited (HK) 345,977
---------------
METAL & GLASS CONTAINERS--0.3%
33,500 Rexam PLC (UK) 292,808
---------------
MULTI-LINE INSURANCE--1.0%
15,000 Fondiaria-Sai SPA (IT) 494,022
89,400 Milano Assicurazioni SPA (IT) 611,205
---------------
1,105,227
---------------
OFFICE SERVICES & SUPPLIES--0.6%
42,900 Buhrmann NV (NE) 631,286
---------------
OIL & GAS DRILLING--0.8%
21,100 Ensign Energy Services, Inc. (CA) 851,623
---------------
OIL & GAS EQUIPMENT & SERVICES--3.1%
10,300 Fugro NV (NE) 330,814
5,300 SBM Offshore NV (NE) 428,229
37,300 Trican Well Service Limited (CA)* 1,796,817
1,700 Vallourec SA (FR) 935,835
---------------
3,491,695
---------------
OIL & GAS EXPLORATION & PRODUCTION--2.3%
33,900 Burren Energy PLC (UK) 531,948
206,800 Oil Search Limited (AU) 559,411
100,000 Tanganyika Oil Company Limited (CA)* 770,974
137,400 Tullow Oil PLC (UK) 638,300
---------------
2,500,633
---------------
OIL & GAS REFINING & MARKETING--1.4%
24,700 Caltex Australia Limited (AU) 350,917
67,000 Cosmo Oil Company Limited (JA) 335,185
33,900 ERG SPA (IT) 816,297
---------------
1,502,399
---------------
OTHER DIVERSIFIED FINANCIAL SERVICES--1.7%
30,200 Home Capital Group, Inc. (CA) 902,753
162 Kenedix, Inc. (JA) 1,020,613
---------------
1,923,366
---------------
PACKAGED FOODS & MEATS--1.0%
2,100 Barry Callebaut AG (SZ) 684,765
40,000 Nisshin Seifun Group, Inc. (JA) 422,606
---------------
1,107,371
---------------
PERSONAL PRODUCTS--1.4%
8,200 Clarins SA (FR) 454,801
6,800 Fancl Corporation (JA) 363,828
636,000 Hengan International Group Company Limited (HK) 721,823
---------------
1,540,452
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
19
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS--1.6%
40,000 Recordati SPA (IT) $ 275,601
24,600 Santen Pharmaceutical Company Limited (JA) 680,002
10,200 Stada Arzneimittel AG (GE) 332,674
17,000 Tsumura & Company (JA) 469,920
---------------
1,758,197
---------------
PROPERTY & CASUALTY INSURANCE--2.8%
42,600 Admiral Group PLC (UK) 333,500
33,020 Dongbu Insurance Company Limited (KR) 668,011
8,700 Euler Hermes SA (FR) 784,823
25,000 Kingsway Financial Services, Inc. (CA) 505,376
28,300 Northbridge Financial Corporation (CA) 852,043
---------------
3,143,753
---------------
PUBLISHING--2.2%
33,800 EMAP PLC (UK) 501,882
26,300 Eniro AB (SW) 331,047
70,400 Informa PLC (UK) 525,396
5,700 Lagardere SCA (FR) 438,617
15,500 Wolters Kluwer NV (NE) 313,413
31,000 Yell Group PLC (UK) 286,158
---------------
2,396,513
---------------
REAL ESTATE INVESTMENT TRUSTS--0.3%
2,000 Cofinimmo (BE) 316,562
---------------
REAL ESTATE MANAGEMENT & DEVELOPMENT--3.1%
1,220,000 China Overseas Land & Investment Limited (HK) 523,170
41,100 Inmobiliaria Urbis SA (SP) 754,660
150,000 Kerry Properties Limited (HK) 397,552
6,100 Pirelli & C. Real Estate SPA (IT) 333,633
11,100 Urban Corporation (JA) 1,199,084
7,800 Vivacon AG (GE) 263,170
---------------
3,471,269
---------------
REGIONAL BANKS--1.2%
1,700 Banque Cantonale Vaudoise (SZ) 489,004
38,100 Pusan Bank (KR) 499,406
27,000 Suruga Bank Limited (JA) 340,433
---------------
1,328,843
---------------
RESTAURANTS--1.8%
43,100 Elior (FR) 566,367
40,500 Enterprise Inns PLC (UK) 653,630
38,000 Greene King PLC (UK) 485,461
124,686 Restaurant Group PLC (UK) 326,089
---------------
2,031,547
---------------
SEMICONDUCTOR EQUIPMENT--0.6%
15,600 ASM International NV (NE)* 261,878
14,000 Ulvac, Inc. (JA) 433,290
---------------
695,168
---------------
</Table>
20
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS--0.9%
9,300 Micronas Semiconductor Holding AG (SZ)* $ 307,853
1,536,000 Solomon Systech International Limited (HK) 638,869
---------------
946,722
---------------
SPECIALIZED FINANCE--1.3%
7,000 Deutsche Boerse AG (GE) 716,160
24,800 Ricoh Leasing Company Limited (JA) 706,559
---------------
1,422,719
---------------
SPECIALTY CHEMICALS--3.0%
14,300 Koninklijke DSM NV (NE) 584,054
105,000 Nippon Shokubai Company Limited (JA) 1,188,578
700 Sika AG (SZ)* 580,626
4,300 Umicore (BE) 507,020
45,100 Victrex PLC (UK) 516,803
---------------
3,377,081
---------------
SPECIALTY STORES--0.4%
55,000 WH Smith PLC (UK) 411,175
---------------
STEEL--3.1%
4,700 Boehler-Uddeholm AG (AT) 795,111
12,300 IPSCO, Inc. (CA) 1,023,254
259,000 Nisshin Steel Company Limited (JA) 836,724
32,600 Rautaruukki Oyj (FI) 793,098
---------------
3,448,187
---------------
SYSTEMS SOFTWARE--0.4%
8,300 Software AG (GE) 404,928
---------------
THRIFTS & MORTGAGE FINANCE--0.3%
7,300 Hypo Real Estate Holding AG (GE) 379,735
---------------
TIRES & RUBBER--1.5%
9,300 Continental AG (GE) 824,636
60,000 Sumitomo Rubber Industries Limited (JA) 854,708
---------------
1,679,344
---------------
TRADING COMPANIES & DISTRIBUTORS--1.6%
59,300 BSS Group PLC (UK) 324,456
23,100 Hitachi High-Technologies Corporation (JA) 577,818
47,300 SIG PLC (UK) 594,098
8,000 Univar NV (NE) 312,537
---------------
1,808,909
---------------
WATER UTILITIES--0.3%
25,500 Kelda Group PLC (UK) 339,591
---------------
WIRELESS TELECOMMUNICATION SERVICES--0.8%
22,100 MobilCom AG (GE) 486,373
283,000 MobileOne Limited (SG) 360,835
---------------
847,208
---------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$98,375,386) 108,940,161
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
21
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS (FOREIGN)--1.1%
HEALTHCARE EQUIPMENT--0.5%
3,700 Fresenius AG Preferred (GE) $ 501,101
---------------
HOUSEHOLD PRODUCTS--0.6%
6,700 Henkel KGAA Preferred (GE) 674,204
---------------
TOTAL PREFERRED STOCKS (FOREIGN)
(COST--$1,116,864) 1,175,305
---------------
</Table>
<Table>
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--0.8%
SPECIAL PURPOSE ENTITY--0.8%
$ 900,000 CAFCO LLC
4.12% 1/3/06~ $ 899,794
---------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$899,794) 899,794
---------------
TOTAL INVESTMENTS--100.0%
(TOTAL COST--$100,392,044) 111,015,260
---------------
OTHER ASSETS AND LIABILITIES--(0.0%) (53,204)
---------------
NET ASSETS--100.0% $ 110,962,056
===============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
* NON-INCOME PRODUCING.
+ SECURITIES WERE ACQUIRED PURSUANT TO RULE 144A AND MAY BE DEEMED TO BE
RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO $761,184, OR 0.7%, OF
THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF
1933 AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES
AMOUNTED TO $899,794, OR 0.8%, OF THE FUND'S NET ASSETS AS OF
DECEMBER 31, 2005.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<Page>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 100,392,044
---------------
Investment securities, at market 111,015,260
Cash 206,508
Foreign currency (cost $5,205) 5,208
Receivables:
Capital shares sold 159,902
Dividends and interest 79,819
Other assets 221,627
---------------
Total Assets 111,688,324
---------------
LIABILITIES
Payables and other accrued liabilities:
Capital shares redeemed 393,774
Advisory fees 92,631
Shareholder servicing fees 14,965
Accounting fees 9,263
Distribution fees 30,292
Transfer agency fees 38,691
Custodian fees 2,429
Directors' deferred compensation 99,651
Other 44,572
---------------
Total Liabilities 726,268
---------------
Net Assets $ 110,962,056
===============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 219,057,625
Accumulated net investment loss (80,032)
Accumulated net realized loss from security and foreign currency
transactions (net of foreign taxes paid on Thailand and Indian
investments of $159,639 and $388,198, respectively) (118,655,420)
Net unrealized appreciation on investments
and foreign currency translation 10,639,883
---------------
Total $ 110,962,056
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
<Table>
CLASS A
Net Assets $ 22,106,639
Shares Outstanding 1,099,900
Net Asset Value, Redemption Price Per Share $ 20.10
Maximum offering price per share
(net asset value plus sales charge of 5.75% of offering price) $ 21.33
CLASS B
Net Assets $ 16,420,825
Shares Outstanding 858,319
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 19.13
CLASS C
Net Assets $ 7,567,754
Shares Outstanding 395,805
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 19.12
CLASS F
Net Assets $ 64,112,155
Shares Outstanding 3,188,496
Net Asset Value, Offering and Redemption Price Per Share $ 20.11
CLASS R
Net Assets $ 310,412
Shares Outstanding 15,835
Net Asset Value, Offering and Redemption Price Per Share $ 19.60
CLASS T
Net Assets $ 444,271
Shares Outstanding 23,186
Net Asset Value, Redemption Price Per Share $ 19.16
Maximum offering price per share
(net asset value plus sales charge of 4.50% of offering price) $ 20.06
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<Page>
STATEMENT OF OPERATIONS
For the year ended December 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 1,475,613
Interest 129,326
Foreign taxes withheld (119,049)
---------------
Total Investment Income 1,485,890
---------------
EXPENSES
Advisory fees--Note 2 1,129,577
Shareholder servicing fees--Note 2 175,671
Accounting fees--Note 2 112,958
Distribution fees--Note 2 355,792
Transfer agency fees--Note 2 140,350
Registration fees 61,245
Postage and mailing expenses 13,805
Custodian fees and expenses--Note 2 550,733
Printing expenses 49,750
Legal and audit fees 40,100
Directors' fees and expenses--Note 2 38,160
Other expenses 92,731
---------------
Total Expenses 2,760,872
Earning Credits (10,913)
Reimbursed/Waived Expenses (168,475)
Expense Offset to Broker Commissions (5,945)
---------------
Net Expenses 2,575,539
---------------
Net Investment Loss (1,089,649)
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITY
TRANSACTIONS AND FOREIGN CURRENCY TRANSACTIONS
Net Realized Gain (Loss) on:
Security Transactions (net of foreign taxes paid on Thailand
and Indian investments of $168,588 and $674,195, respectively) 19,783,095
Foreign Currency Transactions (114,519)
---------------
Net Realized Gain 19,668,576
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation 46,812
---------------
Net Realized and Unrealized Gain 19,715,388
---------------
Net Increase in Net Assets Resulting from Operations $ 18,625,739
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
OPERATIONS
Net Investment Loss $ (1,089,649) $ (1,171,904)
Net Realized Gain on Security and Foreign
Currency Transactions 19,668,576 20,009,742
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation 46,812 (1,026,156)
----------------- -----------------
Net Increase in Net Assets Resulting from Operations 18,625,739 17,811,682
----------------- -----------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A (1,068,075) (9,809,094)
Class B (4,356,640) (2,918,121)
Class C (3,909,744) (1,725,859)
Class F (22,526,616) (14,537,401)
Class R 73,085 22,994
Class T (144,420) (87,939)
----------------- -----------------
Net Decrease from Capital Share Transactions (31,932,410) (29,055,420)
----------------- -----------------
Net Decrease in Net Assets (13,306,671) (11,243,738)
----------------- -----------------
NET ASSETS
Beginning of Year $ 124,268,727 $ 135,512,465
----------------- -----------------
End of Year $ 110,962,056 $ 124,268,727
================= =================
Accumulated Net Investment Loss $ (80,032) $ (83,936)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 16.76 $ 14.24 $ 8.14 $ 9.68 $ 14.18
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.14)(a) (0.11)(a) 0.10 (0.16) (0.14)
Net realized and unrealized gains
(losses) on securities 3.48 2.63 6.00 (1.38) (4.36)
----------------------------------------------------------------------
Total from investment operations 3.34 2.52 6.10 (1.54) (4.50)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 20.10 $ 16.76 $ 14.24 $ 8.14 $ 9.68
======================================================================
TOTAL RETURN(b) 19.93% 17.70% 74.94% (15.91%) (31.74%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 22,107 $ 19,726 $ 27,252 $ 9,422 $ 14,033
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.14% 1.92% 2.45% 2.24% 1.88%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.12% 1.92% 2.45% 2.24% 1.87%
Net investment loss (0.82%) (0.77%) (0.83%) (0.80%) (0.26%)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 729% 648% 707% 495% 704%
</Table>
(a). COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b). SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c). CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 2.29% (2005), 2.02% (2004), 2.54%
(2003), 2.27% (2002), AND 1.88% (2001).
(d). PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 16.09 $ 13.79 $ 7.95 $ 9.54 $ 14.08
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.28)(a) (0.23)(a) (0.31) (0.29) (0.18)
Net realized and unrealized gains
(losses) on securities 3.32 2.53 6.15 (1.30) (4.36)
----------------------------------------------------------------------
Total from investment operations 3.04 2.30 5.84 (1.59) (4.54)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 19.13 $ 16.09 $ 13.79 $ 7.95 $ 9.54
======================================================================
TOTAL RETURN(b) 18.89% 16.68% 73.46% (16.67%) (32.24%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 16,421 $ 17,917 $ 18,198 $ 12,810 $ 19,661
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.98% 2.79% 3.30% 3.09% 2.66%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.97% 2.78% 3.29% 3.09% 2.64%
Net investment loss (1.66%) (1.63%) (1.44%) (1.64%) (1.06%)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 729% 648% 707% 495% 704%
</Table>
(a). COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b). SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c). CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 3.13% (2005), 2.89% (2004), 3.38%
(2003), 3.12% (2002), AND 2.66% (2001).
(d). PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
28
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 16.07 $ 13.76 $ 7.93 $ 9.52 $ 14.06
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.27)(a) (0.22)(a) (0.01) (0.35) (0.22)
Net realized and unrealized gains
(losses) on securities 3.32 2.53 5.84 (1.24) (4.32)
----------------------------------------------------------------------
Total from investment operations 3.05 2.31 5.83 (1.59) (4.54)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 19.12 $ 16.07 $ 13.76 $ 7.93 $ 9.52
======================================================================
TOTAL RETURN(b) 18.98% 16.79% 73.52% (16.70%) (32.29%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 7,568 $ 10,249 $ 10,639 $ 5,268 $ 8,928
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.93% 2.71% 3.25% 3.06% 2.67%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.92% 2.70% 3.25% 3.05% 2.65%
Net investment loss (1.60%) (1.55%) (1.43%) (1.58%) (1.08%)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 729% 648% 707% 495% 704%
</Table>
(a). COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b). SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c). CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 3.08% (2005), 2.81% (2004), 3.34%
(2003), 3.08% (2002), AND 2.67% (2001).
(d). PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
29
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 16.76 $ 14.24 $ 8.13 $ 9.67 $ 14.17
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.13)(a) (0.11)(a) (0.14) (0.23) (0.22)
Net realized and unrealized gains
(losses) on securities 3.48 2.63 6.25 (1.31) (4.28)
----------------------------------------------------------------------
Total from investment operations 3.35 2.52 6.11 (1.54) (4.50)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 20.11 $ 16.76 $ 14.24 $ 8.13 $ 9.67
======================================================================
TOTAL RETURN 19.99% 17.70% 75.15% (15.93%) (31.76%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 64,112 $ 75,677 $ 78,759 $ 50,742 $ 78,574
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 2.10% 1.90% 2.31% 2.18% 1.92%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.08% 1.89% 2.31% 2.18% 1.90%
Net investment loss (0.76%) (0.75%) (0.45%) (0.74%) (0.30%)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 729% 648% 707% 495% 704%
</Table>
(a). COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b). CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 2.24% (2005), 2.00% (2004), 2.40%
(2003), 2.21% (2002), AND 1.92% (2001).
(c). PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
30
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 16.31 $ 13.82 $ 7.87 $ 9.56 $ 14.22
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.12)(a) (0.07)(a) 0.54 (0.81) (0.17)
Net realized and unrealized gains
(losses) on securities 3.41 2.56 5.41 (0.88) (4.49)
----------------------------------------------------------------------
Total from investment operations 3.29 2.49 5.95 (1.69) (4.66)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 19.60 $ 16.31 $ 13.82 $ 7.87 $ 9.56
======================================================================
TOTAL RETURN 20.17% 18.02% 75.60% (17.68%) (32.77%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 310 $ 190 $ 142 $ 37 $ 76
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 1.91% 1.68% 2.08% 3.94% 1.86%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.89% 1.68% 2.07% 3.91% 1.84%
Net investment loss (0.69%) (0.51%) (0.32%) (2.20%) (0.08%)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 729% 648% 707% 495% 704%
</Table>
(a). COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b). CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 2.08% (2005), 1.79% (2004), 2.17%
(2003), 4.65% (2002), AND 2.78% (2001).
(c). PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
31
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 16.05 $ 13.70 $ 7.87 $ 9.50 $ 14.14
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.21)(a) (0.17)(a) (0.24) (0.45) (0.22)
Net realized and unrealized gains
(losses) on securities 3.32 2.52 6.07 (1.18) (4.42)
----------------------------------------------------------------------
Total from investment operations 3.11 2.35 5.83 (1.63) (4.64)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 19.16 $ 16.05 $ 13.70 $ 7.87 $ 9.50
======================================================================
TOTAL RETURN(b) 19.38% 17.15% 74.08% (17.16%) (32.82%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 444 $ 510 $ 522 $ 345 $ 538
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.55% 2.37% 3.07% 4.03% 3.16%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.54% 2.36% 3.07% 4.03% 3.14%
Net investment loss (1.24%) (1.21%) (1.06%) (2.69%) (1.60%)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 729% 648% 707% 495% 704%
</Table>
(a). COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b). SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c). CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 2.70% (2005), 2.47% (2004), 3.16%
(2003), 4.05% (2002), AND 3.16% (2001).
(d). PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
32
<Page>
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders Passport Fund (the "Fund"). The Fund offers Class A,
Class B, Class C, Class F, Class R and Class T shares. Class A and Class T
shares are subject to a sales charge imposed at the time of purchase, Class B
shares are subject to a contingent deferred sales charge ("CDSC") imposed on
Class B shares redeemed within six years of purchase, Class C shares are subject
to a CDSC imposed on Class C shares redeemed within one year of purchase and
Class F and Class R shares are sold at net asset value per share (with Class R
shares sold only to eligible institutional investors). Other differences between
the classes include services offered to and the expenses borne by each Class.
The following significant accounting policies have been consistently followed by
the Fund in the preparation of its financial statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair value as
33
<Page>
determined in good faith by the Company's board of directors or pursuant to
procedures approved by the board of directors. These situations may include
instances where an event occurs after the close of the market on which a
security is traded but before the Fund calculates its net asset value, and it is
determined that the event has materially affected the value of the security.
Fair value of foreign equity securities may be determined with the assistance of
a pricing service using correlations between the movement of prices of foreign
securities and indexes of domestic securities and other appropriate indicators,
such as closing market prices of relevant ADRs and futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund normally will invest a
large portion of its assets in foreign securities. Foreign securities carry more
risk than U.S. securities, such as political and currency risks. In the event
the Fund executes a foreign security transaction, the Fund may enter into a
foreign currency contract to settle the foreign security transaction. The Fund
could be exposed to risk if counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably to the U.S.
dollar. The resultant foreign currency gain or loss from the contract is
recorded as foreign currency gain or loss and is presented as such in the
Statement of Operations. Foreign currency held at December 31, 2005 for settling
foreign trades is listed on the Statement of Assets and Liabilities.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each
business day. Purchases and sales of investment securities and income and
expense items denominated in foreign currencies are translated into U.S. dollar
amounts on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net unrealized gain or loss from investments and foreign
currency translations on the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar
34
<Page>
equivalent of the amounts actually received or paid. Net unrealized appreciation
or depreciation on investments and foreign currency translation arises from
changes in the values of assets and liabilities, including investments in
securities held at the date of the financial statements, resulting from changes
in the exchange rates and changes in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) and from net realized capital gains (if any)
annually. Dividends and distributions, which are determined in accordance with
income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
35
<Page>
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
Financial Corporation, a publicly-owned financial services company which
provides a comprehensive range of financial products and services in domestic
and selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
1.00% of the first $250 million of net assets, 0.80% of the next $250 million of
net assets and 0.70% of net assets in excess of $500 million.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $62,975 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $17,925 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $12.58 to $13.36, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency fees, including both the per account fees paid to
DTI and out-of-pocket charges, during the year ended December 31, 2005 were as
follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
------------------------------------------------------------
Class A $ 29,057
Class B $ 41,805
Class C $ 16,255
Class R $ 377
Class T $ 1,466
</Table>
36
<Page>
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the processing of shareholder transactions in the Funds.
During the year ended December 31, 2005, the Fund was charged $2,768 for cash
management fees, which are included in the out-of-pocket transfer agency charges
above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $33,465 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $169,073 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
---------------------------------------------------------------------
Class A N/A $ 49,696
Class B $ 125,953 $ 41,984
Class C $ 59,626 $ 19,876
Class T $ 1,140 $ 1,140
</Table>
During the year ended December 31, 2005, DSC retained $5,945 in sales
commissions from the sales of Class A shares. DSC also retained $42,377 and
$5,578 of contingent deferred sales charges relating to redemptions of Class B
and Class C shares, respectively.
37
<Page>
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance monitoring, regulatory and shareholder reporting, as well as related
facilities, equipment and clerical help. The fee is computed at the annual rate
of 0.10% of the average daily net assets of the Fund on the first $500 million,
0.065% of the average daily net assets of the Fund on the next $500 million and
0.02% of the average daily net assets of the Fund in excess of $1 billion, plus
reasonable out-of-pocket expenses. Founders has contractually agreed in writing
to waive any fees received for these services to the extent they exceed
Founders' costs in providing the services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits on the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
-----------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $168,475, which reduced the amount paid to
Mellon Bank to $382,258.
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of one or more of the Funds. The amount paid to the director under the
plan will be determined based upon the performance of the selected Funds. The
current value of these amounts is included in Other Assets and Directors'
Deferred Compensation on the Statement of Assets and Liabilities. Changes in
market value are included in the Directors' fees and expenses and the net change
in unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
OTHER--During the year ended December 31, 2005, Founders reimbursed the Fund
$16,414 for a trading error. This amount is not material to the Fund.
38
<Page>
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally accepted in the United States of America. These differences
are due to differing treatments for items such as deferral of wash sale losses,
deferred compensation, passive foreign investment corporations, foreign currency
transactions, net operating losses and capital loss carryovers. Permanent
differences identified during the year ended December 31, 2005 have been
reclassified among the components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
-----------------------------------------------------------------
$ 1,093,553 $ 947,703 $ (2,041,26)
</Table>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of December 31, 2005, represent capital loss carryovers that may be
available to offset future realized capital gains and thereby reduce future
taxable gains distributions. Post-October 31 foreign currency losses noted
below, if any, may be used to offset future net investment income and thereby
reduce future ordinary income distributions. Net capital loss carryovers
utilized during 2005 by the Fund amounted to $22,152,833. Accumulated capital
losses as of December 31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
---------------------------------------------------------
2009 $ 105,273,118
2010 $ 11,833,084
---------------
$ 117,106,202
===============
</Table>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The primary difference between book and tax appreciation or depreciation
is wash sale loss deferrals.
<Table>
Post-October Capital Loss Deferral $ (1,461,360)
Other Book/Tax Differences $ (22,487)
Federal Tax Cost $ 100,520,780
Gross Tax Appreciation of Investments $ 11,019,446
Gross Tax Depreciation of Investments $ (524,966)
Net Tax Appreciation $ 10,494,480
</Table>
39
<Page>
Certain foreign countries impose a tax on capital gains, which is accrued by the
Fund based on unrealized appreciation on affected securities. This unrealized
appreciation is not included in the table above. The tax is paid when the gain
is realized.
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 400 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 431,931 $ 7,916,442 871,718 $ 12,893,364
Redeemed (509,206) $ (8,984,517) 1,608,411) $ (22,702,458)
-------------------------------------------------------------
Net Decrease (77,275) $ (1,068,075) (736,693) $ (9,809,094)
=============================================================
CLASS B
Sold 19,176 $ 327,743 40,534 $ 591,588
Redeemed (274,566) $ (4,684,383) (246,693) $ (3,509,709)
-------------------------------------------------------------
Net Decrease (255,390) $ (4,356,640) (206,159) $ (2,918,121)
=============================================================
CLASS C
Sold 77,684 $ 1,393,853 156,715 $ 2,350,643
Redeemed (319,650) $ (5,303,597) (291,948) $ (4,076,502)
-------------------------------------------------------------
Net Decrease (241,966) $ (3,909,744) (135,233) $ (1,725,859)
=============================================================
CLASS F
Sold 456,877 $ 8,160,585 925,441 $ 13,691,198
Redeemed (1,783,478) $ (30,687,201) (1,942,721) $ (28,228,599)
-------------------------------------------------------------
Net Decrease (1,326,601) $ (22,526,616) (1,017,280) $ (14,537,401)
=============================================================
CLASS R
Sold 25,002 $ 458,697 19,297 $ 276,727
Redeemed (20,814) $ (385,612) (17,956) $ (253,733)
-------------------------------------------------------------
Net Increase 4,188 $ 73,085 1,341 $ 22,994
=============================================================
CLASS T
Sold 4,248 $ 79,625 2,301 $ 33,146
Redeemed (12,834) $ (224,045) (8,628) $ (121,085)
-------------------------------------------------------------
Net Decrease (8,586) $ (144,420) (6,327) $ (87,939)
=============================================================
</Table>
40
<Page>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $797,777,980 and $826,404,342, respectively.
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
41
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders Passport Fund (one
of the portfolios constituting Dreyfus Founders Funds, Inc., hereafter referred
to as the "Fund") at 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 Sates of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
42
<Page>
FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
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The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services
being provided to the Funds are satisfactory, as evidenced in part by the
recent performance records of the Funds, to which the directors gave
significant attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to
the Funds, but also recognize that Founders or its affiliates have provided
the highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive
fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
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small group of funds selected by Lipper and a larger universe of funds also
selected by Lipper. The Lipper materials further included graphs depicting each
Fund's Class F one-year and annualized performance results for two-, three-,
four-, five-, and ten-year periods, if applicable, in comparison to the Fund's
performance group and performance universe.
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
Passport Fund's performance for the one-year period ended December 31, 2004
placed it in the fifth quintile of its Lipper performance group, with the Fund
ranking eighth out of nine Lipper-selected "peer funds," and in the fifth
quintile of its Lipper international small/mid-cap growth fund performance
universe, ranking 68th of 76 funds. The directors further observed that the
Fund's longer-term performance rankings were significantly better, with the Fund
ranking in the first quintile of its Lipper performance group and universe in
calendar year 2003. The Fund's three-year performance results ended December 31,
2004 placed it in the third quintile of its Lipper performance group and in the
second quintile of its Lipper performance universe.(1) The directors expressed
concern that Passport Fund ranked in the lowest quintile of its Lipper group for
the one-year period ended December 31, 2004 with respect to the Fund's
performance, total expenses, brokerage commissions and portfolio turnover rate.
The directors determined that it would be preferable for the Fund to be managed
in a manner that would reduce its portfolio turnover rate to assist in
addressing these issues, and asked Founders to report back to them with possible
alternatives. Subsequently, Founders, in consultation with the directors,
determined to have a new team manage the Fund's portfolio. This new team assumed
portfolio management responsibilities for the Fund in November 2005.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS REFLECT APPLICABLE FEE WAIVERS, BUT
DO NOT REFLECT THE FRONT-END SALES CHARGES THAT APPLY TO OTHER SHARE
CLASSES.
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After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance
difficulties, more recent performance results generally have shown
significant improvement; Founders has focused its efforts upon improving
the performance records of the Funds and will continue to seek improvement;
and
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing
in the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY
FOUNDERS AND ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, Passport Fund's
management fees ranked in the third quintile of its Lipper competitive expense
group, with the Fund's fees the fifth lowest of nine "peer funds." The Fund's
contractual management fees at a common asset level were determined by Lipper to
be lower than five of the nine funds in its group. The Fund's management fees
were in the third quintile of its Lipper expense universe, placing 15th lowest
of 25 funds.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
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Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain
efficiencies in performing the portfolio management, trading and
operational functions related to those accounts (the directors recognized
that in determining its profitability from providing investment management
and other services to the Funds, Founders allocated its expenses between
the Funds and other accounts in a manner which was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment
services to any of the clients it advises, not just the Funds. The
directors recognized that Founders' profitability would be lower if it did
not receive research and brokerage services in connection with these
brokerage transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders' Management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
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Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the investment advisory fees received by
Founders. However, the directors noted that Founders' profitability is expected
to decline in 2005 as a result of declines in Fund asset levels. The directors
also considered the risks assumed by Founders in providing management services
to the Funds, including the risk that the management agreement can be terminated
by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of
investment advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially
fees which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than
fees arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in
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recognition of the quality service which Founders has provided and continues to
provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of scale if the assets of the Funds were to increase. Among other information,
the directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into
increased profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of
an increase in the assets of a particular Fund or a group of Funds would
not be passed along on a dollar-for-dollar basis to the shareholders of
other Funds that did not experience increases in their assets to points
above their breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is
consistent with its objective of sharing its economies of scale with the
Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
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restrictions. The directors determined that Founders is dedicated to compliance
with all applicable rules and regulations and that the systems of controls which
are in place to ensure that the service providers to the Funds, including
Founders, and the Funds themselves, maintain strict adherence to the law are
excellent.
OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years and that efforts are being and will continue to be
made to enhance such improvement and to maintain Fund expense ratios at
reasonable and competitive levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
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YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
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Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice
President--Compliance since 2002. Formerly, Founders' Manager of Compliance
(2000 to 2002) and Securities Compliance Examiner, Staff Accountant and Team
Leader for the U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
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DREYFUS FOUNDERS PASSPORT FUND
PROXY VOTING INFORMATION
A description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities, and information regarding how
the Funds voted these proxies for the 12-month period ended June 30, 2005, is
available through the Funds' website at www.founders.com and on the Securities
and Exchange Commission's (SEC) website at www.sec.gov. The description of the
policies and procedures is also available without charge, upon request, by
calling 1-800-525-2440.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available on the SEC's website at www.sec.gov and may be reviewed and copied
at the SEC's Public Reference Room in Washington, DC. Information on the
operation of the SEC's Public Reference Room may be obtained by calling
1-800-SEC-0330.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
Dreyfus Service Corporation, Distributor.
(C)2006 Founders Asset Management LLC. 2/06
A-646-PAS-05
ANNUAL REPORT
[GRAPHIC]
DREYFUS FOUNDERS WORLDWIDE GROWTH FUND
INVESTMENT UPDATE
DECEMBER 31, 2005
[DREYFUS FOUNDERS FUNDS(R) LOGO]
THE GROWTH SPECIALISTS
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 10
Statement of Investments 12
Statement of Assets and Liabilities 19
Statement of Operations 21
Statements of Changes in Net Assets 22
Financial Highlights 23
Notes to Financial Statements 29
Report of Independent Registered Public Accounting Firm 38
Factors Considered in Renewing the Advisory Agreement 39
Your Board Representatives 47
</Table>
PAPERLESS DELIVERY OF THIS REPORT
[GRAPHIC]
Did you know you can reduce your postal mail by accessing Dreyfus Founders Funds
regulatory material online? It's a simple, reliable process: when new documents
such as this financial report are available, we'll send you an email
notification containing a convenient link that will take you directly to that
Fund information on our website.
To take advantage of this service, simply inform us online of your decision
to receive materials through the Founders E-Communications Program. Cut down on
mailbox clutter and help the Fund reduce printing and postage charges by
enrolling today at www.founders.com/ecommunications. If you own Funds through a
third party, enroll at www.icsdelivery.com.
INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
managers only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-9 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC-INSURED - NOT BANK-GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF REMI J. BROWNE]
[PHOTO OF DANIEL B. LEVAN]
[PHOTO OF JEFFREY R. SULLIVAN]
[PHOTO OF JOHN B. JARES]
A DISCUSSION WITH CO-PORTFOLIO MANAGERS REMI J. BROWNE, CFA, LEFT; DANIEL B.
LEVAN, CFA, SECOND FROM LEFT; JEFFREY R. SULLIVAN, CFA, THIRD FROM LEFT; AND
JOHN B. JARES, CFA, RIGHT, REGARDING FUND PERFORMANCE FOR THE 12-MONTH PERIOD
ENDED DECEMBER 31, 2005.
STRONG GLOBAL EQUITY MARKETS
Markets were strong around the world in 2005 as 21 of 23 countries and 9 of 10
economic sectors posted gains in the Morgan Stanley Capital International (MSCI)
World Index. Japan was one of the best performing markets during the year with a
25.6% return, as investors became increasingly convinced the Japanese economy is
on a sustained growth path, following years of deflation and a prolonged period
of underperformance in the international equity markets. Among the global
sectors, energy was the best performer in the Index with a 29% return, driven
primarily by strong demand for oil and natural gas. The lone weak spot was found
in the Index's telecommunications services sector, which declined nearly 9% as
investors grew impatient with the size of investments telecom companies were
making and the lack of returns they were providing.
In the United States, robust corporate profit growth and a strong economy
led to positive performance from equity markets. Moderate inflation and a
still-strong housing market combined to positively impact numerous economic
indicators. The actions of the Federal Reserve in raising the federal funds rate
to 4.25% by the end of the period did dampen investor sentiment somewhat;
however analysts expected an end to the tightening cycle by mid-2006.
[SIDENOTE]
"OUR STOCK-BY-STOCK RESEARCH APPROACH SERVED THE FUND WELL OVERALL, AS IT
PRODUCED A POSITIVE IMPACT TO THE FUND'S RELATIVE RETURN."
3
<Page>
The Fund's investment strategy did not change during the 12-month period.
Although we are benchmark-aware, we continued to analyze companies individually
through proprietary analysis, Wall Street data and meetings with company
management, among other resources, to seek high-growth opportunities at
attractive valuations. This stock-by-stock research approach served the Fund
well overall, as the Dreyfus Founders Worldwide Growth Fund's return exceeded
the 9.49% return of its benchmark, the Morgan Stanley Capital International
(MSCI) World Index, for the 12-month period ended December 31, 2005.(1)
STANDOUT MARKET PERFORMERS
The energy and materials sectors exhibited strong performance during the year.
Performance was driven by surging commodity prices--crude oil prices topped $70
a barrel, copper rose above $2 a pound and gold increased to over $500 an
ounce--and robust demand in the emerging markets such as China and India. At the
industry level, drilling firms in the energy sector and mining companies in the
materials sector performed exceptionally well during the year.
COUNTRY PERFORMANCE IMPACTED FUND
On a country level, underweight exposures to the United States and Hong Kong,
paired with strong stock selection, boosted the Fund's relative return. An
overweight position coupled with solid stock picking in Switzerland also
produced positive results for the Fund. Fund performance was weakened by stock
selection in Japan and the United Kingdom, and a relative underweight position
in Canada.
INDUSTRIALS, IT AND CONSUMER DISCRETIONARY OUTPERFORMED
The Fund's main investment approach, to search stock-by-stock for the greatest
opportunities for growth, helped the Fund as every sector except energy
benefited from positive stock selection. The industrials sector led the pack,
with names such as U.S.-based airlines companies US AIRWAYS GROUP,
- ----------
(1) Excluding sales charges, which result in lower returns for certain share
classes. Please see page 7 for Average Annual Total Returns for all share
classes, including and excluding sales charges.
[SIDENOTE]
SECTORS BENEFITING THE FUND
Industrials
Information Technology
Consumer Discretionary
4
<Page>
INC. and AMR CORPORATION, parent company of American Airlines, and Japanese
commodity-trading company MITSUBISHI CORPORATION all exhibiting strong
performance during the period. AMR and US Airways experienced
better-than-expected financial returns due to improved pricing driven by
industry consolidation and cost controls. The Fund benefited from its exposure
to Mitsubishi, which saw a 71% price increase during the Fund's holding period.
The information technology (IT) sector also positively impacted the Fund's
annual performance through strong-performing issues such as APPLE COMPUTER, INC.
The popularity of Apple's iPod digital music products and Macintosh computers
helped drive the company's stock price.
An effective selection of consumer discretionary stocks also aided the
Fund's performance. Japanese consumer electronics retailer YAMADA DENKI advanced
after the firm reported results that included a 41% rise in consolidated
recurring profit, exceeding the company's initial target.
In addition, noteworthy individual issues were found across nearly all
sectors. Among the top performers were consumer staples name Gillette Company
and healthcare holding Genentech, Inc. Gillette was acquired by Procter & Gamble
Company during the period for a significant premium, boosting Gillette's return,
and Genentech showed solid revenue and earnings growth.
<Table>
LARGEST EQUITY HOLDINGS (country of origin; ticker symbol)
1. ACCENTURE LIMITED CLASS A (United States; ACN) 1.82%
2. ROYAL CARIBBEAN CRUISES LIMITED (United States; RCL) 1.80%
3. MICROSOFT CORPORATION (United States; MSFT) 1.60%
4. LINEAR TECHNOLOGY CORPORATION (United States; LLTC) 1.59%
5. APPLE COMPUTER, INC. (United States; AAPL) 1.52%
6. AMR CORPORATION (United States; AMR) 1.49%
7. HOME DEPOT, INC. (United States; HD) 1.45%
8. PIXAR, INC. (United States; PIXR) 1.39%
9. MITSUBISHI CORPORATION (Japan; 8058) 1.33%
10. SLM CORPORATION (United States; SLM) 1.31%
</Table>
Portfolio holdings are subject to change, and should not be construed as a
recommendation of any security.
5
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 1-800-525-2440 TO OBTAIN THE MOST
RECENT MONTH-END PERFORMANCE DATA.
[CHART]
Dreyfus Founders
Worldwide Growth Fund MSCI World
Class F Shares Index
12/31/1995 $10,000.00 $10,000.00
12/31/1996 $11,395.39 $11,347.88
12/31/1997 $12,597.58 $13,136.69
12/31/1998 $13,810.20 $16,333.91
12/31/1999 $20,546.04 $20,406.75
12/29/2000 $15,996.69 $17,717.47
12/31/2001 $11,949.09 $14,736.70
12/31/2002 $8,492.83 $11,806.15
12/31/2003 $11,633.03 $15,714.76
12/31/2004 $13,111.38 $18,028.11
12/30/2005 $14,538.74 $19,738.19
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders Worldwide Growth Fund on 12/31/95 to a $10,000 investment made in an
unmanaged securities index on that date. The Fund's performance assumes the
reinvestment of dividends and capital gain distributions, but does not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or
redemption of Fund shares. The Fund offers multiple classes of shares.
Performance shown is for Class F, which is open only to grandfathered investors.
The Fund's performance in the graph takes into account all applicable Class F
fees and expenses, subject to applicable fee waivers. THESE FIGURES DO NOT
REFLECT THE MAXIMUM SALES CHARGES APPLICABLE TO CLASS A, B, C, OR T SHARES OF
THE FUND. FOR THESE SHARE CLASSES, APPLYING THESE CHARGES WILL RESULT IN LOWER
RETURNS FOR INVESTORS.
The Morgan Stanley Capital International (MSCI) World Index measures global
developed market equity performance. The total return figures cited for this
index assume change in security prices and reinvestment of dividends, but do not
reflect the costs of managing a mutual fund. Further information related to Fund
performance is contained elsewhere in this report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (INCEPTION DATE) YEAR YEARS YEARS INCEPTION
- ---------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) 4.49% (3.22%) -- (6.61%)
Without sales charge 10.84% (2.07%) -- (5.68%)
B SHARES (12/31/99)
With redemption* 6.14% (3.09%) -- (6.48%)
Without redemption 10.14% (2.70%) -- (6.35%)
C SHARES (12/31/99)
With redemption** 9.18% (3.08%) -- (6.66%)
Without redemption 10.18% (3.08%) -- (6.66%)
F SHARES (12/29/89) 10.89% (1.89%) 3.81% 7.65%
R SHARES (12/31/99) 11.88% (1.38%) -- (5.15%)
T SHARES (12/31/99)
With sales charge (4.50%) 5.47% (4.08%) -- (7.40%)
Without sales charge 10.46% (3.19%) -- (6.68%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, fee
waivers for certain share classes, and adjustments for financial statement
purposes. Investments in foreign securities entail unique risks, including
political, market, and currency risks.
* The maximum contingent deferred sales charge for Class B shares is 4% and is
reduced to 0% after six years, at which time the Class B shares convert to
Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
ENERGY AND FINANCIALS POSITIONS HURT RETURN
The Fund's relative performance was negatively impacted by both an underweight
position and poor stock selection in the energy sector. Also, an underweight
position in the financials sector hurt relative performance for the Fund.
SELECT ISSUES HAMPERED THE FUND
Although the Fund fared well in the industrials, information technology,
consumer discretionary and telecommunications services sectors, select issues in
these sectors hampered the Fund's return. Industrials name W.W. Grainger, Inc.
negatively impacted the Fund, while information technology holdings Maxim
Integrated Products, Inc. and Xilinx, Inc. declined during the period. Favorable
demand and trends for Maxim's analog semiconductor offerings were offset by
concerns over the company's deteriorating gross margins.
Consumer discretionary offering COMCAST CORPORATION experienced a slow
ramp-up into its cable telephony offering and sluggish trends in video services.
ROYAL CARIBBEAN CRUISES LIMITED also experienced a decline as investors grew
concerned with the effect high oil prices may have on the company. DreamWorks
Animation SKG, Inc. had a revenue shortfall from its DVD sales. Higher spending
levels also resulted in materially lower earnings-per-share results for the
company, and the Fund exited its position based on this
[CHART]
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
United States 46.68%
Japan 12.64%
United Kingdom 9.95%
France 4.19%
Switzerland 3.94%
Germany 3.70%
Netherlands 2.70%
Canada 2.48%
Other Countries 10.98%
Cash & Equivalents 2.74%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio
managers and are subject to change at any time, based on market and other
conditions, and should not be construed as a recommendation of any specific
security.
8
<Page>
decline. The Fund, however, retained a position in Comcast and Royal
Caribbean at the end of the period, as we believed these companies' respective
growth opportunities remained viable.
Telecommunications giant VODAFONE GROUP PLC slid after announcing its
commitment to the highly competitive Japanese market. Vodafone emphasized its
plan to increase market share in Japan through more aggressive marketing, which
was expected to cause further margin deterioration. Although the Fund did not
sell its full position in Vodafone, it ended the period with a smaller position
in the company.
IN CONCLUSION
As we enter 2006, global growth appears to be strong and gaining traction as
monetary policies around the world continue to be accommodative. The market is
suggesting that we may be near the end of the U.S. Federal Reserve's tightening
cycle, lending further support to equity markets. Naturally, any gains in the
global equity markets could be tempered if negative events occur on the
geopolitical landscape.
As always, our focus is on seeking companies with improving business
momentum and attractive valuations, regardless of sector or country, or the
direction of the market.
/s/ Remi J. Browne /s/ Daniel B. LeVan
Remi J. Browne, CFA Daniel B. LeVan, CFA
Co-Portfolio Manager Co-Portfolio Manager
/s/ Jeffrey R. Sullivan /s/ John B. Jares
Jeffrey R. Sullivan, CFA John B. Jares, CFA
Co-Portfolio Manager Co-Portfolio Manager
[SIDE NOTE]
SECTORS DETRACTING FROM THE FUND
Energy
Financials
Utilities
9
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
10
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- -------------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,060.39 $ 10.02
CLASS A HYPOTHETICAL 1,000.00 1,015.35 9.85
CLASS B ACTUAL 1,000.00 1,058.88 13.86
CLASS B HYPOTHETICAL 1,000.00 1,011.58 13.63
CLASS C ACTUAL 1,000.00 1,058.78 13.91
CLASS C HYPOTHETICAL 1,000.00 1,011.53 13.68
CLASS F ACTUAL 1,000.00 1,060.60 10.08
CLASS F HYPOTHETICAL 1,000.00 1,015.30 9.90
CLASS R ACTUAL 1,000.00 1,064.22 7.49
CLASS R HYPOTHETICAL 1,000.00 1,017.85 7.35
CLASS T ACTUAL 1,000.00 1,059.74 11.84
CLASS T HYPOTHETICAL 1,000.00 1,013.57 11.64
</Table>
*Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- ---------------------------------------------------
CLASS A 1.93%
CLASS B 2.67%
CLASS C 2.68%
CLASS F 1.94%
CLASS R 1.44%
CLASS T 2.28%
</Table>
11
<Page>
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
COMMON STOCKS (DOMESTIC)--46.4%
AIRLINES--2.2%
38,538 AMR Corporation* $ 856,702
11,685 US Airways Group, Inc.* 433,981
---------------
1,290,683
---------------
APPLICATION SOFTWARE--0.7%
9,198 Autodesk, Inc. 395,054
---------------
ASSET MANAGEMENT & CUSTODY BANKS--0.6%
6,524 Northern Trust Corporation 338,074
---------------
BIOTECHNOLOGY--0.9%
3,939 Amgen, Inc.* 310,630
5,330 ImClone Systems, Inc.* 182,499
---------------
493,129
---------------
BROADCASTING & CABLE TV--0.9%
20,874 Comcast Corporation Special Class A* 536,253
---------------
COMMUNICATIONS EQUIPMENT--0.6%
16,685 Motorola, Inc. 376,914
---------------
COMPUTER & ELECTRONICS RETAIL--1.0%
13,326 Best Buy Company, Inc. 579,414
---------------
COMPUTER HARDWARE--2.5%
12,152 Apple Computer, Inc.* 873,607
20,998 Hewlett-Packard Company 601,173
---------------
1,474,780
---------------
COMPUTER STORAGE & PERIPHERALS--1.0%
41,314 EMC Corporation* 562,697
---------------
CONSUMER FINANCE--1.3%
13,743 SLM Corporation 757,102
---------------
DATA PROCESSING & OUTSOURCED SERVICES--0.6%
7,273 Automatic Data Processing, Inc. 333,758
---------------
DEPARTMENT STORES--2.1%
5,525 J.C. Penney Company, Inc. 307,190
14,151 Kohl's Corporation* 687,739
5,579 Nordstrom, Inc. 208,655
---------------
1,203,584
---------------
</Table>
AU Australia
AT Austria
BE Belgium
CA Canada
CN China
DE Denmark
FI Finland
FR France
GE Germany
GR Greece
HK Hong Kong
IE Ireland
IT Italy
JA Japan
KR South Korea
NE Netherlands
NW Norway
PT Portugal
SG Singapore
SP Spain
SW Sweden
SZ Switzerland
UK United Kingdom
12
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
GENERAL MERCHANDISE STORES--0.5%
5,450 Target Corporation $ 299,587
---------------
HEALTHCARE SERVICES--0.6%
6,346 Omnicare, Inc. 363,118
---------------
HEALTHCARE SUPPLIES--0.5%
5,490 DENTSPLY International, Inc. 294,758
---------------
HOME ENTERTAINMENT SOFTWARE--0.8%
9,300 Electronic Arts, Inc.* 486,483
---------------
HOME IMPROVEMENT RETAIL--1.5%
20,588 Home Depot, Inc. 833,402
---------------
HOTELS, RESORTS & CRUISE LINES--0.8%
8,292 Carnival Corporation 443,373
---------------
HOUSEHOLD PRODUCTS--2.4%
12,616 Clorox Company 717,724
13,047 Colgate-Palmolive Company 715,628
---------------
1,433,352
---------------
HYPERMARKETS & SUPER CENTERS--0.5%
6,595 Wal-Mart Stores, Inc. 308,646
---------------
INDUSTRIAL CONGLOMERATES--1.3%
21,533 General Electric Company 754,732
---------------
INTEGRATED OIL & GAS--1.3%
2,888 ConocoPhillips 168,024
10,321 ExxonMobil Corporation 579,731
---------------
747,755
---------------
INTEGRATED TELECOMMUNICATION SERVICES--1.3%
5,116 Alltel Corporation 322,820
19,305 Sprint Nextel Corporation 450,965
---------------
773,785
---------------
INTERNET SOFTWARE & SERVICES--0.7%
1,034 Google, Inc. Class A* 428,965
---------------
INVESTMENT BANKING & BROKERAGE--0.7%
2,995 Goldman Sachs Group, Inc. 382,491
---------------
IT CONSULTING & OTHER SERVICES--1.8%
36,435 Accenture Limited Class A 1,051,878
---------------
LEISURE FACILITIES--1.8%
23,000 Royal Caribbean Cruises Limited 1,036,380
---------------
MOVIES & ENTERTAINMENT--1.4%
15,205 Pixar, Inc.* 801,608
---------------
OTHER DIVERSIFIED FINANCIAL SERVICES--0.9%
13,369 JPMorgan Chase & Company 530,616
---------------
PACKAGED FOODS & MEATS--0.3%
3,155 Hershey Foods Corporation 174,314
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
13
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
PERSONAL PRODUCTS--0.6%
9,430 Estee Lauder Companies, Inc. Class A $ 315,716
---------------
PHARMACEUTICALS--4.4%
7,850 Covance, Inc.* 381,118
4,011 Eli Lilly and Company 226,982
9,733 Johnson & Johnson 584,953
28,700 MGI Pharma, Inc.* 492,492
11,038 Pfizer, Inc. 257,406
13,387 Wyeth 616,739
---------------
2,559,690
---------------
RAILROADS--1.2%
8,235 Union Pacific Corporation 663,000
---------------
SEMICONDUCTORS--2.8%
28,658 Intel Corporation 715,304
25,360 Linear Technology Corporation 914,735
---------------
1,630,039
---------------
SPECIALTY CHEMICALS--0.5%
4,577 Sigma-Aldrich Corporation 289,678
---------------
SPECIALTY STORES--0.3%
5,455 Office Depot, Inc.* 171,287
---------------
STEEL--0.6%
5,348 Nucor Corporation 356,819
---------------
SYSTEMS SOFTWARE--1.6%
35,279 Microsoft Corporation 922,546
---------------
THRIFTS & MORTGAGE FINANCE--0.9%
12,371 The PMI Group, Inc. 508,077
---------------
TOTAL COMMON STOCKS (DOMESTIC)
(COST--$23,689,682) 26,903,537
---------------
COMMON STOCKS (FOREIGN)--50.6%
AEROSPACE & DEFENSE--0.7%
21,604 BAE Systems PLC (UK) 141,902
36,578 Rolls-Royce Group PLC (UK) 269,048
---------------
410,950
---------------
APPAREL, ACCESSORIES & LUXURY GOODS--1.0%
6,656 Compagnie Financiere Richemont AG (SZ) 289,722
7,000 Gildan Activewear, Inc. (CA)* 301,075
---------------
590,797
---------------
APPLICATION SOFTWARE--0.7%
45,348 Sage Group PLC (UK) 201,304
1,091 SAP AG (GE) 197,845
---------------
399,149
---------------
ASSET MANAGEMENT & CUSTODY BANKS--0.3%
9,341 Schroder's PLC (UK) 152,683
---------------
AUTO PARTS & EQUIPMENT--0.4%
6,200 Denso Corporation (JA) 213,965
---------------
</Table>
14
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
AUTOMOBILE MANUFACTURERS--1.1%
2,852 DaimlerChrysler AG (GE) $ 145,453
8,600 Honda Motor Company Limited (JA) 490,762
---------------
636,215
---------------
BREWERS--1.5%
53,761 Foster's Group Limited (AU) 219,915
8,926 InBev NV (BE) 388,551
6,000 Orkla ASA (NW) 248,470
---------------
856,936
---------------
BROADCASTING & CABLE TV--0.8%
11,408 Gestevision Telecinco SA (SP) 287,935
77 TV Asahi Corporation (JA) 191,300
---------------
479,235
---------------
COMMUNICATIONS EQUIPMENT--1.1%
20,950 Nokia Oyj (FI) 383,186
66,000 Telefonaktiebolaget LM Ericsson (SW) 226,798
---------------
609,984
---------------
COMPUTER & ELECTRONICS RETAIL--1.0%
4,600 Yamada Denki (JA) 575,707
---------------
COMPUTER HARDWARE--0.9%
34,000 Fujitsu Limited (JA) 258,888
41,000 Toshiba Corporation (JA) 244,745
---------------
503,633
---------------
COMPUTER STORAGE & PERIPHERALS--0.3%
3,435 Logitech International SA (SZ)* 161,412
---------------
CONSTRUCTION MATERIALS--0.7%
33,445 Rinker Group Limited (AU) 403,321
---------------
CONSTRUCTION, FARM MACHINERY & HEAVY TRUCKS--0.9%
10,700 Volvo AB Class B (SW) 504,393
---------------
CONSUMER ELECTRONICS--0.5%
16,000 Matsushita Electric Industrial Company Limited (JA) 308,645
---------------
CONSUMER FINANCE--0.3%
2,420 Sanyo Shinpan Finance Company Limited (JA) 173,597
---------------
DISTILLERS & VINTNERS--0.6%
23,597 Diageo PLC (UK) 342,059
---------------
DIVERSIFIED BANKS--3.2%
60,097 Banca Intesa SPA (IT) 318,378
11,693 Banco Santander Central Hispano SA (SP) 154,347
14,953 Barclays PLC (UK) 157,197
4,084 BNP Paribas SA (FR) 330,462
25,669 Capitalia SPA (IT) 148,599
13,903 HBOS PLC (UK) 237,537
4,900 Royal Bank of Scotland Group PLC (UK) 147,961
2,866 Societe Generale (FR) 352,524
---------------
1,847,005
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
DIVERSIFIED CAPITAL MARKETS--1.2%
9,667 Credit Suisse Group (SZ) $ 492,876
2,028 UBS AG (SZ) 193,062
---------------
685,938
---------------
DIVERSIFIED CHEMICALS--0.8%
5,791 BASF AG (GE) 443,769
---------------
DIVERSIFIED METALS & MINING--2.2%
22,389 BHP Billiton Limited (AU) 373,396
7,100 Teck Cominco Limited Class B (CA) 378,972
21,046 Xstrata PLC (UK) 492,474
---------------
1,244,842
---------------
ELECTRIC UTILITIES--1.0%
3,550 E.ON AG (GE) 367,566
56,211 International Power PLC (UK) 231,633
---------------
599,199
---------------
ELECTRICAL COMPONENTS & EQUIPMENT--1.1%
1,854 Schneider Electric SA (FR) 165,383
30,000 Sumitomo Electric Industries Limited (JA) 455,590
---------------
620,973
---------------
ELECTRONIC EQUIPMENT MANUFACTURERS--0.8%
12,500 Hoya Corporation (JA) 449,400
---------------
FOOD RETAIL--0.3%
31,872 Tesco PLC (UK) 181,789
---------------
HEAVY ELECTRICAL EQUIPMENT--0.3%
21,000 Mitsubishi Electric Corporation (JA) 148,684
---------------
INTEGRATED OIL & GAS--3.0%
65,127 BP PLC (UK) 693,627
4,600 Husky Energy, Inc. (CA) 233,462
8,911 Repsol YPF SA (SP) 260,251
5,847 Royal Dutch Shell PLC Class A (NE) 178,167
1,412 Total SA (FR) 354,713
---------------
1,720,220
---------------
INTEGRATED TELECOMMUNICATION SERVICES--1.3%
72,371 BT Group PLC (UK) 277,368
15,600 Telenor ASA (NW) 153,127
7,100 Telus Corporation (CA) 292,306
---------------
722,801
---------------
INVESTMENT BANKING & BROKERAGE--0.6%
16,000 Daiwa Securities Group, Inc. (JA) 181,388
2,923 Macquarie Bank Limited (AU) 146,032
---------------
327,420
---------------
LIFE & HEALTH INSURANCE--0.4%
73,868 Old Mutual PLC (UK) 209,390
---------------
</Table>
16
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
MARINE--0.5%
30 AP Moller-Maersk AS (DE) $ 310,378
---------------
MOVIES & ENTERTAINMENT--0.8%
14,145 Vivendi Universal SA (FR) 443,088
---------------
MULTI-LINE INSURANCE--0.9%
11,979 Aviva PLC (UK) 145,306
2,923 Baloise Holding Limited (SZ) 170,718
856 Zurich Financial Services AG (SZ) 182,391
---------------
498,415
---------------
OFFICE ELECTRONICS--0.9%
9,300 Canon, Inc. (JA) 544,113
---------------
OIL & GAS EXPLORATION & PRODUCTION--1.0%
9,483 Eni SPA (IT) 263,036
1,860 Norsk Hydro ASA (NW) 190,980
51,908 Oil Search Limited (AU) 140,415
---------------
594,431
---------------
OTHER DIVERSIFIED FINANCIAL SERVICES--1.5%
17,952 ING Groep NV (NE) 622,699
5,600 Sun Life Financial, Inc. (CA) 225,108
---------------
847,807
---------------
PACKAGED FOODS & MEATS--0.4%
812 Nestle SA Registered (SZ) 242,840
---------------
PHARMACEUTICALS--6.8%
6,400 Astellas Pharma, Inc. (JA) 249,629
14,659 AstraZeneca Group PLC (UK) 713,529
8,700 Eisai Company Limited (JA) 365,159
10,400 GlaxoSmithKline PLC (UK) 262,863
6,706 Novartis AG (SZ) 352,370
6,520 Novo Nordisk AS Class B (DE) 366,763
1,255 Roche Holding AG (SZ) 188,427
5,689 Sanofi-Aventis (FR) 498,385
7,100 Santen Pharmaceutical Company Limited (JA) 196,261
4,563 Schering AG (GE) 305,478
7,500 Takeda Pharmaceuticals Company Limited (JA) 405,732
---------------
3,904,596
---------------
PRECIOUS METALS & MINERALS--0.2%
4,849 ThyssenKrupp AG (GE) 101,262
---------------
SEMICONDUCTOR EQUIPMENT--1.6%
37,612 ASM Lithography Holding NV NY Shares (NE)* 755,249
3,100 Tokyo Electron Limited (JA) 194,777
---------------
950,026
---------------
SOFT DRINKS--0.7%
13,600 Coca-Cola Hellenic Bottling Company SA (GR) 400,578
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
17
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
STEEL--0.7%
11,600 JFE Holdings, Inc. (JA) $ 389,503
---------------
TIRES & RUBBER--1.1%
4,691 Continental AG (GE) 415,953
14,000 Sumitomo Rubber Industries Limited (JA) 199,432
---------------
615,385
---------------
TOBACCO--0.8%
21,303 British American Tobacco PLC (UK) 476,495
---------------
TRADING COMPANIES & DISTRIBUTORS--1.8%
34,700 Mitsubishi Corporation (JA) 767,940
22,000 Mitsui & Company Limited (JA) 282,613
---------------
1,050,553
---------------
WIRELESS TELECOMMUNICATION SERVICES--1.9%
5,562 Bouygues SA (FR) 271,943
92,600 China Mobile (Hong Kong) Limited (HK) 438,297
186,388 Vodafone Group PLC (UK) 402,472
---------------
1,112,712
---------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$21,474,143) 29,006,293
---------------
PREFERRED STOCKS (FOREIGN)--0.3%
HEALTHCARE EQUIPMENT--0.3%
1,141 Fresenius AG Preferred (GE) 154,529
---------------
TOTAL PREFERRED STOCKS (FOREIGN)
(COST--$140,876) 154,529
---------------
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- ----------------------------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--2.6%
SPECIAL PURPOSE ENTITY--2.6%
$ 1,500,000 CAFCO LLC
4.12% 1/3/06~ $ 1,499,657
---------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$1,499,657) 1,499,657
---------------
TOTAL INVESTMENTS--99.9%
(TOTAL COST--$46,804,358) 57,564,016
---------------
OTHER ASSETS AND LIABILITIES--0.1% 82,451
---------------
NET ASSETS--100.0% $ 57,646,467
===============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
* NON-INCOME PRODUCING.
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$1,499,657 OR 2.6%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
SEE NOTES TO FINANCIAL STATEMENTS.
18
<Page>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 46,804,358
---------------
Investment securities, at market 57,564,016
Cash 102,470
Receivables:
Investment securities sold 1,103,246
Capital shares sold 120,085
Dividends and interest 80,124
Other assets 126,613
---------------
Total Assets 59,096,554
---------------
LIABILITIES
Payables and other accrued liabilities:
Investment securities purchased 775,205
Capital shares redeemed 455,829
Advisory fees 50,194
Shareholder servicing fees 8,248
Accounting fees 4,070
Distribution fees 15,270
Transfer agency fees 6,564
Custodian fees 796
Directors' deferred compensation 89,142
Other 44,769
---------------
Total Liabilities 1,450,087
---------------
Net Assets $ 57,646,467
===============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 106,933,421
Accumulated net investment loss (28,758)
Accumulated net realized loss from security and foreign currency
transactions (60,027,368)
Net unrealized appreciation on investments and foreign
currency translation 10,769,172
---------------
Total $ 57,646,467
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
<Table>
CLASS A
Net Assets $ 619,010
Shares Outstanding 43,558
Net Asset Value, Redemption Price Per Share $ 14.21
Maximum offering price per share
(net asset value plus sales charge of 5.75% of offering price) $ 15.08
CLASS B
Net Assets $ 1,803,276
Shares Outstanding 132,825
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 13.58
CLASS C
Net Assets $ 308,216
Shares Outstanding 23,162
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 13.31
CLASS F
Net Assets $ 53,184,353
Shares Outstanding 3,728,772
Net Asset Value, Offering and Redemption Price Per Share $ 14.26
CLASS R
Net Assets $ 1,701,449
Shares Outstanding 115,848
Net Asset Value, Offering and Redemption Price Per Share $ 14.69
CLASS T
Net Assets $ 30,163
Shares Outstanding 2,266
Net Asset Value, Redemption Price Per Share $ 13.31
Maximum offering price per share
(net asset value plus sales charge of 4.50% of offering price) $ 13.94
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
STATEMENT OF OPERATIONS
For the year ended December 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 1,496,352
Interest 39,837
Foreign taxes withheld (121,340)
--------------
Total Investment Income 1,414,849
--------------
EXPENSES
Advisory fees--Note 2 808,338
Shareholder servicing fees--Note 2 91,308
Accounting fees--Note 2 64,287
Distribution fees--Note 2 154,879
Transfer agency fees--Note 2 81,731
Registration fees 59,835
Postage and mailing expenses 14,710
Custodian fees and expenses--Note 2 52,039
Printing expenses 45,639
Legal and audit fees 28,677
Directors' fees and expenses--Note 2 26,071
Other expenses 63,277
--------------
Total Expenses 1,490,791
Earnings Credits (5,182)
Reimbursed/Waived Expenses (19,539)
Expense Offset to Broker Commissions (12,370)
--------------
Net Expenses 1,453,700
--------------
Net Investment Loss (38,851)
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITY
TRANSACTIONS AND FOREIGN CURRENCY TRANSACTIONS
Net Realized Gain (Loss) on:
Security Transactions 14,158,749(1)
Foreign Currency Transactions (16,234)
--------------
Net Realized Gain 14,142,515
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation (6,260,128)
--------------
Net Realized and Unrealized Gain 7,882,387
--------------
Net Increase in Net Assets Resulting from Operations $ 7,843,536
==============
</Table>
(1) INCLUDES $4,048,548 OF REALIZED GAINS RESULTING FROM A REDEMPTION IN KIND.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
OPERATIONS
Net Investment Loss $ (38,851) $ (42,516)
Net Realized Gain on Security and Foreign
Currency Transactions 14,142,515 14,019,429
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation (6,260,128) (3,533,551)
----------------- -----------------
Net Increase in Net Assets Resulting
from Operations 7,843,536 10,443,362
----------------- -----------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A 31,644 (195,731)
Class B (430,097) 21,999
Class C 8,837 (26,743)
Class F (13,367,715) (16,782,781)
Class R (25,021,636)(1) 383,468
Class T (26,282) (14,130)
----------------- -----------------
Net Decrease from Capital Share Transactions (38,805,249) (16,613,918)
----------------- -----------------
Net Decrease in Net Assets (30,961,713) (6,170,556)
----------------- -----------------
NET ASSETS
Beginning of Year $ 88,608,180 $ 94,778,736
----------------- -----------------
End of Year $ 57,646,467 $ 88,608,180
================= =================
Accumulated Net Investment Loss $ (28,758) $ (17,206)
</Table>
(1) ON NOVEMBER 30, 2005, CLASS R DISBURSED PORTFOLIO SECURITIES AND CASH VALUED
AT $23,196,136 IN PAYMENT OF A REDEMPTION BY AN AFFILIATE OF THE FUND.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 12.82 $ 11.38 $ 8.32 $ 11.71 $ 15.78
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.02)(a) (0.21) (0.10) (0.15) (0.09)
Net realized and unrealized gains
(losses) on securities 1.41 1.65 3.16 (3.24) (3.98)
------------------------------------------------------------------------
Total from investment operations 1.39 1.44 3.06 (3.39) (4.07)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 14.21 $ 12.82 $ 11.38 $ 8.32 $ 11.71
========================================================================
TOTAL RETURN(b) 10.84% 12.65% 36.78% (28.95%) (25.79%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 619 $ 519 $ 656 $ 543 $ 1,003
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.95% 1.81% 2.03% 2.06% 2.10%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.92% 1.81% 2.03% 2.06% 2.09%
Net investment loss (0.19%) (0.18%) (0.55%) (0.77%) (0.96%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 130% 138% 211% 145%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 1.98% (2005), 1.83% (2004), 2.04% (2003),
2.06% (2002), AND 2.10% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 12.33 $ 11.02 $ 8.12 $ 11.52 $ 15.57
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.11)(a) (0.09) (0.16) (0.14) (0.15)
Net realized and unrealized gains
(losses) on securities 1.36 1.40 3.06 (3.26) (3.90)
------------------------------------------------------------------------
Total from investment operations 1.25 1.31 2.90 (3.40) (4.05)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.58 $ 12.33 $ 11.02 $ 8.12 $ 11.52
========================================================================
TOTAL RETURN(b) 10.14% 11.89% 35.71% (29.51%) (26.01%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,803 $ 2,061 $ 1,821 $ 1,459 $ 2,089
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.69% 2.52% 2.80% 2.71% 2.54%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.66% 2.52% 2.80% 2.70% 2.53%
Net investment loss (0.93%) (0.87%) (1.30%) (1.41%) (1.43%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 130% 138% 211% 145%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 2.72% (2005), 2.54% (2004), 2.82% (2003),
2.71% (2002), AND 2.54% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
24
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 12.08 $ 10.81 $ 7.96 $ 11.34 $ 15.56
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.07) (0.20) (0.20) (0.30) (0.30)
Net realized and unrealized gains
(losses) on securities 1.30 1.47 3.05 (3.08) (3.92)
------------------------------------------------------------------------
Total from investment operations 1.23 1.27 2.85 (3.38) (4.22)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.31 $ 12.08 $ 10.81 $ 7.96 $ 11.34
========================================================================
TOTAL RETURN(a) 10.18% 11.75% 35.80% (29.81%) (27.12%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 308 $ 272 $ 271 $ 218 $ 380
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 2.70% 2.60% 2.82% 3.33% 4.18%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.66% 2.59% 2.82% 3.33% 4.17%
Net investment loss (0.93%) (0.97%) (1.34%) (2.05%) (3.07%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 120% 130% 138% 211% 145%
</Table>
(a) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN OR REIMBURSED BY THE MANAGEMENT
COMPANY OR ITS AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE
EXPENSE RATIOS WOULD HAVE BEEN 2.72% (2005), 2.62% (2004), 2.84% (2003),
3.40% (2002), AND 4.18% (2001).
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 12.86 $ 11.41 $ 8.33 $ 11.72 $ 15.69
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.02)(a) (0.21) (0.13) (0.13) (0.14)
Net realized and unrealized gains
(losses) on securities 1.42 1.66 3.21 (3.26) (3.83)
------------------------------------------------------------------------
Total from investment operations 1.40 1.45 3.08 (3.39) (3.97)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 14.26 $ 12.86 $ 11.41 $ 8.33 $ 11.72
========================================================================
TOTAL RETURN 10.89% 12.71% 36.97% (28.92%) (25.30%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 53,184 $ 61,038 $ 70,566 $ 59,890 $ 101,592
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 1.94% 1.78% 1.97% 1.84% 1.61%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.91% 1.77% 1.97% 1.84% 1.60%
Net investment loss (0.17%) (0.13%) (0.47%) (0.55%) (0.50%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 120% 130% 138% 211% 145%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 1.96% (2005), 1.80% (2004), 1.98% (2003),
1.84% (2002), AND 1.61% (2001).
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
26
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 13.13 $ 11.60 $ 8.44 $ 11.81 $ 15.75
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.05(b) 0.03 0.00(a) (0.01) (0.02)
Net realized and unrealized gains
(losses) on securities 1.51 1.50 3.16 (3.36) (3.92)
------------------------------------------------------------------------
Total from investment operations 1.56 1.53 3.16 (3.37) (3.94)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 14.69 $ 13.13 $ 11.60 $ 8.44 $ 11.81
========================================================================
TOTAL RETURN 11.88% 13.19% 37.44% (28.54%) (25.02%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,701 $ 24,665 $ 21,404 $ 14,060 $ 19,193
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.45% 1.37% 1.51% 1.41% 1.25%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.44% 1.37% 1.51% 1.41% 1.24%
Net investment income (loss) 0.35% 0.28% (0.03%) (0.13%) (0.14%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 130% 138% 211% 145%
</Table>
(a) NET INVESTMENT LOSS FOR THE YEAR ENDED DECEMBER 31, 2003 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(b) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 1.47% (2005), 1.39% (2004), 1.53% (2003),
1.41% (2002), AND 1.25% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 12.05 $ 10.73 $ 7.89 $ 11.46 $ 15.65
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.07)(a) (0.36) (0.14) (0.59) (0.26)
Net realized and unrealized gains
(losses) on securities 1.33 1.68 2.98 (2.98) (3.93)
------------------------------------------------------------------------
Total from investment operations 1.26 1.32 2.84 (3.57) (4.19)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.31 $ 12.05 $ 10.73 $ 7.89 $ 11.46
========================================================================
TOTAL RETURN(b) 10.46% 12.30% 35.99% (31.15%) (26.77%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 30 $ 54 $ 61 $ 47 $ 90
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.33% 2.14% 2.54% 4.60% 3.75%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.30% 2.14% 2.54% 4.60% 3.74%
Net investment loss (0.56%) (0.50%) (1.05%) (2.88%) (2.72%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 130% 138% 211% 145%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN OR REIMBURSED BY THE MANAGEMENT
COMPANY OR ITS AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE
EXPENSE RATIOS WOULD HAVE BEEN 2.35% (2005), 2.16% (2004), 2.56% (2003),
5.48% (2002), AND 10.02% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
28
<Page>
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders Worldwide Growth Fund (the "Fund"). The Fund offers
Class A, Class B, Class C, Class F, Class R and Class T shares. Class A and
Class T shares are subject to a sales charge imposed at the time of purchase,
Class B shares are subject to a contingent deferred sales charge ("CDSC")
imposed on Class B shares redeemed within six years of purchase, Class C shares
are subject to a CDSC imposed on Class C shares redeemed within one year of
purchase and Class F and Class R shares are sold at net asset value per share
(with Class R shares sold only to eligible institutional investors). Other
differences between the classes include services offered to and the expenses
borne by each Class. The following significant accounting policies have been
consistently followed by the Fund in the preparation of its financial
statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair
29
<Page>
value as determined in good faith by the Company's board of directors or
pursuant to procedures approved by the board of directors. These situations may
include instances where an event occurs after the close of the market on which a
security is traded but before the Fund calculates its net asset value, and it is
determined that the event has materially affected the value of the security.
Fair value of foreign equity securities may be determined with the assistance of
a pricing service using correlations between the movement of prices of foreign
securities and indexes of domestic securities and other appropriate indicators,
such as closing market prices of relevant ADRs and futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund normally will invest a
significant portion of its assets in foreign securities. Foreign securities
carry more risk than U.S. securities, such as political and currency risks. In
the event the Fund executes a foreign security transaction, the Fund may enter
into a foreign currency contract to settle the foreign security transaction. The
Fund could be exposed to risk if counterparties are unable to meet the terms of
the contracts or if the value of the currency changes unfavorably to the U.S.
dollar. The resultant foreign currency gain or loss from the contract is
recorded as foreign currency gain or loss and is presented as such in the
Statement of Operations. Foreign currency held at December 31, 2005 for settling
foreign trades is listed on the Statement of Assets and Liabilities.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each
business day. Purchases and sales of investment securities and income and
expense items denominated in foreign currencies are translated into U.S. dollar
amounts on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net unrealized gain or loss from investments and foreign
currency translations on the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized appreciation or depreciation on investments and foreign
currency translation arises from changes in
30
<Page>
the values of assets and liabilities, including investments in securities held
at the date of the financial statements, resulting from changes in the exchange
rates and changes in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) and from net realized capital gains (if any)
annually. Dividends and distributions, which are determined in accordance with
income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
31
<Page>
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
Financial Corporation, a publicly-owned financial services company which
provides a comprehensive range of financial products and services in domestic
and selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
1.00% of the first $250 million of net assets, 0.80% of the next $250 million of
net assets and 0.70% of net assets in excess of $500 million.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $84,389 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $34,862 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $12.58 to $13.36, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency fees, including both the per account fees paid to
DTI and out-of-pocket charges, during the year ended December 31, 2005 were as
follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
------------------------------------------------------------
Class A $ 1,398
Class B $ 3,952
Class C $ 545
Class R $ 6,001
Class T $ 138
</Table>
32
<Page>
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the processing of shareholder transactions in the Funds.
During the year ended December 31, 2005, the Fund was charged $2,029 for cash
management fees, which are included in the out-of-pocket transfer agency charges
above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $34,835 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $138,956 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
--------------------------------------------------------------
Class A N/A $ 1,548
Class B $ 13,850 $ 4,617
Class C $ 1,979 $ 660
Class T $ 94 $ 94
</Table>
During the year ended December 31, 2005, DSC retained $146 in sales commissions
from the sales of Class A shares. DSC also retained $3988 and $2 of contingent
deferred sales charges relating to redemptions of Class B and Class C shares,
respectively.
33
<Page>
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance monitoring, regulatory and shareholder reporting, as well as related
facilities, equipment and clerical help. The fee is computed by applying the
following rates, as applicable, to the domestic assets and foreign assets, with
the proportions of domestic and foreign assets recalculated monthly, plus
reasonable out-of-pocket expenses.
<Table>
<Caption>
ON ASSETS IN BUT NOT DOMESTIC FOREIGN
EXCESS OF EXCEEDING FEE FEE
-----------------------------------------------------------------------
$ 0 $ 500 million 0.06% 0.10%
$ 500 million $ 1 billion 0.04% 0.065%
$ 1 billion 0.02% 0.02%
</Table>
Founders has contractually agreed in writing to waive any fees received for
these services to the extent they exceed Founders' costs in providing the
services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits on the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
------------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $19,539, which reduced the amount paid to
Mellon Bank to $32,500.
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of one or more of the Funds. The amount paid to the director under the
plan will be determined based upon the performance of the selected Funds. The
current value of these amounts is included in Other Assets and Directors'
Deferred Compensation on the Statement of Assets and Liabilities. Changes in
market value are included in the Directors' fees and expenses and the net change
in unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
34
<Page>
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally accepted in the United States of America. These differences
are due to differing treatments for items such as deferral of wash sale losses,
deferred compensation, redemptions-in-kind, foreign currency transactions, net
operating losses and capital loss carryovers. Permanent differences identified
during the year ended December 31, 2005 have been reclassified among the
components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
------------------------------------------------------------
$ 27,299 $ (3,971,207) $ 3,943,908
</Table>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of December 31, 2005, represent capital loss carryovers that may be
available to offset future realized capital gains and thereby reduce future
taxable gains distributions. Post-October 31 foreign currency losses noted
below, if any, may be used to offset future net investment income and thereby
reduce future ordinary income distributions. Net capital loss carryovers
utilized during 2005 by the Fund amounted to $10,043,805. Accumulated capital
losses as of December 31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
------------------------------------------------------
2009 $ 34,530,988
2010 $ 22,200,649
2011 $ 3,142,525
---------------
$ 59,874,162
===============
</Table>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The primary difference between book and tax appreciation or depreciation
is wash sale loss deferrals.
<Table>
Post-October Foreign Currency Loss Deferral $ (2,399)
Other Book/Tax Differences $ (16,845)
Federal Tax Cost $ 46,957,564
Gross Tax Appreciation of Investments $ 10,806,488
Gross Tax Depreciation of Investments $ (200,036)
Net Tax Appreciation $ 10,606,452
</Table>
35
<Page>
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 450 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 22,521 $ 293,185 14,460 $ 169,930
Redeemed (19,415) $ (261,541) (31,674) $ (365,661)
-------------------------------------------------------------
Net Increase (Decrease) 3,106 $ 31,644 (17,214) $ (195,731)
=============================================================
CLASS B
Sold 8,028 $ 98,777 31,752 $ 357,137
Redeemed (42,268) $ (528,874) (29,868) $ (335,138)
-------------------------------------------------------------
Net Increase (Decrease) (34,240) $ (430,097) 1,884 $ 21,999
=============================================================
CLASS C
Sold 10,078 $ 128,403 8,384 $ 94,894
Redeemed (9,465) $ (119,566) (10,901) $ (121,637)
-------------------------------------------------------------
Net Increase (Decrease) 613 $ 8,837 (2,517) $ (26,743)
=============================================================
CLASS F
Sold 210,093 $ 2,732,978 837,712 $ 9,854,038
Redeemed (1,227,387) $ (16,100,693) (2,275,773) $ (26,636,819)
-------------------------------------------------------------
Net Decrease (1,017,294) $ (13,367,715) (1,438,061) $ (16,782,781)
=============================================================
CLASS R
Sold 256,421 $ 3,470,964 209,694 $ 2,478,822
Redeemed (2,018,994) $ (28,492,600) (175,936) $ (2,095,354)
-------------------------------------------------------------
Net Increase (Decrease) (1,762,573) $ (25,021,636) 33,758 $ 383,468
=============================================================
CLASS T
Sold 8 $ 100 1,421 $ 15,509
Redeemed (2,190) $ (26,382) (2,672) $ (29,639)
-------------------------------------------------------------
Net Decrease (2,182) $ (26,282) (1,251) $ (14,130)
=============================================================
</Table>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $95,597,237 and $134,484,922, respectively.
36
<Page>
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
37
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders Worldwide Growth
Fund (one of the portfolios constituting Dreyfus Founders Funds, Inc., hereafter
referred to as the "Fund") at 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 Sates of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where securities purchased had not been received, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
38
<Page>
FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
39
<Page>
The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services being
provided to the Funds are satisfactory, as evidenced in part by the recent
performance records of the Funds, to which the directors gave significant
attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to the
Funds, but also recognize that Founders or its affiliates have provided the
highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
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small group of funds selected by Lipper and a larger universe of funds also
selected Class F by Lipper. The Lipper materials further included graphs
depicting each Fund's one-year and annualized performance results for two-,
three-, four-, five-, and ten-year periods, if applicable, in comparison to the
Fund's performance group and performance universe.
Worldwide Growth Fund's performance for the one-year period ended December 31,
2004 placed it in the second quintile of its Lipper performance group, with the
Fund ranking third out of six Lipper-selected "peer funds," and in the third
quintile of its Lipper global large-cap growth fund performance universe,
ranking 24th of 56 funds. The directors noted that the Fund's performance had
improved significantly since the current managers of the foreign portion of the
Fund's portfolio assumed their duties in March 2003, with the Fund placing in
the first quintile of its Lipper-selected universe for the two-year period ended
December 31, 2004. The directors deemed these relative performance results to be
satisfactory, and stressed the importance to Founders of the need to seek to
maintain a strong performance record.(1)
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS DO NOT REFLECT THE FRONT-END SALES
CHARGES THAT APPLY TO OTHER SHARE CLASSES.
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After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance
difficulties, more recent performance results generally have shown
significant improvement; Founders has focused its efforts upon improving the
performance records of the Funds and will continue to seek improvement; and
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing in
the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY
FOUNDERS AND ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, Worldwide
Growth Fund's management fees ranked in the third quintile of its Lipper
competitive expense group, with the Fund's fees the sixth lowest of 11 "peer
funds." The Fund's contractual management fees at a common asset level were
determined by Lipper to be lower than five of the 11 funds in its group. The
Fund's management fees were in the fourth quintile of its Lipper expense
universe, placing 34th lowest of 48 funds.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
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Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain
efficiencies in performing the portfolio management, trading and operational
functions related to those accounts (the directors recognized that in
determining its profitability from providing investment management and other
services to the Funds, Founders allocated its expenses between the Funds and
other accounts in a manner which was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment
services to any of the clients it advises, not just the Funds. The directors
recognized that Founders' profitability would be lower if it did not receive
research and brokerage services in connection with these brokerage
transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders' management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
43
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Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the investment advisory fees received by
Founders. However, the directors noted that Founders' profitability is expected
to decline in 2005 as a result of declines in Fund asset levels. The directors
also considered the risks assumed by Founders in providing management services
to the Funds, including the risk that the management agreement can be terminated
by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of
investment advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially
fees which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than fees
arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in
44
<Page>
recognition of the quality service which Founders has provided and continues to
provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of scale if the assets of the Funds were to increase. Among other information,
the directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into increased
profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of an
increase in the assets of a particular Fund or a group of Funds would not be
passed along on a dollar-for-dollar basis to the shareholders of other Funds
that did not experience increases in their assets to points above their
breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is
consistent with its objective of sharing its economies of scale with the
Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
45
<Page>
restrictions. The directors determined that Founders is dedicated to compliance
with all applicable rules and regulations and that the systems of controls which
are in place to ensure that the service providers to the Funds, including
Founders, and the Funds themselves, maintain strict adherence to the law are
excellent.
OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years and that efforts are being and will continue to be
made to enhance such improvement and to maintain Fund expense ratios at
reasonable and competitive levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
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<Page>
YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
47
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Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice President--
Compliance since 2002. Formerly, Founders' Manager of Compliance (2000 to 2002)
and Securities Compliance Examiner, Staff Accountant and Team Leader for the
U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
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DREYFUS FOUNDERS WORLDWIDE GROWTH FUND
PROXY VOTING INFORMATION
A description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities, and information regarding how
the Funds voted these proxies for the 12-month period ended June 30, 2005, is
available through the Funds' website at www.founders.com and on the Securities
and Exchange Commission's (SEC) website at www.sec.gov. The description of the
policies and procedures is also available without charge, upon request, by
calling 1-800-525-2440.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available on the SEC's website at www.sec.gov and may be reviewed and copied
at the SEC's Public Reference Room in Washington, DC. Information on the
operation of the SEC's Public Reference Room may be obtained by calling
1-800-SEC-0330.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
Dreyfus Service Corporation, Distributor.
(C)2006 Founders Asset Management LLC. 2/06
A-646-WWG-05
Dreyfus Founders
Balanced Fund
ANNUAL REPORT December 31, 2005
[LION GRAPHIC]
YOU, YOUR ADVISOR AND
(R) [DREYFUS LOGO]
A MELLON FINANCIAL COMPANY (SM)
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 10
Statement of Investments 12
Statement of Assets and Liabilities 17
Statement of Operations 19
Statements of Changes in Net Assets 20
Financial Highlights 21
Notes to Financial Statements 27
Report of Independent Registered Public Accounting Firm 37
Other Tax Information 38
Factors Considered in Renewing the Advisory Agreement 39
Your Board Representatives 47
</Table>
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INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
managers only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-9 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC-INSURED - NOT BANK-GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF JOHN B. JARES AND JOHN V. JOHNSON]
A DISCUSSION WITH PORTFOLIO MANAGER JOHN B. JARES, CFA, LEFT; AND ASSISTANT
PORTFOLIO MANAGER JOHN V. JOHNSON, CFA, REGARDING FUND PERFORMANCE FOR THE
12-MONTH PERIOD ENDED DECEMBER 31, 2005.
ECONOMIC BURDENS
Through 2005, investors endured a restrictive Federal Reserve monetary policy
and a continued contraction of corporate earnings multiples, despite the strong
operating results produced by the market. With what seemed to be an overly
volatile market in 2005, the Standard & Poor's 500 Index posted one of the most
narrow price ranges between the year's high and low in recent history.
Additionally, the economy continued to carry the burden of high materials and
energy prices through the period. In the latter part of the year, the market
began to positively discount the possibility of the Federal Reserve ending its
interest rate increases.
CONSERVATIVE ALLOCATION TO EQUITIES
The Fund's performance for the year was driven by our investment strategy to
fundamentally evaluate companies and industries on an individual basis. However,
that being said, the Dreyfus Founders Balanced Fund underperformed the 4.91%
return of its benchmark, the Standard & Poor's 500 Index, for the 12 months
ended December 31, 2005.
The Fund continued to search for companies exhibiting strong growth
potential, using fundamental analysis. Throughout most of the period, the Fund
maintained a conservative allocation to equities to mitigate risks to the
portfolio overall, with sector weightings biased toward the information
technology (IT) and consumer discretionary sectors. As our investment process
began to reveal improving fundamentals within the information technology sector,
we selected the stocks that we believed were most likely to exhibit
[SIDENOTE]
"THE FUND'S PERFORMANCE FOR THE PERIOD WAS DRIVEN BY OUR INVESTMENT STRATEGY TO
FUNDAMENTALLY EVALUATE COMPANIES AND INDUSTRIES ON AN INDIVIDUAL BASIS."
3
<Page>
strong earnings growth. Early in the period, the Fund's allocation in the energy
sector was decreased due to our adherence to our sell discipline upon reaching
our price targets. This hurt the Fund's relative performance for the year, as
energy was the strongest performing sector in the Index.
IT SHOWED STRONG PERFORMANCE
The most compelling growth opportunities came from the information technology
sector, where strong stock selection and a positive relative weighting boosted
the Fund's performance. APPLE COMPUTER, INC.'s stock price rose during the
period on strong demand for its iPod MP3 music players as well as a shift in
consumer preferences toward the company's Macintosh computers. ASM LITHOGRAPHY
HOLDING NV increased its market share with new lithography tools, and
International Business Machines Corporation experienced a strong mid-year
earnings report and improved value assignment from the market. Semiconductor
manufacturer Marvell Technology Group Limited also saw its stock price increase
during the period.
CONSUMER STAPLES AND MATERIALS AIDED FUND
The Fund held relative underweight positions in the materials and consumer
staples sectors, which, paired with positive stock selection in each respective
sector, benefited the Fund's relative performance as these sectors were not
strong performers in the Index.
Individual names within the healthcare sector boosted the Fund's
performance as well, including GENENTECH, INC. and MedImmune, Inc. Genentech's
stock price rose on the positive receptivity to its new drugs for the treatment
of multiple indications of cancer. MedImmune benefited as the market discounted
future potential revenues from its new human papilloma virus (HPV) vaccine.
Additionally, the company took numerous positive actions during the period to
restructure its product portfolio following an earlier misstep on its Flumist(R)
product.
Consumer staples name Gillette Company was another notable strong
performing stock for the period, as the company was purchased for a significant
premium by PROCTER & GAMBLE COMPANY.
[SIDENOTE]
SECTORS BENEFITING THE FUND
Information Technology
Materials
Consumer Staples
4
<Page>
ENERGY AND FINANCIALS WEIGHED ON PERFORMANCE
As was previously mentioned, the Fund's position reduction in the energy sector
proved the largest detriment to relative performance for the period.
A strong rally in the financials sector in the fourth quarter of the
period, in which the Fund had a significant underweight position, impeded the
Fund's performance, as did weak stock picking. Among the poor-performing
financials issues was First Marblehead Corporation. A provider of outsourcing
services for private education lending, First Marblehead's stock price declined
as investors were concerned about the company's long-term growth rate and
management issues. The company again delivered slower-than-expected facilitation
volume growth in the second quarter. Management issues involved the resignation
of First Marblehead's CEO over alleged improper gifts to an employee of a large
customer. The Fund sold its position in the company as we felt the monies may be
better deployed in other investments.
As we did not find any compelling growth opportunities within the utilities
sector, the Fund did not participate in this sector. However, utilities produced
a double-digit return in the Index, which negatively pressured the Fund's
relative performance.
LARGEST EQUITY HOLDINGS (ticker symbol)
<Table>
1. REGAL ENTERTAINMENT GROUP CLASS A (RGC) 4.73%
2. AMDOCS LIMITED (DOX) 4.45%
3. GENERAL ELECTRIC COMPANY (GE) 4.27%
4. HEWLETT-PACKARD COMPANY (HPQ) 3.85%
5. COLGATE-PALMOLIVE COMPANY (CL) 3.72%
6. SPRINT NEXTEL CORPORATION (S) 3.70%
7. WELLS FARGO & COMPANY (WFC) 3.50%
8. MGI PHARMA, INC. (MOGN) 3.34%
9. JPMORGAN CHASE & COMPANY (JPM) 3.18%
10. ASM LITHOGRAPHY HOLDING NV NY SHARES (ASML) 2.55%
</Table>
Holdings listed are a percentage of equity assets. Portfolio holdings are
subject to change, and should not be construed as a recommendation of any
security.
[SIDENOTE]
SECTORS DETRACTING FROM THE FUND
Energy
Financials
Utilities
5
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GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 1-800-525-2440 TO OBTAIN THE MOST
RECENT MONTH-END PERFORMANCE DATA.
[CHART TO COME]
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders Balanced Fund on 12/31/95 to a $10,000 investment made in unmanaged
securities indexes on that date. The Fund's performance assumes the reinvestment
of dividends and capital gain distributions, but does not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or redemption of
Fund shares. The Fund offers multiple classes of shares. Performance shown is
for Class F, which is open only to grandfathered investors. The Fund's
performance in the graph takes into account all applicable Class F fees and
expenses. THESE FIGURES DO NOT REFLECT THE MAXIMUM SALES CHARGES APPLICABLE TO
CLASS A, B, C, OR T SHARES OF THE FUND. FOR THESE SHARE CLASSES, APPLYING THESE
CHARGES WILL RESULT IN LOWER RETURNS FOR INVESTORS.
The Standard & Poor's (S&P) 500 Index is designed to be representative of the
U.S. equities market and consists of 500 leading companies in leading industries
of the U.S. economy. The total return figures cited for this index assume change
in security prices and reinvestment of dividends, but do not reflect the costs
of managing a mutual fund. The S&P 500 Index does not include a fixed-income
component, while the Fund does. The Lipper Balanced Fund Index is an equal
dollar weighted index of the largest mutual funds within the Balanced Fund
classification, as defined by Lipper. This index is adjusted for the
reinvestment of capital gains and income dividends, and reflects the management
expenses associated with the funds included in the index. Further information
related to Fund performance is contained elsewhere in this report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (INCEPTION DATE) YEAR YEARS YEARS INCEPTION
- --------------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) (3.43%) (1.76%) -- (3.23%)
Without sales charge 2.51% (0.60%) -- (2.27%)
B SHARES (12/31/99)
With redemption* (2.34%) (1.70%) -- (3.16%)
Without redemption 1.66% (1.30%) -- (3.00%)
C SHARES (12/31/99)
With redemption** 0.54% (1.65%) -- (3.34%)
Without redemption 1.54% (1.65%) -- (3.34%)
F SHARES (2/19/63) 2.75% (0.27%) 3.18% N/A
R SHARES (12/31/99) 3.01% (0.60%) -- (2.26%)
T SHARES (12/31/99)
With sales charge (4.50%) (2.40%) (1.32%) -- (2.94%)
Without sales charge 2.21% (0.41%) -- (2.20%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, fee
waivers for certain share classes, and adjustments for financial statement
purposes. Part of the Fund's historical performance is due to the purchase of
securities sold in initial public offerings (IPOs). There is no guarantee that
the Fund's investments in IPOs, if any, will continue to have a similar impact
on performance.
* The maximum contingent deferred sales charge for Class B shares is 4% and is
reduced to 0% after six years, at which time the Class B shares convert to
Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
INDIVIDUAL ISSUES IMPEDED PERFORMANCE
A primary negative impact on an individual stock basis came from the poor
performance of consumer discretionary holding ROYAL CARIBBEAN CRUISES LIMITED.
Royal Caribbean underperformed during the period as investors were concerned
with the effect high oil prices may have on the company's profits. The Fund held
Royal Caribbean at the end of the period as we believed robust demand for
cruises may help the company to continue strong pricing.
Healthcare names Abbott Laboratories, Inc. and MGI PHARMA, INC. also saw
drops in their stock prices. Abbott declined during the period after it reported
disappointing data on two potential new products, which were the basis for
future growth. MGI underperformed as concerns continued over the company's
chemo-induced anti-nausea drug, Aloxi(R). Additionally, a new product,
Dacogen(TM), was expected to be approved in the fall 2005 but has been delayed,
which put pressure on the stock.
Information technology names Xilinx, Inc. and MAXIM INTEGRATED PRODUCTS,
INC. also underperformed during the period.
FIXED-INCOME PERFORMANCE
In the first three quarters of 2005, higher oil prices, a strengthening dollar
and higher short-term interest rates were held accountable for any perceived
slowdown in the fixed-income markets. The housing market provided a considerable
offset to these factors, as well as stimulus to the economy. In
[CHART]
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
Consumer Discretionary 15.89%
Information Technology 13.34%
Financials 9.72%
Healthcare 9.71%
Consumer Staples 5.64%
Industrials 4.68%
Telecommunications Services 3.14%
Energy 2.18%
Materials 1.82%
Fixed-Income Investments 31.93%
Cash & Equivalents 1.95%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio
managers and are subject to change at any time, based on market and other
conditions, and should not be construed as a recommendation of any specific
security.
8
<Page>
the fourth quarter, the bond market was affected by a drop in oil prices,
indicating less inflationary pressure, and speculation that the Federal Reserve
was nearing the end of its tightening cycle. A flattening yield curve pervaded
the annual period, as the yield curve's short end, which is usually more
responsive to federal funds rate changes, experienced a lowering, causing an
overall flattening.
The Fund benefited from its high-quality bias as higher quality bonds
outperformed lower quality securities during the year.
An underweight position in mortgages and overweight position in corporate
bonds hurt the performance of the fixed-income portion of the portfolio;
mortgages outperformed corporates by almost 1.00% for the period. Additionally,
the Fund's shorter duration dampened performance as long-dated securities gained
more than shorter maturities in the bull market-flattening trend.
IN CONCLUSION
At the end of the period, we believe the Fund is well positioned for continued
economic improvement and earnings growth throughout 2006. We have searched for
companies in all sectors that we believe have the potential for earnings growth,
while being mindful of the potential impacts of monetary policy on the market in
general.
For the fixed-income portion of the Fund, we continue to be cautious but
believe we are nearing the end of the Federal Reserve's tightening cycle. We
will assess credit quality and spreads relative to our corporate bond holdings
should we begin to experience economic changes that might affect corporate
earnings.
As we move into 2006, we will continue to apply our investment process and
philosophy to picking stocks for the Fund that seek to take advantage of the
economic environment and that we believe will exhibit strong fundamental
earnings strength through the year. As always, we thank you for your continued
investment in the Fund.
/s/ John B. Jares, CFA /s/ John V. Johnson, CFA
John B. Jares, CFA John V. Johnson, CFA
Portfolio Manager Assistant Portfolio Manager
9
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
10
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- ------------------------------------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,019.15 $ 8.65
CLASS A HYPOTHETICAL 1,000.00 1,016.53 8.68
CLASS B ACTUAL 1,000.00 1,016.94 12.91
CLASS B HYPOTHETICAL 1,000.00 1,012.24 12.97
CLASS C ACTUAL 1,000.00 1,016.53 13.16
CLASS C HYPOTHETICAL 1,000.00 1,011.98 13.22
CLASS F ACTUAL 1,000.00 1,019.76 7.38
CLASS F HYPOTHETICAL 1,000.00 1,017.80 7.40
CLASS R ACTUAL 1,000.00 1,020.37 6.42
CLASS R HYPOTHETICAL 1,000.00 1,018.77 6.43
CLASS T ACTUAL 1,000.00 1,018.50 9.92
CLASS T HYPOTHETICAL 1,000.00 1,015.25 9.95
</Table>
*Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- --------------------------------------------------------------------------------
CLASS A 1.70%
CLASS B 2.54%
CLASS C 2.59%
CLASS F 1.45%
CLASS R 1.26%
CLASS T 1.95%
</Table>
11
<Page>
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------
COMMON STOCKS (DOMESTIC)--58.7%
AUTOMOTIVE RETAIL--1.3%
21,800 Advance Auto Parts, Inc.* $ 947,418
------------
BIOTECHNOLOGY--2.3%
7,800 Amgen, Inc.* 615,108
7,100 Cephalon, Inc.* 459,654
6,600 Genentech, Inc.* 610,500
------------
1,685,262
------------
BROADCASTING & CABLE TV--0.8%
21,700 Comcast Corporation Special Class A* 557,473
------------
COMPUTER & ELECTRONICS RETAIL--1.1%
17,550 Best Buy Company, Inc. 763,074
------------
COMPUTER HARDWARE--3.7%
10,800 Apple Computer, Inc.* 776,412
65,900 Hewlett-Packard Company 1,886,717
------------
2,663,129
------------
CONSUMER ELECTRONICS--1.4%
10,100 Harman International Industries, Inc. 988,285
------------
CONSUMER FINANCE--1.1%
14,900 SLM Corporation 820,841
------------
DEPARTMENT STORES--1.6%
9,400 J.C. Penney Company, Inc. 522,640
12,600 Kohl's Corporation* 612,360
------------
1,135,000
------------
DIVERSIFIED BANKS--3.2%
12,600 Bank of America Corporation 581,490
27,300 Wells Fargo & Company 1,715,259
------------
2,296,749
------------
GENERAL MERCHANDISE STORES--1.8%
33,000 Family Dollar Stores, Inc. 818,070
9,200 Target Corporation 505,724
------------
1,323,794
------------
HEALTHCARE EQUIPMENT--0.5%
10,200 Biomet, Inc. 373,014
------------
HEALTHCARE SUPPLIES--0.7%
9,800 DENTSPLY International, Inc. 526,162
------------
HOME ENTERTAINMENT SOFTWARE--0.3%
3,600 Electronic Arts, Inc.* 188,316
------------
HOME IMPROVEMENT RETAIL--0.8%
15,100 Home Depot, Inc. 611,248
------------
</Table>
12
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS--4.6%
11,200 Clorox Company $ 637,168
33,250 Colgate-Palmolive Company 1,823,763
14,235 Procter & Gamble Company 823,922
------------
3,284,853
------------
INDUSTRIAL CONGLOMERATES--2.9%
59,700 General Electric Company 2,092,485
------------
INTEGRATED OIL & GAS--2.2%
9,800 Chevron Corporation 556,346
18,000 ExxonMobil Corporation 1,011,060
------------
1,567,406
------------
INTEGRATED TELECOMMUNICATION SERVICES--3.1%
7,100 Alltel Corporation 448,010
77,700 Sprint Nextel Corporation 1,815,072
------------
2,263,082
------------
INTERNET SOFTWARE & SERVICES--0.7%
12,100 Yahoo!, Inc.* 474,078
------------
INVESTMENT BANKING & BROKERAGE--1.3%
38,600 Charles Schwab Corporation 566,262
6,700 Morgan Stanley 380,158
------------
946,420
------------
LEISURE FACILITIES--0.4%
6,700 Royal Caribbean Cruises Limited 301,902
------------
METAL & GLASS CONTAINERS--1.2%
21,400 Ball Corporation 850,008
------------
MOVIES & ENTERTAINMENT--5.8%
16,500 Pixar, Inc.* 869,880
121,800 Regal Entertainment Group Class A 2,316,636
55,300 Time Warner, Inc. 964,432
------------
4,150,948
------------
OTHER DIVERSIFIED FINANCIAL SERVICES--2.2%
39,300 JPMorgan Chase & Company 1,559,817
------------
PACKAGED FOODS & MEATS--1.1%
14,000 Hershey Foods Corporation 773,500
------------
PHARMACEUTICALS--5.4%
11,200 Covance, Inc.* 543,760
11,100 Eli Lilly and Company 628,149
95,400 MGI Pharma, Inc.* 1,637,064
15,975 Pfizer, Inc. 372,537
16,000 Wyeth 737,120
------------
3,918,630
------------
RAILROADS--1.0%
9,100 Union Pacific Corporation 732,641
------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
13
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------
SEMICONDUCTORS--1.3%
25,600 Maxim Integrated Products, Inc. $ 927,744
------------
SPECIALTY CHEMICALS--0.6%
7,300 Sigma-Aldrich Corporation 462,017
------------
SPECIALTY STORES--0.9%
17,400 Tiffany & Company 666,246
------------
SYSTEMS SOFTWARE--1.6%
43,100 Microsoft Corporation 1,127,065
------------
THRIFTS & MORTGAGE FINANCE--1.0%
17,100 The PMI Group, Inc. 702,297
------------
TRADING COMPANIES & DISTRIBUTORS--0.8%
7,700 W.W. Grainger, Inc. 547,470
------------
TOTAL COMMON STOCKS (DOMESTIC)
(COST--$39,938,770) 42,228,374
------------
COMMON STOCKS (FOREIGN)--7.4%
APPLICATION SOFTWARE--3.0%
79,400 Amdocs Limited (CI)* 2,183,500
------------
PHARMACEUTICALS--0.7%
11,400 Teva Pharmaceutical Industries Limited
Sponsored ADR (IS) 490,314
------------
PROPERTY & CASUALTY INSURANCE--0.9%
10,000 XL Capital Limited Class A (BD) 673,800
------------
SEMICONDUCTOR EQUIPMENT--1.7%
62,175 ASM Lithography Holding NV NY Shares (NE)* 1,248,474
------------
SEMICONDUCTORS--1.1%
46,825 ATI Technologies, Inc. (CA)* 795,557
------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$4,824,023) 5,391,645
------------
<Caption>
PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------------------------------------------------------
CORPORATE BONDS (DOMESTIC)--9.2%
AUTOMOBILE MANUFACTURERS--1.4%
$ 1,000,000 Toyota Motor Credit Corporation
5.65% 1/15/07 $ 1,003,990
------------
DIVERSIFIED BANKS--2.4%
1,540,000 Washington Mutual, Inc.
8.25% 4/1/10 1,714,728
------------
GENERAL MERCHANDISE STORES--1.1%
750,000 Target Corporation
5.875% 3/1/12 787,853
------------
</Table>
14
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS--2.2%
$ 1,500,000 Colgate-Palmolive Company
5.98% 4/25/12 $ 1,590,825
------------
PHARMACEUTICALS--2.1%
1,500,000 Abbott Laboratories
5.625% 7/1/06 1,506,975
------------
TOTAL CORPORATE BONDS (DOMESTIC)
(COST--$6,436,621) 6,604,371
------------
U.S. GOVERNMENT OBLIGATIONS--22.8%
AGENCY PASS THROUGH--2.3%
1,604,698 U.S. Small Business Administration Series 10-A
6.64% 2/1/11 1,678,450
------------
GOVERNMENT SPONSORED ENTERPRISES--11.6%
Federal Farm Credit Bank:
1,040,000 4.26% 9/30/10 1,017,775
700,000 4.70% 12/10/14 694,442
Federal Home Loan Bank
800,000 4.50% 11/15/12 787,496
Federal Home Loan Mortgage Corporation:
1,000,000 4.125% 7/12/10 975,150
800,000 4.875% 11/15/13 803,784
900,000 5.125% 7/15/12 916,452
Federal National Mortgage Association:
700,000 5.00% 4/6/10 699,391
800,000 5.375% 11/15/11 823,488
Tennessee Valley Authority:
800,000 5.375% 11/13/08 814,288
800,000 5.625% 1/18/11 829,672
------------
8,361,938
------------
MORTGAGE-BACKED SECURITIES: GNMA/GUARANTEED--1.6%
1,090,504 Government National Mortgage Association
6.00% 1/15/33 Pool #563709 1,117,854
------------
U.S. TREASURY NOTES--7.3%
U.S. Treasury Inflation Index Note
607,280 3.875% 1/15/09 637,965
U.S. Treasury Note:
900,000 4.25% 8/15/14 890,154
1,000,000 4.375% 8/15/12 999,880
800,000 5.00% 2/15/11 823,968
900,000 5.00% 8/15/11 928,935
900,000 5.75% 8/15/10 952,137
------------
5,233,039
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST--$16,546,859) 16,391,281
------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- -------------------------------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--2.9%
SPECIAL PURPOSE ENTITY--2.9%
$ 2,100,000 CAFCO LLC
4.12% 1/3/06~ $ 2,099,519
------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$2,099,519) 2,099,519
------------
TOTAL INVESTMENTS--101.0%
(TOTAL COST--$69,845,792) 72,715,190
------------
OTHER ASSETS AND LIABILITIES--(1.0%) (699,897)
------------
NET ASSETS--100.0% $ 72,015,293
============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
* NON-INCOME PRODUCING.
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$2,099,519, OR 2.9%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
BD - BERMUDA
CA - CANADA
CI - CHANNEL ISLANDS
IS - ISRAEL
NE - NETHERLANDS
SEE NOTES TO FINANCIAL STATEMENTS.
16
<Page>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 69,845,792
---------------
Investment securities, at market 72,715,190
Cash 113,742
Receivables:
Investment securities sold 690,619
Capital shares sold 23,840
Dividends and interest 388,299
Other assets 66,344
---------------
Total Assets 73,998,034
---------------
LIABILITIES
Payables and other accrued liabilities:
Investment securities purchased 568,478
Capital shares redeemed 1,198,435
Advisory fees 42,597
Shareholder servicing fees 5,054
Accounting fees 3,932
Distribution fees 10,468
Transfer agency fees 15,977
Custodian fees 906
Directors' Deferred Compensation 66,344
Other 70,550
---------------
Total Liabilities 1,982,741
---------------
Net Assets $ 72,015,293
===============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 252,943,017
Undistributed net investment income 670,753
Accumulated net realized loss from security and
foreign currency transactions (184,467,875)
Net unrealized appreciation on investments
and foreign currency translation 2,869,398
---------------
Total $ 72,015,293
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
<Table>
CLASS A
Net Assets $ 1,759,754
Shares Outstanding 205,144
Net Asset Value, Redemption Price Per Share $ 8.58
Maximum offering price per share
(net asset value plus sales charge of 5.75% of offering price) $ 9.10
CLASS B
Net Assets $ 1,052,670
Shares Outstanding 123,872
Net Asset Value, Offering and Redemption Price Per Share
(excluding applicable contingent deferred sales charge) $ 8.50
CLASS C
Net Assets $ 188,534
Shares Outstanding 22,539
Net Asset Value, Offering and Redemption Price Per Share
(excluding applicable contingent deferred sales charge) $ 8.36
CLASS F
Net Assets $ 68,925,898
Shares Outstanding 8,025,785
Net Asset Value, Offering and Redemption Price Per Share $ 8.59
CLASS R
Net Assets $ 53,831
Shares Outstanding 6,291
Net Asset Value, Offering and Redemption Price Per Share $ 8.56
CLASS T
Net Assets $ 34,606
Shares Outstanding 3,927
Net Asset Value, Redemption Price Per Share $ 8.81
Maximum offering price per share
(net asset value plus sales charge of 4.50% of offering price) $ 9.23
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<Page>
STATEMENT OF OPERATIONS
For the year ended December 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 552,588
Interest 1,567,896
Foreign taxes withheld (398)
---------------
Total Investment Income 2,120,086
---------------
EXPENSES
Advisory fees--Note 2 542,501
Shareholder servicing fees--Note 2 66,309
Accounting fees--Note 2 50,077
Distribution fees--Note 2 212,162
Transfer agency fees--Note 2 127,172
Registration fees 60,860
Postage and mailing expenses 18,606
Custodian fees and expenses--Note 2 6,388
Printing expenses 52,645
Legal and audit fees 27,058
Directors' fees and expenses--Note 2 16,360
Other expenses 33,315
---------------
Total Expenses 1,213,453
Earnings Credits (5,516)
Reimbursed/Waived Expenses (3,731)
Expense Offset to Broker Commissions (13,318)
---------------
Net Expenses 1,190,888
---------------
Net Investment Income 929,198
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITY
TRANSACTIONS AND FOREIGN CURRENCY TRANSACTIONS
Net Realized Gain on:
Security Transactions 10,634,687
Foreign Currency Transactions 13,237
---------------
Net Realized Gain 10,647,924
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation (9,571,705)
---------------
Net Realized and Unrealized Gain 1,076,219
---------------
Net Increase in Net Assets Resulting from Operations $ 2,005,417
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2005 2004
OPERATIONS
Net Investment Income $ 929,198 $ 1,165,048
Net Realized Gain on Security and
Foreign Currency Transactions 10,647,924 8,838,969
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation (9,571,705) (2,078,931)
--------------- ---------------
Net Increase in Net Assets Resulting from Operations 2,005,417 7,925,086
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From Net Investment Income
Class A (16,241) (16,533)
Class B (1,226) (4,861)
Class C (165) (659)
Class F (925,766) (1,146,498)
Class R (776) (763)
Class T (240) (243)
--------------- ---------------
Net Decrease from Dividends and Distributions (944,414) (1,169,557)
--------------- ---------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A 52,147 (2,547)
Class B (587,816) (135,764)
Class C (77,456) (49,827)
Class F (21,792,363) (36,636,581)
Class R (5,724) (16,844)
Class T (856) (3,452)
--------------- ---------------
Net Decrease from Capital Share Transactions (22,412,068) (36,845,015)
--------------- ---------------
Net Decrease in Net Assets (21,351,065) (30,089,486)
--------------- ---------------
NET ASSETS
Beginning of Year $ 93,366,358 $ 123,455,844
--------------- ---------------
End of Year $ 72,015,293 $ 93,366,358
=============== ===============
Undistributed (Accumulated) Net Investment
Income (Loss) $ 670,753 $ (31,472)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 8.45 $ 7.88 $ 6.68 $ 8.18 $ 9.24
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.08 0.08 0.05 0.05 0.06
Net realized and unrealized gains
(losses) on securities 0.13 0.57 1.20 (1.51) (1.03)
----------------------------------------------------------------------
Total from investment operations 0.21 0.65 1.25 (1.46) (0.97)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.08) (0.08) (0.05) (0.04) (0.09)
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions (0.08) (0.08) (0.05) (0.04) (0.09)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 8.58 $ 8.45 $ 7.88 $ 6.68 $ 8.18
======================================================================
TOTAL RETURN(a) 2.51% 8.31% 18.81% (17.85%) (10.46%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,760 $ 1,682 $ 1,572 $ 1,243 $ 1,227
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 1.69% 1.49% 1.83% 1.89% 1.87%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.66% 1.48% 1.83% 1.89% 1.87%
Net investment income 0.90% 0.96% 0.63% 0.56% 0.51%
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 181% 134% 108% 122% 111%
</Table>
(a) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 8.37 $ 7.80 $ 6.63 $ 8.11 $ 9.18
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.01(a) 0.01 0.01 (0.01) 0.01
Net realized and unrealized gains
(losses) on securities 0.13 0.58 1.17 (1.47) (1.03)
----------------------------------------------------------------------
Total from investment operations 0.14 0.59 1.18 (1.48) (1.02)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.01) (0.02) (0.01) 0.00(b) (0.05)
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions (0.01) (0.02) (0.01) 0.00 (0.05)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 8.50 $ 8.37 $ 7.80 $ 6.63 $ 8.11
======================================================================
TOTAL RETURN(c) 1.66% 7.63% 17.76% (18.21%) (11.13%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,053 $ 1,625 $ 1,647 $ 1,181 $ 1,484
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(d) 2.47% 2.21% 2.53% 2.54% 2.50%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.45% 2.21% 2.53% 2.54% 2.49%
Net investment income (loss) 0.08% 0.23% (0.08%) (0.10%) (0.13%)
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(e) 181% 134% 108% 122% 111%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) DISTRIBUTIONS FROM NET INVESTMENT INCOME FOR THE YEAR ENDED DECEMBER 31,
2002 AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(c) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(d) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(e) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
22
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 8.24 $ 7.69 $ 6.54 $ 8.04 $ 9.17
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.00(a),(b) 0.01(a) (0.01) (0.17) (0.05)
Net realized and unrealized gains
(losses) on securities 0.13 0.56 1.16 (1.33) (1.03)
-------------------------------------------------------------------------
Total from investment operations 0.13 0.57 1.15 (1.50) (1.08)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.01) (0.02) 0.00(c) 0.00 (0.05)
From net realized gains 0.00 0.00 0.00 0.00 0.00
-------------------------------------------------------------------------
Total distributions (0.01) (0.02) 0.00 0.00 (0.05)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 8.36 $ 8.24 $ 7.69 $ 6.54 $ 8.04
=========================================================================
TOTAL RETURN(d) 1.54% 7.42% 17.59% (18.66%) (11.80%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 189 $ 264 $ 295 $ 248 $ 496
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(e) 2.54% 2.35% 2.69% 3.48% 3.96%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.51% 2.34% 2.69% 3.48% 3.96%
Net investment income (loss) 0.02% 0.08% (0.17%) (1.05%) (1.64%)
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(f) 181% 134% 108% 122% 111%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) NET INVESTMENT INCOME FOR THE YEAR ENDED DECEMBER 31, 2005 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(c) DISTRIBUTIONS FROM NET INVESTMENT INCOME FOR THE YEAR ENDED DECEMBER 31,
2003 AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(d) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(e) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.54% (2005), 2.35% (2004), 2.69% (2003), 3.48% (2002), AND
4.24% (2001).
(f) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 8.46 $ 7.88 $ 6.69 $ 8.20 $ 9.22
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.09 0.08 0.06 0.07 0.10
Net realized and unrealized gains
(losses) on securities 0.14 0.59 1.20 (1.50) (1.02)
----------------------------------------------------------------------
Total from investment operations 0.23 0.67 1.26 (1.43) (0.92)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.10) (0.09) (0.07) (0.08) (0.10)
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions (0.10) (0.09) (0.07) (0.08) (0.10)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 8.59 $ 8.46 $ 7.88 $ 6.69 $ 8.20
======================================================================
TOTAL RETURN 2.75% 8.58% 18.96% (17.46%) (9.94%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 68,926 $ 89,701 $ 119,835 $ 130,314 $ 297,068
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(a) 1.43% 1.34% 1.54% 1.43% 1.23%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.40% 1.33% 1.54% 1.42% 1.22%
Net investment income 1.14% 1.08% 0.93% 0.99% 1.20%
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(b) 181% 134% 108% 122% 111%
</Table>
(a) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(b) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
24
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 8.43 $ 7.86 $ 6.68 $ 8.18 $ 9.22
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.11 0.09 0.16 (0.16) 0.09
Net realized and unrealized gains
(losses) on securities 0.14 0.58 1.05 (1.34) (1.02)
----------------------------------------------------------------------
Total from investment operations 0.25 0.67 1.21 (1.50) (0.93)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.12) (0.10) (0.03) 0.00 (0.11)
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions (0.12) (0.10) (0.03) 0.00 (0.11)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 8.56 $ 8.43 $ 7.86 $ 6.68 $ 8.18
======================================================================
TOTAL RETURN 3.01% 8.63% 18.12% (18.34%) (10.09%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 54 $ 59 $ 72 $ 11 $ 14
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(a) 1.19% 1.21% 2.37% 4.24% 3.07%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.17% 1.21% 2.37% 4.24% 3.07%
Net investment income (loss) 1.38% 1.21% 0.01% (1.77%) (0.75%)
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(b) 181% 134% 108% 122% 111%
</Table>
(a) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 1.36% (2005), 1.35% (2004), 2.62% (2003), 19.52% (2002), AND
272.77% (2001).
(b) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 8.68 $ 8.09 $ 6.88 $ 8.17 $ 9.21
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.05 0.03 0.21 (0.37) 0.08
Net realized and unrealized gains
(losses) on securities 0.14 0.62 1.00 (0.92) (1.04)
----------------------------------------------------------------------
Total from investment operations 0.19 0.65 1.21 (1.29) (0.96)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.06) (0.06) 0.00(a) 0.00 (0.08)
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions (0.06) (0.06) 0.00 0.00 (0.08)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 8.81 $ 8.68 $ 8.09 $ 6.88 $ 8.17
======================================================================
TOTAL RETURN(b) 2.21% 8.01% 17.65% (15.79%) (10.44%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 35 $ 35 $ 36 $ 13 $ 232
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.89% 1.77% 2.73% 2.60% 3.36%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.87% 1.77% 2.73% 2.59% 3.36%
Net investment income (loss) 0.69% 0.66% (0.29%) (0.31%) (1.12%)
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 181% 134% 108% 122% 111%
</Table>
(a) DISTRIBUTIONS FROM NET INVESTMENT INCOME FOR THE YEAR ENDED DECEMBER 31,
2003 AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.15% (2005), 2.02% (2004), 3.18% (2003), 14.63% (2002), AND
18.37% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<Page>
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders Balanced Fund (the "Fund"). The Fund offers Class A,
Class B, Class C, Class F, Class R and Class T shares. Class A and Class T
shares are subject to a sales charge imposed at the time of purchase, Class B
shares are subject to a contingent deferred sales charge ("CDSC") imposed on
Class B shares redeemed within six years of purchase, Class C shares are subject
to a CDSC imposed on Class C shares redeemed within one year of purchase and
Class F and Class R shares are sold at net asset value per share (with Class R
shares sold only to eligible institutional investors). Other differences between
the classes include services offered to and the expenses borne by each Class.
The following significant accounting policies have been consistently followed by
the Fund in the preparation of its financial statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair value as
27
<Page>
determined in good faith by the Company's board of directors or pursuant to
procedures approved by the board of directors. These situations may include
instances where an event occurs after the close of the market on which a
security is traded but before the Fund calculates its net asset value, and it is
determined that the event has materially affected the value of the security.
Fair value of foreign equity securities may be determined with the assistance of
a pricing service using correlations between the movement of prices of foreign
securities and indexes of domestic securities and other appropriate indicators,
such as closing market prices of relevant ADRs and futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
U.S. GOVERNMENT OBLIGATIONS--Some U.S. government obligations, such as
Government National Mortgage Association (GNMA) pass-through certificates, are
supported by the full faith and credit of the United States Treasury. Other
obligations, such as securities of the Federal Home Loan Bank (FHLB), are
supported by the right of the issuer to borrow from the United States Treasury;
and others, such as bonds issued by Federal National Mortgage Association (FNMA,
a private corporation), are supported only by the credit of the agency,
authority or instrumentality, although the Secretary of the Treasury has
discretionary authority, though not the obligation, to purchase obligations of
FNMA.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund may invest at least a
portion of its assets in foreign securities. Foreign securities carry more risk
than U.S. securities, such as political and currency risks. In the event the
Fund executes a foreign security transaction, the Fund may enter into a foreign
currency contract to settle the foreign security transaction. The Fund could be
exposed to risk if counterparties are unable to meet the terms of the contracts
or if the value of the currency changes unfavorably to the U.S. dollar. The
resultant foreign currency gain or loss from the contract is recorded as foreign
currency gain or loss and is presented as such in the Statement of Operations.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each
business day. Purchases and sales of investment securities and income and
expense items denominated in foreign currencies are translated into U.S. dollar
amounts on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net
28
<Page>
unrealized gain or loss from investments and foreign currency translations on
the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized appreciation or depreciation on investments and foreign
currency translation arises from changes in the values of assets and
liabilities, including investments in securities held at the date of the
financial statements, resulting from changes in the exchange rates and changes
in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) quarterly and from net realized capital gains (if
any) annually. Dividends and distributions, which are determined in accordance
with income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as
29
<Page>
this would involve future claims that may be made against the Fund that have not
yet occurred. However, based on experience, the Funds expect the risk of loss to
be remote.
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
Financial Corporation, a publicly-owned financial services company which
provides a comprehensive range of financial products and services in domestic
and selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
0.65% of the first $250 million of net assets, 0.60% of the next $250 million of
net assets, 0.55% of the next $250 million of net assets and 0.50% of net assets
in excess of $750 million.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $58,080 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $16,747 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $13.09 to $13.88, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency
30
<Page>
fees, including both the per account fees paid to DTI and out-of-pocket charges,
during the year ended December 31, 2005 were as follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
------------------------------------------------------------
Class A $ 5,823
Class B $ 5,226
Class C $ 1,065
Class R $ 145
Class T $ 191
</Table>
Founders has agreed to reimburse (or to cause its affiliates to reimburse) the
Class R and Class T share classes of the Fund for certain transfer agency
expenses pursuant to a written contractual commitment. This commitment will
extend through at least August 31, 2006, and will not be terminated without
prior notification to the Company's board of directors. For the year ended
December 31, 2005, Class R and Class T were each reimbursed $88, which reduced
the amounts paid to DTI to $57 and $103, respectively.
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the processing of shareholder transactions in the Funds.
During the year ended December 31, 2005, the Fund was charged $2,073 for cash
management fees, which are included in the out-of-pocket transfer agency charges
above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $97,975 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $200,291 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
31
<Page>
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
---------------------------------------------------------------------
Class A N/A $ 4,215
Class B $ 10,037 $ 3,346
Class C $ 1,749 $ 583
Class T $ 85 $ 85
</Table>
During the year ended December 31, 2005, DSC retained $1,081 in sales
commissions from the sales of Class A shares. DSC also retained $7,895 and $2 of
contingent deferred sales charges relating to redemptions of Class B and Class C
shares, respectively.
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance monitoring, regulatory and shareholder reporting, as well as related
facilities, equipment and clerical help. The fee is computed at the annual rate
of 0.06% of the average daily net assets of the Fund on the first $500 million,
0.04% of the average daily net assets of the Fund on the next $500 million and
0.02% of the average daily net assets of the Fund in excess of $1 billion, plus
reasonable out-of-pocket expenses. Founders has contractually agreed in writing
to waive any fees received for these services to the extent they exceed
Founders' costs in providing the services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits on the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
-----------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $3,555, which reduced the amount paid to
Mellon Bank to $2,833.
32
<Page>
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of one or more of the Funds. The amount paid to the director under the
plan will be determined based upon the performance of the selected Funds. The
current value of these amounts is included in Other Assets and Directors'
Deferred Compensation on the Statement of Assets and Liabilities. Changes in
market value are included in the Directors' fees and expenses and the net change
in unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally accepted in the United States of America. These differences
are due to differing treatments for items such as deferral of wash sale losses,
foreign currency transactions, deferred compensation, paydowns and capital loss
carryovers. Permanent differences identified during the year ended December 31,
2005 have been reclassified among the components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
---------------------------------------------------------------
$ 717,441 $ (717,441) $ 0
</Table>
The tax character of distributions paid during 2005 and 2004 was as follows:
<Table>
<Caption>
2005 2004
---------------------------
DISTRIBUTIONS PAID FROM:
Ordinary Income $ 944,414 $ 1,169,557
Long-Term Capital Gain $ 0 $ 0
---------------------------
$ 944,414 $ 1,169,557
===========================
</Table>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of
33
<Page>
December 31, 2005, represent capital loss carryovers that may be available to
offset future realized capital gains and thereby reduce future taxable gains
distributions. Post-October 31 foreign currency losses noted below, if any, may
be used to offset future net investment income and thereby reduce future
ordinary income distributions. Net capital loss carryovers utilized during 2005
by the Fund amounted to $9,232,479. Accumulated capital losses as of December
31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
---------------------------------------------------------
2008 $ 63,264,790
2009 $ 49,289,530
2010 $ 70,087,112
2011 $ 1,472,188
$ 184,113,620
===============
</Table>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The primary difference between book and tax appreciation or depreciation
is wash sale loss deferrals.
<Table>
Undistributed Ordinary Income $ 704,506
Other Book/Tax Differences $ (33,754)
Federal Tax Cost $ 70,200,046
Gross Tax Appreciation of Investments $ 3,818,260
Gross Tax Depreciation of Investments $ (1,303,116)
Net Tax Appreciation $ 2,515,144
</Table>
34
<Page>
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 850 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 57,061 $ 480,146 52,105 $ 413,025
Dividends or Distributions Reinvested 1,781 $ 15,071 1,969 $ 15,805
Redeemed (52,764) $ (443,070) (54,549) $ (431,377)
------------------------------------------------------------
Net Increase (Decrease) 6,078 $ 52,147 (475) $ (2,547)
============================================================
CLASS B
Sold 19,802 $ 163,928 53,204 $ 414,706
Dividends or Distributions Reinvested 109 $ 919 466 $ 3,759
Redeemed (90,247) $ (752,663) (70,543) $ (554,229)
------------------------------------------------------------
Net Decrease (70,336) $ (587,816) (16,873) $ (135,764)
============================================================
CLASS C
Sold 536 $ 4,356 16,072 $ 124,317
Dividends or Distributions Reinvested 12 $ 99 59 $ 475
Redeemed (10,020) $ (81,911) (22,428) $ (174,619)
------------------------------------------------------------
Net Decrease (9,472) $ (77,456) (6,297) $ (49,827)
============================================================
CLASS F
Sold 724,211 $ 6,098,334 1,100,066 $ 8,730,703
Dividends or Distributions Reinvested 106,167 $ 897,919 138,996 $ 1,116,482
Redeemed (3,407,950) $ (28,788,616) (5,836,747) $ (46,483,766)
------------------------------------------------------------
Net Decrease (2,577,572) $ (21,792,363) (4,597,685) $ (36,636,581)
============================================================
CLASS R
Sold 288 $ 2,500 0 $ 0
Dividends or Distributions Reinvested 92 $ 776 94 $ 751
Redeemed (1,074) $ (9,000) (2,224) $ (17,595)
------------------------------------------------------------
Net Decrease (694) $ (5,724) (2,130) $ (16,844)
============================================================
CLASS T
Sold 11 $ 100 4,985 $ 39,775
Dividends or Distributions Reinvested 15 $ 130 27 $ 223
Redeemed (127) $ (1,086) (5,430) $ (43,450)
------------------------------------------------------------
Net Decrease (101) $ (856) (418) $ (3,452)
============================================================
</Table>
35
<Page>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $124,838,140 and $152,276,648, respectively. Purchases and sales of
long-term U.S. government obligations were $10,762,757 and $10,071,278,
respectively.
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
36
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders Balanced Fund (one
of the portfolios constituting Dreyfus Founders Funds, Inc., hereafter referred
to as the "Fund") at 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 Sates of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where securities purchased had not been received, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
37
<Page>
OTHER TAX INFORMATION
(UNAUDITED)
CORPORATE DIVIDENDS RECEIVED DEDUCTION
Dividends paid by the Fund from net investment income and distributions of net
realized short-term capital gains are, for federal tax purposes, taxable as
ordinary income to shareholders. Of the ordinary income distributions declared
for the year ended December 31, 2005, 32.05% qualified for the dividends
received deduction available to the Fund's corporate shareholders.
QUALIFIED DIVIDEND INCOME
For the year ended December 31, 2005, the Fund designated 55% of the ordinary
income distributions paid as qualified dividend income subject to reduced income
tax rates for taxpayers with taxable accounts.
38
<Page>
FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
39
<Page>
The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services being
provided to the Funds are satisfactory, as evidenced in part by the recent
performance records of the Funds, to which the directors gave significant
attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to the
Funds, but also recognize that Founders or its affiliates have provided the
highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
40
<Page>
small group of funds selected by Lipper and a larger universe of funds also
selected by Lipper. The Lipper materials further included graphs depicting each
Fund's Class F one-year and annualized performance results for two-, three-,
four-, five-, and ten-year periods, if applicable, in comparison to the Fund's
performance group and performance universe.
Balanced Fund's performance for the one-year period ended December 31, 2004
placed it in the second quintile of its Lipper performance group, with the Fund
ranking sixth out of 15 Lipper-selected "peer funds," and in the third quintile
of its Lipper balanced fund performance universe, ranking 229th of 569 funds.
These relative performance results were similar to the Fund's relative
performance results in 2003, both of which represented an improvement in the
Fund's relative performance from the previous few years. The directors deemed
these relative performance results to be acceptable, but stressed the importance
to Founders of the need to continue to seek to improve the Fund's performance
record.(1)
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance
difficulties, more recent performance results generally have shown
significant improvement; Founders has focused its efforts upon improving the
performance records of the Funds and will continue to seek improvement; and
(1) PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS DO NOT REFLECT THE FRONT-END SALES
CHARGES THAT APPLY TO OTHER SHARE CLASSES.
41
<Page>
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing in
the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY
FOUNDERS AND ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, Balanced Fund's
management fees ranked in the second best quintile of its Lipper competitive
expense group, with the Fund's fees the sixth lowest of 15 "peer funds." The
Fund's contractual management fees at a common asset level were determined by
Lipper to be lower than ten of the 15 funds in its group. The Fund's management
fees were in the third quintile of its Lipper expense universe, placing 69th
lowest of 139 funds.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain
efficiencies in performing the portfolio management, trading and operational
functions related to those accounts (the directors recognized that in
determining its profitability from
42
<Page>
providing investment management and other services to the Funds, Founders
allocated its expenses between the Funds and other accounts in a manner which
was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment
services to any of the clients it advises, not just the Funds. The directors
recognized that Founders' profitability would be lower if it did not receive
research and brokerage services in connection with these brokerage
transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders' management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the investment advisory fees received by
Founders. However, the directors noted that Founders' profitability is expected
to decline in 2005 as a result of declines in Fund
43
<Page>
asset levels. The directors also considered the risks assumed by Founders in
providing management services to the Funds, including the risk that the
management agreement can be terminated by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of
investment advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially
fees which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than fees
arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in recognition of the quality service
which Founders has provided and continues to provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of
44
<Page>
scale if the assets of the Funds were to increase. Among other information, the
directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into increased
profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of an
increase in the assets of a particular Fund or a group of Funds would not be
passed along on a dollar-for-dollar basis to the shareholders of other Funds
that did not experience increases in their assets to points above their
breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is
consistent with its objective of sharing its economies of scale with the
Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
restrictions. The directors determined that Founders is dedicated to compliance
with all applicable rules and regulations and that the systems of controls which
are in place to ensure that the service providers to the Funds, including
Founders, and the Funds themselves, maintain strict adherence to the law are
excellent.
OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years
45
<Page>
and that efforts are being and will continue to be made to enhance such
improvement and to maintain Fund expense ratios at reasonable and competitive
levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
46
<Page>
YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
47
<Page>
Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice
President--Compliance since 2002. Formerly, Founders' Manager of Compliance
(2000 to 2002) and Securities Compliance Examiner, Staff Accountant and Team
Leader for the U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
48
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51
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FOR MORE INFORMATION
- -------------------------------------------------------------------------------
DREYFUS FOUNDERS TRANSFER AGENT &
BALANCED FUND DIVIDEND DISBURSING AGENT
MANAGER Dreyfus Transfer, Inc.
200 Park Avenue
Founders Asset New York, NY 10166
Management LLC
210 University Boulevard DISTRIBUTOR
Suite 800
Denver, CO 80206 Dreyfus Service Corporation
200 Park Avenue
New York, NY 10166
- -------------------------------------------------------------------------------
TELEPHONE Call your financial representative or 1-800-554-4611
MAIL Dreyfus Founders Funds, Inc.
144 Glenn Curtiss Boulevard, Uniondale, NY 11556-0144
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The fund's Forms N-Q are available on the SEC's website at
http://www.sec.gov and may be reviewed and copied at 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.
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities, and information regarding how
the fund voted these proxies for the 12-month period ended June 30, 2005, is
available at http://www.dreyfus.com and on the SEC's website at
http://www.sec.gov. The description of the policies and procedures is
also available without charge, upon request, by calling 1-800-645-6561.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE
GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Dreyfus Founders Funds are managed by Founders Asset Management LLC.
Founders and Founders Funds are registered trademarks of Founders
Asset Management LLC.
[LION GRAPHIC]
(C)2006 Founders Asset Management LLC 0086AR1205
<Page>
Dreyfus Founders
Discovery Fund
ANNUAL REPORT December 31, 2005
[LION GRAPHIC]
YOU, YOUR ADVISOR AND
(R) [DREYFUS LOGO]
A MELLON FINANCIAL COMPANY (SM)
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 12
Statement of Investments 14
Statement of Assets and Liabilities 18
Statement of Operations 20
Statements of Changes in Net Assets 21
Financial Highlights 22
Notes to Financial Statements 28
Report of Independent Registered Public Accounting Firm 36
Factors Considered in Renewing the Advisory Agreement 37
Your Board Representatives 45
</Table>
-----------------------------------------------------------
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and sign up for Dreyfus eCommunications. It's simple and
only takes a few minutes.
-----------------------------------------------------------
INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
managers only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-11 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC-INSURED - NOT BANK-GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF BRADLEY C. ORR]
[PHOTO OF JAMES (J.D.) PADGETT]
A DISCUSSION WITH CO-PORTFOLIO MANAGERS BRADLEY C. ORR, CFA, LEFT; AND JAMES
(J.D.) PADGETT, CFA, REGARDING FUND PERFORMANCE FOR THE 12-MONTH PERIOD ENDED
DECEMBER 31, 2005.
ENDING THE YEAR POSITIVE
Following the strong advances registered by the domestic equity markets during
the fourth quarter of 2004, 2005 started on a far less positive note. Equity
markets declined broadly in the first quarter due to a persistent rise in oil
prices and the continuing efforts of the Federal Reserve to remain vigilant in
fighting potential inflationary pressures. The markets partially recovered
during the second quarter, as economic growth remained relatively strong,
evidenced by a robust gross domestic product (GDP). The third quarter closely
mirrored the second. Crude oil prices continued their ascent to historic levels,
driven equally by supply concerns and strong demand. In addition, the market
continued to dismiss the tightening campaign of the Federal Reserve, and GDP
remained solid. A modest rally hit in the fourth quarter of the period;
investors perhaps began to anticipate an end to the interest rate tightening
campaign by the Federal Reserve in early 2006, and economic indicators, in
general, remained positive.
After declining roughly 7% from the end of the first quarter to a low point
at the end of April, the small-cap equity market proved resilient through the
remainder of the period. The Russell 2000 Growth Index moved up nearly 20% from
the period's low through year-end, despite continued uncertainty over the
economy due to high and rising commodity pressures, faltering consumer
confidence, and the Federal Reserve's interest rate hikes.
[SIDENOTE]
"OUR INVESTMENT APPROACH IN MANAGING THE FUND REMAINED CONSISTENT DURING THE
PERIOD, WITH NO MAJOR CHANGES IN PORTFOLIO COMPOSITION OCCURRING."
3
<Page>
For the 12-month period ended December 31, 2005, Dreyfus Founders Discovery
Fund underperformed its benchmark, the Russell 2000 Growth Index, which posted a
4.15% return for the same period.
STOCK SELECTION HAD A NEGATIVE IMPACT
Our investment approach in managing the Fund remained consistent during the
period, with no major changes to portfolio composition. We continued to search
company by company, analyzing fundamentals and speaking with management teams
and industry experts in an attempt to pinpoint the best growth opportunities for
the Fund. That being said, our efforts in selecting Fund holdings did not pay
off as we would have liked. Weak stock picking was the main culprit in the
Fund's relative underperformance for the 12-month period.
ENERGY BOOSTED PERFORMANCE
For the period, the best performing sector in the Fund as well as the benchmark
was the energy sector. Rising commodity prices and the resulting impact on the
business of energy companies were the drivers for the dramatic outperformance in
this sector. Strong stock selection helped the Fund's return with energy names
GRANT PRIDECO, INC., Patterson-UTI Energy, Inc., National Oilwell Varco, Inc.,
and Spinnaker Exploration Company among the top performers for the Fund in this
sector and overall. Rising oil prices throughout the year led to increased
demand for drilling rigs and related products and services, the industry in
which Grant Prideco competes. The company turned revenue growth of roughly 37%
into earnings growth of over 200%, exhibiting the pricing leverage that
accompanied strong demand in this industry. Patterson-UTI Energy saw increasing
demand for its land-drilling rigs and related services. Again, rising oil prices
led to increased demand, therefore helping pricing and creating significant
earnings leverage. National Oilwell Varco was another beneficiary of a very
strong energy market. In addition, the company made a very accretive acquisition
during the period, following which the market capitalization exceeded $8
billion, taking it out of the small-cap category and causing the Fund to
gradually exit the
[SIDENOTE]
SECTORS BENEFITING THE FUND
Energy
Industrials
Consumer Staples
4
<Page>
position. In addition to exhibiting strong fundamentals throughout the year, oil
and gas exploration and production company Spinnaker was acquired by Norsk Hydro
ASA in the fourth quarter of the period. Overall, at the end of the period the
outlook for the oil services environment continued to be very robust as supply
concerns, both short- and long-term, continued and very strong global demand had
yet to be tempered by the high commodity price.
INDUSTRIALS AND CONSUMER STAPLES LIFTED FUND PERFORMANCE
Relative performance was also aided by a positive selection of industrials
stocks, and to a lesser extent, consumer staples stocks. Industrials holding
HUGHES SUPPLY, INC., a wholesale industrial and construction supply distributor,
exhibited strong outperformance due to both solid business fundamentals and an
announcement that the company's board of directors was reviewing strategic
alternatives, as it did not feel that the company's valuation in the market was
representative. It has been long speculated that Home Depot, Inc. was interested
in acquiring the company, and that this was the driver for the board taking
action. Home Depot announced its intent to acquire Hughes Supply in early
January of 2006.
LARGEST EQUITY HOLDINGS (ticker symbol)
<Table>
1. WMS INDUSTRIES, INC. (WMS) 3.20%
2. AFFILIATED MANAGERS GROUP, INC. (AMG) 2.72%
3. QUICKSILVER RESOURCES, INC. (KWK) 2.44%
4. EPICOR SOFTWARE CORPORATION (EPIC) 2.43%
5. GUITAR CENTER, INC. (GTRC) 2.37%
6. AEROFLEX, INC. (ARXX) 2.36%
7. DIGITAS, INC. (DTAS) 2.36%
8. MGI PHARMA, INC. (MOGN) 2.13%
9. KRONOS, INC. (KRON) 2.13%
10. HUGHES SUPPLY, INC. (HUG) 2.11%
</Table>
Portfolio holdings are subject to change, and should not be construed as a
recommendation of any security.
5
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 1-800-525-2440 TO OBTAIN THE MOST
RECENT MONTH-END PERFORMANCE DATA.
[CHART TO COME]
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders Discovery Fund on 12/31/95 to a $10,000 investment made in an unmanaged
securities index on that date. The Fund's performance assumes the reinvestment
of dividends and capital gain distributions, but does not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or redemption of
Fund shares. The Fund offers multiple classes of shares. Performance shown is
for Class F, which is open only to grandfathered investors. The Fund's
performance in the graph takes into account all applicable Class F fees and
expenses. THESE FIGURES DO NOT REFLECT THE MAXIMUM SALES CHARGES APPLICABLE TO
CLASS A, B, C, OR T SHARES OF THE FUND. FOR THESE SHARE CLASSES, APPLYING THESE
CHARGES WILL RESULT IN LOWER RETURNS FOR INVESTORS.
The Russell 2000 Growth Index measures the performance of stocks of companies in
the Russell 2000 Index with higher price-to-book ratios and higher forecasted
growth values. The Russell 2000 Index is a widely recognized, unmanaged
small-cap index comprising common stocks of the 2,000 U.S. public companies next
in size after the largest 1,000 publicly traded U.S. companies. The total return
figures cited for the Russell 2000 Growth Index assume change in security prices
and reinvestment of dividends, but do not reflect the costs of managing a mutual
fund. Further information related to Fund performance is contained elsewhere in
this report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (INCEPTION DATE) YEAR YEARS YEARS INCEPTION
- --------------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) (6.38%) (4.88%) -- (5.44%)
Without sales charge (0.66%) (3.75%) -- (4.50%)
B SHARES (12/31/99)
With redemption* (5.57%) (5.02%) -- (5.51%)
Without redemption (1.63%) (4.64%) -- (5.36%)
C SHARES (12/31/99)
With redemption** (2.54%) (4.62%) -- (5.34%)
Without redemption (1.56%) (4.62%) -- (5.34%)
F SHARES (12/29/89) (0.66%) (3.76%) 8.61% 12.40%
R SHARES (12/31/99) (0.38%) (3.48%) -- (4.24%)
T SHARES (12/31/99)
With sales charge (4.50%) (5.42%) (5.06%) -- (5.63%)
Without sales charge (0.96%) (4.19%) -- (4.91%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, and
adjustments for financial statement purposes. Part of the Fund's historical
performance is due to the purchase of securities sold in initial public
offerings (IPOs). There is no guarantee that the Fund's investments in IPOs, if
any, will continue to have a similar impact on performance. Part of the Fund's
historical performance is due to amounts received from class action settlements
regarding prior Fund holdings. There is no guarantee that these settlement
distributions will occur in the future or have a similar impact on performance.
There are risks associated with small-cap investing such as limited product
lines, less liquidity, and small market share.
* The maximum contingent deferred sales charge for Class B shares is 4% and is
reduced to 0% after six years, at which time the Class B shares convert to
Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
SELECT HEALTHCARE NAMES PERFORMED STRONGLY
Although the Fund's position in the healthcare sector produced a minimal effect
overall on the Fund's relative return, select issues in this sector were among
the top-performing holdings for the period. Biotechnology company ALKERMES, INC.
benefited during the period from increasing sales of Risperdal Consta(R), a drug
manufactured and sold by Johnson & Johnson, which licenses technology from
Alkermes. More importantly, the company gained a conditional approval from the
Food and Drug Administration on an important new drug, VIVITROL(TM), which
addresses the $40 billion alcohol-dependency market. Endo Pharmaceuticals
Holdings, Inc., a branded and generic drug manufacturer specializing in the
pain-treatment market, was on the favorable side of a court ruling allowing the
company to begin selling into a previously patent-protected market for
Oxycontin, which is a roughly $2 billion market. The ruling increased the
company's estimated earnings for 2005 over 50%, and the stock rose 30%.
[CHART]
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
Information Technology 23.22%
Healthcare 21.99%
Consumer Discretionary 16.30%
Industrials 15.15%
Energy 7.86%
Financials 7.36%
Consumer Staples 1.72%
Materials 1.41%
Telecommunications Services 1.08%
Cash & Equivalents 3.91%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio
managers and are subject to change at any time, based on market and other
conditions, and should not be construed as a recommendation of any specific
security.
8
<Page>
IT AND CONSUMER DISCRETIONARY HURT RETURN
Although the Fund's underweight position in the poor-performing information
technology (IT) sector did prove beneficial, poor stock selection more than
offset this contribution. High valuations and stock-specific issues drove the
underperformance in this sector. Manufacturer of video, voice and data
teleconferencing solutions, Polycom, Inc., missed fourth quarter 2004 and first
quarter 2005 expectations, reducing forward expectations both times. The concern
over increased competition continued to weigh on this stock. Although the
stock's valuation was attractive, we believed that the company's numbers
continued to be at risk, as competitive issues continued; therefore, the Fund
exited its position in Polycom during the period.
Weak stock picking and a substantial overweight relative position in the
consumer discretionary sector also weighed heavily on the Fund's performance for
the period as declining consumer sentiment in the third quarter led to earnings
disappointments from companies in various industries within the sector.
Tempur-Pedic International, Inc., a visco-elastic foam-bedding manufacturer,
missed revenue and earnings expectations in the second and third quarters and
reduced guidance. Despite a low valuation, the Fund exited its position in the
stock during the period, as we believed that the earnings expectations the
company was supporting were too high. PETCO Animal Supplies, Inc., after a
period of 60 consecutive quarters of same-store sales growth exceeding 4%,
encountered problems with its merchandising efforts as well as intensifying
competition. In addition, a more difficult consumer-spending environment in the
second half of the period proved problematic for sales. As sales and earnings
growth results and forward estimates came in lower than expected, the valuation
of the stock came down and the stock sold off accordingly. The Fund no longer
owned PETCO at the end of the period, as we believed problems remained. Despite
WMS INDUSTRIES, INC.'s strong earnings performance, the slot-machine
manufacturer's stock sold off during the period due to a revenue shift from the
second quarter into the third quarter,
[SIDENOTE]
SECTORS DETRACTING FROM THE FUND
Information Technology
Consumer Discretionary
Financials
9
<Page>
as customers consolidated and orders were delayed. In addition, the company's
third quarter results were somewhat lower than investors expected. Compounding
the weakness in the stock has been a general lack of interest in the gaming
industry among investors, as most competitors are not seeing the robust business
that WMS has seen. The stock remained one of the Fund's largest positions at the
end of the year, however, and we remained positive on the company's outlook.
FINANCIALS WEIGHED ON PERFORMANCE
Fund holdings in the financials sector also suffered from sub-par performance.
Among the weakest financials holdings was First Marblehead Corporation, provider
of loans to the private education market. The stock's weakness was driven by
continued negative sentiment surrounding its competitive environment, but more
importantly, the announcement of the sudden resignation of the CEO following
alleged improper dealings with a customer. In addition, an important customer
announced that it would, in addition to continuing its strategic relationship
with First Marblehead, compete directly with the company in underwriting loans,
calling First Marblehead's value proposition into question. Although we believed
this would prove to be far less impactful than the market had priced into the
stock, the Fund sold its position in the company, as we believed it could take
years for the education loans to "season" and provide evidence either way.
OTHER UNDERPERFORMING STOCKS
There were other notable individual issues that weighed on the Fund's overall
relative performance across a variety of sectors, including those in which the
Fund outperformed its benchmark. For example, industrials holding Trex Company,
Inc. experienced softer demand in the first half of the year, but more harmful
to expectations and stock performance were the company's inventory issues within
its distribution network. Our concern was that there may be more inventory
de-stocking to come, and that demand trends may continue to fade. Therefore, the
Fund sold its position in this stock during the period.
10
<Page>
Healthcare holding MGI PHARMA, INC., an oncology-focused drug developer, saw
sales of its main product, Aloxi(R), which addresses the chemo-induced nausea
and vomiting (CINV) market, fall slightly below investor expectations in both
the third and fourth quarters, although the outlook continued to be strong. In
addition, the approval of a new key drug, Dacogen(TM), was delayed. The Fund
continued to hold a large position in MGI Pharma at the end of the period, as we
believed that Aloxi sales would continue to be strong, and that Dacogen would
gain approval. In addition, MGI Pharma's new drug pipeline remained robust, and
the valuation of the stock was attractive.
IN CONCLUSION
We remain cautious on the outlook for the equity markets and the economy in
general; the mixed economic data warrants continual monitoring.
Our strategy for the Fund as we enter 2006 remains consistent. We will
continue to utilize our bottom-up process to seek to identify high-quality
companies we believe are capable of posting strong future earnings growth and
that are valued attractively.
/s/ Bradley C. Orr /s/ James (J.D.) Padgett
Bradley C. Orr, CFA James (J.D.) Padgett, CFA
Co-Portfolio Manager Co-Portfolio Manager
11
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
12
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- -----------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,011.34 $ 7.35
CLASS A HYPOTHETICAL 1,000.00 1,017.80 7.40
CLASS B ACTUAL 1,000.00 1,008.72 12.20
CLASS B HYPOTHETICAL 1,000.00 1,012.90 12.30
CLASS C ACTUAL 1,000.00 1,008.87 11.80
CLASS C HYPOTHETICAL 1,000.00 1,013.31 11.89
CLASS F ACTUAL 1,000.00 1,011.19 7.45
CLASS F HYPOTHETICAL 1,000.00 1,017.70 7.50
CLASS R ACTUAL 1,000.00 1,012.04 5.98
CLASS R HYPOTHETICAL 1,000.00 1,019.18 6.02
CLASS T ACTUAL 1,000.00 1,010.49 8.87
CLASS T HYPOTHETICAL 1,000.00 1,016.27 8.93
</Table>
*Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- --------------------------------------------------------------------
CLASS A 1.45%
CLASS B 2.41%
CLASS C 2.33%
CLASS F 1.47%
CLASS R 1.18%
CLASS T 1.75%
</Table>
13
<Page>
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------
COMMON STOCKS (DOMESTIC)--92.8%
AIR FREIGHT & LOGISTICS--1.3%
159,872 Hub Group, Inc. Class A* $ 5,651,473
------------
AIRLINES--0.7%
203,362 JetBlue Airways Corporation* 3,127,708
------------
APPAREL RETAIL--1.7%
286,325 Pacific Sunwear of California, Inc.* 7,135,219
------------
APPLICATION SOFTWARE--5.9%
730,136 Epicor Software Corporation* 10,316,822
215,800 Kronos, Inc.* 9,033,388
281,236 Witness Systems, Inc.* 5,531,912
------------
24,882,122
------------
ASSET MANAGEMENT & CUSTODY BANKS--2.7%
143,775 Affiliated Managers Group, Inc.* 11,537,943
------------
BIOTECHNOLOGY--1.0%
222,396 Alkermes, Inc.* 4,252,212
------------
BUILDING PRODUCTS--1.8%
191,950 NCI Building Systems Systems, Inc.* 8,154,036
------------
CASINOS & GAMING--3.2%
540,850 WMS Industries, Inc.* 13,569,927
------------
COMMUNICATIONS EQUIPMENT--1.4%
414,506 Redback Networks, Inc.* 5,827,954
------------
CONSTRUCTION & ENGINEERING--3.6%
240,150 Foster Wheeler Limited* 8,832,717
274,876 Perini Corporation* 6,638,255
------------
15,470,972
------------
CONSTRUCTION, FARM MACHINERY & HEAVY TRUCKS--0.7%
55,900 Bucyrus International, Inc. Class A 2,945,930
------------
DIVERSIFIED METALS & MINING--0.5%
111,950 Alpha Natural Resources, Inc.* 2,150,559
------------
ELECTRONIC EQUIPMENT MANUFACTURERS--2.4%
929,640 Aeroflex, Inc.* 9,993,630
------------
ELECTRONIC MANUFACTURING SERVICES--0.9%
173,250 Plexus Corporation* 3,939,705
------------
FOOD DISTRIBUTORS--1.7%
181,500 Central European Distribution
Corporation* 7,285,410
------------
GOLD--0.9%
139,475 Glamis Gold Limited* 3,832,773
------------
HEALTHCARE DISTRIBUTORS--0.2%
42,329 PSS World Medical, Inc. 628,162
------------
</Table>
14
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------
HEALTHCARE EQUIPMENT--9.0%
202,200 ArthroCare Corporation* $ 8,520,708
543,197 ev3, Inc.* 8,006,724
612,764 I-Flow Corporation* 8,958,610
195,520 Integra LifeSciences Holdings* 6,933,139
138,524 Kyphon, Inc.* 5,655,935
------------
38,075,116
------------
HEALTHCARE FACILITIES--2.7%
107,925 LCA - Vision Inc. 5,127,517
200,496 United Surgical Partners
International, Inc.* 6,445,946
------------
11,573,463
------------
HEALTHCARE SERVICES--1.0%
300,650 Option Care, Inc. 4,016,684
------------
HEALTHCARE SUPPLIES--1.8%
154,275 Gen-Probe, Inc.* 7,527,077
------------
HOMEBUILDING--0.8%
145,825 Levitt Corporation Class A 3,316,061
------------
HOMEFURNISHING RETAIL--1.8%
360,124 Aaron Rents, Inc. 7,591,414
------------
HOTELS, RESORTS & CRUISE LINES--1.9%
188,815 Gaylord Entertainment Company* 8,230,446
------------
HUMAN RESOURCE & EMPLOYMENT SERVICES--1.3%
218,275 Resources Connection, Inc.* 5,688,247
------------
INTERNET SOFTWARE & SERVICES--6.8%
287,068 Digital River, Inc.* 8,537,402
797,627 Digitas, Inc.* 9,986,290
429,300 EarthLink Network, Inc.* 4,769,523
310,429 Openwave Systems, Inc.* 5,423,195
------------
28,716,410
------------
LEISURE FACILITIES--1.3%
146,200 Life Time Fitness, Inc.* 5,568,758
------------
LIFE & HEALTH INSURANCE--1.4%
461,093 American Equity Investment Life
Holding Company 6,017,264
------------
MANAGED HEALTHCARE--3.1%
466,205 Aveta, Inc. 144A*+# 6,293,768
266,900 Centene Corporation* 7,016,801
------------
13,310,569
------------
MULTI-LINE INSURANCE--1.5%
209,612 HCC Insurance Holdings, Inc. 6,221,284
------------
OIL & GAS EQUIPMENT & SERVICES--3.4%
192,800 Grant Prideco, Inc.* 8,506,336
275,325 Superior Energy Services, Inc.* 5,795,591
------------
14,301,927
------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------
OIL & GAS EXPLORATION & PRODUCTION--4.5%
507,975 KFx, Inc.* $ 8,691,452
246,050 Quicksilver Resources, Inc.* 10,336,561
------------
19,028,013
------------
PHARMACEUTICALS--3.3%
527,525 MGI Pharma, Inc.* 9,052,329
272,506 Salix Pharmaceuticals Limited* 4,790,655
------------
13,842,984
------------
RESTAURANTS--1.8%
149,519 Red Robin Gourmet Burgers, Inc.* 7,619,488
------------
SEMICONDUCTOR EQUIPMENT--1.8%
799,905 Entegris, Inc.* 7,535,105
------------
SEMICONDUCTORS--4.2%
186,175 Microsemi Corporation* 5,149,601
951,300 RF Micro Devices, Inc.* 5,146,533
407,700 Trident Microsystems, Inc.* 7,338,600
------------
17,634,734
------------
SPECIALTY STORES--2.4%
200,600 Guitar Center, Inc.* 10,032,006
------------
THRIFTS & MORTGAGE FINANCE--1.8%
510,075 NewAlliance Bancshares, Inc. 7,416,491
------------
TRADING COMPANIES & DISTRIBUTORS--2.1%
250,079 Hughes Supply, Inc. 8,965,332
------------
TRUCKING--1.4%
222,487 Old Dominion Freight Line, Inc.* 6,002,699
------------
WIRELESS TELECOMMUNICATION SERVICES--1.1%
526,575 InPhonic, Inc.* 4,575,937
------------
TOTAL COMMON STOCKS (DOMESTIC)
(COST--$371,906,299) 393,193,244
------------
COMMON STOCKS (FOREIGN)--3.3%
HOTELS, RESORTS & CRUISE LINES--1.4%
88,000 Kerzner International Limited (BA)* 6,050,000
------------
MARINE--1.9%
315,600 Diana Shipping, Inc. (GR) 4,058,616
342,468 Dryships, Inc. (GR) 4,184,925
------------
8,243,541
------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$17,501,479) 14,293,541
------------
</Table>
16
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- ----------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--1.0%
SPECIAL PURPOSE ENTITY--1.0%
$ 4,200,000 CAFCO LLC
4.12% 1/3/06~ $ 4,199,039
--------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$4,199,039) 4,199,039
--------------
TOTAL INVESTMENTS--97.1%
(TOTAL COST--$393,606,817) 411,685,824
--------------
OTHER ASSETS AND LIABILITIES--2.9% 12,350,006
--------------
NET ASSETS--100.0% $ 424,035,830
==============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
* NON-INCOME PRODUCING.
+ SECURITIES WERE ACQUIRED PURSUANT TO RULE 144A AND MAY BE DEEMED TO BE
RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO $6,293,768, OR 1.5%, OF
THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$4,199,039, OR 1.0%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
# FAIR VALUED SECURITY.
BA - BAHAMA ISLANDS
GR - GREECE
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 393,606,817
--------------
Investment securities, at market 411,685,824
Cash 479,931
Receivables:
Investment securities sold 14,200,533
Capital shares sold 426,051
Dividends and interest 15,721
Other assets 68,203
--------------
Total Assets 426,876,263
--------------
LIABILITIES
Payables and other accrued liabilities:
Investment securities purchased 818,146
Capital shares redeemed 1,117,872
Advisory fees 345,044
Shareholder servicing fees 35,685
Accounting fees 22,693
Distribution fees 106,447
Transfer agency fees 41,214
Custodian fees 2,331
Directors' deferred compensation 68,203
Other 282,798
--------------
Total Liabilities 2,840,433
--------------
Net Assets $ 424,035,830
==============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 691,273,464
Accumulated net investment loss (132,136)
Accumulated net realized loss from security transactions (285,184,505)
Net unrealized appreciation on investments 18,079,007
--------------
Total $ 424,035,830
==============
</Table>
18
<Page>
<Table>
CLASS A
Net Assets $ 45,092,023
Shares Outstanding 1,575,235
Net Asset Value, Redemption Price Per Share $ 28.63
Maximum offering price per share
(net asset value plus sales charge of 5.75% of offering price) $ 30.38
CLASS B
Net Assets $ 13,964,166
Shares Outstanding 515,250
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 27.10
CLASS C
Net Assets $ 4,390,568
Shares Outstanding 161,747
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 27.14
CLASS F
Net Assets $ 351,087,239
Shares Outstanding 12,285,296
Net Asset Value, Offering and Redemption Price Per Share $ 28.58
CLASS R
Net Assets $ 8,314,623
Shares Outstanding 285,655
Net Asset Value, Offering and Redemption Price Per Share $ 29.11
CLASS T
Net Assets $ 1,187,211
Shares Outstanding 42,534
Net Asset Value, Redemption Price Per Share $ 27.91
Maximum offering price per share
(net asset value plus sales charge of 4.50% of offering price) $ 29.23
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
STATEMENT OF OPERATIONS
For the year ended December 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 1,629,902
Interest 441,216
--------------
Total Investment Income 2,071,118
--------------
EXPENSES
Advisory fees--Note 2 4,965,602
Shareholder servicing fees--Note 2 464,012
Accounting fees--Note 2 325,807
Distribution fees--Note 2 1,086,090
Transfer agency fees--Note 2 611,549
Registration fees 52,910
Postage and mailing expenses 117,845
Custodian fees and expenses--Note 2 28,055
Printing expenses 142,400
Legal and audit fees 218,006
Directors' fees and expenses--Note 2 112,680
Other expenses 219,087
--------------
Total Expenses 8,344,043
Earnings Credits (28,055)
Reimbursed/Waived Expenses (16,736)
Expense Offset to Broker Commissions (19,084)
--------------
Net Expenses 8,280,168
--------------
Net Investment Loss (6,209,050)
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITY TRANSACTIONS
Net Realized Gain on Security Transactions 104,859,627
Net Change in Unrealized Appreciation/Depreciation of Investments (110,156,860)
--------------
Net Realized and Unrealized Loss (5,297,233)
--------------
Net Decrease in Net Assets Resulting from
Operations $ (11,506,283)
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
OPERATIONS
Net Investment Loss $ (6,209,050) $ (8,291,203)
Net Realized Gain on Security Transactions 104,859,627 74,597,741
Net Change in Unrealized
Appreciation/Depreciation of Investments (110,156,860) 5,007,548
----------------- -----------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (11,506,283) 71,314,086
----------------- -----------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A (19,962,138) (20,072,155)
Class B (4,382,098) (3,926,079)
Class C (2,118,101) (2,295,210)
Class F (190,412,627) (143,830,150)
Class R (62,960,862) 25,138
Class T (434,663) (302,253)
----------------- -----------------
Net Decrease from Capital Share Transactions (280,270,489) (170,400,709)
----------------- -----------------
Net Decrease in Net Assets (291,776,772) (99,086,623)
----------------- -----------------
NET ASSETS
Beginning of Year $ 715,812,602 $ 814,899,225
----------------- -----------------
End of Year $ 424,035,830 $ 715,812,602
================= =================
Accumulated Net Investment Loss $ (132,136) $ (125,444)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 28.82 $ 26.04 $ 19.09 $ 28.50 $ 34.79
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.28)(a) (0.64) (0.36) (0.31) (0.17)
Net realized and unrealized gains
(losses) on securities 0.09 3.42 7.31 (9.10) (6.02)
------------------------------------------------------------------------
Total from investment operations (0.19) 2.78 6.95 (9.41) (6.19)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 (0.10)
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 (0.10)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 28.63 $ 28.82 $ 26.04 $ 19.09 $ 28.50
========================================================================
TOTAL RETURN(b) (0.66%) 10.68% 36.41% (33.02%) (17.78%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 45,092 $ 65,763 $ 79,630 $ 67,184 $ 117,773
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.47% 1.38% 1.50% 1.35% 1.19%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.45% 1.37% 1.50% 1.35% 1.18%
Net investment loss (1.09%) (1.11%) (1.25%) (1.08%) (0.58%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 160% 98% 130% 128% 110%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
22
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 27.55 $ 25.12 $ 18.60 $ 28.03 $ 34.49
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.54)(a) (1.07) (0.81) (0.69) (0.45)
Net realized and unrealized gains
(losses) on securities 0.09 3.50 7.33 (8.74) (5.91)
------------------------------------------------------------------------
Total from investment operations (0.45) 2.43 6.52 (9.43) (6.36)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 (0.10)
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 (0.10)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 27.10 $ 27.55 $ 25.12 $ 18.60 $ 28.03
========================================================================
TOTAL RETURN(b) (1.63%) 9.67% 35.05% (33.64%) (18.43%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 13,964 $ 18,795 $ 21,009 $ 18,804 $ 35,845
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.44% 2.30% 2.56% 2.26% 1.97%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.43% 2.29% 2.56% 2.26% 1.96%
Net investment loss (2.06%) (2.03%) (2.31%) (1.98%) (1.35%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 160% 98% 130% 128% 110%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 27.57 $ 25.14 $ 18.60 $ 28.05 $ 34.51
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.50)(a) (1.53) (0.94) (0.86) (0.48)
Net realized and unrealized gains
(losses) on securities 0.07 3.96 7.48 (8.59) (5.88)
------------------------------------------------------------------------
Total from investment operations (0.43) 2.43 6.54 (9.45) (6.36)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 (0.10)
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 (0.10)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 27.14 $ 27.57 $ 25.14 $ 18.60 $ 28.05
========================================================================
TOTAL RETURN(b) (1.56%) 9.67% 35.16% (33.69%) (18.42%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 4,391 $ 6,668 $ 8,352 $ 7,794 $ 17,031
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.36% 2.28% 2.52% 2.27% 1.98%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.35% 2.27% 2.52% 2.26% 1.96%
Net investment loss (1.98%) (2.01%) (2.28%) (1.99%) (1.36%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 160% 98% 130% 128% 110%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
24
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 28.77 $ 25.98 $ 19.04 $ 28.45 $ 34.74
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.30)(a) (0.69) (0.35) (0.36) (0.20)
Net realized and unrealized gains
(losses) on securities 0.11 3.48 7.29 (9.05) (5.99)
------------------------------------------------------------------------
Total from investment operations (0.19) 2.79 6.94 (9.41) (6.19)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 (0.10)
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 (0.10)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 28.58 $ 28.77 $ 25.98 $ 19.04 $ 28.45
========================================================================
TOTAL RETURN (0.66%) 10.74% 36.45% (33.08%) (17.81%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 351,087 $ 550,622 $ 638,880 $ 498,970 $ 847,330
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 1.46% 1.35% 1.53% 1.41% 1.25%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.45% 1.34% 1.53% 1.40% 1.24%
Net investment loss (1.09%) (1.08%) (1.29%) (1.13%) (0.64%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 160% 98% 130% 128% 110%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 29.22 $ 26.32 $ 19.23 $ 28.64 $ 34.87
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.24)(a) (0.24) (0.17) (0.18) (0.08)
Net realized and unrealized gains
(losses) on securities 0.13 3.14 7.26 (9.23) (6.05)
------------------------------------------------------------------------
Total from investment operations (0.11) 2.90 7.09 (9.41) (6.13)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 (0.10)
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 (0.10)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 29.11 $ 29.22 $ 26.32 $ 19.23 $ 28.64
========================================================================
TOTAL RETURN (0.38%) 11.02% 36.87% (32.86%) (17.57%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 8,315 $ 72,317 $ 65,240 $ 42,872 $ 61,163
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 1.18% 1.11% 1.21% 1.10% 0.95%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.17% 1.10% 1.21% 1.10% 0.94%
Net investment loss (0.80%) (0.83%) (0.96%) (0.82%) (0.38%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 160% 98% 130% 128% 110%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
26
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 28.18 $ 25.55 $ 18.79 $ 28.24 $ 34.69
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.38)(a) (0.65) (0.31) (0.54) (0.33)
Net realized and unrealized gains
(losses) on securities 0.11 3.28 7.07 (8.91) (6.02)
------------------------------------------------------------------------
Total from investment operations (0.27) 2.63 6.76 (9.45) (6.35)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 (0.10)
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 (0.10)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 27.91 $ 28.18 $ 25.55 $ 18.79 $ 28.24
========================================================================
TOTAL RETURN(b) (0.96%) 10.29% 35.98% (33.46%) (18.30%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,187 $ 1,648 $ 1,788 $ 1,291 $ 2,341
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.77% 1.71% 1.91% 2.06% 1.83%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.76% 1.70% 1.90% 2.06% 1.82%
Net investment loss (1.40%) (1.44%) (1.66%) (1.79%) (1.24%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 160% 98% 130% 128% 110%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<Page>
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders Discovery Fund (the "Fund"). The Fund offers Class
A, Class B, Class C, Class F, Class R and Class T shares. Class A and Class T
shares are subject to a sales charge imposed at the time of purchase, Class B
shares are subject to a contingent deferred sales charge ("CDSC") imposed on
Class B shares redeemed within six years of purchase, Class C shares are subject
to a CDSC imposed on Class C shares redeemed within one year of purchase and
Class F and Class R shares are sold at net asset value per share (with Class R
shares sold only to eligible institutional investors). Other differences between
the classes include services offered to and the expenses borne by each Class.
The following significant accounting policies have been consistently followed by
the Fund in the preparation of its financial statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair value as determined in good faith by the Company's board of directors
or pursuant
28
<Page>
to procedures approved by the board of directors. These situations may include
instances where an event occurs after the close of the market on which a
security is traded but before the Fund calculates its net asset value, and it is
determined that the event has materially affected the value of the security.
Fair value of foreign equity securities may be determined with the assistance of
a pricing service using correlations between the movement of prices of foreign
securities and indexes of domestic securities and other appropriate indicators,
such as closing market prices of relevant ADRs and futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund may invest at least a
portion of its assets in foreign securities. Foreign securities carry more risk
than U.S. securities, such as political and currency risks. In the event the
Fund executes a foreign security transaction, the Fund may enter into a foreign
currency contract to settle the foreign security transaction. The Fund could be
exposed to risk if counterparties are unable to meet the terms of the contracts
or if the value of the currency changes unfavorably to the U.S. dollar. The
resultant foreign currency gain or loss from the contract is recorded as foreign
currency gain or loss and is presented as such in the Statement of Operations.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each
business day. Purchases and sales of investment securities and income and
expense items denominated in foreign currencies are translated into U.S. dollar
amounts on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net unrealized gain or loss from investments and foreign
currency translations on the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized appreciation or depreciation on investments and foreign
currency translation arises from changes in the values of assets and
liabilities, including investments in securities held at the date
29
<Page>
of the financial statements, resulting from changes in the exchange rates and
changes in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) and from net realized capital gains (if any)
annually. Dividends and distributions, which are determined in accordance with
income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
Financial Corporation, a publicly-owned financial services company which
provides
30
<Page>
a comprehensive range of financial products and services in domestic and
selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
1.00% of the first $250 million of net assets, 0.80% of the next $250 million of
net assets and 0.70% of net assets in excess of $500 million.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $285,079 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $105,280 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $12.58 to $13.36, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency fees, including both the per account fees paid to
DTI and out-of-pocket charges, during the year ended December 31, 2005 were as
follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
--------------------------------------------------------------
Class A $ 25,540
Class B $ 42,807
Class C $ 9,979
Class R $ 15,723
Class T $ 1,470
</Table>
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the processing of shareholder transactions in the Funds.
During the year ended
31
<Page>
December 31, 2005, the Fund was charged $14,289 for cash management fees, which
are included in the out-of-pocket transfer agency charges above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $410,750 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $927,299 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
--------------------------------------------------------
Class A N/A $ 123,723
Class B $ 117,233 $ 39,078
Class C $ 38,139 $ 12,713
Class T $ 3,419 $ 3,419
</Table>
During the year ended December 31, 2005, DSC retained $199 and $3 in sales
commissions from the sales of Class A and Class T shares, respectively. DSC also
retained $44, $53,549 and $1,127 of contingent deferred sales charges relating
to redemptions of Class A, Class B and Class C shares, respectively.
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance monitoring, regulatory and shareholder reporting, as well as related
facilities, equipment and clerical help. The fee is computed at the annual rate
of 0.06% of the average daily net assets of the Fund on the first $500 million,
0.04% of the average daily
32
<Page>
net assets of the Fund on the next $500 million and 0.02% of the average daily
net assets of the Fund in excess of $1 billion, plus reasonable out-of-pocket
expenses. Founders has contractually agreed in writing to waive any fees
received for these services to the extent they exceed Founders' costs in
providing the services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits on the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
--------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $16,736 which reduced the amount paid to
Mellon Bank to $11,319.
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of one or more of the Funds. The amount paid to the director under the
plan will be determined based upon the performance of the selected Funds. The
current value of these amounts is included in Other Assets and Directors'
Deferred Compensation on the Statement of Assets and Liabilities. Changes in
market value are included in the directors' fees and expenses and the net change
in unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally accepted in the United States of America. These differences
are due to differing treatments for items such as deferral of wash sale losses,
deferred compensation, net operating losses and capital loss carryovers.
Permanent differences identified during the year ended December 31, 2005 have
been reclassified among the components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
-------------------------------------------------------------------
$ 6,202,358 $ 0 $ (6,202,35)
</Table>
33
<Page>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of December 31, 2005, represent capital loss carryovers that may be
available to offset future realized capital gains and thereby reduce future
taxable gains distributions. Post-October 31 foreign currency losses noted
below, if any, may be used to offset future net investment income and thereby
reduce future ordinary income distributions. Net capital loss carryovers
utilized during 2005 by the Fund amounted to $100,604,612. Accumulated capital
losses as of December 31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
--------------------------------------------------------
2009 $ 38,219,881
2010 $ 230,439,968
2011 $ 14,100,467
--------------
$ 282,760,316
==============
</Table>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The primary difference between book and tax appreciation or depreciation
is wash sale loss deferrals.
<Table>
Other Book/Tax Differences $ (132,136)
Federal Tax Cost $ 396,031,006
Gross Tax Appreciation of Investments $ 39,443,883
Gross Tax Depreciation of Investments $ (23,789,065)
Net Tax Appreciation $ 15,654,818
</Table>
34
<Page>
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 450 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 608,634 $ 16,949,413 606,846 $ 16,285,433
Redeemed (1,315,511) $ (36,911,551) (1,383,103) $ (36,357,588)
----------------------------------------------------------------
Net Decrease (706,877) $ (19,962,138) (776,257) $ (20,072,155)
================================================================
CLASS B
Sold 6,784 $ 179,523 7,176 $ 180,419
Redeemed (173,781) $ (4,561,621) (161,266) $ (4,106,498)
----------------------------------------------------------------
Net Decrease (166,997) $ (4,382,098) (154,090) $ (3,926,079)
================================================================
CLASS C
Sold 7,954 $ 207,689 7,418 $ 188,358
Redeemed (88,042) $ (2,325,790) (97,877) $ (2,483,568)
----------------------------------------------------------------
Net Decrease (80,088) $ (2,118,101) (90,459) $ (2,295,210)
================================================================
CLASS F
Sold 1,487,909 $ 40,938,769 3,312,230 $ 88,403,785
Redeemed (8,342,143) $ (231,351,396) (8,760,046) $ (232,233,935)
----------------------------------------------------------------
Net Decrease (6,854,234) $ (190,412,627) (5,447,816) $ (143,830,150)
================================================================
CLASS R
Sold 348,073 $ 9,843,662 568,863 $ 15,239,651
Redeemed (2,537,460) $ (72,804,524) (572,087) $ (15,214,513)
----------------------------------------------------------------
Net Increase (Decrease) (2,189,387) $ (62,960,862) (3,224) $ 25,138
================================================================
CLASS T
Sold 8,141 $ 222,678 15,867 $ 408,647
Redeemed (24,068) $ (657,341) (27,379) $ (710,900)
----------------------------------------------------------------
Net Decrease (15,927) $ (434,663) (11,512) $ (302,253)
================================================================
</Table>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $882,940,874 and $1,186,955,496, respectively.
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
35
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders Discovery Fund
(one of the portfolios constituting Dreyfus Founders Funds, Inc., hereafter
referred to as the "Fund") at 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 Sates of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where securities purchased had not been received, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
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FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
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The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services being
provided to the Funds are satisfactory, as evidenced in part by the recent
performance records of the Funds, to which the directors gave significant
attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to the
Funds, but also recognize that Founders or its affiliates have provided the
highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
38
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small group of funds selected by Lipper and a larger universe of funds also
selected by Lipper. The Lipper materials further included graphs depicting each
Fund's Class F one-year and annualized performance results for two-, three-,
four-, five-, and ten-year periods, if applicable, in comparison to the Fund's
performance group and performance universe.
Discovery Fund's performance for the one-year period ended December 31, 2004
placed it in the third quintile of its Lipper performance group, with the Fund
ranking eighth out of 15 Lipper-selected "peer funds," and in the third quintile
of its Lipper small-cap growth fund performance universe, ranking 274th of 500
funds. The Fund's performance within its Lipper-selected group and universe had
been in the fourth quintiles for the two- and three-year periods ended December
31, 2004. The Fund's performance relative to its Lipper-selected peer group and
universe had, therefore, improved in the most recent calendar year from its
average performance results over the past two and three calendar years. The
directors deemed these relative performance results to be acceptable, but
stressed the importance to Founders of the need to continue to seek to improve
the Fund's performance record.(1)
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS DO NOT REFLECT THE FRONT-END SALES
CHARGES THAT APPLY TO OTHER SHARE CLASSES.
39
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After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance
difficulties, more recent performance results generally have shown
significant improvement; Founders has focused its efforts upon improving the
performance records of the Funds and will continue to seek improvement; and
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing in
the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY FOUNDERS AND
ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, Discovery
Fund's management fees ranked in the second best quintile of its Lipper
competitive expense group, with the Fund's fees the sixth lowest of 15 "peer
funds." The Fund's contractual management fees at a common asset level were
determined by Lipper to be lower than eight of the 15 funds in its group. The
Fund's management fees were in the second best quintile of its Lipper expense
universe, placing 58th lowest of 154 funds.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
40
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Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain
efficiencies in performing the portfolio management, trading and operational
functions related to those accounts (the directors recognized that in
determining its profitability from providing investment management and other
services to the Funds, Founders allocated its expenses between the Funds and
other accounts in a manner which was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment
services to any of the clients it advises, not just the Funds. The directors
recognized that Founders' profitability would be lower if it did not receive
research and brokerage services in connection with these brokerage
transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders' management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
41
<Page>
Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the investment advisory fees received by
Founders. However, the directors noted that Founders' profitability is expected
to decline in 2005 as a result of declines in Fund asset levels. The directors
also considered the risks assumed by Founders in providing management services
to the Funds, including the risk that the management agreement can be terminated
by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of
investment advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially
fees which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than fees
arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in
42
<Page>
recognition of the quality service which Founders has provided and continues to
provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of scale if the assets of the Funds were to increase. Among other information,
the directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into increased
profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of an
increase in the assets of a particular Fund or a group of Funds would not be
passed along on a dollar-for-dollar basis to the shareholders of other Funds
that did not experience increases in their assets to points above their
breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is
consistent with its objective of sharing its economies of scale with the
Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
43
<Page>
restrictions. The directors determined that Founders is dedicated to compliance
with all applicable rules and regulations and that the systems of controls which
are in place to ensure that the service providers to the Funds, including
Founders, and the Funds themselves, maintain strict adherence to the law are
excellent.
OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years and that efforts are being and will continue to be
made to enhance such improvement and to maintain Fund expense ratios at
reasonable and competitive levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
44
<Page>
YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
45
<Page>
Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice
President--Compliance since 2002. Formerly, Founders' Manager of Compliance
(2000 to 2002) and Securities Compliance Examiner, Staff Accountant and Team
Leader for the U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
46
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<Page>
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
DREYFUS FOUNDERS TRANSFER AGENT &
DISCOVERY FUND DIVIDEND DISBURSING AGENT
MANAGER Dreyfus Transfer, Inc.
200 Park Avenue
Founders Asset New York, NY 10166
Management LLC
210 University Boulevard DISTRIBUTOR
Suite 800
Denver, CO 80206 Dreyfus Service Corporation
200 Park Avenue
New York, NY 10166
- -------------------------------------------------------------------------------
TELEPHONE Call your financial representative or 1-800-554-4611
MAIL Dreyfus Founders Funds, Inc.
144 Glenn Curtiss Boulevard, Uniondale, NY 11556-0144
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The fund's Forms N-Q are available on the SEC's website at
http://www.sec.gov and may be reviewed and copied at 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.
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities, and information regarding how
the fund voted these proxies for the 12-month period ended June 30, 2005, is
available at http://www.dreyfus.com and on the SEC's website at
http://www.sec.gov. The description of the policies and procedures is
also available without charge, upon request, by calling 1-800-645-6561.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE
GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Dreyfus Founders Funds are managed by Founders Asset Management LLC.
Founders and Founders Funds are registered trademarks of Founders
Asset Management LLC.
[LION GRAPHIC]
(C)2006 Founders Asset Management LLC 0182AR1205
<Page>
Dreyfus Founders
Equity Growth Fund
ANNUAL REPORT December 31, 2005
[LION GRAPHIC]
YOU, YOUR ADVISOR AND
(R) [DREYFUS LOGO]
A MELLON FINANCIAL COMPANY (SM)
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 10
Statement of Investments 12
Statement of Assets and Liabilities 17
Statement of Operations 19
Statements of Changes in Net Assets 20
Financial Highlights 21
Notes to Financial Statements 27
Report of Independent Registered Public Accounting Firm 36
Other Tax Information 37
Factors Considered in Renewing the Advisory Agreement 38
Your Board Representatives 46
</Table>
-----------------------------------------------------------
Save time. Save paper. View your next shareholder report
online as soon as it's available. Log into www.dreyfus.com
and sign up for Dreyfus eCommunications. It's simple and
only takes a few minutes.
-----------------------------------------------------------
INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
manager only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-9 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC-INSURED - NOT BANK-GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF JOHN B. JARES]
A DISCUSSION WITH PORTFOLIO MANAGER JOHN B. JARES, CFA, REGARDING FUND
PERFORMANCE FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2005.
ECONOMIC COUNTERBALANCE
2005 was a year of robust economic and corporate profit growth. Employment
levels improved, the housing market remained resilient, and consumer spending
continued to advance at a steady pace. However, the year also saw the Federal
Reserve raising the federal funds rate to end the period at 4.25%, and energy
prices skyrocketed, reaching record highs.
The stock market oscillated slightly for most of the period. Fortunately, a
fourth quarter rally enabled the market to finish the calendar year in positive
territory.
STOCK SELECTION DROVE PERFORMANCE
The Fund continued its pursuit of uncovering the best growth opportunities via
stock-by-stock research, meetings with company management and internal analysis.
Overall, this bottom-up stock picking approach benefited the Fund as strong
stock selection produced a positive contribution to relative performance. Strong
performers, particularly in the information technology (IT) sector, the
transportation industry within the industrials sector, and the consumer staples
sector, positively impacted the Fund's annual performance. However, this was not
enough for the Dreyfus Founders Equity Growth Fund to outperform its benchmark,
the Russell 1000 Growth Index, which returned 5.26% for the 12-month period
ended December 31, 2005.
[SIDENOTE]
"OUR BOTTOM-UP STOCK PICKING APPROACHED BENEFITED THE FUND AS STRONG STOCK
SELECTION PRODUCED A POSITIVE CONTRIBUTION TO RELATIVE PERFORMANCE."
3
<Page>
IT AND TRANSPORTATION STOCKS AIDED FUND PERFORMANCE
Strong stock selection in the information technology sector buoyed the Fund's
relative return for the period, with numerous stocks gaining double-and
triple-digit price increases for the period. The popularity of APPLE COMPUTER,
INC.'s iPod digital music products and Macintosh computers propelled the
company's stock. The iPod trend also pushed SanDisk, Inc.'s stock price up as
demand grew for the company's NAND flash memory used in iPod nano, as well as in
music-enabled cell phones. Broadcom Corporation, a provider of wired and
wireless broadband communications semiconductors, and AUTODESK, INC., a supplier
of advanced software including CAD/CAM drafting tools, both experienced strong
demand for their respective products. Autodesk also saw better-than-expected
revenue and earnings growth rates during the 12-month timeframe. ADOBE SYSTEMS,
INC. also outperformed during the period.
The transportation industry within the industrials sector also rallied
during the period as railroad and airline companies benefited from pricing power
driven by controlled capacity growth and the ability to pass along higher fuel
costs. Some of the top overall performing stocks in the Fund for the period
included transportation stocks such as AMR CORPORATION, US AIRWAYS GROUP, INC.
and UNION PACIFIC CORPORATION. Parent company of American Airlines, AMR
experienced better-than-expected financial returns due to improved pricing
driven by industry consolidation and company cost controls. US Airways saw
improved pricing due to its merger with America West Airlines, allowing for the
reduction of costs.
SELECT STOCKS CONTRIBUTED POSITIVELY
During the period, there were a few standout performers, which positively
contributed to the Fund's performance as well. PROCTER & GAMBLE COMPANY acquired
Gillette Company during the period for a significant premium, which boosted
Gillette's return, and healthcare issue GENENTECH, INC. showed solid revenue and
earnings growth.
[SIDENOTE]
SECTORS BENEFITING THE FUND
Information Technology
Industrials
Consumer Staples
4
<Page>
HEALTHCARE, ENERGY AND TELECOM DETRACTED
The healthcare, energy and telecommunications services sectors were the largest
drags on the Fund's relative return for the period, due to underweight relative
positions in these strong-performing sectors paired with weak stock picking.
Telecommunications services holding Avaya, Inc. hampered the Fund. A difficult
integration of a German acquisition and volatile growth trends led to the
company's poor performance. The Fund sold its position in this company, as we
felt the monies may be better deployed in other investments.
SELECT STOCKS IMPEDED PERFORMANCE
Although the information technology sector had the greatest positive
contribution to the Fund's relative performance of any sector, select IT stocks
fell short of our expectations. Favorable demand and growth trends for MAXIM
INTEGRATED PRODUCTS, INC.'s analog semiconductor offerings were offset by
concerns over the company's deteriorating gross margins.
LARGEST EQUITY HOLDINGS (ticker symbol)
<Table>
1. MICROSOFT CORPORATION (MSFT) 4.83%
2. GOOGLE, INC. CLASS A (GOOG) 3.23%
3. GENERAL ELECTRIC COMPANY (GE) 3.12%
4. COLGATE-PALMOLIVE COMPANY (CL) 2.51%
5. LINEAR TECHNOLOGY CORPORATION (LLTC) 1.96%
6. JOHNSON & JOHNSON (JNJ) 1.95%
7. TIME WARNER, INC. (TWX) 1.91%
8. APPLE COMPUTER, INC. (AAPL) 1.85%
9. WYETH (WYE) 1.85%
10. COMCAST CORPORATION SPECIAL CLASS A (CMCSK) 1.80%
</Table>
Portfolio holdings are subject to change, and should not be construed as a
recommendation of any security.
5
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 1-800-525-2440 TO OBTAIN THE MOST
RECENT MONTH-END PERFORMANCE DATA.
[CHART TO COME]
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders Equity Growth Fund on 12/31/95 to a $10,000 investment made in
unmanaged securities indexes on that date. The Fund's performance assumes the
reinvestment of dividends and capital gain distributions, but does not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or
redemption of Fund shares. The Fund offers multiple classes of shares.
Performance shown is for Class F, which is open only to grandfathered investors.
The Fund's performance in the graph takes into account all applicable Class F
fees and expenses. THESE FIGURES DO NOT REFLECT THE MAXIMUM SALES CHARGES
APPLICABLE TO CLASS A, B, C, OR T SHARES OF THE FUND. FOR THESE SHARE CLASSES,
APPLYING THESE CHARGES WILL RESULT IN LOWER RETURNS FOR INVESTORS.
The Russell 1000 Growth Index is an unmanaged index that measures the
performance of those Russell 1000 companies with higher price-to-book ratios and
higher forecasted growth values. The Standard & Poor's (S&P) 500 Index is
designed to be representative of the U.S. equities market and consists of 500
leading companies in leading industries of the U.S. economy. The total return
figures cited for these indexes assume change in security prices and
reinvestment of dividends, but do not reflect the costs of managing a mutual
fund. In future annual reports, the Fund's performance will no longer be
compared to the S&P 500 Index, as the Russell 1000 Growth Index is more
reflective of the Fund's growth style of investing. Further information related
to Fund performance is contained elsewhere in this report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (INCEPTION DATE) YEAR YEARS YEARS INCEPTION
- -----------------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) (1.62%) (3.48%) -- (6.26%)
Without sales charge 4.46% (2.33%) -- (5.34%)
B SHARES (12/31/99)
With redemption* (0.41%) (3.15%) -- (6.04%)
Without redemption 3.59% (2.76%) -- (5.89%)
C SHARES (12/31/99)
With redemption** 2.68% (3.11%) -- (6.15%)
Without redemption 3.68% (3.11%) -- (6.15%)
F SHARES (7/5/38) 4.64% (1.71%) 4.03% N/A
R SHARES (12/31/99) 4.78% (2.07%) -- (5.10%)
T SHARES (12/31/99)
With sales charge (4.50%) (1.82%) (4.00%) -- (6.81%)
Without sales charge 2.75% (3.10%) -- (6.09%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, fee
waivers for certain share classes, and adjustments for financial statement
purposes.
* The maximum contingent deferred sales charge for Class B shares is 4% and is
reduced to 0% after six years, at which time the Class B shares convert to
Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
SYMANTEC CORPORATION declined as a result of the acquisition of VERITAS Software
Corporation, which was seen as dilutive to the company's revenue and earnings
growth rates. This, combined with the fear that consumer demand for antivirus
software was waning, caused a drop in the company's stock price. Xilinx, Inc., a
manufacturer of digital programmable logic devices (PLD), and International
Business Machines Corporation also declined during the period.
Select consumer discretionary stocks did not fare well either. A slow
ramp-up into its cable telephony offering, combined with sluggish trends in
video services, resulted in COMCAST CORPORATION's stock declining during the
period. Sluggish sales trends hit WAL-MART STORES, INC. as rising energy prices
reduced the spending power of the company's main customer group. TIME Warner,
Inc.'s stock price also underperformed, dropping over ten percentage
PORTFOLIO COMPOSITION OF NET ASSETS
[CHART]
<Table>
Information Technology 30.42%
Consumer Discretionary 19.07%
Healthcare 12.53%
Industrials 9.60%
Financials 9.22%
Consumer Staples 8.43%
Telecommunications Services 1.60%
Materials 1.58%
Energy 1.28%
Other 4.43%
Cash & Equivalents 1.84%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio manager
and are subject to change at any time, based on market and other conditions, and
should not be construed as a recommendation of any specific security.
[SIDENOTE]
SECTORS DETRACTING FROM THE FUND
Healthcare
Energy
Telecommunications Services
8
<Page>
points in value during the Fund's holding period. The Fund, however, retained a
position in all three stocks at the end of the period, as we believed the
companies' respective growth opportunities remained viable.
IN CONCLUSION
We will watch the actions of the Federal Reserve and analyze the trends in
corporate profit growth. We will continue to rely on our bottom-up research
process to seek companies we believe are capable of posting strong future
revenues and earnings growth at attractive valuations.
/s/ John B. Jares
John B. Jares, CFA
Portfolio Manager
9
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
10
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- ------------------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,039.22 $ 6.84
CLASS A HYPOTHETICAL 1,000.00 1,018.42 6.79
CLASS B ACTUAL 1,000.00 1,036.34 11.34
CLASS B HYPOTHETICAL 1,000.00 1,013.92 11.28
CLASS C ACTUAL 1,000.00 1,037.11 10.12
CLASS C HYPOTHETICAL 1,000.00 1,015.15 10.06
CLASS F ACTUAL 1,000.00 1,039.83 5.76
CLASS F HYPOTHETICAL 1,000.00 1,019.49 5.72
CLASS R ACTUAL 1,000.00 1,039.62 5.50
CLASS R HYPOTHETICAL 1,000.00 1,019.74 5.46
CLASS T ACTUAL 1,000.00 1,039.22 7.35
CLASS T HYPOTHETICAL 1,000.00 1,017.91 7.30
</Table>
*Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- -------------------------------------
CLASS A 1.33%
CLASS B 2.21%
CLASS C 1.97%
CLASS F 1.12%
CLASS R 1.07%
CLASS T 1.43%
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<Page>
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------
COMMON STOCKS (DOMESTIC)--95.7%
AIRLINES--2.2%
147,025 AMR Corporation* $ 3,268,366
44,575 US Airways Group, Inc.* 1,655,516
---------------
4,923,882
---------------
APPLICATION SOFTWARE--1.2%
63,050 Autodesk, Inc. 2,707,998
---------------
ASSET MANAGEMENT & CUSTODY BANKS--1.7%
50,250 Northern Trust Corporation 2,603,955
20,150 State Street Corporation 1,117,116
---------------
3,721,071
---------------
AUTOMOTIVE RETAIL--1.1%
56,375 Advance Auto Parts, Inc.* 2,450,058
---------------
BIOTECHNOLOGY--3.8%
21,350 Amgen, Inc.* 1,683,661
35,975 Genentech, Inc.* 3,327,688
15,475 Genzyme Corporation* 1,095,321
64,200 ImClone Systems, Inc.* 2,198,208
---------------
8,304,878
---------------
BROADCASTING & CABLE TV--2.1%
154,450 Comcast Corporation Special Class A* 3,967,821
21,150 XM Satellite Radio Holdings, Inc. Class A* 576,972
---------------
4,544,793
---------------
CASINOS & GAMING--0.9%
17,375 Harrah's Entertainment, Inc. 1,238,664
25,100 International Game Technology 772,578
---------------
2,011,242
---------------
COMMUNICATIONS EQUIPMENT--1.2%
31,788 Cisco Systems, Inc.* 544,211
90,875 Motorola, Inc. 2,052,866
---------------
2,597,077
---------------
COMPUTER & ELECTRONICS RETAIL--1.0%
51,000 Best Buy Company, Inc. 2,217,480
---------------
COMPUTER HARDWARE--2.9%
56,850 Apple Computer, Inc.* 4,086,947
80,325 Hewlett-Packard Company 2,299,705
---------------
6,386,652
---------------
COMPUTER STORAGE & PERIPHERALS--1.3%
217,525 EMC Corporation* 2,962,691
---------------
CONSUMER ELECTRONICS--0.5%
11,525 Harman International Industries, Inc. 1,127,721
---------------
CONSUMER FINANCE--1.3%
53,175 SLM Corporation 2,929,411
---------------
</Table>
12
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------
DATA PROCESSING & OUTSOURCED SERVICES--0.8%
38,075 Automatic Data Processing, Inc. $ 1,747,262
---------------
DEPARTMENT STORES--1.7%
21,075 J.C. Penney Company, Inc. 1,171,770
39,125 Kohl's Corporation* 1,901,475
20,325 Nordstrom, Inc. 760,155
---------------
3,833,400
---------------
ELECTRICAL COMPONENTS & EQUIPMENT--1.5%
42,975 Emerson Electric Company 3,210,233
---------------
ELECTRONIC EQUIPMENT MANUFACTURERS--0.6%
36,925 Agilent Technologies, Inc.* 1,229,233
---------------
EXCHANGE TRADED FUNDS--4.4%
68,700 iShares Russell 1000 Growth Index Fund 3,507,135
73,075 Nasdaq 100 Index Tracking Stock 2,953,692
26,625 SPDR Trust Series 1 3,312,948
---------------
9,773,775
---------------
GENERAL MERCHANDISE STORES--1.6%
96,375 Family Dollar Stores, Inc. 2,389,136
20,850 Target Corporation 1,146,125
---------------
3,535,261
---------------
HEALTHCARE EQUIPMENT--0.8%
30,625 Medtronic, Inc. 1,763,081
---------------
HEALTHCARE SERVICES--0.6%
24,950 Omnicare, Inc. 1,427,639
---------------
HEALTHCARE SUPPLIES--0.5%
20,925 DENTSPLY International, Inc. 1,123,463
---------------
HOME ENTERTAINMENT SOFTWARE--0.8%
35,600 Electronic Arts, Inc.* 1,862,236
---------------
HOME IMPROVEMENT RETAIL--1.5%
79,675 Home Depot, Inc. 3,225,244
---------------
HOTELS, RESORTS & CRUISE LINES--0.8%
31,925 Carnival Corporation 1,707,030
---------------
HOUSEHOLD PRODUCTS--5.5%
48,250 Clorox Company 2,744,943
100,850 Colgate-Palmolive Company 5,531,623
67,171 Procter & Gamble Company 3,887,857
---------------
12,164,423
---------------
HYPERMARKETS & SUPER CENTERS--0.5%
23,925 Wal-Mart Stores, Inc. 1,119,690
---------------
INDUSTRIAL CONGLOMERATES--3.1%
196,350 General Electric Company 6,882,068
---------------
INTEGRATED OIL & GAS--0.3%
10,950 ConocoPhillips 637,071
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
13
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------
INTEGRATED TELECOMMUNICATION SERVICES--1.6%
20,175 Alltel Corporation $ 1,273,043
96,200 Sprint Nextel Corporation 2,247,232
---------------
3,520,275
---------------
INTERNET SOFTWARE & SERVICES--4.9%
17,175 Google, Inc. Class A* 7,125,221
96,950 Yahoo!, Inc.* 3,798,501
---------------
10,923,722
---------------
INVESTMENT BANKING & BROKERAGE--2.8%
202,350 Charles Schwab Corporation 2,968,475
16,675 Goldman Sachs Group, Inc. 2,129,564
18,075 Morgan Stanley 1,025,576
---------------
6,123,615
---------------
IT CONSULTING & OTHER SERVICES--1.8%
136,500 Accenture Limited Class A 3,940,755
---------------
LEISURE FACILITIES--1.8%
87,709 Royal Caribbean Cruises Limited 3,952,168
---------------
MANAGED HEALTHCARE--0.6%
14,500 Aetna, Inc. 1,367,495
---------------
MOVIES & ENTERTAINMENT--4.9%
41,600 DreamWorks Animation SKG, Inc.* 1,021,696
63,725 Pixar, Inc.* 3,359,582
242,075 Time Warner, Inc. 4,221,788
68,474 Viacom, Inc. Class B 2,232,278
---------------
10,835,344
---------------
MULTI-LINE INSURANCE--0.4%
14,625 American International Group, Inc. 997,864
---------------
OIL & GAS EQUIPMENT & SERVICES--1.0%
22,575 Schlumberger Limited 2,193,161
---------------
OTHER DIVERSIFIED FINANCIAL SERVICES--1.1%
59,250 JPMorgan Chase & Company 2,351,633
---------------
PACKAGED FOODS & MEATS--0.8%
29,775 Hershey Foods Corporation 1,645,069
---------------
PERSONAL PRODUCTS--0.6%
36,125 Estee Lauder Companies, Inc. Class A 1,209,465
---------------
PHARMACEUTICALS--6.2%
30,075 Covance, Inc.* 1,460,141
15,750 Eli Lilly and Company 891,293
71,700 Johnson & Johnson 4,309,170
109,500 MGI Pharma, Inc.* 1,879,020
44,192 Pfizer, Inc. 1,030,557
88,475 Wyeth 4,076,043
---------------
13,646,224
---------------
PROPERTY & CASUALTY INSURANCE--1.0%
41,875 Allstate Corporation 2,264,181
---------------
</Table>
14
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------
RAILROADS--1.7%
47,250 Union Pacific Corporation $ 3,804,098
---------------
SEMICONDUCTOR EQUIPMENT--0.4%
15,525 KLA-Tencor Corporation 765,848
---------------
SEMICONDUCTORS--4.4%
109,278 Intel Corporation 2,727,579
120,000 Linear Technology Corporation 4,328,400
74,525 Maxim Integrated Products, Inc. 2,700,786
---------------
9,756,765
---------------
SOFT DRINKS--1.1%
41,625 PepsiCo, Inc. 2,459,205
---------------
SPECIALTY CHEMICALS--1.0%
34,000 Sigma-Aldrich Corporation 2,151,860
---------------
SPECIALTY STORES--1.2%
20,450 Office Depot, Inc.* 642,130
51,600 Tiffany & Company 1,975,764
---------------
2,617,894
---------------
STEEL--0.6%
19,850 Nucor Corporation 1,324,392
---------------
SYSTEMS SOFTWARE--7.6%
105,775 Adobe Systems, Inc. 3,909,444
407,541 Microsoft Corporation 10,657,197
66,000 Oracle Corporation* 805,860
75,300 Symantec Corporation* 1,317,750
---------------
16,690,251
---------------
THRIFTS & MORTGAGE FINANCE--0.9%
47,600 The PMI Group, Inc. 1,954,932
---------------
TRADING COMPANIES & DISTRIBUTORS--1.1%
32,975 W.W. Grainger, Inc. 2,344,523
---------------
TOTAL COMMON STOCKS (DOMESTIC)
(COST--$197,522,009) 210,966,802
---------------
COMMON STOCKS (FOREIGN)--2.5%
APPLICATION SOFTWARE--0.5%
24,350 SAP AG Sponsored ADR (GE) 1,097,455
---------------
SEMICONDUCTOR EQUIPMENT--1.2%
135,400 ASM Lithography Holding NV NY Shares (NE)* 2,718,832
---------------
SEMICONDUCTORS--0.8%
101,900 ATI Technologies, Inc. (CA)* 1,731,280
---------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$4,805,981) 5,547,567
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- ----------------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--3.0%
SPECIAL PURPOSE ENTITY--3.0%
$6,600,000 CAFCO LLC
4.12% 1/3/06~ $ 6,598,489
---------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$6,598,489) 6,598,489
---------------
TOTAL INVESTMENTS--101.2%
(TOTAL COST--$208,926,479) 223,112,858
---------------
OTHER ASSETS AND LIABILITIES--(1.2%) (2,548,214)
---------------
NET ASSETS--100.0% $ 220,564,644
===============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
* NON-INCOME PRODUCING.
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$6,598,489, OR 3.0%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
ADR - AMERICAN DEPOSITARY RECEIPT
SPDR - STANDARD AND POOR'S DEPOSITARY RECEIPT
CA - CANADA
GE - GERMANY
NE - NETHERLANDS
SEE NOTES TO FINANCIAL STATEMENTS.
16
<Page>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 208,926,479
---------------
Investment securities, at market 223,112,858
Cash 239,080
Receivables:
Investment securities sold 21,332,043
Capital shares sold 11,201
Dividends and interest 235,503
Other assets 15,478
---------------
Total Assets 244,946,163
---------------
LIABILITIES
Payables and other accrued liabilities:
Investment securities purchased 23,931,852
Capital shares redeemed 178,756
Advisory fees 123,958
Shareholder servicing fees 21,272
Directors' deferred compensation 15,478
Accounting fees 11,442
Distribution fees 20,331
Transfer agency fees 8,255
Custodian fees 358
Other 69,817
---------------
Total Liabilities 24,381,519
---------------
Net Assets $ 220,564,644
===============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 288,692,356
Undistributed net investment income 159,962
Accumulated net realized loss from security transactions (82,474,053)
Net unrealized appreciation on investments 14,186,379
---------------
Total $ 220,564,644
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
<Table>
CLASS A
Net Assets $ 1,265,880
Shares Outstanding 249,868
Net Asset Value, Redemption Price Per Share $ 5.07
Maximum offering price per share
(net asset value plus sales charge of 5.75% of offering price) $ 5.38
CLASS B
Net Assets $ 1,452,806
Shares Outstanding 295,826
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 4.91
CLASS C
Net Assets $ 2,011,596
Shares Outstanding 417,568
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 4.82
CLASS F
Net Assets $ 215,556,228
Shares Outstanding 41,624,774
Net Asset Value, Offering and Redemption Price Per Share $ 5.18
CLASS R
Net Assets $ 270,102
Shares Outstanding 52,682
Net Asset Value, Offering and Redemption Price Per Share $ 5.13
CLASS T
Net Assets $ 8,032
Shares Outstanding 1,657
Net Asset Value, Redemption Price Per Share $ 4.85
Maximum offering price per share
(net asset value plus sales charge of 4.50% of offering price) $ 5.08
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<Page>
STATEMENT OF OPERATIONS
For the year ended December 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 2,356,966
Interest 376,652
Foreign taxes withheld (680)
---------------
Total Investment Income 2,732,938
---------------
EXPENSES
Advisory fees--Note 2 1,448,888
Shareholder servicing fees--Note 2 254,387
Accounting fees--Note 2 133,743
Distribution fees--Note 2 197,310
Transfer agency fees--Note 2 132,523
Registration fees 58,460
Postage and mailing expenses 34,390
Custodian fees and expenses--Note 2 11,981
Printing expenses 76,010
Legal and audit fees 80,349
Directors' fees and expenses--Note 2 47,535
Other expenses 82,969
---------------
Total Expenses 2,558,545
Earnings Credits (11,692)
Reimbursed/Waived Expenses (7,536)
Expense Offset to Broker Commissions (11,459)
---------------
Net Expenses 2,527,858
---------------
Net Investment Income 205,080
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
SECURITY TRANSACTIONS
Net Realized Gain on Security Transactions 22,014,185
Net Change in Unrealized Appreciation/Depreciation of Investments (12,580,203)
---------------
Net Realized and Unrealized Gain 9,433,982
---------------
Net Increase in Net Assets Resulting from Operations $ 9,639,062
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2005 2004
OPERATIONS
Net Investment Income $ 205,080 $ 1,263,861
Net Realized Gain on Security Transactions 22,014,185 20,710,093
Net Change in Unrealized Appreciation/Depreciation of Investments (12,580,203) (2,549,571)
--------------- ---------------
Net Increase in Net Assets Resulting from Operations 9,639,062 19,424,383
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From Net Investment Income
Class A (1,749) (3,007)
Class C (4,846) 0
Class F (428,422) (945,884)
Class R (786) (1,108)
--------------- ---------------
Net Decrease from Dividends and Distributions (435,803) (949,999)
--------------- ---------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A 28,615 174,433
Class B (702,149) 237,470
Class C 1,342,518 173,366
Class F (26,845,562) (18,116,372)
Class R 11,896 29,755
Class T (23,106) 0
Class T Payment by Service Provider 0 698
--------------- ---------------
Net Decrease from Capital Share Transactions (26,187,788) (17,500,650)
--------------- ---------------
Net Increase (Decrease) in Net Assets (16,984,529) 973,734
--------------- ---------------
NET ASSETS
Beginning of Year $ 237,549,173 $ 236,575,439
--------------- ---------------
End of Year $ 220,564,644 $ 237,549,173
=============== ===============
Undistributed Net Investment Income $ 159,962 $ 393,754
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.86 $ 4.49 $ 3.44 $ 4.66 $ 5.73
- -------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.00)(a) 0.02 0.03 (0.02) (0.07)
Net realized and unrealized gains (losses)
on securities 0.22 0.36 1.02 (1.20) (1.00)
-------------------------------------------------------------------------
Total from investment operations 0.22 0.38 1.05 (1.22) (1.07)
- -------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.01) (0.01) 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00(b)
-------------------------------------------------------------------------
Total distributions (0.01) (0.01) 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 5.07 $ 4.86 $ 4.49 $ 3.44 $ 4.66
=========================================================================
TOTAL RETURN(c) 4.46% 8.54% 30.52% (26.18%) (18.65%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,266 $ 1,180 $ 935 $ 378 $ 442
- -------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(d) 1.35% 1.26% 1.49% 1.87% 2.98%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.33% 1.25% 1.48% 1.87% 2.98%
Net investment income (loss) (0.09%) 0.38% (0.25%) (0.67%) (1.82%)
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(e) 126% 115% 123% 152% 144%
</Table>
(a) NET INVESTMENT LOSS FOR THE YEAR ENDED DECEMBER 31, 2005 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(b) DISTRIBUTIONS FROM NET REALIZED GAINS FOR THE YEAR ENDED DECEMBER 31, 2001
AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(c) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(d) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(e) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.74 $ 4.40 $ 3.40 $ 4.61 $ 5.65
- -------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.04)(b) (0.00)(a) (0.01) (0.05) (0.04)
Net realized and unrealized gains (losses)
on securities 0.21 0.34 1.01 (1.16) (1.00)
-------------------------------------------------------------------------
Total from investment operations 0.17 0.34 1.00 (1.21) (1.04)
- -------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00(c)
-------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.91 $ 4.74 $ 4.40 $ 3.40 $ 4.61
=========================================================================
TOTAL RETURN(d) 3.59% 7.73% 29.41% (26.25%) (18.38%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,453 $ 2,110 $ 1,709 $ 1,013 $ 1,599
- -------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(e) 2.19% 2.01% 2.30% 2.14% 2.20%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.18% 2.00% 2.30% 2.14% 2.19%
Net investment loss (0.97%) (0.34%) (1.08%) (0.95%) (1.03%)
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(f) 126% 115% 123% 152% 144%
</Table>
(a) NET INVESTMENT LOSS FOR THE YEAR ENDED DECEMBER 31, 2004 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(b) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(c) DISTRIBUTIONS FROM NET REALIZED GAINS FOR THE YEAR ENDED DECEMBER 31, 2001
AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(d) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(e) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(f) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
22
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.66 $ 4.32 $ 3.34 $ 4.55 $ 5.66
- -------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.03)(a) 0.04 0.04 (0.07) (0.13)
Net realized and unrealized gains (losses)
on securities 0.20 0.30 0.94 (1.14) (0.98)
-------------------------------------------------------------------------
Total from investment operations 0.17 0.34 0.98 (1.21) (1.11)
- -------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.01) 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00(b)
-------------------------------------------------------------------------
Total distributions (0.01) 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.82 $ 4.66 $ 4.32 $ 3.34 $ 4.55
=========================================================================
TOTAL RETURN(c) 3.68% 7.87% 29.34% (26.59%) (19.58%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 2,012 $ 571 $ 357 $ 186 $ 270
- -------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(d) 1.98% 1.99% 2.29% 2.77% 3.17%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.96% 1.99% 2.28% 2.76% 3.16%
Net investment loss (0.72%) (0.24%) (1.04%) (1.55%) (2.01%)
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(e) 126% 115% 123% 152% 144%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) DISTRIBUTIONS FROM NET REALIZED GAINS FOR THE YEAR ENDED DECEMBER 31, 2001
AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(c) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(d) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 1.98% (2005), 1.99% (2004), 2.29% (2003), 3.02% (2002), AND
3.56% (2001).
(e) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD. SEE NOTES TO FINANCIAL
STATEMENTS.
23
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.96 $ 4.57 $ 3.50 $ 4.69 $ 5.69
- -------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.00(a) 0.02 0.00(a) 0.00(a) 0.00(a)
Net realized and unrealized gains (losses)
on securities 0.23 0.39 1.07 (1.19) (1.00)
-------------------------------------------------------------------------
Total from investment operations 0.23 0.41 1.07 (1.19) (1.00)
- -------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.01) (0.02) 0.00(b) 0.00(b) 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00(b)
-------------------------------------------------------------------------
Total distributions (0.01) (0.02) 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 5.18 $ 4.96 $ 4.57 $ 3.50 $ 4.69
=========================================================================
TOTAL RETURN 4.64% 8.97% 30.67% (25.33%) (17.55%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 215,556 $ 233,410 $ 233,333 $ 191,701 $ 288,752
- -------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(c) 1.13% 1.06% 1.13% 1.08% 1.14%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.12% 1.06% 1.13% 1.08% 1.14%
Net investment income 0.11% 0.56% 0.06% 0.11% 0.02%
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 126% 115% 123% 152% 144%
</Table>
(a) NET INVESTMENT INCOME FOR THE YEARS ENDED DECEMBER 31, 2005, 2003, 2002, AND
2001 AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(b) DISTRIBUTIONS FROM NET INVESTMENT INCOME FOR THE YEARS ENDED DECEMBER 31,
2003 AND 2002 AND DISTRIBUTIONS FROM NET REALIZED GAINS FOR THE YEAR ENDED
DECEMBER 31, 2001 AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
24
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.91 $ 4.53 $ 3.47 $ 4.74 $ 5.74
- -------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.01 0.03 0.06 (0.08) (0.01)
Net realized and unrealized gains (losses)
on securities 0.22 0.37 1.00 (1.19) (0.99)
-------------------------------------------------------------------------
Total from investment operations 0.23 0.40 1.06 (1.27) (1.00)
- -------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.01) (0.02) 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00(a)
-------------------------------------------------------------------------
Total distributions (0.01) (0.02) 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 5.13 $ 4.91 $ 4.53 $ 3.47 $ 4.74
=========================================================================
TOTAL RETURN 4.78% 8.88% 30.55% (26.79%) (17.39%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 270 $ 247 $ 211 $ 57 $ 51
- -------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(b) 1.10% 1.00% 1.35% 2.95% 2.73%
Expenses with reimbursements, earnings
credits and brokerage offsets 1.09% 1.00% 1.35% 2.95% 2.72%
Net investment income (loss) 0.15% 0.54% (0.12%) (1.78%) (1.68%)
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 126% 115% 123% 152% 144%
</Table>
(a) DISTRIBUTIONS FROM NET REALIZED GAINS FOR THE YEAR ENDED DECEMBER 31, 2001
AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(b) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 1.10% (2005), 1.00% (2004), 1.35% (2003), 4.68% (2002), AND
82.23% (2001).
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.72 $ 4.38 $ 3.39 $ 4.60 $ 5.68
- -------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.05)(a) (0.01) (0.23) (0.30) (0.09)
Net realized and unrealized gains (losses)
on securities 0.18 0.25 1.22 (0.91) (0.99)
-------------------------------------------------------------------------
Total from investment operations 0.13 0.24 0.99 (1.21) (1.08)
- -------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00(b)
-------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------
Other:
Payment by Service Provider 0.00 0.10(c) 0.00 0.00 0.00
Net Asset Value, end of year $ 4.85 $ 4.72 $ 4.38 $ 3.39 $ 4.60
=========================================================================
TOTAL RETURN(d) 2.75% 7.76% 29.20% (26.30%) (18.99%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 8 $ 32 $ 30 $ 33 $ 127
- -------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(e) 2.16% 1.90% 2.27% 2.47% 3.14%
Expenses with reimbursements, earnings
credits and brokerage offsets 2.15% 1.90% 2.26% 2.46% 3.13%
Net investment loss (0.98%) (0.29%) (1.11%) (1.29%) (1.96%)
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(f) 126% 115% 123% 152% 144%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) DISTRIBUTIONS FROM NET REALIZED GAINS FOR THE YEAR ENDED DECEMBER 31, 2001
AGGREGATED LESS THAN $0.01 ON A PER SHARE BASIS.
(c) A SERVICE PROVIDER REIMBURSED THE FUND'S CLASS T SHARES FOR LOSSES RESULTING
FROM CERTAIN SHAREHOLDER ADJUSTMENTS WHICH OTHERWISE WOULD HAVE REDUCED
TOTAL RETURN BY 2.28%.
(d) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(e) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.59% (2005), 1.90% (2004), 2.27% (2003), 3.71% (2002), AND
6.32% (2001).
(f) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<Page>
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders Equity Growth Fund (the "Fund"). The Fund offers
Class A, Class B, Class C, Class F, Class R and Class T shares. Class A and
Class T shares are subject to a sales charge imposed at the time of purchase,
Class B shares are subject to a contingent deferred sales charge ("CDSC")
imposed on Class B shares redeemed within six years of purchase, Class C shares
are subject to a CDSC imposed on Class C shares redeemed within one year of
purchase and Class F and Class R shares are sold at net asset value per share
(with Class R shares sold only to eligible institutional investors). Other
differences between the classes include services offered to and the expenses
borne by each Class. The following significant accounting policies have been
consistently followed by the Fund in the preparation of its financial
statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair value as
27
<Page>
determined in good faith by the Company's board of directors or pursuant to
procedures approved by the board of directors. These situations may include
instances where an event occurs after the close of the market on which a
security is traded but before the Fund calculates its net asset value, and it is
determined that the event has materially affected the value of the security.
Fair value of foreign equity securities may be determined with the assistance of
a pricing service using correlations between the movement of prices of foreign
securities and indexes of domestic securities and other appropriate indicators,
such as closing market prices of relevant ADRs and futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund may invest at least a
portion of its assets in foreign securities. Foreign securities carry more risk
than U.S. securities, such as political and currency risks. In the event the
Fund executes a foreign security transaction, the Fund may enter into a foreign
currency contract to settle the foreign security transaction. The Fund could be
exposed to risk if counterparties are unable to meet the terms of the contracts
or if the value of the currency changes unfavorably to the U.S. dollar. The
resultant foreign currency gain or loss from the contract is recorded as foreign
currency gain or loss and is presented as such in the Statement of Operations.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each day.
Purchases and sales of investment securities and income and expense items
denominated in foreign currencies are translated into U.S. dollar amounts on the
respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net unrealized gain or loss from investments and foreign
currency translations on the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized appreciation or depreciation on investments and foreign
currency translation arises from changes in
28
<Page>
the values of assets and liabilities, including investments in securities held
at the date of the financial statements, resulting from changes in the exchange
rates and changes in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) and from net realized capital gains (if any)
annually. Dividends and distributions, which are determined in accordance with
income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
29
<Page>
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
Financial Corporation, a publicly-owned financial services company which
provides a comprehensive range of financial products and services in domestic
and selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
0.65% of the first $250 million of net assets, 0.60% of the next $250 million of
net assets, 0.55% of the next $250 million of net assets and 0.50% of net assets
in excess of $750 million.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $242,834 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $105,473 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $12.58 to $13.36, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency fees, including both the per account fees paid to
DTI and out-of-pocket charges, during the year ended December 31, 2005 were as
follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
---------------------------------------------------------
Class A $ 2,522
Class B $ 5,100
Class C $ 1,322
Class R $ 518
Class T $ 128
</Table>
30
<Page>
Founders has agreed to reimburse (or to cause its affiliates to reimburse) the
Class T share class of the Fund for certain transfer agency expenses pursuant to
a written contractual commitment. This commitment will extend through at least
August 31, 2006, and will not be terminated without prior notification to the
Company's board of directors. For the year ended December 31, 2005, Class T was
reimbursed $44, which reduced the amount paid to DTI to $84.
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the processing of shareholder transactions in the Funds.
During the year ended December 31, 2005, the Fund was charged $5,449 for cash
management fees, which are included in the out-of-pocket transfer agency charges
above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $17,460 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $172,072 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
-------------------------------------------------------------
Class A N/A $ 3,123
Class B $ 12,764 $ 4,255
Class C $ 12,449 $ 4,150
Class T $ 25 $ 25
</Table>
31
<Page>
During the year ended December 31, 2005, DSC retained $1,232 and $35 in sales
commissions from the sales of Class A and Class T shares, respectively. DSC also
retained $6,210 and $2 of contingent deferred sales charges relating to
redemptions of Class B and Class C shares, respectively.
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance monitoring, regulatory and shareholder reporting, as well as related
facilities, equipment and clerical help. The fee is computed at the annual rate
of 0.06% of the average daily net assets of the Fund on the first $500 million,
0.04% of the average daily net assets of the Fund on the next $500 million and
0.02% of the average daily net assets of the Fund in excess of $1 billion, plus
reasonable out-of-pocket expenses. Founders has contractually agreed in writing
to waive any fees received for these services to the extent they exceed
Founders' costs in providing the services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits on the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
---------------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $7,492, which reduced the amount paid to
Mellon Bank to $4,489.
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of one or more of the Funds. The amount paid to the director under the
plan will be determined based upon the performance of the selected Funds. The
current value of these amounts is included in Other Assets and Directors'
Deferred Compensation on the Statement of Assets and Liabilities. Changes in
market value are included in the Directors' fees and expenses and the net change
in unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
32
<Page>
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally accepted in the United States of America. These differences
are due to differing treatments for items such as deferral of wash sale losses,
deferred compensation and capital loss carryovers. Permanent differences
identified during the year ended December 31, 2005 have been reclassified among
the components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
---------------------------------------------------------
$ (3,069) $ 3,069 $ 0
</Table>
The tax character of distributions paid during 2005 and 2004 was as follows:
<Table>
<Caption>
2005 2004
-----------------------------
DISTRIBUTIONS PAID FROM:
Ordinary Income $ 435,803 $ 949,999
Long-Term Capital Gain $ 0 $ 0
-----------------------------
$ 435,803 $ 949,999
=============================
</Table>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of December 31, 2005, represent capital loss carryovers that may be
available to offset future realized capital gains and thereby reduce future
taxable gains distributions. Post-October 31 foreign currency losses noted
below, if any, may be used to offset future net investment income and thereby
reduce future ordinary income distributions. Net capital loss carryovers
utilized during 2005 by the Fund amounted to $20,044,046. Accumulated capital
losses as of December 31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
--------------------------------------------------------------
2009 $ 29,494,922
2010 $ 50,083,635
---------------
$ 79,578,557
===============
</Table>
33
<Page>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The primary difference between book and tax appreciation or depreciation
is wash sale loss deferrals.
<Table>
Post-October Capital Loss Deferral $ (555,661)
Undistributed Ordinary Income $ 209,198
Other Book/Tax Differences $ (49,237)
Federal Tax Cost $ 211,266,313
Gross Tax Appreciation of Investments $ 16,901,507
Gross Tax Depreciation of Investments $ (5,054,962)
Net Tax Appreciation $ 11,846,545
</Table>
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 750 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 133,918 $ 645,347 167,335 $ 765,894
Dividends or Distributions Reinvested 258 $ 1,321 404 $ 1,961
Redeemed (127,183) $ (618,053) (133,430) $ (593,422)
-----------------------------------------------------------------
Net Increase 6,993 $ 28,615 34,309 $ 174,433
=================================================================
CLASS B
Sold 13,761 $ 63,612 215,457 $ 939,503
Redeemed (162,888) $ (765,761) (159,027) $ (702,033)
-----------------------------------------------------------------
Net Increase (Decrease) (149,127) $ (702,149) 56,430 $ 237,470
=================================================================
CLASS C
Sold 331,465 $ 1,510,039 63,935 $ 278,992
Dividends or Distributions Reinvested 275 $ 1,336 0 $ 0
Redeemed (36,722) $ (168,857) (24,034) $ (105,626)
-----------------------------------------------------------------
Net Increase 295,018 $ 1,342,518 39,901 $ 173,366
=================================================================
</Table>
34
<Page>
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS F
Sold 587,677 $ 2,884,040 1,109,016 $ 5,075,748
Dividends or Distributions Reinvested 71,482 $ 373,127 165,648 $ 819,960
Redeemed (6,113,337) $ (30,102,729) (5,197,897) $ (24,012,080)
-----------------------------------------------------------------
Net Decrease (5,454,178) $ (26,845,562) (3,923,233) $ (18,116,372)
=================================================================
CLASS R
Sold 4,796 $ 23,193 36,325 $ 170,596
Dividends or Distributions Reinvested 150 $ 778 223 $ 1,096
Redeemed (2,559) $ (12,075) (32,838) $ (141,937)
-----------------------------------------------------------------
Net Increase 2,387 $ 11,896 3,710 $ 29,755
=================================================================
CLASS T
Sold 1,538 $ 7,232 14 $ 65
Redeemed (6,655) $ (30,338) (14) $ (65)
-----------------------------------------------------------------
Net Increase (Decrease) (5,117) $ (23,106) 0 $ 0
=================================================================
</Table>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $268,939,916 and $293,530,183, respectively.
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
35
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders Equity Growth Fund
(one of the portfolios constituting Dreyfus Founders Funds, Inc., hereafter
referred to as the "Fund") at 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 Sates of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where securities purchased had not been received, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
36
<Page>
OTHER TAX INFORMATION
(UNAUDITED)
CORPORATE DIVIDENDS RECEIVED DEDUCTION
Dividends paid by the Fund from net investment income and distributions of net
realized short-term capital gains are, for federal tax purposes, taxable as
ordinary income to shareholders. Of the ordinary income distributions declared
for the year ended December 31, 2005, 100% qualified for the dividends received
deduction available to the Fund's corporate shareholders.
QUALIFIED DIVIDEND INCOME
For the year ended December 31, 2005, the Fund designated 100% of the ordinary
income distributions paid as qualified dividend income subject to reduced income
tax rates for taxpayers with taxable accounts.
37
<Page>
FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
38
<Page>
The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services being
provided to the Funds are satisfactory, as evidenced in part by the recent
performance records of the Funds, to which the directors gave significant
attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to the
Funds, but also recognize that Founders or its affiliates have provided the
highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
39
<Page>
small group of funds selected by Lipper and a larger universe of funds also
selected by Lipper. The Lipper materials further included graphs depicting each
Fund's Class F one-year and annualized performance results for two-, three-,
four-, five-, and ten-year periods, if applicable, in comparison to the Fund's
performance group and performance universe.
Equity Growth Fund's performance for the one-year period ended December 31, 2004
placed it in the second quintile of its Lipper performance group, with the Fund
ranking fourth out of 15 Lipper-selected "peer funds," and in the second
quintile of its Lipper large-cap growth fund performance universe, ranking 184th
of 640 funds. The Fund's performance within its Lipper-selected group and
universe for the three-year period ended December 31, 2004 had placed it in the
first quintile, with the Fund having placed in the second quintile of its
Lipper-selected group and in the first quintile of its Lipper-selected universe
for the two-year period ended December 31, 2004. The directors deemed these
relative performance results to be very satisfactory and stressed the importance
to Founders of the need to seek to maintain a strong performance record.(1)
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance
difficulties, more recent performance results generally have shown
significant improvement;
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS DO NOT REFLECT THE FRONT-END SALES
CHARGES THAT APPLY TO OTHER SHARE CLASSES.
40
<Page>
Founders has focused its efforts upon improving the performance records of
the Funds and will continue to seek improvement; and
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing in
the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY
FOUNDERS AND ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, Equity Growth
Fund's management fees ranked in the first (best) quintile of its Lipper
competitive expense group, with the Fund's fees the second lowest of 15 "peer
funds." The Fund's contractual management fees at a common asset level were
determined by Lipper to be lower than 13 of the 15 funds in its group. The
Fund's management fees were in the second best quintile of its Lipper expense
universe, placing 49th lowest of 171 funds.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain
efficiencies in performing the
41
<Page>
portfolio management, trading and operational functions related to those
accounts (the directors recognized that in determining its profitability
from providing investment management and other services to the Funds,
Founders allocated its expenses between the Funds and other accounts in a
manner which was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment
services to any of the clients it advises, not just the Funds. The directors
recognized that Founders' profitability would be lower if it did not receive
research and brokerage services in connection with these brokerage
transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the investment advisory fees received by
Founders. However, the directors noted that
42
<Page>
Founders' profitability is expected to decline in 2005 as a result of declines
in Fund asset levels. The directors also considered the risks assumed by
Founders in providing management services to the Funds, including the risk that
the management agreement can be terminated by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of
investment advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially
fees which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than fees
arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in recognition of the quality service
which Founders has provided and continues to provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
43
<Page>
ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of scale if the assets of the Funds were to increase. Among other information,
the directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into increased
profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of an
increase in the assets of a particular Fund or a group of Funds would not be
passed along on a dollar-for-dollar basis to the shareholders of other Funds
that did not experience increases in their assets to points above their
breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is
consistent with its objective of sharing its economies of scale with the
Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
restrictions. The directors determined that Founders is dedicated to compliance
with all applicable rules and regulations and that the systems of controls which
are in place to ensure that the service providers to the Funds, including
Founders, and the Funds themselves, maintain strict adherence to the law are
excellent.
44
<Page>
OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years and that efforts are being and will continue to be
made to enhance such improvement and to maintain Fund expense ratios at
reasonable and competitive levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
45
<Page>
YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
46
<Page>
Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice
President--Compliance since 2002. Formerly, Founders' Manager of Compliance
(2000 to 2002) and Securities Compliance Examiner, Staff Accountant and Team
Leader for the U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
47
<Page>
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
DREYFUS FOUNDERS TRANSFER AGENT &
EQUITY GROWTH FUND DIVIDEND DISBURSING AGENT
MANAGER Dreyfus Transfer, Inc.
200 Park Avenue
Founders Asset New York, NY 10166
Management LLC
210 University Boulevard DISTRIBUTOR
Suite 800
Denver, CO 80206 Dreyfus Service Corporation
200 Park Avenue
New York, NY 10166
- -------------------------------------------------------------------------------
TELEPHONE Call your financial representative or 1-800-554-4611
MAIL Dreyfus Founders Funds, Inc.
144 Glenn Curtiss Boulevard, Uniondale, NY 11556-0144
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The fund's Forms N-Q are available on the SEC's website at
http://www.sec.gov and may be reviewed and copied at 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.
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities, and information regarding how
the fund voted these proxies for the 12-month period ended June 30, 2005, is
available at http://www.dreyfus.com and on the SEC's website at
http://www.sec.gov. The description of the policies and procedures is
also available without charge, upon request, by calling 1-800-645-6561.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE
GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Dreyfus Founders Funds are managed by Founders Asset Management LLC.
Founders and Founders Funds are registered trademarks of Founders
Asset Management LLC.
[LION GRAPHIC]
(C)2006 Founders Asset Management LLC 0275AR1205
<Page>
Dreyfus Founders
Growth Fund
ANNUAL REPORT December 31, 2005
[LION GRAPHIC]
YOU, YOUR ADVISOR AND
(R) [DREYFUS LOGO]
A MELLON FINANCIAL COMPANY (SM)
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 10
Statement of Investments 12
Statement of Assets and Liabilities 17
Statement of Operations 19
Statements of Changes in Net Assets 20
Financial Highlights 21
Notes to Financial Statements 27
Report of Independent Registered Public Accounting Firm 36
Other Tax Information 37
Factors Considered in Renewing the Advisory Agreement 38
Your Board Representatives 46
</Table>
-----------------------------------------------------------
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and sign up for Dreyfus eCommunications. It's simple and
only takes a few minutes.
-----------------------------------------------------------
INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
manager only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-9 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC-INSURED - NOT BANK-GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF JOHN B. JARES]
A DISCUSSION WITH PORTFOLIO MANAGER JOHN B. JARES, CFA, REGARDING FUND
PERFORMANCE FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2005.
ECONOMIC COUNTERBALANCE
2005 was a year of robust economic and corporate profit growth. Employment
levels improved, the housing market remained resilient, and consumer spending
continued to advance at a steady pace. However, the year also saw the Federal
Reserve raising the federal funds rate to end the period at 4.25%, and
skyrocketing energy prices reaching record highs.
The stock market oscillated slightly for most of the period. Fortunately, a
fourth quarter rally enabled the market to finish the calendar year in positive
territory.
STOCK SELECTION DROVE PERFORMANCE
The period saw no investment strategy shifts in the Fund, as we continued to
search for growth-stock opportunities using a fundamental-based, bottom-up
approach. We continued to explore investment theses and meet with company
management teams in an attempt to assemble the greatest growth potential for
Fund shareholders. This approach led to positive stock picking overall for the
period, although relative weightings partially offset this gain. For the
12-month period ended December 31, 2005, the Dreyfus Founders Growth Fund
underperformed its benchmark, the Russell 1000 Growth Index, which returned
5.26%.
[SIDENOTE]
"OUR INVESTMENT APPROACH LED TO POSITIVE STOCK PICKING OVERALL FOR THE PERIOD,
ALTHOUGH RELATIVE WEIGHTINGS PARTIALLY OFFSET THIS GAIN."
3
<Page>
IT, INDUSTRIALS AND CONSUMER STAPLES BOOSTED FUND PERFORMANCE
The Fund's relative performance was driven by strong selection of investments in
the information technology (IT) sector, the transportation industry within the
industrials sector, and the consumer staples sector.
The information technology sector offered numerous growth opportunities.
Driven by the popularity of the company's line of iPod digital music players and
the increased popularity of its Macintosh computers, APPLE COMPUTER, INC. had a
triple-digit stock price increase for the period. Broadcom Corporation saw
excellent demand for its semiconductors used in wireless networking,
communications and industrial applications. AUTODESK, INC., driven by demand and
market share for its CAD/CAM software products, combined with improving
operating margins, experienced better-than-expected revenue and earnings growth
rates. SanDisk, inc. and ADOBE SYSTEMS, INC. were other notable strong
performers in the information technology sector.
Railroad and airline companies within the industrials sector's
transportation industry began to see pricing power, partially driven by the
ability to pass along higher fuel costs, but primarily as a result of controlled
capacity growth. UNION PACIFIC CORPORATION had a double-digit stock price
increase during the period. AMR CORPORATION, parent company of American
Airlines, experienced better-than-expected financial returns due to improved
pricing driven by industry consolidation and the company management's ability to
reign in costs. US AIRWAYS GROUP, INC. saw improved pricing due to industry
consolidation and its merger with America West Airlines, allowing for the
elimination of duplicate costs.
[SIDENOTE]
SECTORS BENEFITING THE FUND
Information Technology
Industrials
Consumer Staples
4
<Page>
Consumer staples holding Gillette Company was acquired during the period by
PROCTER & GAMBLE COMPANY for a significant premium, which aided the Fund's
return. Healthcare issue GENENTECH, INC. had solid revenue and earnings growth
driven by the sales of its cancer treatment, Avastin(R).
UNDERWEIGHT POSITIONS DRAINED RELATIVE PERFORMANCE
Relative underweight positions and poor stock picking in both the healthcare and
energy sectors produced the largest drain on the Fund's relative performance.
One stock that underperformed for the Fund during the period was healthcare
issue MGI PHARMA, INC. Uneven sales trends for the company's chemotherapy drug,
Aloxi(R), paired with a FDA approval delay for one of the company's new drugs
drove the stock price lower.
In the telecommunications services sector, weak individual performers such
as Avaya, Inc. hampered the Fund. A difficult integration of a German
acquisition combined with volatile growth trends led to Avaya's sub-par
performance. The Fund exited its position in this company during the period.
LARGEST EQUITY HOLDINGS (ticker symbol)
<Table>
1. MICROSOFT CORPORATION (MSFT) 5.24%
2. GENERAL ELECTRIC COMPANY (GE) 3.32%
3. GOOGLE, INC. CLASS A (GOOG) 3.24%
4. COLGATE-PALMOLIVE COMPANY (CL) 2.52%
5. ACCENTURE LIMITED CLASS A (ACN) 2.15%
6. LINEAR TECHNOLOGY CORPORATION (LLTC) 2.05%
7. JOHNSON & JOHNSON (JNJ) 2.04%
8. APPLE COMPUTER, INC. (AAPL) 1.91%
9. COMCAST CORPORATION SPECIAL CLASS A (CMCSK) 1.90%
10. PROCTER & GAMBLE COMPANY (PG) 1.87%
</Table>
Portfolio holdings are subject to change, and should not be construed as a
recommendation of any security.
5
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 1-800-525-2440 TO OBTAIN THE MOST
RECENT MONTH-END PERFORMANCE DATA.
[CHART TO COME]
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders Growth Fund on 12/31/95 to a $10,000 investment made in unmanaged
securities indexes on that date. The Fund's performance assumes the reinvestment
of dividends and capital gain distributions, but does not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or redemption of
Fund shares. The Fund offers multiple classes of shares. Performance shown is
for Class F, which is open only to grandfathered investors. The Fund's
performance in the graph takes into account all applicable Class F fees and
expenses. THESE FIGURES DO NOT REFLECT THE MAXIMUM SALES CHARGES APPLICABLE TO
CLASS A, B, C, OR T SHARES OF THE FUND. FOR THESE SHARE CLASSES, APPLYING THESE
CHARGES WILL RESULT IN LOWER RETURNS FOR INVESTORS.
The Russell 1000 Growth Index is an unmanaged index that measures the
performance of those Russell 1000 companies with higher price-to-book ratios and
higher forecasted growth values. The Standard & Poor's (S&P) 500 Index is
designed to be representative of the U.S. equities market and consists of 500
leading companies in leading industries of the U.S. economy. The total return
figures cited for these indexes assume change in security prices and
reinvestment of dividends, but do not reflect the costs of managing a mutual
fund. In future annual reports, the Fund's performance will no longer be
compared to the S&P 500 Index, as the Russell 1000 Growth Index is more
reflective of the Fund's growth style of investing. Further information related
to Fund performance is contained elsewhere in this report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (INCEPTION DATE) YEAR YEARS YEARS INCEPTION
- ----------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) (1.98%) (5.95%) -- (9.90%)
Without sales charge 3.98% (4.82%) -- (9.00%)
B SHARES (12/31/99)
With redemption* (0.84%) (5.92%) -- (9.80%)
Without redemption 3.16% (5.54%) -- (9.67%)
C SHARES (12/31/99)
With redemption** 2.16% (5.57%) -- (9.69%)
Without redemption 3.16% (5.57%) -- (9.69%)
F SHARES (1/5/62) 4.08% (4.73%) 3.90% N/A
R SHARES (12/31/99) 4.54% (4.50%) -- (8.70%)
T SHARES (12/31/99)
With sales charge (4.50%) (1.50%) (6.47%) -- (10.34%)
Without sales charge 3.15% (5.61%) -- (9.64%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, and
adjustments for financial statement purposes. Part of the Fund's historical
performance is due to amounts received from class action settlements regarding
prior Fund holdings. There is no guarantee that these settlement distributions
will occur in the future or have a similar impact on performance.
* The maximum contingent deferred sales charge for Class B shares is 4% and is
reduced to 0% after six years, at which time the Class B shares convert to
Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
SELECT IT AND CONSUMER STOCKS CREATED A NEGATIVE IMPACT
Some of the Fund's best-performing stocks and some of its worst performers were
found in the information technology sector. Select IT names that were a drag on
the Fund's relative return included MAXIM INTEGRATED PRODUCTS, INC. and SYMANTEC
CORPORATION. The favorable demand and growth trends for Maxim's analog
semiconductor offerings were offset by concerns over the company's deteriorating
gross margins. Symantec declined as a result of the acquisition of VERITAS
Software Corporation, which was seen as dilutive to the company's revenue and
earnings growth rates. This, combined with the fear that consumer demand for
anti-virus software was waning, caused a drop in the company's stock price.
Xilinx, Inc., a manufacturer of digital programmable logic devices (PLD), and
International Business Machines Corporation also declined during the period.
Select consumer discretionary stocks did not fare well either. COMCAST
CORPORATION experienced a slow ramp-up into its cable telephony offering. This,
paired with sluggish trends in video services, resulted in the cable
[CHART]
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
Information Technology 31.41%
Consumer Discretionary 19.81%
Healthcare 12.65%
Industrials 10.07%
Financials 9.82%
Consumer Staples 9.00%
Telecommunications Services 1.68%
Materials 1.65%
Energy 1.32%
Other 2.59%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio manager
and are subject to change at any time, based on market and other conditions, and
should not be construed as a recommendation of any specific security.
[SIDENOTE]
SECTORS DETRACTING FROM THE FUND
Healthcare
Energy
Telecommunications Services
8
<Page>
company's stock losing substantial ground during the period. WAL-MART STORES,
INC. experienced sluggish sales trends as rising energy prices crimped the
spending power of bargain-conscious consumers, its target market. DREAMWORKS
ANIMATION SKG, INC. had a revenue shortfall from DVD sales of its follow-up
blockbuster movie, SHREK 2. In addition, higher spending levels resulted in
materially lower earnings-per-share results than were originally expected by
Wall Street analysts. The Fund, however, retained a position in all three stocks
at the end of the period as we believed the companies' respective growth
opportunities remained viable.
IN CONCLUSION
As we move into 2006, we will continue to monitor the Federal Reserve's actions
in seeking to contain inflation and how these may affect corporate profit
growth. In addition, we will continue to employ a bottom-up research approach to
selecting growth stocks that we believe have the potential to post superior
revenue and earnings growth.
/s/ John B. Jares
John B. Jares, CFA
Portfolio Manager
9
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
10
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- ---------------------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,038.61 $ 7.50
CLASS A HYPOTHETICAL 1,000.00 1,017.75 7.45
CLASS B ACTUAL 1,000.00 1,036.70 11.76
CLASS B HYPOTHETICAL 1,000.00 1,013.52 11.69
CLASS C ACTUAL 1,000.00 1,036.19 11.39
CLASS C HYPOTHETICAL 1,000.00 1,013.87 11.33
CLASS F ACTUAL 1,000.00 1,038.51 7.09
CLASS F HYPOTHETICAL 1,000.00 1,018.16 7.04
CLASS R ACTUAL 1,000.00 1,040.18 5.25
CLASS R HYPOTHETICAL 1,000.00 1,020.00 5.21
CLASS T ACTUAL 1,000.00 1,036.04 11.75
CLASS T HYPOTHETICAL 1,000.00 1,013.52 11.69
</Table>
*Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- ----------------------------------------------------------------
CLASS A 1.46%
CLASS B 2.29%
CLASS C 2.22%
CLASS F 1.38%
CLASS R 1.02%
CLASS T 2.29%
</Table>
11
<Page>
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (DOMESTIC)--98.0%
AIRLINES--2.2%
234,275 AMR Corporation* $ 5,207,906
71,025 US Airways Group, Inc.* 2,637,869
--------------
7,845,775
--------------
APPLICATION SOFTWARE--1.2%
100,575 Autodesk, Inc. 4,319,696
--------------
ASSET MANAGEMENT & CUSTODY BANKS--1.8%
84,725 Northern Trust Corporation 4,390,450
34,050 State Street Corporation 1,887,732
--------------
6,278,182
--------------
AUTOMOTIVE RETAIL--1.2%
94,475 Advance Auto Parts, Inc.* 4,105,884
--------------
BIOTECHNOLOGY--3.8%
35,675 Amgen, Inc.* 2,813,331
57,375 Genentech, Inc.* 5,307,188
26,100 Genzyme Corporation* 1,847,358
102,400 ImClone Systems, Inc.* 3,506,176
--------------
13,474,053
--------------
BROADCASTING & CABLE TV--2.2%
258,508 Comcast Corporation Special Class A* 6,641,071
35,700 XM Satellite Radio Holdings, Inc. Class A* 973,896
--------------
7,614,967
--------------
CASINOS & GAMING--1.0%
29,375 Harrah's Entertainment, Inc. 2,094,144
41,550 International Game Technology 1,278,909
--------------
3,373,053
--------------
COMMUNICATIONS EQUIPMENT--1.0%
150,475 Motorola, Inc. 3,399,230
--------------
COMPUTER & ELECTRONICS RETAIL--1.0%
81,337 Best Buy Company, Inc. 3,536,533
--------------
COMPUTER HARDWARE--3.0%
92,850 Apple Computer, Inc.* 6,674,987
133,575 Hewlett-Packard Company 3,824,252
--------------
10,499,239
--------------
COMPUTER STORAGE & PERIPHERALS--1.4%
358,400 EMC Corporation* 4,881,408
--------------
CONSUMER ELECTRONICS--0.5%
19,300 Harman International Industries, Inc. 1,888,505
--------------
CONSUMER FINANCE--1.4%
89,000 SLM Corporation 4,903,010
--------------
DATA PROCESSING & OUTSOURCED SERVICES--0.8%
62,525 Automatic Data Processing, Inc. 2,869,272
--------------
</Table>
12
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- --------------------------------------------------------------------------------
DEPARTMENT STORES--1.8%
33,625 J.C. Penney Company, Inc. $ 1,869,550
65,450 Kohl's Corporation* 3,180,870
33,925 Nordstrom, Inc. 1,268,795
--------------
6,319,215
--------------
ELECTRICAL COMPONENTS & EQUIPMENT--1.6%
73,550 Emerson Electric Company 5,494,185
--------------
ELECTRONIC EQUIPMENT MANUFACTURERS--0.9%
92,650 Agilent Technologies, Inc.* 3,084,319
--------------
EXCHANGE TRADED FUNDS--3.2%
113,825 iShares Russell 1000 Growth Index Fund 5,810,766
60,850 Nasdaq 100 Index Tracking Stock 2,459,557
21,200 SPDR Trust Series 1 2,637,916
--------------
10,908,239
--------------
GENERAL MERCHANDISE STORES--1.6%
153,825 Family Dollar Stores, Inc. 3,813,322
33,250 Target Corporation 1,827,753
--------------
5,641,075
--------------
HEALTHCARE EQUIPMENT--0.8%
48,825 Medtronic, Inc. 2,810,855
--------------
HEALTHCARE SERVICES--0.7%
42,025 Omnicare, Inc. 2,404,671
--------------
HEALTHCARE SUPPLIES--0.5%
34,875 DENTSPLY International, Inc. 1,872,439
--------------
HOME ENTERTAINMENT SOFTWARE--0.9%
56,825 Electronic Arts, Inc.* 2,972,516
--------------
HOME IMPROVEMENT RETAIL--1.5%
133,350 Home Depot, Inc. 5,398,008
--------------
HOTELS, RESORTS & CRUISE LINES--0.8%
50,975 Carnival Corporation 2,725,633
--------------
HOUSEHOLD PRODUCTS--5.6%
76,950 Clorox Company 4,377,686
160,825 Colgate-Palmolive Company 8,821,251
113,221 Procter & Gamble Company 6,553,231
--------------
19,752,168
--------------
HYPERMARKETS & SUPER CENTERS--0.5%
39,900 Wal-Mart Stores, Inc. 1,867,320
--------------
INDUSTRIAL CONGLOMERATES--3.3%
331,434 General Electric Company 11,616,762
--------------
INTEGRATED OIL & GAS--0.3%
19,200 ConocoPhillips 1,117,056
--------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
13
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- --------------------------------------------------------------------------------
INTEGRATED TELECOMMUNICATION SERVICES--1.7%
34,025 Alltel Corporation $ 2,146,978
160,225 Sprint Nextel Corporation 3,742,856
--------------
5,889,834
--------------
INTERNET SOFTWARE & SERVICES--5.0%
27,325 Google, Inc. Class A* 11,336,050
154,625 Yahoo!, Inc.* 6,058,208
--------------
17,394,258
--------------
INVESTMENT BANKING & BROKERAGE--2.9%
322,450 Charles Schwab Corporation 4,730,342
28,150 Goldman Sachs Group, Inc. 3,595,037
30,675 Morgan Stanley 1,740,500
--------------
10,065,879
--------------
IT CONSULTING & OTHER SERVICES--2.2%
260,800 Accenture Limited Class A 7,529,296
--------------
LEISURE FACILITIES--1.8%
139,769 Royal Caribbean Cruises Limited 6,297,991
--------------
MANAGED HEALTHCARE--0.7%
24,000 Aetna, Inc. 2,263,440
--------------
MOVIES & ENTERTAINMENT--4.9%
68,500 DreamWorks Animation SKG, Inc.* 1,682,360
101,650 Pixar, Inc.* 5,358,988
356,475 Time Warner, Inc. 6,216,924
116,270 Viacom, Inc. Class B 3,790,452
--------------
17,048,724
--------------
MULTI-LINE INSURANCE--0.5%
25,049 American International Group, Inc. 1,709,093
--------------
OIL & GAS EQUIPMENT & SERVICES--1.0%
36,000 Schlumberger Limited 3,497,400
--------------
OTHER DIVERSIFIED FINANCIAL SERVICES--1.1%
98,525 JPMorgan Chase & Company 3,910,457
--------------
PACKAGED FOODS & MEATS--0.8%
47,450 Hershey Foods Corporation 2,621,613
--------------
PERSONAL PRODUCTS--0.6%
60,100 Estee Lauder Companies, Inc. Class A 2,012,148
--------------
PHARMACEUTICALS--6.1%
48,000 Covance, Inc.* 2,330,400
26,700 Eli Lilly and Company 1,510,953
118,700 Johnson & Johnson 7,133,870
174,475 MGI Pharma, Inc.* 2,993,991
73,594 Pfizer, Inc. 1,716,212
125,700 Wyeth 5,790,999
--------------
21,476,425
--------------
PROPERTY & CASUALTY INSURANCE--1.2%
77,150 Allstate Corporation 4,171,501
--------------
</Table>
14
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- --------------------------------------------------------------------------------
RAILROADS--1.8%
78,575 Union Pacific Corporation $ 6,326,073
--------------
SEMICONDUCTORS--4.5%
174,134 Intel Corporation 4,346,385
198,800 Linear Technology Corporation 7,170,716
118,950 Maxim Integrated Products, Inc. 4,310,748
--------------
15,827,849
--------------
SOFT DRINKS--1.5%
89,025 PepsiCo, Inc. 5,259,597
--------------
SPECIALTY CHEMICALS--1.0%
56,550 Sigma-Aldrich Corporation 3,579,050
--------------
SPECIALTY STORES--1.5%
67,950 Office Depot, Inc.* 2,133,630
85,475 Tiffany & Company 3,272,838
--------------
5,406,468
--------------
STEEL--0.6%
32,725 Nucor Corporation 2,183,412
--------------
SYSTEMS SOFTWARE--8.0%
168,700 Adobe Systems, Inc. 6,235,152
701,376 Microsoft Corporation 18,340,982
108,200 Oracle Corporation* 1,321,122
125,725 Symantec Corporation* 2,200,188
--------------
28,097,444
--------------
THRIFTS & MORTGAGE FINANCE--1.0%
81,350 The PMI Group, Inc. 3,341,045
--------------
TRADING COMPANIES & DISTRIBUTORS--1.1%
55,675 W.W. Grainger, Inc. 3,958,493
--------------
TOTAL COMMON STOCKS (DOMESTIC)
(COST--$320,921,735) 342,840,758
--------------
COMMON STOCKS (FOREIGN)--2.6%
APPLICATION SOFTWARE--0.5%
38,825 SAP AG Sponsored ADR (GE) 1,749,843
--------------
SEMICONDUCTOR EQUIPMENT--1.3%
226,900 ASM Lithography Holding NV NY Shares (NE)* 4,556,152
--------------
SEMICONDUCTORS--0.8%
166,600 ATI Technologies, Inc. (CA)* 2,830,534
--------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$7,899,934) 9,136,529
--------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- --------------------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--0.7%
SPECIAL PURPOSE ENTITY--0.7%
$ 2,600,000 CAFCO LLC
4.12% 1/3/06~ $ 2,599,405
--------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$2,599,405) 2,599,405
--------------
TOTAL INVESTMENTS--101.3%
(TOTAL COST--$331,421,074) 354,576,692
--------------
OTHER ASSETS AND LIABILITIES--(1.3%) (4,468,736)
--------------
NET ASSETS--100.0% $ 350,107,956
==============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
* NON-INCOME PRODUCING.
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$2,599,405, OR 0.7%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
ADR - AMERICAN DEPOSITARY RECEIPT
SPDR - STANDARD AND POOR'S DEPOSITARY RECEIPT
CA - CANADA
GE - GERMANY
NE - NETHERLANDS
SEE NOTES TO FINANCIAL STATEMENTS.
16
<Page>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 331,421,074
---------------
Investment securities, at market 354,576,692
Cash 449,327
Receivables:
Investment securities sold 34,841,034
Capital shares sold 225,775
Dividends and interest 375,793
Other assets 21,369
---------------
Total Assets 390,489,990
---------------
LIABILITIES
Payables and other accrued liabilities:
Investment securities purchased 38,777,279
Capital shares redeemed 1,015,169
Advisory fees 234,401
Shareholder servicing fees 32,239
Accounting fees 18,453
Distribution fees 101,952
Transfer agency fees 33,170
Custodian fees 2,076
Directors' deferred compensation 21,369
Other 145,926
---------------
Total Liabilities 40,382,034
---------------
Net Assets $ 350,107,956
===============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 1,021,281,32
Accumulated net investment loss (107,913)
Accumulated net realized loss from security transactions (694,221,070)
Net unrealized appreciation on investments 23,155,618
---------------
Total $ 350,107,956
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
<Table>
CLASS A
Net Assets $ 5,505,440
Shares Outstanding 504,634
Net Asset Value, Redemption Price Per Share $ 10.91
Maximum offering price per share
(net asset value plus sales charge of 5.75% of
offering price) $ 11.58
CLASS B
Net Assets $ 9,603,001
Shares Outstanding 918,489
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales
charge) Per Share $ 10.46
CLASS C
Net Assets $ 1,361,755
Shares Outstanding 130,325
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales
charge) Per Share $ 10.45
CLASS F
Net Assets $ 331,585,062
Shares Outstanding 30,221,128
Net Asset Value, Offering and Redemption Price Per Share $ 10.97
CLASS R
Net Assets $ 1,982,182
Shares Outstanding 178,342
Net Asset Value, Offering and Redemption Price Per Share $ 11.11
CLASS T
Net Assets $ 70,516
Shares Outstanding 6,721
Net Asset Value, Redemption Price Per Share $ 10.49
Maximum offering price per share
(net asset value plus sales charge of 4.50% of
offering price) $ 10.98
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<Page>
STATEMENT OF OPERATIONS
For the year ended December 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 4,099,887
Interest 500,132
Foreign taxes withheld (1,220)
---------------
Total Investment Income 4,598,799
---------------
EXPENSES
Advisory fees--Note 2 2,929,053
Shareholder servicing fees--Note 2 401,247
Accounting fees--Note 2 231,776
Distribution fees--Note 2 987,452
Transfer agency fees--Note 2 317,636
Registration fees 40,415
Postage and mailing expenses 71,040
Custodian fees and expenses--Note 2 19,507
Printing expenses 102,585
Legal and audit fees 128,635
Directors' fees and expenses--Note 2 77,450
Other expenses 110,244
---------------
Total Expenses 5,417,040
Earnings Credits (19,507)
Reimbursed/Waived Expenses (12,315)
Expense Offset to Broker Commissions (13,288)
---------------
Net Expenses 5,371,930
---------------
Net Investment Loss (773,131)
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITY TRANSACTIONS
Net Realized Gain on Security Transactions 38,521,459
Net Change in Unrealized Appreciation/Depreciation
of Investments (24,451,397)
---------------
Net Realized and Unrealized Gain 14,070,062
---------------
Net Increase in Net Assets Resulting from Operations $ 13,296,931
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2005 2004
OPERATIONS
Net Investment Income (Loss) $ (773,131) $ 1,291,564
Net Realized Gain on Security Transactions 38,521,459 52,095,404
Net Change in Unrealized
Appreciation/Depreciation of Investments (24,451,397) (21,249,162)
---------------- ----------------
Net Increase in Net Assets Resulting
from Operations 13,296,931 32,137,806
---------------- ----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From Net Investment Income
Class A (19,905) 0
Class F (1,261,946) 0
Class R (13,251) 0
---------------- ----------------
Net Decrease from Dividends and Distributions (1,295,102) 0
---------------- ----------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A (1,032,110) (520,803)
Class B (3,049,516) (2,029,596)
Class C (552,479) (15,393)
Class F (86,019,465) (108,174,647)
Class R (9,087,141) 967,838
Class T (31,280) (130,287)
---------------- ----------------
Net Decrease from Capital Share Transactions (99,771,991) (109,902,888)
---------------- ----------------
Net Decrease in Net Assets (87,770,162) (77,765,082)
---------------- ----------------
NET ASSETS
Beginning of Year $ 437,878,118 $ 515,643,200
---------------- ----------------
End of Year $ 350,107,956 $ 437,878,118
---------------- ----------------
Undistributed (Accumulated) Net
Investment Income (Loss) $ (107,913) $ 1,178,792
================ ================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
---------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 10.53 $ 9.79 $ 7.46 $ 10.53 $ 14.02
- --------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.03)(a) 0.02(a) (0.06) (0.06) (0.05)
Net realized and unrealized gains
(losses) on securities 0.45 0.72 2.39 (3.01) (3.44)
---------------------------------------------------------------
Total from investment operations 0.42 0.74 2.33 (3.07) (3.49)
- --------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.04) 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
---------------------------------------------------------------
Total distributions (0.04) 0.00 0.00 0.00 0.00
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 10.91 $ 10.53 $ 9.79 $ 7.46 $ 10.53
===============================================================
TOTAL RETURN(b) 3.98% 7.56% 31.23% (29.15%) (24.89%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 5,505 $ 6,356 $ 6,452 $ 5,149 $ 7,795
- --------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.49% 1.42% 1.66% 1.48% 1.21%
Expenses with reimbursements, earnings credits
and brokerage offsets 1.47% 1.41% 1.66% 1.48% 1.20%
Net investment income (loss) (0.28%) 0.22% (0.59%) (0.56%) (0.47%)
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 107% 124% 139% 152%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 10.14 $ 9.50 $ 7.30 $ 10.38 $ 13.91
----------------------------------------------------------------
Income from investment operations:
Net investment loss (0.11)(a) (0.06)(a) (0.17) (0.18) (0.13)
Net realized and unrealized gains
(losses) on securities 0.43 0.70 2.37 (2.90) (3.40)
----------------------------------------------------------------
Total from investment operations 0.32 0.64 2.20 (3.08) (3.53)
- ---------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 10.46 $ 10.14 $ 9.50 $ 7.30 $ 10.38
================================================================
TOTAL RETURN(b) 3.16% 6.74% 30.14% (29.67%) (25.38%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 9,603 $ 12,406 $ 13,664 $ 11,603 $ 19,829
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(c) 2.31% 2.22% 2.48% 2.22% 1.93%
Expenses with reimbursements, earnings
credits and brokerage offsets 2.30% 2.22% 2.48% 2.22% 1.92%
Net investment loss (1.11%) (0.58%) (1.41%) (1.30%) (1.20%)
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 107% 124% 139% 152%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
22
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 10.13 $ 9.48 $ 7.29 $ 10.36 $ 13.92
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.10)(a) (0.05)(a) (0.19) (0.26) (0.18)
Net realized and unrealized
gains (losses) on securities 0.42 0.70 2.38 (2.81) (3.38)
----------------------------------------------------------------
Total from investment operations 0.32 0.65 2.19 (3.07) (3.56)
- ---------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 10.45 $ 10.13 $ 9.48 $ 7.29 $ 10.36
================================================================
TOTAL RETURN(b) 3.16% 6.86% 30.04% (29.63%) (25.58%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,362 $ 1,881 $ 1,774 $ 1,528 $ 2,979
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(c) 2.24% 2.16% 2.49% 2.37% 2.11%
Expenses with reimbursements, earnings
credits and brokerage offsets 2.22% 2.16% 2.49% 2.37% 2.10%
Net investment loss (1.03%) (0.49%) (1.42%) (1.46%) (1.38%)
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 107% 124% 139% 152%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 10.58 $ 9.83 $ 7.48 $ 10.53 $ 14.03
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.02)(a) 0.03(a) (0.17) (0.22) (0.15)
Net realized and unrealized gains
(losses) on securities 0.45 0.72 2.52 (2.83) (3.35)
----------------------------------------------------------------
Total from investment operations 0.43 0.75 2.35 (3.05) (3.50)
- ---------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.04) 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------
Total distributions (0.04) 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 10.97 $ 10.58 $ 9.83 $ 7.48 $ 10.53
================================================================
TOTAL RETURN 4.08% 7.63% 31.42% (28.96%) (24.95%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 331,585 $ 406,550 $ 484,742 $ 443,307 $ 865,425
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(b) 1.38% 1.33% 1.47% 1.38% 1.31%
Expenses with reimbursements, earnings
credits and brokerage offsets 1.37% 1.33% 1.47% 1.37% 1.30%
Net investment income (loss) (0.18%) 0.30% (0.41%) (0.46%) (0.58%)
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 120% 107% 124% 139% 152%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
24
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 10.69 $ 9.89 $ 7.50 $ 10.57 $ 14.07
- ------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.02(a) 0.07 0.01 0.01 (0.02)
Net realized and unrealized gains
(losses) on securities 0.47 0.73 2.38 (3.08) (3.48)
-------------------------------------------------------------
Total from investment operations 0.49 0.80 2.39 (3.07) (3.50)
- ------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.07) 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
-------------------------------------------------------------
Total distributions (0.07) 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 11.11 $ 10.69 $ 9.89 $ 7.50 $ 10.57
=============================================================
TOTAL RETURN 4.54% 8.09% 31.87% (29.04%) (24.88%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,982 $ 10,584 $ 8,792 $ 4,333 $ 2,023
- ------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(b) 1.05% 1.03% 1.13% 1.30% 1.46%
Expenses with reimbursements, earnings
credits and brokerage offsets 1.04% 1.03% 1.13% 1.30% 1.46%
Net investment income (loss) 0.15% 0.65% (0.04%) (0.34%) (0.72%)
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 120% 107% 124% 139% 152%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 10.17 $ 9.48 $ 7.27 $ 10.38 $ 14.00
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.10)(a) (0.02)(a) (0.30) (0.56) (0.19)
Net realized and unrealized gains
(losses) on securities 0.42 0.71 2.51 (2.55) (3.43)
----------------------------------------------------------------
Total from investment operations 0.32 0.69 2.21 (3.11) (3.62)
- ---------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 10.49 $ 10.17 $ 9.48 $ 7.27 $ 10.38
================================================================
TOTAL RETURN(b) 3.15% 7.28% 30.40% (29.96%) (25.86%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 71 $ 100 $ 220 $ 208 $ 621
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(c) 2.21% 1.79% 2.22% 2.78% 2.56%
Expenses with reimbursements, earnings
credits and brokerage offsets 2.20% 1.79% 2.22% 2.78% 2.55%
Net investment loss (1.01%) (0.17%) (1.15%) (1.89%) (1.83%)
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 107% 124% 139% 152%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<Page>
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders Growth Fund (the "Fund"). The Fund offers Class A,
Class B, Class C, Class F, Class R and Class T shares. Class A and Class T
shares are subject to a sales charge imposed at the time of purchase, Class B
shares are subject to a contingent deferred sales charge ("CDSC") imposed on
Class B shares redeemed within six years of purchase, Class C shares are subject
to a CDSC imposed on Class C shares redeemed within one year of purchase and
Class F and Class R shares are sold at net asset value per share (with Class R
shares sold only to eligible institutional investors). Other differences between
the classes include services offered to and the expenses borne by each Class.
The following significant accounting policies have been consistently followed by
the Fund in the preparation of its financial statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
27
<Page>
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair value as determined in good faith by the Company's board of directors
or pursuant to procedures approved by the board of directors. These situations
may include instances where an event occurs after the close of the market on
which a security is traded but before the Fund calculates its net asset value,
and it is determined that the event has materially affected the value of the
security. Fair value of foreign equity securities may be determined with the
assistance of a pricing service using correlations between the movement of
prices of foreign securities and indexes of domestic securities and other
appropriate indicators, such as closing market prices of relevant ADRs and
futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund may invest at least a
portion of its assets in foreign securities. Foreign securities carry more risk
than U.S. securities, such as political and currency risks. In the event the
Fund executes a foreign security transaction, the Fund may enter into a foreign
currency contract to settle the foreign security transaction. The Fund could be
exposed to risk if counterparties are unable to meet the terms of the contracts
or if the value of the currency changes unfavorably to the U.S. dollar. The
resultant foreign currency gain or loss from the contract is recorded as foreign
currency gain or loss and is presented as such in the Statement of Operations.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each
business day. Purchases and sales of investment securities and income and
expense items denominated in foreign currencies are translated into U.S. dollar
amounts on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net unrealized gain or loss from investments and foreign
currency translations on the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar
28
<Page>
equivalent of the amounts actually received or paid. Net unrealized appreciation
or depreciation on investments and foreign currency translation arises from
changes in the values of assets and liabilities, including investments in
securities held at the date of the financial statements, resulting from changes
in the exchange rates and changes in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) and from net realized capital gains (if any)
annually. Dividends and distributions, which are determined in accordance with
income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
29
<Page>
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
Financial Corporation, a publicly-owned financial services company which
provides a comprehensive range of financial products and services in domestic
and selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
1.00% of the first $30 million of net assets, 0.75% of the next $270 million of
net assets, 0.70% of the next $200 million of net assets and 0.65% of net assets
in excess of $500 million.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $356,535 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $140,595 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $12.58 to $13.36, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency fees, including both the per account fees paid to
DTI and out-of-pocket charges, during the year ended December 31, 2005 were as
follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
----------------------------------------------------------------
Class A $ 13,901
Class B $ 33,685
Class C $ 3,729
Class R $ 5,712
Class T $ 604
</Table>
30
<Page>
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the processing of shareholder transactions in the Funds.
During the year ended December 31, 2005, the Fund was charged $9,532 for cash
management fees, which are included in the out-of-pocket transfer agency charges
above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $119,410 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $896,642 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
------------------------------------------------------------------
Class A N/A $ 14,302
Class B $ 79,219 $ 26,406
Class C $ 11,380 $ 3,793
Class T $ 211 $ 211
</Table>
During the year ended December 31, 2005, DSC retained $1,062 and $9 in sales
commissions from the sales of Class A and Class T shares, respectively. DSC also
retained $34,881 and $151 of contingent deferred sales charges relating to
redemptions of Class B and Class C shares, respectively.
31
<Page>
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance monitoring, regulatory and shareholder reporting, as well as related
facilities, equipment and clerical help. The fee is computed at the annual rate
of 0.06% of the average daily net assets of the Fund on the first $500 million,
0.04% of the average daily net assets of the Fund on the next $500 million and
0.02% of the average daily net assets of the Fund in excess of $1 billion, plus
reasonable out-of-pocket expenses. Founders has contractually agreed in writing
to waive any fees received for these services to the extent they exceed
Founders' costs in providing the services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits in the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
---------------------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $12,315, which reduced the amount paid to
Mellon Bank to $7,192.
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of one or more of the Funds. The amount paid to the director under the
plan will be determined based upon the performance of the selected Funds. The
current value of these amounts is included in Other Assets and Directors'
Deferred Compensation on the Statement of Assets and Liabilities. Changes in
market value are included in the Directors' fees and expenses and the net change
in unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally
32
<Page>
accepted in the United States of America. These differences are due to differing
treatments for items such as deferral of wash sale losses, deferred
compensation, net operating losses and capital loss carryovers. Permanent
differences identified during the year ended December 31, 2005 have been
reclassified among the components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
-------------------------------------------------------------
$ 781,528 $ 5,945 $ (787,473)
</Table>
The tax character of distributions paid during 2005 and 2004 was as follows:
<Table>
<Caption>
2005 2004
--------------- -------------
DISTRIBUTIONS PAID FROM:
Ordinary Income $ 1,295,102 $ 0
Long-Term Capital Gain $ 0 $ 0
--------------- -------------
$ 1,295,102 $ 0
=============== =============
</Table>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of December 31, 2005, represent capital loss carryovers that may be
available to offset future realized capital gains and thereby reduce future
taxable gains distributions. Post-October 31 foreign currency losses noted
below, if any, may be used to offset future net investment income and thereby
reduce future ordinary income distributions. Net capital loss carryovers
utilized during 2005 by the Fund amounted to $35,361,125. Accumulated capital
losses as of December 31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
-------------------------------------------
2009 $ 481,174,758
2010 $ 209,975,954
-------------
$ 691,150,712
=============
</Table>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The
33
<Page>
primary difference between book and tax appreciation or depreciation is wash
sale loss deferrals.
<Table>
Post-October Capital Loss Deferral $ (974,792)
Other Book/Tax Differences $ (107,912)
Federal Tax Cost $ 333,516,64
Gross Tax Appreciation of Investments $ 28,561,273
Gross Tax Depreciation of Investments $ (7,501,222)
Net Tax Appreciation $ 21,060,051
</Table>
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 750 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 56,086 $ 588,334 105,906 $ 1,056,250
Dividends or Distributions Reinvested 1,577 $ 17,366 0 $ 0
Redeemed (156,471) $ (1,637,810) (161,536) $ (1,577,053)
----------------------------------------------------------------
Net Decrease (98,808) $ (1,032,110) (55,630) $ (520,803)
================================================================
CLASS B
Sold 13,206 $ 130,840 30,813 $ 293,687
Redeemed (317,903) $ (3,180,356) (246,029) $ (2,323,283)
----------------------------------------------------------------
Net Decrease (304,697) $ (3,049,516) (215,216) $ (2,029,596)
================================================================
CLASS C
Sold 7,980 $ 80,497 38,619 $ 368,762
Redeemed (63,320) $ (632,976) (40,060) $ (384,155)
----------------------------------------------------------------
Net Decrease (55,340) $ (552,479) (1,441) $ (15,393)
================================================================
</Table>
34
<Page>
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS F
Sold 1,864,857 $ 19,477,463 2,973,891 $ 29,284,630
Dividends or Distributions Reinvested 107,799 $ 1,193,334 0 $ 0
Redeemed (10,161,82) $ (106,690,262) (13,900,368) $ (137,459,277)
----------------------------------------------------------------
Net Decrease (8,189,172) $ (86,019,456) (10,926,477) $ (108,174,647)
================================================================
CLASS R
Sold 323,673 $ 3,445,896 381,438 $ 3,739,499
Dividends or Distributions Reinvested 1,182 $ 13,251 0 $ 0
Redeemed (1,136,441) $ (12,546,288) (280,086) $ (2,771,661)
----------------------------------------------------------------
Net Increase (Decrease) (811,586) $ (9,087,141) 101,352 $ 967,838
================================================================
CLASS T
Sold 189 $ 1,893 136 $ 1,307
Redeemed (3,345) $ (33,173) (13,405) $ (131,594)
----------------------------------------------------------------
Net Decrease (3,156) $ (31,280) (13,269) $ (130,287)
================================================================
</Table>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $446,397,340 and $544,019,252, respectively.
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
35
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders Growth Fund (one
of the portfolios constituting Dreyfus Founders Funds, Inc., hereafter referred
to as the "Fund") at 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 Sates of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where securities purchased had not been received, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
36
<Page>
OTHER TAX INFORMATION
(UNAUDITED)
CORPORATE DIVIDENDS RECEIVED DEDUCTION
Dividends paid by the Fund from net investment income and distributions of net
realized short-term capital gains are, for federal tax purposes, taxable as
ordinary income to shareholders. Of the ordinary income distributions declared
for the year ended December 31, 2005, 100% qualified for the dividends received
deduction available to the Fund's corporate shareholders.
QUALIFIED DIVIDEND INCOME
For the year ended December 31, 2005, the Fund designated 100% of the ordinary
income distributions paid as qualified dividend income subject to reduced income
tax rates for taxpayers with taxable accounts.
37
<Page>
FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
38
<Page>
The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services being
provided to the Funds are satisfactory, as evidenced in part by the recent
performance records of the Funds, to which the directors gave significant
attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to the
Funds, but also recognize that Founders or its affiliates have provided the
highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
39
<Page>
small group of funds selected by Lipper and a larger universe of funds also
selected by Lipper. The Lipper materials further included graphs depicting each
Fund's Class F one-year and annualized performance results for two-, three-,
four-, five-, and ten-year periods, if applicable, in comparison to the Fund's
performance group and performance universe.
Growth Fund's performance for the one-year period ended December 31, 2004 placed
it in the third quintile of its Lipper performance group, with the Fund ranking
sixth out of 13 Lipper-selected "peer funds," and in the third quintile of its
Lipper large-cap growth fund performance universe, ranking 274th of 640 funds.
The directors noted that the Fund's longer-term performance rankings were
significantly better, with the Fund ranking in the first performance quintile of
its Lipper performance group and universe in calendar year 2003. The Fund's
three-year performance results ended December 31, 2004 placed it in the first
quintile of its respective Lipper performance group and in the second quintile
of its Lipper performance universe. The directors deemed these relative
performance results to be very satisfactory, and stressed the importance to
Founders of the need to seek to maintain a strong performance record.(1)
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance
difficulties, more recent performance results generally have shown
significant improvement;
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS DO NOT REFLECT THE FRONT-END SALES
CHARGES THAT APPLY TO OTHER SHARE CLASSES.
40
<Page>
Founders has focused its efforts upon improving the performance records of
the Funds and will continue to seek improvement; and
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing in
the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY FOUNDERS AND
ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, Growth Fund's
management fees ranked in the second best quintile of its Lipper competitive
expense group, with the Fund's fees the sixth lowest of 15 "peer funds." The
Fund's contractual management fees at a common asset level were determined by
Lipper to be lower than 10 of the 15 funds in its group. The Fund's management
fees were in the third quintile of its Lipper expense universe, placing 84th
lowest of 171 funds.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain
efficiencies in performing
41
<Page>
the portfolio management, trading and operational functions related to those
accounts (the directors recognized that in determining its profitability
from providing investment management and other services to the Funds,
Founders allocated its expenses between the Funds and other accounts in a
manner which was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment
services to any of the clients it advises, not just the Funds. The directors
recognized that Founders' profitability would be lower if it did not receive
research and brokerage services in connection with these brokerage
transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders' management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the
42
<Page>
investment advisory fees received by Founders. However, the directors noted that
Founders' profitability is expected to decline in 2005 as a result of declines
in Fund asset levels. The directors also considered the risks assumed by
Founders in providing management services to the Funds, including the risk that
the management agreement can be terminated by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of
investment advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially
fees which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than fees
arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in recognition of the quality service
which Founders has provided and continues to provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
43
<Page>
ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of scale if the assets of the Funds were to increase. Among other information,
the directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into increased
profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of an
increase in the assets of a particular Fund or a group of Funds would not be
passed along on a dollar-for-dollar basis to the shareholders of other Funds
that did not experience increases in their assets to points above their
breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is
consistent with its objective of sharing its economies of scale with the
Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
restrictions. The directors determined that Founders is dedicated to compliance
with all applicable rules and regulations and that the systems of controls which
are in place to ensure that the service providers to the Funds, including
Founders, and the Funds themselves, maintain strict adherence to the law are
excellent.
44
<Page>
OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years and that efforts are being and will continue to be
made to enhance such improvement and to maintain Fund expense ratios at
reasonable and competitive levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
45
<Page>
YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
46
<Page>
Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice
President--Compliance since 2002. Formerly, Founders' Manager of Compliance
(2000 to 2002) and Securities Compliance Examiner, Staff Accountant and Team
Leader for the U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
47
<Page>
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
DREYFUS FOUNDERS TRANSFER AGENT &
GROWTH FUND DIVIDEND DISBURSING AGENT
MANAGER Dreyfus Transfer, Inc.
200 Park Avenue
Founders Asset New York, NY 10166
Management LLC
210 University Boulevard DISTRIBUTOR
Suite 800
Denver, CO 80206 Dreyfus Service Corporation
200 Park Avenue
New York, NY 10166
- -------------------------------------------------------------------------------
TELEPHONE Call your financial representative or 1-800-554-4611
MAIL Dreyfus Founders Funds, Inc.
144 Glenn Curtiss Boulevard, Uniondale, NY 11556-0144
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The fund's Forms N-Q are available on the SEC's website at
http://www.sec.gov and may be reviewed and copied at 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.
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities, and information regarding how
the fund voted these proxies for the 12-month period ended June 30, 2005, is
available at http://www.dreyfus.com and on the SEC's website at
http://www.sec.gov. The description of the policies and procedures is
also available without charge, upon request, by calling 1-800-645-6561.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE
GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Dreyfus Founders Funds are managed by Founders Asset Management LLC.
Founders and Founders Funds are registered trademarks of Founders
Asset Management LLC.
[LION GRAPHIC]
(C)2006 Founders Asset Management LLC 0213AR1205
<Page>
Dreyfus Founders
International Equity Fund
ANNUAL REPORT December 31, 2005
[LION GRAPHIC]
YOU, YOUR ADVISOR AND
(R) [DREYFUS LOGO]
A MELLON FINANCIAL COMPANY (SM)
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 10
Statement of Investments 12
Statement of Assets and Liabilities 17
Statement of Operations 19
Statements of Changes in Net Assets 20
Financial Highlights 21
Notes to Financial Statements 27
Report of Independent Registered Public Accounting Firm 36
Other Tax Information 37
Factors Considered in Renewing the Advisory Agreement 38
Your Board Representatives 46
</Table>
-----------------------------------------------------------
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INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
managers only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-9 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC INSURED - NOT BANK GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF REMI J. BROWNE]
[PHOTO OF DANIEL B. LEVAN]
[PHOTO OF JEFFREY R. SULLIVAN]
A DISCUSSION WITH CO-PORTFOLIO MANAGERS REMI J. BROWNE, CFA, LEFT; DANIEL B.
LEVAN, CFA, CENTER; AND JEFFREY R. SULLIVAN, CFA, RIGHT, REGARDING FUND
PERFORMANCE FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2005.
STRONG INTERNATIONAL EQUITY MARKETS
Markets were strong around the world in 2005 as 20 of 22 countries and 9 of 10
sectors posted gains in the Morgan Stanley Capital International (MSCI) World ex
U.S. Index. Japan was one of the best performing markets during the year with a
25.6% return as investors became increasingly convinced that the Japanese
economy was on a sustained growth path, following years of deflation and a
prolonged period of underperformance in the international equity markets. Among
sectors, materials was the best performer in the Index with a 27% return driven
primarily by strong demand for metals. The lone weak spot was found in the
telecommunications services sector, which declined nearly 11%, as investors grew
impatient with the size of investments telecom companies were making and the
lack of returns they were providing.
CONSISTENT INVESTMENT APPROACH
The positioning of the Fund was not substantially altered during the 12-month
period, as we continued to seek companies whose valuations were attractive and
growth potential was high. Overall, this process produced good stock selection;
however, allocations in various sectors resulted in a sub-par relative return.
For the 12-month period ended December 31, 2005, Dreyfus Founders International
Equity Fund underperformed its benchmark, the MSCI World ex U.S. Index, which
returned 14.47%.
[SIDENOTE]
"OUR BOTTOM-UP INVESTMENT PROCESS PRODUCED STRONG STOCK SELECTION; HOWEVER,
ALLOCATIONS IN VARIOUS SECTORS RESULTED IN A SUB-PAR RELATIVE RETURN."
3
<Page>
OVERALL MARKET DRIVERS
The energy, materials and industrials sectors each exhibited strong performance
during the period. Performance was driven by surging commodity prices--crude oil
prices topped $70 a barrel, copper rose above $2 a pound and gold increased to
over $500 an ounce--and robust demand in emerging markets such as China and
India. Drilling companies in the energy sector, miners in the materials sector,
and trading companies in the industrials sector all performed exceptionally well
for the year.
IMPACT OF COUNTRY PERFORMANCE
As mentioned above, Japan was one of the best performing markets in 2005. Other
countries that performed well were Canada and Norway, both rich in natural
resources, which benefited from strong positions in the energy and materials
sectors.
Stock selection also produced positive results for the Fund on the country
level. Spain, Hong Kong and Australia were the strongest positive contributors
to the Fund's relative performance, while Japan, the Netherlands and Belgium
weighed on the Fund's return. The Fund benefited from its Hong Kong-listed
telecom holding, and Australia's return was boosted by its exposure to the
energy sector. In Japan, an underweight position in the recovering financials
sector had a negative impact on the Fund's overall performance.
INDUSTRIALS, CONSUMER DISCRETIONARY AND TELECOM OUTPERFORMED
The benchmark's industrials holdings produced a 25% return; however, through a
slight relative overweight position and strong stock selection in this sector,
the Fund's holdings gained nearly 41%. Japanese commodity trading company,
MITSUBISHI CORPORATION, performed extremely well with a 71% price increase
during the Fund's holding period.
Solid stock picking in the consumer discretionary sector added a boost to
the Fund's relative return for the period. Stock price increases in Japanese
consumer electronics retailer YAMADA DENKI, German tire producer, CONTINENTAL
AG, and Swiss luxury goods firm COMPAGNIE FINANCIERIE RICHEMONT AG benefited the
Fund. Yamada Denki's stock price advanced after the firm reported strong
earnings results. Continental's stock rose following strong demand for the
company's tires and electronic stability-control products. Richemont posted a
solid gain as the high-end watch export market recovered nicely.
4
<Page>
As stated earlier, the telecommunications services sector experienced a
10.8% decline during the period. However portfolio holding CHINA MOBILE (HONG
KONG) LIMITED, the Hong Kong-listed Chinese mobile phone operator, provided a
large boost to the Fund's annual relative return, as the company repeatedly beat
subscriber growth numbers throughout the year.
SELECT ENERGY AND MATERIALS STOCKS BOOSTED RETURN
Although the Fund's underweight position hurt relative performance in both the
materials and energy sectors, individual holdings were among the top performers
for the period. BHP BILLITON LIMITED's exposure to many strong commodities,
including oil, copper and iron ore, helped the company's earnings increase.
Australian oil company OIL SEARCHLIMITED had a strong year as its Yemeni oil
field increased production and its Papua New Guinea gas pipeline project came to
fruition. Finally, XSTRATA PLC, the U.K.-based coal and base metals company,
also benefited from rising commodity prices, specifically the strong increase in
coal prices.
IT AND CONSUMER STAPLES WEIGHED ON PERFORMANCE
The Fund's overweight position coupled with weak stock selection caused the
information technology (IT) and consumer staples sectors to be the largest
detriments to annual performance. Casio Computer Company Limited's stock
LARGEST EQUITY HOLDINGS (country of origin; ticker symbol)
<Table>
1. MITSUBISHI CORPORATION (Japan; 8058) 2.56%
2. ASTRAZENECA GROUP PLC (United Kingdom; AZN) 2.55%
3. BP PLC (United Kingdom; BP) 2.48%
4. ING GROEP NV (Netherlands; ING.C) 2.11%
5. YAMADA DENKI (Japan; 9831) 1.95%
6. CANON, INC. (Japan; 7751) 1.77%
7. VOLVO AB CLASS B (Sweden; VOLVB) 1.72%
8. CREDIT SUISSE GROUP (Switzerland; CSG.N) 1.68%
9. XSTRATA PLC (United Kingdom; XTA) 1.68%
10. SANOFIAVENTIS (France; SAN) 1.67%
</Table>
Portfolio holdings are subject to change, and should not be construed as a
recommendation of any security.
[SIDENOTE]
SECTORS BENEFITING THE FUND
Industrials
Consumer Discretionary
Telecommunications Services
5
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 1-800-525-2440 TO OBTAIN THE MOST
RECENT MONTH-END PERFORMANCE DATA.
[CHART TO COME]
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders International Equity Fund on 12/31/95 to a $10,000 investment made in
an unmanaged securities index on that date. The Fund's performance assumes the
reinvestment of dividends and capital gain distributions, but does not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or
redemption of Fund shares. The Fund offers multiple classes of shares.
Performance shown is for Class F, which is open only to grandfathered investors.
The Fund's performance in the graph takes into account all applicable Class F
fees and expenses, subject to fee waivers and expense limitations. THESE FIGURES
DO NOT REFLECT THE MAXIMUM SALES CHARGES APPLICABLE TO CLASS A, B, C, OR T
SHARES OF THE FUND. FOR THESE SHARE CLASSES, APPLYING THESE CHARGES WILL RESULT
IN LOWER RETURNS FOR INVESTORS.
The Morgan Stanley Capital International (MSCI) World ex U.S. Index measures
global developed market equity performance outside of the United States. The
total return figures cited for this index assume change in security prices and
reinvestment of dividends, but do not reflect the costs of managing a mutual
fund. Further information related to Fund performance is contained elsewhere in
this report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (Inception Date) YEAR YEARS YEARS INCEPTION
- ---------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) 7.35% (2.07%) -- (4.85%)
Without sales charge 13.93% (0.91%) -- (3.91%)
B SHARES (12/31/99)
With redemption* 9.02% (2.04%) -- (4.77%)
Without redemption 13.02% (1.64%) -- (4.63%)
C SHARES (12/31/99)
With redemption** 12.05% (1.66%) -- (4.66%)
Without redemption 13.05% (1.66%) -- (4.66%)
F SHARES (12/29/95) 13.91% (0.86%) 7.26% 7.26%
R SHARES (12/31/99) 14.22% (0.59%) -- (3.62%)
T SHARES (12/31/99)
With sales charge (4.50%) 8.52% (2.05%) -- (4.88%)
Without sales charge 13.65% (1.14%) -- (4.15%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, expense
limitations, and adjustments for financial statement purposes. Investments in
foreign securities entail unique risks, including political, market, and
currency risks.
* The maximum contingent deferred sales charge for Class B shares is 4% and is
reduced to 0% after six years, at which time the Class B shares convert to
Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
price fell after Casio Micronics, a 75%-owned subsidiary of Casio Computer,
lowered its 2005 estimates. This was enough to affect Casio Computer's 2005
operating profit estimate, causing the stock to drop. Trend Micro, Inc., a
Japanese developer of anti-virus software, experienced a decline on Microsoft's
announcement that it would be packaging a competitive product into its operating
system. The Fund sold off its positions in both companies during the period as
each firm's growth profile was no longer viable. In the consumer staples sector,
exposure to European food retailers TESCO PLC and Delhaize Group proved damaging
as oil price rises choked off consumer spending and both stocks underperformed
during the year.
INDIVIDUAL STOCKS HURT RETURN
Although the telecommunications services sector produced an overall positive
result for the Fund, select telecom holdings did not fare well during the
period. One of these was VODAFONE GROUP PLC, whose share price dropped after it
announced its commitment to the highly competitive Japanese market. Vodafone
emphasized its plan to increase market share in Japan through more aggressive
marketing, which was expected to cause further margin deterioration.
The Fund had bad timing with its holding of Toyota Motor Corporation's
stock in 2005. A holding for the first half of the year, the Fund sold its
position in the company as we believed Toyota was preparing to increase
[CHART]
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
Japan 23.98%
United Kingdom 19.98%
France 8.26%
Switzerland 7.88%
Germany 7.49%
Canada 5.71%
Australia 4.25%
Spain 3.66%
Other Countries 17.11%
Cash & EQUIVALENTS 1.68%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio
managers and are subject to change at any time, based on market and other
conditions, and should not be construed as a recommendation of any specific
security.
8
<Page>
spending in an effort to expand production capacity. We sold the company's stock
at the wrong time and watched it rally 40% as the Japanese economy and consumer
began to show signs of recovery.
Other detractors were Publishing and Broadcasting Limited, an Australian media
company, and Japanese healthcare holding Ono Pharmaceuticals Company Limited,
which both produced double-digit declines during the period.
The Fund sold many of the poor-performing individual issues listed in this
section of the commentary during the period, as we believed the company-specific
events surrounding each would negatively affect earnings growth going forward.
IN CONCLUSION
As we enter 2006, global growth appears to be strong and gaining traction as
monetary policies around the world continue to be accommodative. The nascent
Japanese economic recovery seems to be hitting its stride, and many economists
expect the European Union's gross domestic product growth to be significantly
higher in 2006 than in 2005. Additionally, the market is suggesting that the
next increase to the U.S. federal funds rate may be the last of this cycle,
lending further support to equity markets. Naturally, any gains in the equity
markets could be tempered as the geopolitical climate remains a wildcard.
We will continue to look for companies with strong growth rates, improving
business momentum and reasonable valuations.
/s/ Remi J. Browne /s/ Daniel B. LeVan /s/ Jeffrey R. Sullivan
Remi J. Browne, CFA Daniel B. LeVan, CFA Jeffrey R. Sullivan, CFA
Co-Portfolio Manager Co-Portfolio Manager Co-Portfolio Manager
[SIDENOTE]
SECTORS DETRACTING FROM THE FUND
Information Technology
Consumer Staples
Materials
9
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
10
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- -----------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,076.58 $ 7.33
CLASS A HYPOTHETICAL 1,000.00 1,018.06 7.15
CLASS B ACTUAL 1,000.00 1,074.56 11.24
CLASS B HYPOTHETICAL 1,000.00 1,014.23 10.97
CLASS C ACTUAL 1,000.00 1,074.76 11.24
CLASS C HYPOTHETICAL 1,000.00 1,014.23 10.97
CLASS F ACTUAL 1,000.00 1,076.48 7.33
CLASS F HYPOTHETICAL 1,000.00 1,018.06 7.15
CLASS R ACTUAL 1,000.00 1,077.53 6.02
CLASS R HYPOTHETICAL 1,000.00 1,019.34 5.87
CLASS T ACTUAL 1,000.00 1,076.17 8.63
CLASS T HYPOTHETICAL 1,000.00 1,016.78 8.42
</Table>
*Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- ---------------------------------
CLASS A 1.40%
CLASS B 2.15%
CLASS C 2.15%
CLASS F 1.40%
CLASS R 1.15%
CLASS T 1.65%
</Table>
11
<Page>
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
COMMON STOCKS (FOREIGN)--97.8%
AEROSPACE & DEFENSE--1.7%
47,400 BAE Systems PLC (UK) $ 311,338
49,000 Rolls-Royce Group PLC (UK) 360,418
---------------
671,756
---------------
APPAREL, ACCESSORIES & LUXURY GOODS--2.0%
9,300 Compagnie Financiere Richemont AG (SZ) 404,809
8,800 Gildan Activewear, Inc. (CA)* 378,495
---------------
783,304
---------------
APPLICATION SOFTWARE--1.3%
53,600 Sage Group PLC (UK) 237,935
1,450 SAP AG (GE) 262,947
---------------
500,882
---------------
ASSET MANAGEMENT & CUSTODY BANKS--0.5%
12,500 Schroder's PLC (UK) 204,319
---------------
AUTO PARTS & EQUIPMENT--0.7%
7,900 Denso Corporation (JA) 272,633
---------------
AUTOMOBILE MANUFACTURERS--2.1%
3,800 DaimlerChrysler AG (GE) 193,801
11,000 Honda Motor Company Limited (JA) 627,719
---------------
821,520
---------------
BREWERS--2.9%
71,800 Foster's Group Limited (AU) 293,706
12,600 InBev NV (BE) 548,481
7,800 Orkla ASA (NW) 323,011
---------------
1,165,198
---------------
BROADCASTING & CABLE TV--1.6%
15,600 Gestevision Telecinco SA (SP) 393,740
101 TV Asahi Corporation (JA) 250,926
---------------
644,666
---------------
COMMUNICATIONS EQUIPMENT--2.3%
30,200 Nokia Oyj (FI) 552,374
112,600 Telefonaktiebolaget LM Ericsson (SW) 386,932
---------------
939,306
---------------
COMPUTER & ELECTRONICS RETAIL--2.0%
6,200 Yamada Denki (JA) 775,953
---------------
</Table>
AU Australia
AT Austria
BE Belgium
CA Canada
CN China
DE Denmark
FI Finland
FR France
GE Germany
GR Greece
HK Hong Kong
IE Ireland
IT Italy
JA Japan
KR South Korea
NE Netherlands
NW Norway
PT Portugal
SG Singapore
SP Spain
SW Sweden
SZ Switzerland
UK United Kingdom
12
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
COMPUTER HARDWARE--1.6%
45,000 Fujitsu Limited (JA) $ 342,646
51,000 Toshiba Corporation (JA) 304,439
---------------
647,085
---------------
COMPUTER STORAGE & PERIPHERALS--0.5%
4,500 Logitech International SA (SZ)* 211,457
---------------
CONSTRUCTION & ENGINEERING--0.9%
11,100 ACS, Actividades de Construccion y Servicios SA (SP) 357,560
---------------
CONSTRUCTION MATERIALS--1.2%
40,100 Rinker Group Limited (AU) 483,575
---------------
CONSTRUCTION, FARM MACHINERY & HEAVY TRUCKS--1.7%
14,500 Volvo AB Class B (SW) 683,523
---------------
CONSUMER ELECTRONICS--1.1%
22,000 Matsushita Electric Industrial Company Limited (JA) 424,386
---------------
CONSUMER FINANCE--0.6%
3,200 Sanyo Shinpan Finance Company Limited (JA) 229,550
---------------
DISTILLERS & VINTNERS--1.2%
32,500 Diageo PLC (UK) 471,116
---------------
DIVERSIFIED BANKS--6.3%
82,600 Banca Intesa SPA (IT) 437,593
15,400 Banco Santander Central Hispano SA (SP) 203,279
19,919 Barclays PLC (UK) 209,403
5,607 BNP Paribas SA (FR) 453,698
34,300 Capitalia SPA (IT) 198,564
18,200 HBOS PLC (UK) 310,953
6,700 Royal Bank of Scotland Group PLC (UK) 202,314
3,900 Societe Generale (FR) 479,709
---------------
2,495,513
---------------
DIVERSIFIED CAPITAL MARKETS--2.3%
13,100 Credit Suisse Group (SZ) 667,910
2,470 UBS AG (SZ) 235,140
---------------
903,050
---------------
DIVERSIFIED CHEMICALS--1.5%
7,900 BASF AG (GE) 605,383
---------------
DIVERSIFIED METALS & MINING--4.1%
32,100 BHP Billiton Limited (AU) 535,353
7,700 Teck Cominco Limited Class B (CA) 410,998
28,500 Xstrata PLC (UK) 666,896
---------------
1,613,247
---------------
ELECTRIC UTILITIES--2.1%
4,900 E.ON AG (GE) 507,345
75,200 International Power PLC (UK) 309,883
---------------
817,228
---------------
</Table>
SEE NOTES TO STATEMENTS OF INVESTMENTS.
13
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
ELECTRICAL COMPONENTS & EQUIPMENT--2.0%
2,500 Schneider Electric SA (FR) $ 223,008
38,000 Sumitomo Electric Industries Limited (JA) 577,081
---------------
800,089
---------------
ELECTRONIC EQUIPMENT MANUFACTURERS--1.4%
15,600 Hoya Corporation (JA) 560,851
---------------
FOOD RETAIL--0.6%
42,000 Tesco PLC (UK) 239,556
---------------
HEAVY ELECTRICAL EQUIPMENT--0.5%
29,000 Mitsubishi Electric Corporation (JA) 205,325
---------------
INTEGRATED OIL & GAS--6.5%
92,619 BP PLC (UK) 986,427
7,300 Husky Energy, Inc. (CA) 370,495
17,100 Repsol YPF SA (SP) 499,416
7,400 Royal Dutch Shell PLC Class A (NE) 225,489
2,158 Total SA (FR) 542,119
---------------
2,623,946
---------------
INTEGRATED TELECOMMUNICATION SERVICES--2.4%
94,100 BT Group PLC (UK) 360,647
21,000 Telenor ASA (NW) 206,132
9,800 Telus Corporation (CA) 403,465
---------------
970,244
---------------
INVESTMENT BANKING & BROKERAGE--1.1%
22,000 Daiwa Securities Group, Inc. (JA) 249,409
3,900 Macquarie Bank Limited (AU) 194,843
---------------
444,252
---------------
LIFE & HEALTH INSURANCE--0.6%
87,900 Old Mutual PLC (UK) 249,166
---------------
MARINE--1.0%
38 AP Moller-Maersk AS (DE) 393,145
---------------
MOVIES & ENTERTAINMENT--1.5%
18,400 Vivendi Universal SA (FR) 576,375
---------------
MULTI-LINE INSURANCE--1.7%
16,200 Aviva PLC (UK) 196,507
3,900 Baloise Holding Limited (SZ) 227,779
1,100 Zurich Financial Services AG (SZ) 234,381
---------------
658,667
---------------
OFFICE ELECTRONICS--1.8%
12,000 Canon, Inc. (JA) 702,082
---------------
OIL & GAS EXPLORATION & PRODUCTION--1.9%
12,200 Eni SPA (IT) 338,399
2,200 Norsk Hydro ASA (NW) 225,890
67,800 Oil Search Limited (AU) 183,404
---------------
747,693
---------------
</Table>
14
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
OTHER DIVERSIFIED FINANCIAL SERVICES--2.8%
24,200 ING Groep NV (NE) $ 839,422
6,600 Sun Life Financial, Inc. (CA) 265,306
---------------
1,104,728
---------------
PACKAGED FOODS & MEATS--0.8%
1,090 Nestle SA Registered (SZ) 325,980
---------------
PHARMACEUTICALS--13.5%
8,500 Astellas Pharma, Inc. (JA) 331,539
20,800 AstraZeneca Group PLC (UK) 1,012,443
11,400 Eisai Company Limited (JA) 478,484
14,800 GlaxoSmithKline PLC (UK) 374,074
10,959 Novartis AG (SZ) 575,846
8,980 Novo Nordisk AS Class B (DE) 505,143
1,670 Roche Holding AG (SZ) 250,735
7,600 Sanofi-Aventis (FR) 665,799
9,500 Santen Pharmaceutical Company Limited (JA) 262,602
6,100 Schering AG (GE) 408,376
9,900 Takeda Pharmaceuticals Company Limited (JA) 535,566
---------------
5,400,607
---------------
PRECIOUS METALS & MINERALS--0.6%
11,500 ThyssenKrupp AG (GE) 240,156
---------------
RAILROADS--1.1%
5,500 Canadian National Railway Company (CA) 440,662
---------------
SEMICONDUCTOR EQUIPMENT--0.7%
4,100 Tokyo Electron Limited (JA) 257,608
---------------
SOFT DRINKS--1.0%
12,900 Coca-Cola Hellenic Bottling Company SA (GR) 379,960
---------------
STEEL--1.3%
14,900 JFE Holdings, Inc. (JA) 500,309
---------------
TIRES & RUBBER--2.1%
6,300 Continental AG (GE) 558,624
19,000 Sumitomo Rubber Industries Limited (JA) 270,658
---------------
829,282
---------------
TOBACCO--1.7%
29,700 British American Tobacco PLC (UK) 664,315
---------------
TRADING COMPANIES & DISTRIBUTORS--3.4%
46,000 Mitsubishi Corporation (JA) 1,018,018
28,000 Mitsui & Company Limited (JA) 359,690
---------------
1,377,708
---------------
WIRELESS TELECOMMUNICATION SERVICES--3.6%
7,000 Bouygues SA (FR) 342,252
118,900 China Mobile (Hong Kong) Limited (HK) 562,780
267,775 Vodafone Group PLC (UK) 578,213
---------------
1,483,245
---------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$28,444,835) 38,898,161
---------------
</Table>
SEE NOTES TO STATEMENTS OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
PREFERRED STOCKS (FOREIGN)--0.5%
HEALTHCARE EQUIPMENT--0.5%
1,500 Fresenius AG Preferred (GE) $ 203,149
---------------
TOTAL PREFERRED STOCKS (FOREIGN)
(COST--$185,201) 203,149
---------------
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- ----------------------------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--1.5%
SPECIAL PURPOSE ENTITY--1.5%
$ 600,000 CAFCO LLC
4.12% 1/3/06~ $ 599,863
---------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$599,863) 599,863
---------------
TOTAL INVESTMENTS--99.8%
(TOTAL COST--$29,229,899) 39,701,173
---------------
OTHER ASSETS AND LIABILITIES--0.2% 66,015
---------------
NET ASSETS--100.0% $ 39,767,188
===============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
* NON-INCOME PRODUCING.
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$599,863, OR 1.5%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
SEE NOTES TO STATEMENTS OF INVESTMENTS.
16
<Page>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 29,229,899
--------------
Investment securities, at market 39,701,173
Cash 132,990
Foreign currency (cost $993) 1,001
Receivables:
Capital shares sold 17,415
Dividends and interest 57,420
From adviser 15,881
Other assets 36,412
--------------
Total Assets 39,962,292
--------------
LIABILITIES
Payables and other accrued liabilities:
Capital shares redeemed 108,252
Advisory fees 25,340
Shareholder servicing fees 7,843
Accounting fees 3,379
Distribution fees 4,483
Transfer agency fees 13,564
Custodian fees 1,466
Directors' deferred compensation 8,178
Other 22,599
--------------
Total Liabilities 195,104
--------------
Net Assets $ 39,767,188
==============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 56,584,115
Accumulated net investment loss (4,110)
Accumulated net realized loss from security and
foreign currency transactions (27,282,847)
Net unrealized appreciation on investments
and foreign currency translation 10,470,030
--------------
Total $ 39,767,188
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
<Table>
CLASS A
Net Assets $ 25,519,479
Shares Outstanding 1,899,179
Net Asset Value, Redemption Price Per Share $ 13.44
Maximum offering price per share
(net asset value plus sales charge of 5.75% of offering price) $ 14.26
CLASS B
Net Assets $ 1,966,435
Shares Outstanding 149,885
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 13.12
CLASS C
Net Assets $ 584,456
Shares Outstanding 44,653
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 13.09
CLASS F
Net Assets $ 11,484,573
Shares Outstanding 853,208
Net Asset Value, Offering and Redemption Price Per Share $ 13.46
CLASS R
Net Assets $ 69,710
Shares Outstanding 5,137
Net Asset Value, Offering and Redemption Price Per Share $ 13.57
CLASS T
Net Assets $ 142,535
Shares Outstanding 10,664
Net Asset Value, Redemption Price Per Share $ 13.37
Maximum offering price per share
(net asset value plus sales charge of 4.50% of offering price) $ 14.00
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<Page>
STATEMENT OF OPERATIONS
For the year ended December 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 991,687
Interest 11,055
Foreign taxes withheld (115,173)
--------------
Total Investment Income 887,569
--------------
EXPENSES
Advisory fees--Note 2 380,617
Shareholder servicing fees--Note 2 93,921
Accounting fees--Note 2 38,062
Distribution fees--Note 2 45,631
Transfer agency fees--Note 2 73,709
Registration fees 56,415
Postage and mailing expenses 3,011
Custodian fees and expenses--Note 2 50,860
Printing expenses 41,124
Legal and audit fees 15,266
Directors' fees and expenses--Note 2 8,150
Other expenses 49,651
--------------
Total Expenses 856,417
Earning Credits (3,172)
Reimbursed/Waived Expenses (289,434)
Expense Offset to Broker Commissions (12,641)
--------------
Net Expenses 551,170
--------------
Net Investment Income 336,399
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITY
TRANSACTIONS AND FOREIGN CURRENCY TRANSACTIONS
Net Realized Gain (Loss) on:
Security Transactions 3,946,597
Foreign Currency Transactions (14,891)
--------------
Net Realized Gain 3,931,706
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation 683,031
--------------
Net Realized and Unrealized Gain 4,614,737
--------------
Net Increase in Net Assets Resulting from Operations $ 4,951,136
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2005 2004
OPERATIONS
Net Investment Income $ 336,399 $ 277,266
Net Realized Gain on Security and Foreign
Currency Transactions 3,931,706 8,483,384
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation 683,031 (886,438)
-------------- --------------
Net Increase in Net Assets Resulting from Operations 4,951,136 7,874,212
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From Net Investment Income
Class A (221,917) (185,495)
Class B (3,527) 0
Class C (1,574) 0
Class F (100,227) (72,290)
Class R (750) (11,405)
Class T (912) (511)
-------------- --------------
Net Decrease from Dividends and Distributions (328,907) (269,701)
-------------- --------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A (2,546,598) (2,078,483)
Class B (529,010) (527,506)
Class C 42,438 (94,599)
Class F (729,040) (980,705)
Class R (4,365) (3,373,718)
Class T (48,533) (31,098)
-------------- --------------
Net Decrease from Capital Share Transactions (3,815,108) (7,086,109)
-------------- --------------
Net Increase in Net Assets 807,121 518,402
-------------- --------------
NET ASSETS
Beginning of year $ 38,960,067 $ 38,441,665
-------------- --------------
End of year $ 39,767,188 $ 38,960,067
============== ==============
Undistributed (Accumulated) Net
Investment Income (Loss) $ (4,110) $ 3,289
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 11.90 $ 9.77 $ 7.19 $ 10.03 $ 14.42
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.12 0.08 0.06 0.01 0.00(a)
Net realized and unrealized gains
(losses) on securities 1.54 2.14 2.59 (2.84) (4.39)
----------------------------------------------------------------------
Total from investment operations 1.66 2.22 2.65 (2.83) (4.39)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.12) (0.09) (0.07) (0.01) 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions (0.12) (0.09) (0.07) (0.01) 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.44 $ 11.90 $ 9.77 $ 7.19 $ 10.03
======================================================================
TOTAL RETURN(b) 13.93% 22.69% 36.84% (28.19%) (30.44%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 25,519 $ 25,076 $ 22,432 $ 18,217 $ 29,151
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.44% 1.42% 1.41% 1.40% 1.46%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.40% 1.40% 1.40% 1.40% 1.44%
Net investment income (loss) 0.94% 0.74% 0.80% 0.13% (0.74%)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 54% 85% 144% 220% 213%
</Table>
(a) NET INVESTMENT LOSS FOR THE YEAR ENDED DECEMBER 31, 2001 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.15% (2005), 2.05% (2004), 2.48% (2003), 2.18% (2002), AND
1.78% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
---------------------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 11.63 $ 9.55 $ 7.03 $ 9.87 $ 14.29
- --------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.02(a) 0.00(a), (b) (0.08) (0.11) (0.12)
Net realized and unrealized gains
(losses) on securities 1.49 2.08 2.61 (2.73) (4.30)
---------------------------------------------------------------------------
Total from investment operations 1.51 2.08 2.53 (2.84) (4.42)
- --------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.02) 0.00 (0.01) 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
---------------------------------------------------------------------------
Total distributions (0.02) 0.00 (0.01) 0.00 0.00
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.12 $ 11.63 $ 9.55 $ 7.03 $ 9.87
===========================================================================
TOTAL RETURN(c) 13.02% 21.78% 35.95% (28.77%) (30.93%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,966 $ 2,281 $ 2,372 $ 2,201 $ 3,786
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(d) 2.19% 2.16% 2.16% 2.16% 2.28%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.15% 2.15% 2.15% 2.15% 2.26%
Net investment income (loss) 0.21% 0.00% 0.07% (0.61%) (1.03%)
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(e) 54% 85% 144% 220% 213%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) NET INVESTMENT INCOME FOR THE YEAR ENDED DECEMBER 31, 2004 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(c) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(d) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 3.04% (2005), 2.85% (2004), 3.32% (2003), 2.91% (2002), AND
2.67% (2001).
(e) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
22
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
---------------------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 11.61 $ 9.53 $ 7.02 $ 9.86 $ 14.27
- --------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.02(a) 0.00(a), (b) (0.26) (0.29) (0.16)
Net realized and unrealized gains
(losses) on securities 1.50 2.08 2.77 (2.55) (4.25)
---------------------------------------------------------------------------
Total from investment operations 1.52 2.08 2.51 (2.84) (4.41)
- --------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.04) 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
---------------------------------------------------------------------------
Total distributions (0.04) 0.00 0.00 0.00 0.00
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.09 $ 11.61 $ 9.53 $ 7.02 $ 9.86
===========================================================================
TOTAL RETURN(c) 13.05% 21.83% 35.76% (28.80%) (30.90%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 584 $ 476 $ 482 $ 532 $ 1,429
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(d) 2.20% 2.16% 2.16% 2.16% 2.29%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.15% 2.15% 2.15% 2.15% 2.26%
Net investment income (loss) 0.14% 0.03% 0.08% (0.63%) (0.99%)
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(e) 54% 85% 144% 220% 213%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) NET INVESTMENT INCOME FOR THE YEAR ENDED DECEMBER 31, 2004 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(c) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(d) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.94% (2005), 2.87% (2004), 3.25% (2003), 3.11% (2002), AND
2.85% (2001).
(e) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
--------------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 11.92 $ 9.78 $ 7.18 $ 10.03 $ 14.40
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.11(a) 0.08(a) (0.01) (0.05) (0.07)
Net realized and unrealized gains
(losses) on securities 1.55 2.14 2.68 (2.79) (4.30)
--------------------------------------------------------------------------
Total from investment operations 1.66 2.22 2.67 (2.84) (4.37)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.12) (0.08) (0.07) (0.01) 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------
Total distributions (0.12) (0.08) (0.07) (0.01) 0.00
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.46 $ 11.92 $ 9.78 $ 7.18 $ 10.03
==========================================================================
TOTAL RETURN 13.91% 22.70% 37.17% (28.30%) (30.35%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 11,485 $ 10,885 $ 9,837 $ 9,321 $ 16,640
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 1.44% 1.41% 1.40% 1.40% 1.55%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.40% 1.40% 1.40% 1.40% 1.52%
Net investment income (loss) 0.92% 0.76% 0.80% 0.12% (0.26%)
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 54% 85% 144% 220% 213%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.28% (2005), 2.10% (2004), 2.52% (2003), 2.13% (2002), AND
1.99% (2001).
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
24
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
--------------------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 12.01 $ 9.82 $ 7.22 $ 10.08 $ 14.45
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.14(b) 0.13(b) 0.09 0.02 0.00(a)
Net realized and unrealized gains
(losses) on securities 1.57 2.17 2.60 (2.85) (4.37)
--------------------------------------------------------------------------
Total from investment operations 1.71 2.30 2.69 (2.83) (4.37)
- -------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.15) (0.11) (0.09) (0.03) 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------
Total distributions (0.15) (0.11) (0.09) (0.03) 0.00
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.57 $ 12.01 $ 9.82 $ 7.22 $ 10.08
==========================================================================
TOTAL RETURN 14.22% 23.45% 37.27% (28.10%) (30.24%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 70 $ 66 $ 3,146 $ 2,470 $ 6,102
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.20% 1.15% 1.15% 1.16% 1.28%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.15% 1.15% 1.15% 1.15% 1.26%
Net investment income (loss) 1.15% 1.21% 1.03% 0.27% (0.04%)
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 54% 85% 144% 220% 213%
</Table>
(a) NET INVESTMENT LOSS FOR THE YEAR ENDED DECEMBER 31, 2001 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(b) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(c) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 3.35% (2005), 1.65% (2004), 1.95% (2003), 1.71% (2002), AND
1.57% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 11.84 $ 9.70 $ 7.14 $ 9.97 $ 14.37
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.08(b) 0.06(b) 0.00(a) (0.10) (0.09)
Net realized and unrealized gains
(losses) on securities 1.54 2.11 2.61 (2.73) (4.31)
----------------------------------------------------------------------------
Total from investment operations 1.62 2.17 2.61 (2.83) (4.40)
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income (0.09) (0.03) (0.05) 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------------
Total distributions (0.09) (0.03) (0.05) 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.37 $ 11.84 $ 9.70 $ 7.14 $ 9.97
============================================================================
TOTAL RETURN(c) 13.65% 22.42% 36.58% (28.39%) (30.62%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 143 $ 175 $ 172 $ 158 $ 343
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(d) 1.69% 1.66% 1.65% 1.65% 1.80%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.65% 1.65% 1.65% 1.65% 1.77%
Net investment income (loss) 0.67% 0.57% 0.67% (0.12%) (0.53%)
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(e) 54% 85% 144% 220% 213%
</Table>
(a) NET INVESTMENT INCOME FOR THE YEAR ENDED DECEMBER 31, 2003 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(b) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(c) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(d) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.81% (2005), 2.44% (2004), 2.88% (2003), 4.00% (2002), AND
2.86% (2001).
(e) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<Page>
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders International Equity Fund (the "Fund"). The Fund
offers Class A, Class B, Class C, Class F, Class R and Class T shares. Class A
and Class T shares are subject to a sales charge imposed at the time of
purchase, Class B shares are subject to a contingent deferred sales charge
("CDSC") imposed on Class B shares redeemed within six years of purchase, Class
C shares are subject to a CDSC imposed on Class C shares redeemed within one
year of purchase and Class F and Class R shares are sold at net asset value per
share (with Class R shares sold only to eligible institutional investors). Other
differences between the classes include services offered to and the expenses
borne by each Class. The following significant accounting policies have been
consistently followed by the Fund in the preparation of its financial
statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair value as
27
<Page>
determined in good faith by the Company's board of directors or pursuant to
procedures approved by the board of directors. These situations may include
instances where an event occurs after the close of the market on which a
security is traded but before the Fund calculates its net asset value, and it is
determined that the event has materially affected the value of the security.
Fair value of foreign equity securities may be determined with the assistance of
a pricing service using correlations between the movement of prices of foreign
securities and indexes of domestic securities and other appropriate indicators,
such as closing market prices of relevant ADRs and futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund normally will invest a
large portion of its assets in foreign securities. Foreign securities carry more
risk than U.S. securities, such as political and currency risks. In the event
the Fund executes a foreign security transaction, the Fund may enter into a
foreign currency contract to settle the foreign security transaction. The Fund
could be exposed to risk if counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably to the U.S.
dollar. The resultant foreign currency gain or loss from the contract is
recorded as foreign currency gain or loss and is presented as such in the
Statement of Operations. Foreign currency held at December 31, 2005 for settling
foreign trades is listed on the Statement of Assets and Liabilities.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each
business day. Purchases and sales of investment securities and income and
expense items denominated in foreign currencies are translated into U.S. dollar
amounts on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net unrealized gain or loss from investments and foreign
currency translations on the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized appreciation or depreciation on investments and foreign
currency translation arises from changes in
28
<Page>
the values of assets and liabilities, including investments in securities held
at the date of the financial statements, resulting from changes in the exchange
rates and changes in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) and from net realized capital gains (if any)
annually. Dividends and distributions, which are determined in accordance with
income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
29
<Page>
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
Financial Corporation, a publicly-owned financial services company which
provides a comprehensive range of financial products and services in domestic
and selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
1.00% of the first $250 million of net assets, 0.80% of the next $250 million of
net assets and 0.70% of net assets in excess of $500 million.
Founders has agreed to waive a portion of its management fee and to limit the
total expenses of the Fund. Founders agreed to waive that portion of its
management fee that exceeds 0.75% of the Fund's average net assets and to limit
the annual expenses of the Fund (net of credits received from the Fund's
custodian and expense offsets to broker commissions) to 1.40% for Class A and
Class F shares, 2.15% for Class B and Class C shares, 1.15% for Class R shares
and 1.65% for Class T shares. These reductions are made pursuant to a permanent
written contractual commitment. For the year ended December 31, 2005, $271,337
was reimbursed to the Fund by Founders pursuant to this provision.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $25,972 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $10,108 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $12.58 to $13.36, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency
30
<Page>
fees, including both the per account fees paid to DTI and out-of-pocket charges,
during the year ended December 31, 2005 were as follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
---------------------------------------------------
Class A $ 50,313
Class B $ 6,701
Class C $ 1,172
Class R $ 1,012
Class T $ 840
</Table>
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the processing of shareholder transactions in the Funds.
During the year ended December 31, 2005, the Fund was charged $930 for cash
management fees, which are included in the out-of-pocket transfer agency charges
above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $3,563 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $27,025 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
31
<Page>
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
-------------------------------------------------------
Class A N/A $ 61,518
Class B $ 14,400 $ 4,800
Class C $ 3,863 $ 1,288
Class T $ 343 $ 343
</Table>
During the year ended December 31, 2005, DSC retained $278 in sales commissions
from the sales of Class A shares. DSC also retained $9781 and $40 of contingent
deferred sales charges relating to redemptions of Class B and Class C shares,
respectively.
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance monitoring, regulatory and shareholder reporting, as well as related
facilities, equipment and clerical help. The fee is computed at the annual rate
of 0.10% of the average daily net assets of the Fund on the first $500 million,
0.065% of the average daily net assets of the Fund on the next $500 million and
0.02% of the average daily net assets of the Fund in excess of $1 billion, plus
reasonable out-of-pocket expenses. Founders has contractually agreed in writing
to waive any fees received for these services to the extent they exceed
Founders' costs in providing the services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits on the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
---------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $18,097, which reduced the amount paid to
Mellon Bank to $32,763.
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of
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<Page>
one or more of the Funds. The amount paid to the director under the plan will be
determined based upon the performance of the selected Funds. The current value
of these amounts is included in Other Assets and Directors' Deferred
Compensation on the Statement of Assets and Liabilities. Changes in market value
are included in the Directors' fees and expenses and the net change in
unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally accepted in the United States of America. These differences
are due to differing treatments for items such as deferral of wash sale losses,
defered compensation, foreign currency transactions and capital loss carryovers.
Permanent differences identified during the year ended December 31, 2005 have
been reclassified among the components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
---------------------------------------------------------
$ (14,891) $ 14,891 $ 0
</Table>
The tax character of distributions paid during 2005 and 2004 was as follows:
<Table>
<Caption>
2005 2004
-----------------------
DISTRIBUTIONS PAID FROM:
Ordinary Income $ 328,907 $ 269,701
Long-Term Capital Gain $ 0 $ 0
-----------------------
$ 328,907 $ 269,701
=======================
</Table>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of December 31, 2005, represent capital loss carryovers that may be
available to offset future realized capital gains and thereby reduce future
taxable gains distributions. Post-October 31 foreign currency losses noted
below, if any, may be used to offset future net investment income and thereby
reduce future ordinary income distributions. Net capital loss
33
<Page>
carryovers utilized during 2005 by the Fund amounted to $3,946,147. Accumulated
capital losses as of December 31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
-----------------------------------------------------------------
2008 $ 3,805,803
2009 $ 10,099,981
2010 $ 5,986,171
2011 $ 7,339,094
----------------
$ 27,231,049
================
</Table>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The primary difference between book and tax appreciation or depreciation
is wash sale loss deferrals.
<Table>
Post-October Foreign Currency Loss Deferral $ (2,188)
Undistributed Ordinary Income $ 4,737
Other Book/Tax Differences $ (7,904)
Federal Tax Cost $ 29,281,696
Gross Tax Appreciation of Investments $ 10,468,302
Gross Tax Depreciation of Investments $ (48,825)
Net Tax Appreciation $ 10,419,477
</Table>
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 450 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 48,763 $ 599,013 111,208 $ 1,148,486
Dividends or Distributions Reinvested 15,907 $ 210,698 14,688 $ 174,191
Redeemed (272,133) $ (3,356,309) (315,412) $ (3,401,160)
------------ ---------------- ------------ ----------------
Net Decrease (207,463) $ (2,546,598) (189,516) $ (2,078,483)
============ ================ ============ ================
CLASS B
Sold 22,161 $ 266,981 11,870 $ 124,485
Dividends or Distributions Reinvested 212 $ 2,770 0 $ 0
Redeemed (68,649) $ (798,761) (64,211) $ (651,991)
------------ ---------------- ------------ ----------------
Net Decrease (46,276) $ (529,010) (52,341) $ (527,506)
============ ================ ============ ================
</Table>
34
<Page>
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS C
Sold 13,942 $ 162,011 6,433 $ 64,792
Dividends or Distributions Reinvested 52 $ 684 0 $ 0
Redeemed (10,373) $ (120,257) (15,944) $ (159,391)
------------ ---------------- ------------ ----------------
Net Increase (Decrease) 3,621 $ 42,438 (9,511) $ (94,599)
============ ================ ============ ================
CLASS F
Sold 129,124 $ 1,589,753 470,504 $ 4,815,790
Dividends or Distributions Reinvested 7,163 $ 95,978 5,843 $ 69,420
Redeemed (196,116) $ (2,414,771) (569,384) $ (5,865,911)
------------ ---------------- ------------ ----------------
Net Decrease (59,829) $ (729,040) (93,037) $ (980,705)
============ ================ ============ ================
CLASS R
Sold 75 $ 1,000 40,338 $ 419,337
Dividends or Distributions
Reinvested 55 $ 750 957 $ 11,405
Redeemed (518) $ (6,115) (355,989) $ (3,804,460)
------------ ---------------- ------------ ----------------
Net Decrease (388) $ (4,365) (314,694) $ (3,373,718)
============ ================ ============ ================
CLASS T
Sold 111 $ 1,276 1,431 $ 14,400
Dividends or Distributions Reinvested 66 $ 881 42 $ 492
Redeemed (4,290) $ (50,690) (4,460) $ (45,990)
------------ ---------------- ------------ ----------------
Net Decrease (4,113) $ (48,533) (2,987) $ (31,098)
============ ================ ============ ================
</Table>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $20,421,360 and $25,809,492, respectively.
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
35
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders International
Equity Fund (one of the portfolios constituting Dreyfus Founders Funds, Inc.,
hereafter referred to as the "Fund") at 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 Sates of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit 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, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 2005 by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
36
<Page>
OTHER TAX INFORMATION
(UNAUDITED)
CORPORATE DIVIDENDS RECEIVED DEDUCTION
Dividends paid by the Fund from net investment income and distributions of net
realized short-term capital gains are, for federal tax purposes, taxable as
ordinary income to shareholders. Of the ordinary income distributions declared
for the year ended December 31, 2005, 0.00% qualified for the dividends received
deduction available to the Fund's corporate shareholders.
QUALIFIED DIVIDEND INCOME
For the year ended December 31, 2005, the Fund designated 100% of the ordinary
income distributions paid as qualified dividend income subject to reduced income
tax rates for taxpayers with taxable accounts.
37
<Page>
FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
38
<Page>
The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services being
provided to the Funds are satisfactory, as evidenced in part by the recent
performance records of the Funds, to which the directors gave significant
attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to the
Funds, but also recognize that Founders or its affiliates have provided the
highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
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small group of funds selected by Lipper and a larger universe of funds also
selected by Lipper. The Lipper materials further included graphs depicting each
Fund's Class F one-year and annualized performance results for two-, three-,
four-, five-, and ten-year periods, if applicable, in comparison to the Fund's
performance group and performance universe.
International Equity Fund's performance for the one-year period ended December
31, 2004 placed it in the second quintile of its Lipper performance group, with
the Fund ranking fourth out of 14 Lipper-selected "peer funds," and in the first
quintile of its Lipper international multi-cap core fund performance universe,
ranking 31st of 259 funds. The directors noted that the Fund's performance had
improved significantly since the current portfolio management team assumed its
duties in March 2003, with the Fund placing in the first quintile of its
Lipper-selected group and universe for the two-year period ended December 31,
2004. The directors deemed these relative performance results to be very
satisfactory, and stressed the importance to Founders of the need to seek to
maintain a strong performance record.(1)
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance
difficulties, more recent performance results generally have shown
significant improvement;
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS REFLECT APPLICABLE FEE WAIVERS AND
EXPENSE LIMITATIONS, BUT DO NOT REFLECT THE FRONT-END SALES CHARGES THAT
APPLY TO OTHER SHARE CLASSES.
40
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Founders has focused its efforts upon improving the performance records of
the Funds and will continue to seek improvement; and
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing in
the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY FOUNDERS AND
ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, International
Equity Fund's management fees ranked in the first (best) quintile of its Lipper
competitive expense group, with the Fund's fees the second lowest of 14 "peer
funds." The Fund's contractual management fees at a common asset level were
determined by Lipper to be lower than 10 of the 14 funds in its group. The
Fund's management fees were in the first (best) quintile of its Lipper expense
universe, placing eighth lowest of 60 funds. The directors noted that Founders
has agreed to permanently waive the portion of its management fee for the Fund
that exceeds 0.75% of the Fund's average net assets, and has further agreed to a
permanent limitation upon the total expenses of each class of the Fund's shares.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
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The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain
efficiencies in performing the portfolio management, trading and operational
functions related to those accounts (the directors recognized that in
determining its profitability from providing investment management and other
services to the Funds, Founders allocated its expenses between the Funds and
other accounts in a manner which was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment
services to any of the clients it advises, not just the Funds. The directors
recognized that Founders' profitability would be lower if it did not receive
research and brokerage services in connection with these brokerage
transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds. However, the International Equity Fund's 2005 expense ratios, net of
brokerage offsets and credits earned on cash balances held by the Fund's
custodian, are not expected to increase, due to Founders' commitment to
permanently limit such net expense ratios to certain levels.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders' management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
42
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Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the investment advisory fees received by
Founders. However, the directors noted that Founders' profitability is expected
to decline in 2005 as a result of declines in Fund asset levels. The directors
also considered the risks assumed by Founders in providing management services
to the Funds, including the risk that the management agreement can be terminated
by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of
investment advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially
fees which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than fees
arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in
43
<Page>
recognition of the quality service which Founders has provided and continues to
provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of scale if the assets of the Funds were to increase. Among other information,
the directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into increased
profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of an
increase in the assets of a particular Fund or a group of Funds would not be
passed along on a dollar-for-dollar basis to the shareholders of other Funds
that did not experience increases in their assets to points above their
breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is
consistent with its objective of sharing its economies of scale with the
Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
restrictions. The directors determined that Founders is dedicated to compliance
with
44
<Page>
all applicable rules and regulations and that the systems of controls which are
in place to ensure that the service providers to the Funds, including Founders,
and the Funds themselves, maintain strict adherence to the law are excellent.
OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years and that efforts are being and will continue to be
made to enhance such improvement and to maintain Fund expense ratios at
reasonable and competitive levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
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<Page>
YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
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<Page>
Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice
President--Compliance since 2002. Formerly, Founders' Manager of Compliance
(2000 to 2002) and Securities Compliance Examiner, Staff Accountant and Team
Leader for the U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
47
<Page>
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
DREYFUS FOUNDERS TRANSFER AGENT &
INTERNATIONAL EQUITY FUND DIVIDEND DISBURSING AGENT
MANAGER Dreyfus Transfer, Inc.
200 Park Avenue
Founders Asset New York, NY 10166
Management LLC
210 University Boulevard DISTRIBUTOR
Suite 800
Denver, CO 80206 Dreyfus Service Corporation
200 Park Avenue
New York, NY 10166
- -------------------------------------------------------------------------------
TELEPHONE Call your financial representative or 1-800-554-4611
MAIL Dreyfus Founders Funds, Inc.
144 Glenn Curtiss Boulevard, Uniondale, NY 11556-0144
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The fund's Forms N-Q are available on the SEC's website at
http://www.sec.gov and may be reviewed and copied at 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.
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities, and information regarding how
the fund voted these proxies for the 12-month period ended June 30, 2005, is
available at http://www.dreyfus.com and on the SEC's website at
http://www.sec.gov. The description of the policies and procedures is
also available without charge, upon request, by calling 1-800-645-6561.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE
GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Dreyfus Founders Funds are managed by Founders Asset Management LLC.
Founders and Founders Funds are registered trademarks of Founders
Asset Management LLC.
[LION GRAPHIC]
(C)2006 Founders Asset Management LLC 0360AR1205
<Page>
Dreyfus Founders
Mid-Cap Growth Fund
ANNUAL REPORT December 31, 2005
[LION GRAPHIC]
YOU, YOUR ADVISOR AND
(R) [DREYFUS LOGO]
A MELLON FINANCIAL COMPANY (SM)
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 12
Statement of Investments 14
Statement of Assets and Liabilities 18
Statement of Operations 20
Statements of Changes in Net Assets 21
Financial Highlights 22
Notes to Financial Statements 28
Report of Independent Registered Public Accounting Firm 37
Factors Considered in Renewing the Advisory Agreement 38
Your Board Representatives 46
</Table>
-----------------------------------------------------------
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and sign up for Dreyfus eCommunications. It's simple and
only takes a few minutes.
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INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
managers only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-11 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC-INSURED - NOT BANK-GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF JOHN B. JARES]
[PHOTO OF DANIEL E. CROWE]
A DISCUSSION WITH CO-PORTFOLIO MANAGERS JOHN B. JARES, CFA, LEFT; AND DANIEL E.
CROWE, CFA, REGARDING FUND PERFORMANCE FOR THE 12-MONTH PERIOD ENDED DECEMBER
31, 2005.
COUNTERVAILING ECONOMIC FACTORS
The market struggled with countervailing forces throughout 2005. Continued
economic growth, benign core inflation, strong consumer spending, corporate
balance sheets flush with cash, and further housing price gains were favorable
to the market during the year. Offsetting this, however, were increases in
energy costs, the Federal Reserve's continued campaign of raising the federal
funds rate, catastrophic Gulf Coast hurricanes, terrorism in London, and
declining approval ratings for President Bush. These factors combined to lead to
robust earnings growth offset by declining valuations, which in turn produced
moderate increases in stock prices.
MODEST CHANGES IN COMPOSITION HELPED FUND
The number of holdings in the Fund remained consistent within the range of 50-60
positions, and cash levels and turnover rates were similar to 2004 levels.
However, the Fund transitioned its allocation from being overweight the consumer
discretionary sector and underweight the healthcare sector to holding an
overweight position in healthcare and an underweight position in consumer
discretionary. The Fund's consumer discretionary weighting declined as high
valuations, coupled with headwinds that were likely to slow consumer spending,
led us to find fewer investments within this sector. The number of healthcare
positions was increased as we found more opportunities at attractive valuations.
[SIDENOTE]
"PORTFOLIO COMPOSITION CHANGES POSITIVELY IMPACTED THE FUND'S RELATIVE
PERFORMANCE DURING THE PERIOD."
3
<Page>
Dreyfus Founders Mid-Cap Growth Fund's return for the 12-month period ended
December 31, 2005 was competitive(1) with its benchmark, the Russell Mid-Cap
Growth Index, which produced a 12.10% return. The Fund's relative performance
was primarily driven by strong stock picking overall, particularly in the
information technology (IT) and industrials sectors. However, some weak stock
choices in the financials and, to a lesser extent, energy sectors partially
offset the gains made by strong stock selection elsewhere.
COMPELLING OPPORTUNITIES
We found compelling growth opportunities in many sectors during the period,
including the information technology, healthcare and industrials sectors.
Information technology companies with strong cyclical demand for their products
presented attractive investment options for the Fund. Furthermore, companies
with industry-leading products in fast growing markets also presented prospects
for growth. Industrials companies in general benefited from continued economic
expansion and, to a lesser extent, increased corporate spending. The airline
industry within the industrials sector rose on a rationalization of capacity
within the industry due to the numerous recent bankruptcies. And although the
Fund's allocation and stock selection in the energy sector did not help its
relative performance, many energy companies in general continued to benefit from
large increases in the prices of oil and natural gas.
STRONG STOCK PICKING
The Fund's relative performance overall was mostly driven by strong stock
picking across a number of sectors. Solid selection of holdings in the
information technology sector provided outperformance relative to the Index.
Among the top performers in IT, and in the Fund overall, was SanDisk, Inc., a
leading supplier of NAND flash memory, which benefited from favorable supply and
demand characteristics. Apple Computer, Inc.'s use of SanDisk's flash memory
within the new iPod nano MP3 music player, as well as expected strong demand in
musicenabled cell phones, gave credence to the stock's growth. SanDisk's stock
was purchased during the period on the expectation
- ----------
(1) Excluding sales charges, which result in lower returns for certain share
classes. Please see page 7 for Average Annual Total Returns for all share
classes, including and excluding sales charges.
4
<Page>
that NAND flash memory demand would increase; however, the stock was later sold
due to concerns of increased supply entering the market. We purchased Cogent
Systems, Inc., a provider of biometric solutions including automated fingerprint
identification systems (AFIS), in the second quarter of the period after a
substantial pullback by the market over a secondary offering of shares. After
the secondary offering was completed, the company's strong fundamentals and
leading position in the AFIS industry led to strong share-price appreciation.
The position was sold later in the period over concerns about delays in
potential contract wins in Europe.
As was mentioned above, the airline industry within the industrials sector
saw many stocks realizing gains during the period, including AMR CORPORATION,
parent company of American Airlines. Recent bankruptcies accelerated the
reduction of capacity in the industry, resulting in a much-improved pricing
environment. In addition, aggressive cuts in operating costs compensated for the
period's higher price of fuel. For the first time in several years, American
Airlines is expected to be profitable in 2006. Other industrials players that
<Table>
LARGEST EQUITY HOLDINGS (ticker symbol)
1. HARMAN INTERNATIONAL INDUSTRIES, INC. (HAR) 3.54%
2. AMERICAN TOWER CORPORATION (AMT) 3.26%
3. R.H. DONNELLEY CORPORATION (RHD) 3.09%
4. BALL CORPORATION (BLL) 3.00%
5. OMNICARE, INC. (OCR) 2.73%
6. PERKINELMER, INC. (PKI) 2.73%
7. FLIR SYSTEMS, INC. (FLIR) 2.49%
8. COVANCE, INC. (CVD) 2.46%
9. THOMAS AND BETTS CORPORATION (TNB) 2.40%
10. SCIENTIFIC GAMES CORPORATION (SGMS) 2.24%
</Table>
Portfolio holdings are subject to change, and should not be construed as a
recommendation of any security.
[SIDENOTE]
SECTORS BENEFITING THE FUND
Information Technology
Industrials
Telecommunications Services
5
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 18005252440 TO OBTAIN THE MOST RECENT
MONTH-END PERFORMANCE DATA.
[CHART TO COME]
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders Mid-Cap Growth Fund on 12/31/95 to a $10,000 investment made in an
unmanaged securities index on that date. The Fund's performance assumes the
reinvestment of dividends and capital gain distributions, but does not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or
redemption of Fund shares. The Fund offers multiple classes of shares.
Performance shown is for Class F, which is open only to grandfathered investors.
The Fund's performance in the graph takes into account all applicable Class F
fees and expenses. THESE FIGURES DO NOT REFLECT THE MAXIMUM SALES CHARGES
APPLICABLE TO CLASS A, B, C, OR T SHARES OF THE FUND. FOR THESE SHARE CLASSES,
APPLYING THESE CHARGES WILL RESULT IN LOWER RETURNS FOR INVESTORS.
The Russell Mid-cap Growth Index measures the performance of the 800 smallest
companies in the Russell 1000 Index with higher price-to-book ratios and higher
forecasted growth values. The total return figures cited for this index assume
change in security prices and reinvestment of dividends, but do not reflect the
costs of managing a mutual fund. The Russell 1000 Index measures the performance
of the largest 1,000 publicly traded U.S. companies. Further information related
to Fund performance is contained elsewhere in this report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (INCEPTION DATE) YEAR YEARS YEARS INCEPTION
- ---------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) 6.36% 0.13% -- (4.23%)
Without sales charge 12.77% 1.33% -- (3.28%)
B SHARES (12/31/99)
With redemption* 7.72% 0.34% -- (4.03%)
Without redemption 11.72% 0.73% -- (3.92%)
C SHARES (12/31/99)
With redemption** 10.62% 0.46% -- (4.14%)
Without redemption 11.62% 0.46% -- (4.14%)
F SHARES (9/8/61) 12.74% 1.86% 4.62% N/A
R SHARES (12/31/99) 12.89% 1.50% -- (3.12%)
T SHARES (12/31/99)
With sales charge (4.50%) 6.49% (0.53%) -- (4.87%)
Without sales charge 11.59% 0.37% -- (4.14%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, fee
waivers for certain share classes, and adjustments for financial statement
purposes. Part of the Fund's historical performance is due to the purchase of
securities sold in initial public offerings (IPOs). There is no guarantee that
the Fund's investments in IPOs, if any, will continue to have a similar impact
on performance. Part of the Fund's historical performance is due to amounts
received from class action settlements regarding prior Fund holdings. There is
no guarantee that these settlement distributions will occur in the future or
have a similar impact on performance. There are risks associated with mid-cap
investing, such as limited product lines, less liquidity, and small market
share.
* The maximum contingent deferred sales charge for Class B shares is 4% and is
reduced to 0% after six years, at which time the Class B shares convert to
Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
aided the Fund's relative performance for the period included THOMAS AND BETTS
CORPORATION. A rebound in commercial construction from previous lows during 2002
and 2003, as well as a build-out of the utility transmission infrastructure,
drove double-digit revenue growth for the company. In addition, increased
capacity utilization and productivity improvements resulted in higher margins
for Thomas and Betts despite a higher raw material cost environment. The company
was also able to raise prices due to increased demand for its products.
Strong stock selection in the telecommunications services sector aided the
Fund's return; the Fund's relative overweight position during the period also
benefited the Fund's performance. Telecom issue AMERICAN TOWER CORPORATION's
stock price rose as investors continued to realize the attractive fundamentals
within the cellular tower industry. The industry recently consolidated to a
smaller number of financially strong players and has enjoyed stable price
increases, improving balance sheets and strong cash flow generation. The stock
remained a large holding in the Fund at the end of the period.
[CHART]
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
Healthcare 22.60%
Consumer Discretionary 20.69%
Information Technology 17.17%
Industrials 10.76%
Materials 8.36%
Financials 6.73%
Energy 6.65%
Telecommunications Services 3.26%
Consumer Staples 1.09%
Cash & Equivalents 2.69%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio
managers and are subject to change at any time, based on market and other
conditions, and should not be construed as a recommendation of any specific
security.
8
<Page>
OTHER STRONG PERFORMERS
Other notable strong performers during the period included Blackboard, Inc. and
CB RICHARD ELLIS GROUP, INC. A provider of educational software, Blackboard
continued to see strong demand for its academic suite of products and upgrades;
however, the Fund's position in this stock was sold during the year due to
concerns regarding valuation. CB Richard Ellis, a worldwide provider of
commercial real estate services, performed strongly as the company raised
earnings guidance multiple times throughout the period. Increased earnings were
driven by the strong recovery in the commercial real estate market; CB Richard
Ellis outperformed many other financial services companies, as the company was
not negatively impacted by the flattening yield curve experienced in 2005.
FINANCIALS AND ENERGY WEIGHED ON PERFORMANCE
The aforementioned flattening yield curve negatively impacted the growth
opportunities of many financial services companies, particularly banks, during
2005. Slowing growth in areas such as credit card receivables also had a
negative impact on financial companies. The Fund's slight relative overweight
position and weak stock selection in this sector was the largest weight on Fund
performance for the period. First Marblehead Corporation, a provider of
outsourcing services for private education lending, saw its stock price drop
during the period as investors became concerned over the company's long-term
growth rate and management issues: the company delivered slower-than-expected
facilitation volume growth in the second and third quarters, and management
issues arose involving the CEO's resignation for the alleged giving of improper
gifts to an employee at one of First Marblehead's larger customers. Ambac
Financial Group, Inc. also underperformed, as slower credit enhancement
production was a sign that future earnings growth was likely to slow. The Fund
exited its positions in these stocks by the end of the period, as we believed
stronger growth opportunities existed elsewhere.
Although energy was a strong-performing sector in the Index during the
period, the Fund's underweight allocation and poor selection of energy stocks
impeded the Fund's relative return.
9
<Page>
SELECT IT ISSUES HURT RETURN
As was previously mentioned, the information technology sector positively
impacted the Fund's return; however, select IT stocks did detract from the
Fund's performance in this sector. Zebra Technologies Corporation missed second
quarter earnings because of weak retail numbers and economic conditions in
Europe. A slower-than-expected adoption of radio frequency identification (RFID)
technologies also impacted the near-term growth of the company. CDW Corporation
underperformed as the company missed Financials earnings expectations and saw
revenue growth at slower-than-historical levels. Furthermore, management failed
to maximize investor returns by not deploying its significant cash position.
VERITAS Software Corporation declined in the first half of the period, as
investors were concerned over the strategic rationale of the acquisition of
VERITAS by Symantec. TIBCO Software, Inc. was another underperforming IT stock.
INDIVIDUAL ISSUES IMPEDED RETURN
Tempur-Pedic International, Inc. was a notable individual poor performer as the
company delivered slightly lower-than-expected revenue growth in the second
quarter of the period, and announced substantially lower-than-expected earnings
and revenue for the period's third quarter. Management credibility was
negatively impacted by a lack of identification of the underlying problems that
led to the large shortfall in the third quarter. Healthcare holding Biomet, Inc.
declined over increasing concerns on pricing pressure for the company's
orthopedic hips and knees, and worries regarding slowing procedures growth.
[SIDENOTE]
SECTORS DETRACTING FROM THE FUND
Financials
Energy
Utilities
10
<Page>
POSITIONED FOR 2006
At the end of the period, the Fund was comprised of companies we believed may
continue to grow through a slowing economic environment--this included many
healthcare companies and select stocks within the information technology sector.
The Fund was also positioned to benefit from increased spending within the
telecommunications services sector. The Fund held underweight positions in
sectors likely to be negatively impacted by slowing consumer spending. Finally,
the Fund held a reduced relative position in the energy sector as a slowing
economy may lead to lower demand for oil and natural gas. Furthermore, the
weighting of this sector in the Fund's benchmark, the Russell MidCap Growth
Index, has increased substantially due to changes in the composition in the
Index; we have not found a corresponding increase in the number of energy sector
investments that we find compelling.
We will continue to focus on our bottom-up investment process and will work
diligently to seek the most attractive mix of potential reward and limited risk.
/s/ John B. Jares /s/ Daniel E. Crowe
John B. Jares, CFA Daniel E. Crowe, CFA
Co-Portfolio Manager Co-Portfolio Manager
11
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
12
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- ---------------------------------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,069.92 $ 8.09
CLASS A HYPOTHETICAL 1,000.00 1,017.29 7.91
CLASS B ACTUAL 1,000.00 1,067.65 12.40
CLASS B HYPOTHETICAL 1,000.00 1,013.06 12.15
CLASS C ACTUAL 1,000.00 1,067.19 11.98
CLASS C HYPOTHETICAL 1,000.00 1,013.46 11.74
CLASS F ACTUAL 1,000.00 1,070.98 7.20
CLASS F HYPOTHETICAL 1,000.00 1,018.16 7.04
CLASS R ACTUAL 1,000.00 1,071.84 6.48
CLASS R HYPOTHETICAL 1,000.00 1,018.88 6.33
CLASS T ACTUAL 1,000.00 1,067.04 13.49
CLASS T HYPOTHETICAL 1,000.00 1,011.98 13.22
</Table>
* Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- --------------------------------------------------------------------------------
CLASS A 1.55%
CLASS B 2.38%
CLASS C 2.30%
CLASS F 1.38%
CLASS R 1.24%
CLASS T 2.59%
</Table>
13
<Page>
STATEMENT OF INVESTMENTS
DECEMBER 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (DOMESTIC)--90.3%
ADVERTISING--3.1%
57,375 R.H. Donnelley Corporation* $ 3,535,446
--------------
AIRLINES--1.9%
100,000 AMR Corporation* 2,223,000
--------------
APPLICATION SOFTWARE--1.5%
39,000 NAVTEQ* 1,710,930
--------------
AUTOMOTIVE RETAIL--2.2%
58,000 Advance Auto Parts, Inc.* 2,520,680
--------------
BIOTECHNOLOGY--3.8%
20,000 Cephalon, Inc.* 1,294,800
30,500 Neurocrine Biosciences, Inc.* 1,913,265
94,000 Senomyx, Inc.* 1,139,280
--------------
4,347,345
--------------
CASINOS & GAMING--3.4%
94,000 Scientific Games Corporation* 2,564,320
25,000 Wynn Resorts Limited* 1,371,250
--------------
3,935,570
--------------
COMMERCIAL PRINTING--1.7%
150,000 Cenveo, Inc.* 1,974,000
--------------
COMMUNICATIONS EQUIPMENT--1.3%
135,000 Tellabs, Inc.* 1,471,500
--------------
CONSUMER ELECTRONICS--3.5%
41,425 Harman International Industries, Inc. 4,053,436
--------------
DATA PROCESSING & OUTSOURCED SERVICES--2.3%
25,500 Fiserv, Inc.* 1,103,385
40,000 Paychex, Inc. 1,524,800
--------------
2,628,185
--------------
DEPARTMENT STORES--0.8%
18,550 Kohl's Corporation* 901,530
--------------
ELECTRICAL COMPONENTS & EQUIPMENT--4.0%
33,675 Genlyte Group, Inc.* 1,803,970
65,450 Thomas and Betts Corporation* 2,746,282
--------------
4,550,252
--------------
ELECTRONIC EQUIPMENT MANUFACTURERS--4.3%
60,500 Agilent Technologies, Inc.* 2,014,045
128,000 FLIR Systems, Inc.* 2,858,240
--------------
4,872,285
--------------
HEALTHCARE EQUIPMENT--2.7%
132,675 PerkinElmer, Inc. 3,125,823
--------------
HEALTHCARE SERVICES--2.7%
54,700 Omnicare, Inc. 3,129,934
--------------
</Table>
14
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- --------------------------------------------------------------------------------
HEALTHCARE SUPPLIES--3.9%
61,300 Dade Behring Holdings, Inc. $ 2,506,557
36,700 DENTSPLY International, Inc. 1,970,423
--------------
4,476,980
--------------
HOME ENTERTAINMENT SOFTWARE--1.0%
85,500 Activision, Inc.* 1,174,770
--------------
HOME FURNISHINGS--1.0%
13,475 Mohawk Industries, Inc.* 1,172,056
--------------
HOMEFURNISHING RETAIL--1.8%
55,475 Bed Bath & Beyond, Inc.* 2,005,421
--------------
HOUSEWARES & SPECIALTIES--1.8%
69,000 Jarden Corporation* 2,080,350
--------------
LEISURE FACILITIES--0.5%
13,175 Royal Caribbean Cruises Limited 593,666
--------------
LEISURE PRODUCTS--1.0%
28,500 Brunswick Corporation 1,158,810
--------------
MANAGED HEALTHCARE--1.5%
29,025 Coventry Health Care, Inc.* 1,653,264
--------------
METAL & GLASS CONTAINERS--3.0%
86,575 Ball Corporation 3,438,759
--------------
OIL & GAS EQUIPMENT & SERVICES--4.2%
61,400 BJ Services Company 2,251,538
30,150 FMC Technologies, Inc.* 1,294,038
35,000 Weatherford International Limited* 1,267,000
--------------
4,812,576
--------------
OIL & GAS EXPLORATION & PRODUCTION--1.3%
29,300 Newfield Exploration Company* 1,467,051
--------------
OIL & GAS REFINING & MARKETING--1.2%
26,000 Valero Energy Corporation 1,341,600
--------------
PACKAGED FOODS & MEATS--1.1%
28,500 J. M. Smucker Company 1,254,000
--------------
PHARMACEUTICALS--6.0%
58,000 Covance, Inc.* 2,815,900
100,000 MGI Pharma, Inc.* 1,716,000
105,125 Theravance, Inc.* 2,367,415
--------------
6,899,315
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT--2.1%
40,950 CB Richard Ellis Group, Inc.* 2,409,908
--------------
REGIONAL BANKS--1.0%
66,000 UCBH Holdings, Inc. 1,180,080
--------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- --------------------------------------------------------------------------------
SEMICONDUCTORS--4.8%
106,000 Cypress Semiconductor Corporation* $ 1,510,500
92,400 Freescale Semiconductor, Inc. Class B* 2,325,708
46,650 Maxim Integrated Products, Inc. 1,690,596
--------------
5,526,804
--------------
SPECIALTY CHEMICALS--1.7%
31,100 Sigma-Aldrich Corporation 1,968,319
--------------
STEEL--3.7%
68,000 Allegheny Technologies, Inc. 2,453,440
25,850 Nucor Corporation 1,724,712
--------------
4,178,152
--------------
SYSTEMS SOFTWARE--1.0%
23,000 MICROS Systems, Inc.* 1,111,360
--------------
THRIFTS & MORTGAGE FINANCE--1.0%
27,000 The PMI Group, Inc. 1,108,890
--------------
TRADING COMPANIES & DISTRIBUTORS--1.3%
20,750 W.W. Grainger, Inc. 1,475,325
--------------
TRUCKING--1.9%
93,100 J.B. Hunt Transport Services, Inc. 2,107,784
--------------
WIRELESS TELECOMMUNICATION SERVICES--3.3%
138,050 American Tower Corporation* 3,741,155
--------------
TOTAL COMMON STOCKS (DOMESTIC)
(COST--$93,942,162) 103,316,311
--------------
COMMON STOCKS (FOREIGN)--7.1%
AUTO PARTS & EQUIPMENT--1.5%
38,500 Autoliv, Inc. (SW) 1,748,670
--------------
HEALTHCARE EQUIPMENT--2.0%
40,975 Mettler-Toledo International, Inc. (SZ)* 2,261,820
--------------
INVESTMENT BANKING & BROKERAGE--1.8%
65,150 Lazard Limited Class A (BD) 2,078,285
--------------
MULTI-LINE INSURANCE--0.8%
17,000 Arch Capital Group Limited (BD)* 930,750
--------------
SEMICONDUCTORS--1.0%
69,125 ATI Technologies, Inc. (CA)* 1,174,435
--------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$6,981,107) 8,193,960
--------------
</Table>
16
<Page>
<Table>
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- --------------------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--2.4%
SPECIAL PURPOSE ENTITY--2.4%
$ 2,800,000 CAFCO LLC
4.12% 1/3/06~ $ 2,799,359
--------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$2,799,359) 2,799,359
--------------
TOTAL INVESTMENTS--99.8%
(TOTAL COST--$103,722,628) 114,309,630
--------------
OTHER ASSETS AND LIABILITIES--0.2% 281,109
--------------
NET ASSETS--100.0% $ 114,590,739
==============
</Table>
NOTES TO STATEMENTS OF INVESTMENTS
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$2,799,359, OR 2.4%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
* NON-INCOME PRODUCING.
BD - BERMUDA
CA - CANADA
SW - SWEDEN
SZ - SWITZERLAND
SEE NOTES TO FINANCIAL STATEMENTS.
17
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 103,722,628
--------------
Investment securities, at market 114,309,630
Cash 167,613
Receivables:
Investment securities sold 356,639
Capital shares sold 31,945
Dividends and interest 39,364
Other assets 32,375
--------------
Total Assets 114,937,566
--------------
LIABILITIES
Payables and other accrued liabilities:
Capital shares redeemed 149,982
Advisory fees 80,537
Shareholder servicing fees 13,283
Accounting fees 5,933
Distribution fees 12,547
Transfer agency fees 8,650
Custodian fees 1,379
Directors' deferred compensation 32,375
Other 42,141
--------------
Total Liabilities 346,827
--------------
Net Assets $ 114,590,739
==============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 134,417,588
Accumulated net investment loss (21,525)
Accumulated net realized loss from security
and foreign currency transactions (30,392,326)
Net unrealized appreciation on investments
and foreign currency translation 10,587,002
--------------
Total $ 114,590,739
==============
</Table>
18
<Page>
<Table>
CLASS A
Net Assets $ 1,656,331
Shares Outstanding 353,936
Net Asset Value, Redemption Price Per Share $ 4.68
Maximum offering price per share
(net asset value plus sales charge of 5.75% of
offering price) $ 4.97
CLASS B
Net Assets $ 1,885,886
Shares Outstanding 421,009
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales
charge) Per Share $ 4.48
CLASS C
Net Assets $ 549,618
Shares Outstanding 124,333
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales
charge) Per Share $ 4.42
CLASS F
Net Assets $ 110,169,625
Shares Outstanding 23,056,571
Net Asset Value, Offering and Redemption Price Per Share $ 4.78
CLASS R
Net Assets $ 296,699
Shares Outstanding 62,746
Net Asset Value, Offering and Redemption Price Per Share $ 4.73
CLASS T
Net Assets $ 32,580
Shares Outstanding 7,360
Net Asset Value, Redemption Price Per Share $ 4.43
Maximum offering price per share
(net asset value plus sales charge of 4.50% of
offering price) $ 4.64
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 503,545
Interest 186,419
Foreign taxes withheld (460)
--------------
Total Investment Income 689,504
--------------
EXPENSES
Advisory fees--Note 2 900,119
Shareholder servicing fees--Note 2 157,519
Accounting fees--Note 2 66,009
Distribution fees--Note 2 138,955
Transfer agency fees--Note 2 84,207
Registration fees 56,220
Postage and mailing expenses 16,700
Custodian fees and expenses--Note 2 7,995
Printing expenses 48,790
Legal and audit fees 35,698
Directors' fees and expenses--Note 2 21,145
Other expenses 47,014
--------------
Total Expenses 1,580,371
Earnings Credits (7,875)
Reimbursed/Waived Expenses (3,773)
Expense Offset to Broker Commissions (12,440)
--------------
Net Expenses 1,556,283
--------------
Net Investment Loss (866,779)
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITY
TRANSACTIONS AND FOREIGN CURRENCY TRANSACTIONS
Net Realized Gain (Loss) on:
Security Transactions 19,689,375
Foreign Currency Transactions (2)
--------------
Net Realized Gain 19,689,373
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation (6,069,623)
--------------
Net Realized and Unrealized Gain 13,619,750
--------------
Net Increase in Net Assets Resulting from Operations $ 12,752,971
==============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2005 2004
OPERATIONS
Net Investment Loss $ (866,779) $ (1,149,129)
Net Realized Gain on Security
and Foreign Currency Transactions 19,689,373 32,490,110
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation (6,069,623) (10,271,293)
--------------- ---------------
Net Increase in Net Assets Resulting from Operations 12,752,971 21,069,688
--------------- ---------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A (86,979) 152,338
Class B (115,914) (32,488)
Class C 62,359 45,566
Class F (21,399,040) (60,416,547)
Class R 205,827 (51,768)
Class T (9,705) (76)
--------------- ---------------
Net Decrease from Capital Share Transactions (21,343,452) (60,302,975)
--------------- ---------------
Net Decrease in Net Assets (8,590,481) (39,233,287)
--------------- ---------------
NET ASSETS
Beginning of Year $ 123,181,220 $ 162,414,507
--------------- ---------------
End of Year $ 114,590,739 $ 123,181,220
=============== ===============
Accumulated Net Investment Loss $ (21,525) $ (19,633)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.15 $ 3.52 $ 2.58 $ 3.44 $ 4.38
- -------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.05) (0.03) 0.03 (0.04) (0.06)
Net realized and unrealized gains
(losses) on securities 0.58 0.66 0.91 (0.82) (0.88)
------------------------------------------------------------
Total from investment operations 0.53 0.63 0.94 (0.86) (0.94)
- -------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.68 $ 4.15 $ 3.52 $ 2.58 $ 3.44
============================================================
TOTAL RETURN(a) 12.77% 17.90% 36.43% (25.00%) (21.46%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,656 $ 1,546 $ 1,191 $ 476 $ 538
- -------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or
brokerage offsets(b) 1.58% 1.54% 1.87% 2.15% 2.47%
Expenses with reimbursements,
earnings credits and
brokerage offsets 1.55% 1.53% 1.86% 2.15% 2.46%
Net investment loss (0.92%) (1.07%) (1.38%) (1.81%) (1.93%)
- -------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 211% 147% 160% 216% 214%
</Table>
(a) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
22
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.01 $ 3.43 $ 2.54 $ 3.39 $ 4.32
- -------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.09) (0.07) (0.03) (0.05) (0.05)
Net realized and unrealized gains
(losses) on securities 0.56 0.65 0.92 (0.80) (0.88)
------------------------------------------------------------
Total from investment operations 0.47 0.58 0.89 (0.85) (0.93)
- -------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.48 $ 4.01 $ 3.43 $ 2.54 $ 3.39
============================================================
TOTAL RETURN(a) 11.72% 16.91% 35.04% (25.07%) (21.53%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,886 $ 1,823 $ 1,587 $ 969 $ 1,138
- -------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage
offsets(b) 2.43% 2.37% 2.65% 2.68% 2.59%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.41% 2.37% 2.64% 2.67% 2.58%
Net investment loss (1.78%) (1.90%) (2.16%) (2.33%) (2.06%)
- -------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 211% 147% 160% 216% 214%
</Table>
(a) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
--------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 3.96 $ 3.38 $ 2.50 $ 3.36 $ 4.32
- ---------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.02) (0.06)(a) (0.10) (0.08) (0.08)
Net realized and unrealized gains
(losses) on securities 0.48 0.64 0.98 (0.78) (0.88)
--------------------------------------------------------------
Total from investment operations 0.46 0.58 0.88 (0.86) (0.96)
- ---------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
--------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.42 $ 3.96 $ 3.38 $ 2.50 $ 3.36
==============================================================
TOTAL RETURN(b) 11.62% 17.16% 35.20% (25.60%) (22.22%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 550 $ 428 $ 323 $ 274 $ 380
- ---------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or
brokerage offsets(c) 2.35% 2.32% 2.51% 2.99% 3.94%
Expenses with reimbursements,
earnings credits and
brokerage offsets 2.32% 2.31% 2.51% 2.98% 3.93%
Net investment loss (1.69%) (1.83%) (2.02%) (2.65%) (3.41%)
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 211% 147% 160% 216% 214%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE
RATIOS WOULD HAVE BEEN 2.35% (2005), 2.32% (2004), 2.51% (2003), 3.04%
(2002), AND 4.25% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
24
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.24 $ 3.58 $ 2.62 $ 3.47 $ 4.36
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.12) (0.03)(a) 0.02 (0.04) (0.05)
Net realized and unrealized gains
(losses) on securities 0.66 0.69 0.94 (0.81) (0.84)
-------------------------------------------------------------------------
Total from investment operations 0.54 0.66 0.96 (0.85) (0.89)
- ---------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
-------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.78 $ 4.24 $ 3.58 $ 2.62 $ 3.47
=========================================================================
TOTAL RETURN 12.74% 18.44% 36.64% (24.50%) (20.41%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 110,170 $ 119,273 $ 159,161 $ 89,970 $ 119,708
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(b) 1.41% 1.33% 1.51% 1.56% 1.39%
Expenses with reimbursements, earnings
credits and brokerage offsets 1.39% 1.33% 1.50% 1.56% 1.37%
Net investment loss (0.77%) (0.87%) (1.01%) (1.22%) (0.84%)
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 211% 147% 160% 216% 214%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. THESE WAIVERS DID NOT HAVE AN
IMPACT ON THE EXPENSE RATIOS.
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
---------------------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 4.19 $ 3.56 $ 2.61 $ 3.48 $ 4.39
- -----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.02)(a) (0.04)(a) (0.03) (0.04) 0.01
Net realized and unrealized gains
(losses) on securities 0.56 0.67 0.98 (0.83) (0.92)
---------------------------------------------------------------------------
Total from investment operations 0.54 0.63 0.95 (0.87) (0.91)
- -----------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
---------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.73 $ 4.19 $ 3.56 $ 2.61 $ 3.48
===========================================================================
TOTAL RETURN 12.89% 17.70% 36.40% (25.00%) (20.73%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 297 $ 71 $ 119 $ 77 $ 49
- -----------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(b) 1.38% 1.48% 1.64% 1.97% 2.91%
Expenses with reimbursements, earnings
credits and brokerage offsets 1.34% 1.48% 1.64% 1.97% 2.89%
Net investment loss (0.70%) (1.03%) (1.15%) (1.63%) (2.40%)
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 211% 147% 160% 216% 214%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 1.38% (2005), 1.48% (2004), 1.64% (2003), 3.49% (2002), AND
57.54% (2001).
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
26
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
-----------------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 3.97 $ 3.39 $ 2.51 $ 3.39 $ 4.35
- -------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.17) (0.06) (0.02) (0.06) (0.11)
Net realized and unrealized gains
(losses) on securities 0.63 0.64 0.90 (0.82) (0.85)
-----------------------------------------------------------------------
Total from investment operations 0.46 0.58 0.88 (0.88) (0.96)
- -------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
-----------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 4.43 $ 3.97 $ 3.39 $ 2.51 $ 3.39
=======================================================================
TOTAL RETURN(a) 11.59% 17.11% 35.06% (25.96%) (22.07%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 33 $ 40 $ 34 $ 20 $ 20
- -------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements, but no
earnings credits or brokerage offsets(b) 2.59% 2.26% 2.76% 3.64% 3.13%
Expenses with reimbursements, earnings
credits and brokerage offsets 2.57% 2.25% 2.76% 3.63% 3.11%
Net investment loss (1.94%) (1.78%) (2.27%) (3.29%) (2.57%)
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 211% 147% 160% 216% 214%
</Table>
(a) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(b) CERTAIN FEES WERE REIMBURSED OR WAIVED BY THE MANAGEMENT COMPANY OR ITS
AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE EXPENSE RATIOS
WOULD HAVE BEEN 2.59% (2005), 2.26% (2004), 2.76% (2003), 10.30% (2002), AND
28.91% (2001).
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<Page>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders Mid-Cap Growth Fund (the "Fund"). The Fund offers
Class A, Class B, Class C, Class F, Class R and Class T shares. Class A and
Class T shares are subject to a sales charge imposed at the time of purchase,
Class B shares are subject to a contingent deferred sales charge ("CDSC")
imposed on Class B shares redeemed within six years of purchase, Class C shares
are subject to a CDSC imposed on Class C shares redeemed within one year of
purchase and Class F and Class R shares are sold at net asset value per share
(with Class R shares sold only to eligible institutional investors). Other
differences between the classes include services offered to and the expenses
borne by each Class. The following significant accounting policies have been
consistently followed by the Fund in the preparation of its financial
statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair value as
28
<Page>
determined in good faith by the Company's board of directors or pursuant to
procedures approved by the board of directors. These situations may include
instances where an event occurs after the close of the market on which a
security is traded but before the Fund calculates its net asset value, and it is
determined that the event has materially affected the value of the security.
Fair value of foreign equity securities may be determined with the assistance of
a pricing service using correlations between the movement of prices of foreign
securities and indexes of domestic securities and other appropriate indicators,
such as closing market prices of relevant ADRs and futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund may invest at least a
portion of its assets in foreign securities. Foreign securities carry more risk
than U.S. securities, such as political and currency risks. In the event the
Fund executes a foreign security transaction, the Fund may enter into a foreign
currency contract to settle the foreign security transaction. The Fund could be
exposed to risk if counterparties are unable to meet the terms of the contracts
or if the value of the currency changes unfavorably to the U.S. dollar. The
resultant foreign currency gain or loss from the contract is recorded as foreign
currency gain or loss and is presented as such in the Statement of Operations.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each day.
Purchases and sales of investment securities and income and expense items
denominated in foreign currencies are translated into U.S. dollar amounts on the
respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net unrealized gain or loss from investments and foreign
currency translations on the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized appreciation or depreciation on investments and foreign
currency translation arises from changes in the values of assets and
liabilities, including investments in securities held at the date
29
<Page>
of the financial statements, resulting from changes in the exchange rates and
changes in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) and from net realized capital gains (if any)
annually. Dividends and distributions, which are determined in accordance with
income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
30
<Page>
Financial Corporation, a publicly-owned financial services company which
provides a comprehensive range of financial products and services in domestic
and selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
1.00% of the first $30 million of net assets, 0.75% of the next $270 million of
net assets, 0.70% of the next $200 million of net assets and 0.65% of net assets
in excess of $500 million.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $148,040 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $58,677 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $12.58 to $13.36, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency fees, including both the per account fees paid to
DTI and out-of-pocket charges, during the year ended December 31, 2005 were as
follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
----------------------------------------------------------------
Class A $ 3,461
Class B $ 5,664
Class C $ 1,143
Class R $ 319
Class T $ 288
</Table>
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the
31
<Page>
processing of shareholder transactions in the Funds. During the year ended
December 31, 2005, the Fund was charged $2,696 for cash management fees, which
are included in the out-of-pocket transfer agency charges above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $14,655 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $122,339 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
-------------------------------------------------------------------
Class A N/A $ 3,892
Class B $ 12,948 $ 4,316
Class C $ 3,595 $ 1,198
Class T $ 73 $ 73
</Table>
During the year ended December 31, 2005, DSC retained $2,891 in sales
commissions from the sales of Class A shares. DSC also retained $2,219 and $44
of contingent deferred sales charges relating to redemptions of Class B and
Class C shares, respectively.
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance
32
<Page>
monitoring, regulatory and shareholder reporting, as well as related facilities,
equipment and clerical help. The fee is computed at the annual rate of 0.06% of
the average daily net assets of the Fund on the first $500 million, 0.04% of the
average daily net assets of the Fund on the next $500 million and 0.02% of the
average daily net assets of the Fund in excess of $1 billion, plus reasonable
out-of-pocket expenses. Founders has contractually agreed in writing to waive
any fees received for these services to the extent they exceed Founders' costs
in providing the services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits on the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
------------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $3,773, which reduced the amount paid to
Mellon Bank to $4,222.
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of one or more of the Funds. The amount paid to the director under the
plan will be determined based upon the performance of the selected Funds. The
current value of these amounts is included in Other Assets and Directors'
Deferred Compensation on the Statement of Assets and Liabilities. Changes in
market value are included in the Directors' fees and expenses and the net change
in unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally
33
<Page>
accepted in the United States of America. These differences are due to differing
treatments for items such as deferral of wash sale losses, deferred
compensation, foreign currency transactions, net operating losses and capital
loss carryovers. Permanent differences identified during the year ended December
31, 2005 have been reclassified among the components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
-------------------------------------------------------------
$ 864,887 $ 2 $ (864,889)
</Table>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of December 31, 2005, represent capital loss carryovers that may be
available to offset future realized capital gains and thereby reduce future
taxable gains distributions. Post-October 31 foreign currency losses noted
below, if any, may be used to offset future net investment income and thereby
reduce future ordinary income distributions. Net capital loss carryovers
utilized during 2005 by the Fund amounted to $19,469,094. Accumulated capital
losses as of December 31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
-----------------------------------------------------------
2010 $ 30,227,567
===============
</Table>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The primary difference between book and tax appreciation or depreciation
is wash sale loss deferrals.
<Table>
Other Book/Tax Differences $ (21,524)
Federal Tax Cost $ 103,887,388
Gross Tax Appreciation of Investments $ 11,953,629
Gross Tax Depreciation of Investments $ (1,531,387)
Net Tax Appreciation $ 10,422,242
</Table>
34
<Page>
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 500 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 190,179 $ 807,085 226,896 $ 852,592
Redeemed (208,547) $ (894,064) (193,006) $ (700,254)
----------- --------------- ----------- ---------------
Net Increase (Decrease) (18,368) $ (86,979) 33,890 $ 152,338
=========== =============== =========== ===============
CLASS B
Sold 84,947 $ 353,630 89,684 $ 322,791
Redeemed (118,554) $ (469,544) (98,294) $ (355,279)
----------- --------------- ----------- ---------------
Net Decrease (33,607) $ (115,914) (8,610) $ (32,488)
=========== =============== =========== ===============
CLASS C
Sold 44,048 $ 176,957 110,256 $ 385,913
Redeemed (27,892) $ (114,598) (97,748) $ (340,347)
----------- --------------- ----------- ---------------
Net Increase 16,156 $ 62,359 12,508 $ 45,566
=========== =============== =========== ===============
CLASS F
Sold 1,291,586 $ 5,627,660 3,973,983 $ 14,909,282
Redeemed (6,397,317) $ (27,026,700) (20,268,328) $ (75,325,829)
----------- --------------- ----------- ---------------
Net Decrease (5,105,731) $ (21,399,040) (16,294,345) $ (60,416,547)
=========== =============== =========== ===============
CLASS R
Sold 57,080 $ 257,056 23,623 $ 90,989
Redeemed (11,295) $ (51,229) (40,138) $ (142,757)
----------- --------------- ----------- ---------------
Net Increase (Decrease) 45,785 $ 205,827 (16,515) $ (51,768)
=========== =============== =========== ===============
CLASS T
Sold 906 $ 4,021 1,380 $ 4,956
Redeemed (3,512) $ (13,726) (1,452) $ (5,032)
----------- --------------- ----------- ---------------
Net Decrease (2,606) $ (9,705) (72) $ (76)
=========== =============== =========== ===============
</Table>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $220,910,477 and $240,649,658, respectively.
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<Page>
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
36
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders Mid-Cap Growth
Fund (one of the portfolios constituting Dreyfus Founders Funds, Inc., hereafter
referred to as the "Fund") at 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 Sates of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where securities purchased had not been received, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
37
<Page>
FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
38
<Page>
The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services being
provided to the Funds are satisfactory, as evidenced in part by the recent
performance records of the Funds, to which the directors gave significant
attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to the
Funds, but also recognize that Founders or its affiliates have provided the
highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
39
<Page>
small group of funds selected by Lipper and a larger universe of funds also
selected by Lipper. The Lipper materials further included graphs depicting each
Fund's Class F one-year and annualized performance results for two-, three-,
four-, five-, and ten-year periods, if applicable, in comparison to the Fund's
performance group and performance universe.
Mid-Cap Growth Fund's performance for the one-year period ended December 31,
2004 placed it in the first quintile of its Lipper performance group, with the
Fund ranking third out of 15 Lipper-selected "peer funds," and in the first
quintile of its Lipper mid-cap growth fund performance universe, ranking 69th of
527 funds. The Fund's performance within its Lipper-selected group and universe
for the two-year period ended December 31, 2004 had placed it in the second
quintile, with the Fund having placed in the third quintile of its
Lipper-selected group and in the first quintile of its Lipper-selected universe
for the three-year period ended December 31, 2004. The directors deemed these
relative performance results to be very satisfactory, and stressed the
importance to Founders of the need to seek to maintain a strong performance
record.(1)
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance difficulties,
more recent performance results generally have shown significant improvement;
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS DO NOT REFLECT THE FRONT-END SALES
CHARGES THAT APPLY TO OTHER SHARE CLASSES.
40
<Page>
Founders has focused its efforts upon improving the performance records of
the Funds and will continue to seek improvement; and
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing in
the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY FOUNDERS AND
ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, Mid-Cap Growth
Fund's management fees ranked in the third quintile of its Lipper competitive
expense group, with the Fund's fees the seventh lowest of 15 "peer funds." The
Fund's contractual management fees at a common asset level were determined by
Lipper to be lower than eight of the 15 funds in its group. The Fund's
management fees were in the third quintile of its Lipper expense universe,
placing 72nd lowest of 145 funds.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain efficiencies
in performing the
41
<Page>
portfolio management, trading and operational functions related to those
accounts (the directors recognized that in determining its profitability from
providing investment management and other services to the Funds, Founders
allocated its expenses between the Funds and other accounts in a manner which
was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment services
to any of the clients it advises, not just the Funds. The directors
recognized that Founders' profitability would be lower if it did not receive
research and brokerage services in connection with these brokerage
transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders' management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the investment advisory fees received by
Founders. However, the directors noted that
42
<Page>
Founders' profitability is expected to decline in 2005 as a result of declines
in Fund asset levels. The directors also considered the risks assumed by
Founders in providing management services to the Funds, including the risk that
the management agreement can be terminated by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of investment
advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially fees
which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than fees
arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in recognition of the quality service
which Founders has provided and continues to provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
43
<Page>
ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of scale if the assets of the Funds were to increase. Among other information,
the directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into increased
profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of an
increase in the assets of a particular Fund or a group of Funds would not be
passed along on a dollar-for-dollar basis to the shareholders of other Funds
that did not experience increases in their assets to points above their
breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is consistent
with its objective of sharing its economies of scale with the Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
restrictions. The directors determined that Founders is dedicated to compliance
with all applicable rules and regulations and that the systems of controls which
are in place to ensure that the service providers to the Funds, including
Founders, and the Funds themselves, maintain strict adherence to the law are
excellent.
44
<Page>
OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years and that efforts are being and will continue to be
made to enhance such improvement and to maintain Fund expense ratios at
reasonable and competitive levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
45
<Page>
YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
46
<Page>
Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice
President--Compliance since 2002. Formerly, Founders' Manager of Compliance
(2000 to 2002) and Securities Compliance Examiner, Staff Accountant and Team
Leader for the U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
47
<Page>
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
DREYFUS FOUNDERS TRANSFER AGENT &
MID-CAP GROWTH FUND DIVIDEND DISBURSING AGENT
MANAGER Dreyfus Transfer, Inc.
200 Park Avenue
Founders Asset New York, NY 10166
Management LLC
210 University Boulevard DISTRIBUTOR
Suite 800
Denver, CO 80206 Dreyfus Service Corporation
200 Park Avenue
New York, NY 10166
- -------------------------------------------------------------------------------
TELEPHONE Call your financial representative or 1-800-554-4611
MAIL Dreyfus Founders Funds, Inc.
144 Glenn Curtiss Boulevard, Uniondale, NY 11556-0144
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The fund's Forms N-Q are available on the SEC's website at
http://www.sec.gov and may be reviewed and copied at 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.
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities, and information regarding how
the fund voted these proxies for the 12-month period ended June 30, 2005, is
available at http://www.dreyfus.com and on the SEC's website at
http://www.sec.gov. The description of the policies and procedures is
also available without charge, upon request, by calling 1-800-645-6561.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE
GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Dreyfus Founders Funds are managed by Founders Asset Management LLC.
Founders and Founders Funds are registered trademarks of Founders
Asset Management LLC.
[LION GRAPHIC]
(C)2006 Founders Asset Management LLC 0291AR1205
<Page>
Dreyfus Founders
Passport Fund
ANNUAL REPORT December 31, 2005
[LION GRAPHIC]
YOU, YOUR ADVISOR AND
(R) [DREYFUS LOGO]
A MELLON FINANCIAL COMPANY (SM)
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 12
Statement of Investments 14
Statement of Assets and Liabilities 23
Statement of Operations 25
Statements of Changes in Net Assets 26
Financial Highlights 27
Notes to Financial Statements 33
Report of Independent Registered Public Accounting Firm 42
Factors Considered in Renewing the Advisory Agreement 43
Your Board Representatives 51
</Table>
-----------------------------------------------------------
Save time. Save paper. View your next shareholder report
online as soon as it's available. Log into www.dreyfus.com
and sign up for Dreyfus eCommunications. It's simple and
only takes a few minutes.
-----------------------------------------------------------
INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
managers only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-10 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC-INSURED - NOT BANK-GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF DANIEL B. LEVAN]
[PHOTO OF JOHN W. EVERS]
A DISCUSSION WITH CO-PORTFOLIO MANAGERS DANIEL B. LEVAN, CFA, LEFT; AND JOHN W.
EVERS, CFA, REGARDING FUND PERFORMANCE FOR THE 12-MONTH PERIOD ENDED
DECEMBER 31, 2005.
ROBUST RETURNS DESPITE OBSTACLES
Generally speaking, 2005 may be remembered as a year in which international
equity markets, burdened with a plethora of market obstacles including high
energy prices, rising raw material prices, increasing interest rates and
inflationary pressures, geopolitical tension and severe weather events, posted
broad-based and robust returns.
The most compelling growth opportunities overall were found in Japan and
South Korea. Confirmation concerning Japan's long-awaited emergence from
deflation finally surfaced as domestic economic activity ticked up in earnest,
while improving relations with the North bolstered South Korea's advance. Also
important to note is that the economies of both Japan and South Korea
significantly benefited from intra-Asian trade with China and India.
European markets offered the least compelling growth opportunities in 2005
as the Bank of England and the European Central Bank each reversed course on
monetary policy and began raising inter-bank borrowing rates in an effort to
ward off inflation. Other notable distractions to growth opportunities across
Europe included higher energy costs, continued high employment and overwhelming
lack of support for the European Union constitution. Nonetheless, European stock
prices continued to move higher despite these headwinds, as companies reported
improving profitability and continued to raise the bar on earnings forecasts.
3
<Page>
Nine out of ten economic sectors in the Morgan Stanley Capital
International (MSCI) World ex U.S. Small Cap Index posted double-digit returns
in 2005, with the energy sector posting the highest return of 67%. Several
sectors and countries posted returns above 20% in the MSCI World ex U.S. Small
Cap Index for the full-year period, with Japan a notable gainer.
For the 12-month period ended December 31, 2005, Dreyfus Founders Passport
Fund underperformed the MSCI World ex U.S. Small Cap Index, which gained 25.04%.
The Fund also underperformed the Standard & Poor's/Citigroup Extended Market
Index World ex U.S.(SM), which rose 22.09% for the same period.(1)
NEW MANAGEMENT TEAM MADE CHANGES
In November 2005, the Fund's new management team was put in place, and
instituted several changes to the Fund's composition. One major change was to
mitigate risk exposure to countries and sectors in order to focus exclusively on
bottom-up stock selection. To accomplish this, a large component of the
portfolio was replaced with securities exhibiting business momentum and
valuation metrics more consistent with the portfolio management team's
investment philosophy. Another shift instituted was the embedding of the stock
selection process within a quantitative framework, which is used to introduce
greater efficiency and discipline into the portfolio management process. These
changes, however, came late in the period and thus did not materially impact
Fund performance for the balance of 2005.
COUNTRIES AFFECTED PERFORMANCE
The Fund's relative overexposure to South Korea added value to its performance.
A relative overweight position and effective stock selection in oil-rich Norway
also benefited Fund performance for the period. The Fund's
- ----------
(1) The Morgan Stanley Capital International (MSCI) World ex U.S. Small Cap
Index measures global performance of small capitalization securities outside of
the United States. In connection with the management team change in November
2005, the Fund's benchmark index was changed from the MSCI World ex U.S. Small
Cap Index to the Standard & Poor's/Citigroup Extended Market Index World ex U.S.
(the "S&P/Citigroup EMI World ex U.S."). The total return figures cited for
these indexes assume change in share price and reinvestment of dividends after
the deduction of local taxes, but do not reflect the costs of managing a mutual
fund.
[SIDENOTE]
"ONE MAJOR CHANGE MADE TO THE FUND WAS TO MITIGATE RISK EXPOSURE TO COUNTRIES
AND SECTORS IN ORDER TO FOCUS EXCLUSIVELY ON BOTTOM-UP STOCK SELECTION."
4
<Page>
underweight position and solid selection of stocks in Austria allowed the Fund
to post an excellent return in this country, due in part to the strong
performance of alternative energy companies. Positions in the emerging markets
of India and Taiwan, which are not included in the MSCI World ex U.S. Small Cap
Index, also had a positive total effect on relative performance.
Strong-performing Japanese real-estate stocks such as URBAN CORPORATION and
KENEDIX, INC., however, did not counterbalance the negative effect the Fund's
underweight position in Japan had on annual relative performance.
Hong Kong, Italy and Australia hampered Fund performance for the period
through weak relative weightings and poor performance by select stocks within
each country. The Fund's position in Thailand, an emerging market not included
in the Index, also detracted from performance.
ENERGY GAINED GROUND
Some of the more compelling growth stories during the period were found in
sectors that historically have not been considered as such. For example,
commodity-driven sectors such as energy and materials reported record earnings
on the back of strong demand as well as historically high commodity prices.
These sustained high commodity prices were very favorable to small-cap energy
stocks in 2005. Companies such as independent exploration and development firms
benefited from high leverage to oil prices, while small-cap oil-services stocks
benefited from higher capital spending by the
<Table>
LARGEST EQUITY HOLDINGS (country of origin; ticker symbol)
1. TRICAN WELL SERVICE LIMITED (Canada; TCW) 1.62%
2. URBAN CORPORATION (Japan; 8868) 1.08%
3. NIPPON SHOKUBAI COMPANY LIMITED (Japan; 4114) 1.07%
4. INMET MINING CORPORATION (Canada; IMN) 1.01%
5. KEIHIN CORPORATION (Japan; 7251) 0.98%
6. MITSUBISHI GAS CHEMICAL COMPANY, INC. (Japan; 4182) 0.97%
7. IPSCO, INC. (Canada; IPS) 0.92%
8. KENEDIX, INC. (Japan; 4321) 0.92%
9. VALLOUREC SA (France; VK) 0.84%
10. SUMISHO LEASE COMPANY LIMITED (Japan; 8592) 0.83%
</Table>
Portfolio holdings are subject to change, and should not be construed as a
recommendation of any security.
5
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 1-800-525-2440 TO OBTAIN THE MOST
RECENT MONTH-END PERFORMANCE DATA.
[CHART TO COME]
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders Passport Fund on 12/31/95 to a $10,000 investment made in unmanaged
securities indexes on that date. The Fund's performance assumes the reinvestment
of dividends and capital gain distributions, but does not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or redemption of
Fund shares. The Fund offers multiple classes of shares. Performance shown is
for Class F, which is open only to grandfathered investors. The Fund's
performance in the graph takes into account all applicable Class F fees and
expenses, subject to applicable fee waivers. THESE FIGURES DO NOT REFLECT THE
MAXIMUM SALES CHARGES APPLICABLE TO CLASS A, B, C, OR T SHARES OF THE FUND. FOR
THESE SHARE CLASSES, APPLYING THESE CHARGES WILL RESULT IN LOWER RETURNS FOR
INVESTORS.
The S&P/Citigroup EMI World ex U.S. represents, on a country-by-country basis,
the small-capitalization component of the Citigroup Broad Market Index(SM),
which is a comprehensive float-weighted index of companies in 26 countries
(excluding the U.S.) with market capitalizations of at least $100 million. The
Morgan Stanley Capital International (MSCI) World ex U.S. Index measures global
developed market equity performance outside of the United States. The total
return figures cited for these indexes assume change in security prices and
reinvestment of dividends, but do not reflect the costs of managing a mutual
fund. In future shareholder reports, the Fund's performance will no longer be
compared to the MSCI World ex U.S. Index, as the S&P/Citigroup EMI World ex U.S.
is the benchmark used by the new portfolio management team in managing the Fund.
Further information related to Fund performance is contained elsewhere in this
report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (INCEPTION DATE) YEAR YEARS YEARS INCEPTION
- -----------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) 13.05% 5.96% -- (1.02%)
Without sales charge 19.93% 7.23% -- (0.04%)
B SHARES (12/31/99)
With redemption* 14.89% 6.01% -- (0.99%)
Without redemption 18.89% 6.32% -- (0.84%)
C SHARES (12/31/99)
With redemption** 17.98% 6.34% -- (0.85%)
Without redemption 18.98% 6.34% -- (0.85%)
F SHARES (11/6/93) 19.99% 7.25% 9.90% 9.54%
R SHARES (12/31/99) 20.17% 6.63% -- (0.46%)
T SHARES (12/31/99)
With sales charge (4.50%) 13.98% 5.29% -- (1.58%)
Without sales charge 19.38% 6.26% -- (0.83%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, fee
waivers, and adjustments for financial statement purposes. Part of the Fund's
historical performance is due to the purchase of securities sold in initial
public offerings (IPOs). There is no guarantee that the Fund's investments in
IPOs, if any, will continue to have a similar impact on performance. Part of the
Fund's historical performance is due to amounts received from class action
settlements regarding prior Fund holdings. There is no guarantee that these
settlement distributions will occur in the future or have a similar impact on
performance. There are risks associated with small-cap investments such as
limited product lines, less liquidity, and small market share. Investments in
foreign securities entail unique risks, including political, market, and
currency risks.
* The maximum contingent deferred sales charge for Class B shares is 4% and
is reduced to 0% after six years, at which time the Class B shares convert
to Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
major oil companies and a tight oil rig market. The Fund's overweight position
in the energy sector did buoy performance, as Norwegian offshore drillers, Ocean
Rig ASA and Sinvest ASA, and French oil-services company VALLOUREC SA were
positive contributors to Fund performance.
The Fund's positions in firms involved in the engineering and production of
alternative sources of energy, particularly solar, also outperformed, as high
oil prices pushed consumers to consider alternative energy sources. SolarWorld
AG, a solar products company, was the strongest performing individual issue in
the Fund for the period, and boosted the Fund's performance in its country of
domicile, Germany.
IT AND CONSUMER-RELATED STOCKS HELPED RETURN
The Fund's stock selection in the information technology (IT) sector created a
boon to performance as well, with issues such as CSR PLC. CSR, a Bluetooth
technology provider, advanced during the period as the attach rate for cell
phones with Bluetooth technology continued to accelerate, in addition to other
Bluetooth applications.
Consumer staples and consumer discretionary stocks also positively impacted
the Fund's performance through effective stock selection. An underweight
position in the consumer staples sector also proved fruitful.
[CHART]
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
Japan 23.35%
United Kingdom 16.80%
France 9.31%
Canada 8.00%
Germany 6.19%
Switzerland 4.44%
Netherlands 4.34%
Australia 4.15%
Other Countries 22.65%
Cash & Equivalents 0.77%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio
managers and are subject to change at any time, based on market and other
conditions, and should not be construed as a recommendation of any specific
security.
[SIDENOTE]
SECTORS BENEFITING THE FUND
Information Technology
Energy
Consumer Staples
8
<Page>
Consumer discretionary issue Ic Companys AS implemented a comprehensive
restructuring plan during the period, which has proven successful. Online gaming
stocks, such as Austrian-based BetandWin.com Interactive, also benefited the
consumer discretionary sector and contributed to the Fund's relative
outperformance in Austria.
An underweight position in the strong-performing materials sector, however,
weighed on the Fund's return for the period.
FINANCIALS PERFORMANCE WAS MIXED
Although stocks in the financials sector underperformed for the Fund, with an
underweight position and weak stock selection both culprits overall, the sector
provided mixed performance from individual holdings. Some holdings that greatly
benefited the Fund's return included aforementioned Japanese real estate
companies, Urban Corporation and Kenedix, Inc., while others, namely Upbest
Group Limited and Melco International Development Limited, produced a drag on
relative performance.
TELECOMMUNICATIONS SERVICES WEIGHED ON RETURN
Telecommunications services operators suffered in 2005 as wireless providers
spent more money on next-generation networks and attracting new customers.
Additionally, mobile number portability led to higher churn rates across
wireless operators, and wire-line operators lost customers to the mobile market.
A major detractor to Fund performance was its stock selection in this sector,
with holdings such as French telecommunications service company, 123 Multimedia
SA, underperforming. 123 Multimedia issued a profit warning in July after
reporting lower-than-expected sales figures.
SELECT ISSUES DETRACTED
The information technology sector had the greatest positive contribution to the
Fund's relative performance during the period; however, select IT issues also
realized declines, including Global Flex Holdings Limited, producer of flexible
printed circuit boards (FPCs), e-gaming software provider Boss Media
[SIDENOTE]
SECTORS DETRACTING FROM THE FUND
Financials
Telecommunications Services
Utilities
9
<Page>
AB and Taiwan-domiciled PC Home Online. PC Home Online's stock fell during the
period due to a change in the company's business model, resulting in lower
margins.
Although numerous alternative energy companies prospered in the high
oil-price environment, biodiesel manufacturer D1 Oils PLC's stock price faltered
during the period. Some consumer discretionary holdings also suffered, including
Korean record label S.M. Entertainment Company Limited and Japanese online ad
agency Cyber Agent Limited. Industrials firm Romag Holdings PLC, a manufacturer
of specialist transparent composites, also experienced a stock price drop during
the period.
IN CONCLUSION
We believe the aforementioned changes made to the Fund's composition positioned
the Fund well at the end of the period. Our plans to reduce the turnover rate of
holdings and focus on strong business momentum, and our withdrawal from
participation in emerging markets will, in our view, help the Fund perform more
in line with its new benchmark, the S&P/Citigroup EMI World ex U.S., and will
allow us to focus on stock selection.
At the end of the period, the Fund was broadly diversified across countries
and sectors, investing in all 10 major economic sectors and 21 of 26 benchmark
countries; the five countries without exposure in the Fund represented less than
1% of the new benchmark. Overall, we believe the Fund is more attractively
valued with higher earnings growth potential than its new benchmark.
We are excited by the opportunity to manage the Fund and appreciate the
support we have received during this management transition. We are optimistic as
we enter 2006 and committed to serving the Fund's shareholders with the highest
level of investment excellence.
/s/ Daniel B. LeVan /s/ John W. Evers
Daniel B. LeVan, CFA, John W. Evers, CFA
Co-Portfolio Manager Co-Portfolio Manager
10
<Page>
This page intentionally left blank.
11
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
12
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- ------------------------------------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,093.31 $ 11.45
CLASS A HYPOTHETI 1,000.00 1,014.13 11.08
CLASS B ACTUAL 1,000.00 1,090.79 15.81
CLASS B HYPOTHETICAL 1,000.00 1,009.89 15.31
CLASS C ACTUAL 1,000.00 1,090.84 15.60
CLASS C HYPOTHETICAL 1,000.00 1,010.10 15.11
CLASS F ACTUAL 1,000.00 1,093.26 11.40
CLASS F HYPOTHETICAL 1,000.00 1,014.18 11.03
CLASS R ACTUAL 1,000.00 1,093.97 9.98
CLASS R HYPOTHETICAL 1,000.00 1,015.56 9.65
CLASS T ACTUAL 1,000.00 1,092.10 13.50
CLASS T HYPOTHETICAL 1,000.00 1,012.14 13.07
</Table>
*Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- --------------------------------------------------------------------------------
CLASS A 2.17%
CLASS B 3.00%
CLASS C 2.96%
CLASS F 2.16%
CLASS R 1.89%
CLASS T 2.56%
</Table>
13
<Page>
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (FOREIGN)--98.1%
ADVERTISING--0.6%
9,300 Publicis Groupe (FR) $ 323,686
12,800 SR Teleperformance (FR) 400,047
---------------
723,733
---------------
AEROSPACE & DEFENSE--1.3%
22,339 Chemring Group PLC (UK) 282,120
26,000 Japan Aviation Electronics Industry Limited (JA) 365,964
25,500 Ultra Electronics Holdings PLC (UK) 435,237
6,000 Zodiac SA (FR) 385,344
---------------
1,468,665
---------------
AIR FREIGHT & LOGISTICS--0.3%
61,500 Wincanton PLC (UK) 359,773
---------------
AIRLINES--0.4%
80,100 British Airways PLC (UK)* 460,313
---------------
APPAREL RETAIL--0.4%
5,200 Charles Voegele Holding AG (SZ) 393,730
---------------
APPAREL, ACCESSORIES & LUXURY GOODS--0.6%
15,800 Gildan Activewear, Inc. (CA)* 679,570
---------------
ASSET MANAGEMENT & CUSTODY BANKS--1.0%
3,613 MPC Muenchmeyer Petersen Capital AG (GE) 282,727
6,000 Perpetual Trustees Australia Limited (AU) 299,098
29,100 Schroder's PLC (UK) 475,654
---------------
1,057,479
---------------
AUTO PARTS & EQUIPMENT--2.0%
14,700 Futaba Industrial Company Limited (JA) 352,745
42,300 Keihin Corporation (JA) 1,083,190
53,000 Koito Manufacturing Company Limited (JA) 814,313
---------------
2,250,248
---------------
BIOTECHNOLOGY--0.3%
4,000 Actelion Limited (SZ)* 330,873
---------------
BREWERS--0.3%
17,500 Wolverhampton & Dudley Breweries PLC (UK) 382,398
---------------
</Table>
AU Australia
AT Austria
BE Belgium
CA Canada
CN China
DE Denmark
FI Finland
FR France
GE Germany
GR Greece
HK Hong Kong
IE Ireland
IT Italy
JA Japan
KR South Korea
NE Netherlands
NW Norway
PT Portugal
SG Singapore
SP Spain
SW Sweden
SZ Switzerland
UK United Kingdom
14
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
BROADCASTING & CABLE TV--0.6%
14,100 Astral Media, Inc. (CA) $ 371,634
60,000 Television Broadcasts Limited (HK) 318,816
---------------
690,450
---------------
BUILDING PRODUCTS--0.3%
400 Geberit AG (SZ) 316,566
---------------
COMMODITY CHEMICALS--0.3%
7,300 Honam Petrochemical Corporation (KR) 361,082
---------------
COMMUNICATIONS EQUIPMENT--1.8%
171,300 Carphone Warehouse PLC (UK) 816,416
38,800 GN Store Nord AS (DE) 507,934
47,100 Tandberg Television ASA (NW)* 622,831
---------------
1,947,181
---------------
COMPUTER HARDWARE--0.3%
3,300 Wincor Nixdorf AG (GE) 347,658
---------------
COMPUTER STORAGE & PERIPHERALS--1.1%
523,000 Jurong Technologies Industrial Corporation Limited (SG) 569,333
12,700 Logitech International SA (SZ)* 596,777
---------------
1,166,110
---------------
CONSTRUCTION & ENGINEERING--5.8%
22,000 ACS, Actividades de Construccion y Servicios SA (SP) 708,678
86,900 Carillion PLC (UK) 457,526
7,300 Eiffage SA (FR) 789,026
8,700 Hyundai Development Company (KR) 394,183
26,145 Kier Group PLC (UK) 535,316
9,700 Koninklijke BAM Groep NV (NE) 814,171
65,000 Kyowa Exeo Corporation (JA) 849,324
27,600 Morgan Sindall PLC (UK) 441,401
11,531 Speedy Hire PLC (UK) 164,969
7,500 Vinci SA (FR) 645,051
14,100 YIT-Yhtyma Oyj (FI) 603,093
---------------
6,402,738
---------------
CONSTRUCTION MATERIALS--0.8%
3,700 Ciments Francais SA (FR) 480,952
5,300 Imerys SA (FR) 383,367
---------------
864,319
---------------
CONSTRUCTION, FARM MACHINERY & HEAVY TRUCKS--1.2%
5,500 Aker Yards AS (NW) 264,027
24,800 Hitachi Construction Machinery Company Limited (JA) 578,285
8,700 Hyundai Mipo Dockyard Company Limited (KR) 527,586
---------------
1,369,898
---------------
CONSUMER ELECTRONICS--0.3%
3,200 Bang & Olufsen Holding AS Class B (DE) 329,038
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE--1.4%
9,000 Sanyo Shinpan Finance Company Limited (JA) $ 645,610
18,100 Sumisho Lease Company Limited (JA) 925,450
---------------
1,571,060
---------------
DEPARTMENT STORES--1.0%
5,700 Hyundai Department Store Company Limited (KR) 482,683
19,100 Izumi Company Limited (JA) 652,673
---------------
1,135,356
---------------
DISTILLERS & VINTNERS--0.9%
107,900 C&C Group PLC (IE) 689,783
43,100 Davide Campari--Milano SPA (IT) 318,900
---------------
1,008,683
---------------
DISTRIBUTORS--0.8%
15,000 Inchcape PLC (UK) 588,696
173,700 Pacific Brands Limited (AU) 338,716
---------------
927,412
---------------
DIVERSIFIED BANKS--3.8%
83,400 Banco BPI SA (PT) 381,110
22,100 Banco de Sabadell SA (SP) 579,775
31,100 Banco Popolare di Verona e Novara Scrl (IT) 629,216
45,700 Banco Popolare di Milano (IT) 500,714
6,300 Deutsche Postbank AG (GE) 365,306
10,500 Jyske Bank AS (DE)* 515,670
4,000 Natexis Banques Populaires (FR) 666,272
17,100 OKO Bank (FI) 240,092
47,500 Wing Hang Bank Limited (HK) 341,837
---------------
4,219,992
---------------
DIVERSIFIED CAPITAL MARKETS--1.0%
45,000 Close Brothers Group PLC (UK) 702,641
61,100 Record Investments Limited (AU) 364,602
---------------
1,067,243
---------------
DIVERSIFIED CHEMICALS--1.0%
114,000 Mitsubishi Gas Chemical Company, Inc.(JA) 1,077,797
---------------
DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES--0.8%
5,700 Arrk Corporation (JA) 420,486
90,800 Downer EDI Limited (AU) 477,930
---------------
898,416
---------------
DIVERSIFIED METALS & MINING--2.5%
44,100 Inmet Mining Corporation (CA) 1,119,097
1,580,000 International Ferro Metals 144A (AU)+ 761,184
485,900 Oxiana Limited (AU)* 619,798
23,500 Sims Group Limited (AU) 302,514
---------------
2,802,593
---------------
DRUG RETAIL--0.3%
7,900 Tsuruha Holdings, Inc. (JA) 363,064
---------------
</Table>
16
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES--1.2%
131,000 International Power PLC (UK) $ 539,823
128,700 Terna SPA (IT) 317,674
32,900 Viridian Group PLC (UK) 506,350
---------------
1,363,847
---------------
ELECTRICAL COMPONENTS & EQUIPMENT--1.1%
57,000 Dainippon Screen Manufacturing Company Limited (JA) 477,034
13,700 Leoni AG (GE) 434,663
5,400 Nexans SA (FR) 256,543
---------------
1,168,240
---------------
ELECTRONIC EQUIPMENT MANUFACTURERS--1.9%
11,400 Axalto Holding NV (FR)* 314,185
39,400 CSR PLC (UK)* 634,522
14,200 Intops Company Limited (KR) 479,023
46,900 Laird Group PLC (UK) 338,919
35,000 Yaskawa Electric Corporation (JA) 353,161
---------------
2,119,810
---------------
ENVIRONMENTAL & FACILITIES SERVICES--0.4%
20,100 Asahi Pretec Corporation (JA) 487,438
---------------
FERTILIZERS & AGRICULTURAL CHEMICALS--0.5%
4,500 Syngenta AG (SZ)* 559,889
---------------
FOOD DISTRIBUTORS--0.3%
126,700 Fyffes PLC (IE) 344,986
---------------
FOOD RETAIL--0.3%
13,500 Kesko Oyj (FI) 382,769
---------------
GAS UTILITIES--0.2%
336,000 Xinao Gas Holdings Limited (CN) 266,505
---------------
GENERAL MERCHANDISE STORES--0.8%
9,600 Ryohin Keikaku Company Limited (JA) 837,614
---------------
HEALTHCARE DISTRIBUTORS--0.4%
30,700 Alliance Unichem PLC (UK) 422,838
---------------
HEALTHCARE EQUIPMENT--1.7%
15,700 Cochlear Limited (AU) 526,326
35,000 Elekta AB Class B (SW) 519,857
22,400 Sysmex Corporation (JA) 854,708
---------------
1,900,891
---------------
HEALTHCARE FACILITIES--0.5%
14,800 Generale de Sante (FR) 509,861
---------------
HEALTHCARE SERVICES--0.3%
41,000 iSOFT Group PLC (UK) 274,768
---------------
HOME IMPROVEMENT RETAIL--0.8%
37,700 Grafton Group PLC Units (IE)* 410,607
26,200 Nobia AB (SW) 530,959
---------------
941,566
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
17
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
HOMEBUILDING--1.8%
25,100 Barratt Developments PLC (UK) $ 425,819
18,100 Fadesa Inmobiliaria SA (SP) 596,548
15,200 Joint Corporation (JA) 525,849
20,300 Persimmon PLC (UK) 439,391
---------------
1,987,607
---------------
HOTELS, RESORTS & CRUISE LINES--0.6%
160,500 First Choice Holidays PLC (UK) 690,382
---------------
HOUSEHOLD APPLIANCES--0.4%
15,600 Makita Corporation (JA) 383,601
---------------
HUMAN RESOURCE & EMPLOYMENT SERVICES--0.4%
93,500 Michael Page International PLC (UK) 434,360
---------------
INDUSTRIAL CONGLOMERATES--0.9%
10,800 Aalberts Industries NV (NE) 573,434
6,100 Rheinmetall AG (GE) 383,245
---------------
956,679
---------------
INDUSTRIAL MACHINERY--5.2%
44,700 Charter PLC (UK)* 430,695
30,000 JTEKT Corporation (JA) 558,358
36,000 Makino Milling Machine Company Limited (JA) 396,829
8,900 Man AG (GE) 474,976
95,000 Nachi-Fujikoshi Corporation (JA) 507,483
52,000 NTN Corporation (JA) 410,938
33,500 OSG Corporation (JA) 694,514
1,000 Rieter Holding AG (SZ) 296,781
22,500 Sodick Company Limited (JA) 398,737
13,200 Stork NV (NE) 563,973
700 Sulzer AG (SZ) 370,748
67,000 Toshiba Machine Company Limited (JA) 662,984
---------------
5,767,016
---------------
INSURANCE BROKERS--0.3%
8,700 April Group (FR) 359,453
---------------
INTEGRATED OIL & GAS--0.4%
25,500 Enagas (SP) 476,974
---------------
INTERNET SOFTWARE & SERVICES--0.6%
10,900 Iliad SA (FR) 674,879
---------------
IT CONSULTING & OTHER SERVICES--2.1%
18,300 Alten (FR)* 548,112
17,600 Indra Sistemas, SA (SP) 343,999
176,200 Northgate Information Solutions PLC (UK)* 259,207
7,300 Otsuka Corporation (JA) 805,300
125,000 WM Data AB Class B (SW) 399,648
---------------
2,356,266
---------------
LEISURE PRODUCTS--0.3%
64,350 Sportingbet PLC (UK) 380,320
---------------
</Table>
18
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
LIFE & HEALTH INSURANCE--0.4%
5,300 CNP Assurances (FR) $ 417,876
---------------
MARINE--0.3%
102,000 Orient Overseas International Limited (HK) 345,977
---------------
METAL & GLASS CONTAINERS--0.3%
33,500 Rexam PLC (UK) 292,808
---------------
MULTI-LINE INSURANCE--1.0%
15,000 Fondiaria-Sai SPA (IT) 494,022
89,400 Milano Assicurazioni SPA (IT) 611,205
---------------
1,105,227
---------------
OFFICE SERVICES & SUPPLIES--0.6%
42,900 Buhrmann NV (NE) 631,286
---------------
OIL & GAS DRILLING--0.8%
21,100 Ensign Energy Services, Inc. (CA) 851,623
---------------
OIL & GAS EQUIPMENT & SERVICES--3.1%
10,300 Fugro NV (NE) 330,814
5,300 SBM Offshore NV (NE) 428,229
37,300 Trican Well Service Limited (CA)* 1,796,817
1,700 Vallourec SA (FR) 935,835
---------------
3,491,695
---------------
OIL & GAS EXPLORATION & PRODUCTION--2.3%
33,900 Burren Energy PLC (UK) 531,948
206,800 Oil Search Limited (AU) 559,411
100,000 Tanganyika Oil Company Limited (CA)* 770,974
137,400 Tullow Oil PLC (UK) 638,300
---------------
2,500,633
---------------
OIL & GAS REFINING & MARKETING--1.4%
24,700 Caltex Australia Limited (AU) 350,917
67,000 Cosmo Oil Company Limited (JA) 335,185
33,900 ERG SPA (IT) 816,297
---------------
1,502,399
---------------
OTHER DIVERSIFIED FINANCIAL SERVICES--1.7%
30,200 Home Capital Group, Inc. (CA) 902,753
162 Kenedix, Inc. (JA) 1,020,613
---------------
1,923,366
---------------
PACKAGED FOODS & MEATS--1.0%
2,100 Barry Callebaut AG (SZ) 684,765
40,000 Nisshin Seifun Group, Inc. (JA) 422,606
---------------
1,107,371
---------------
PERSONAL PRODUCTS--1.4%
8,200 Clarins SA (FR) 454,801
6,800 Fancl Corporation (JA) 363,828
636,000 Hengan International Group Company Limited (HK) 721,823
---------------
1,540,452
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
19
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS--1.6%
40,000 Recordati SPA (IT) $ 275,601
24,600 Santen Pharmaceutical Company Limited (JA) 680,002
10,200 Stada Arzneimittel AG (GE) 332,674
17,000 Tsumura & Company (JA) 469,920
---------------
1,758,197
---------------
PROPERTY & CASUALTY INSURANCE--2.8%
42,600 Admiral Group PLC (UK) 333,500
33,020 Dongbu Insurance Company Limited (KR) 668,011
8,700 Euler Hermes SA (FR) 784,823
25,000 Kingsway Financial Services, Inc. (CA) 505,376
28,300 Northbridge Financial Corporation (CA) 852,043
---------------
3,143,753
---------------
PUBLISHING--2.2%
33,800 EMAP PLC (UK) 501,882
26,300 Eniro AB (SW) 331,047
70,400 Informa PLC (UK) 525,396
5,700 Lagardere SCA (FR) 438,617
15,500 Wolters Kluwer NV (NE) 313,413
31,000 Yell Group PLC (UK) 286,158
---------------
2,396,513
---------------
REAL ESTATE INVESTMENT TRUSTS--0.3%
2,000 Cofinimmo (BE) 316,562
---------------
REAL ESTATE MANAGEMENT & DEVELOPMENT--3.1%
1,220,000 China Overseas Land & Investment Limited (HK) 523,170
41,100 Inmobiliaria Urbis SA (SP) 754,660
150,000 Kerry Properties Limited (HK) 397,552
6,100 Pirelli & C. Real Estate SPA (IT) 333,633
11,100 Urban Corporation (JA) 1,199,084
7,800 Vivacon AG (GE) 263,170
---------------
3,471,269
---------------
REGIONAL BANKS--1.2%
1,700 Banque Cantonale Vaudoise (SZ) 489,004
38,100 Pusan Bank (KR) 499,406
27,000 Suruga Bank Limited (JA) 340,433
---------------
1,328,843
---------------
RESTAURANTS--1.8%
43,100 Elior (FR) 566,367
40,500 Enterprise Inns PLC (UK) 653,630
38,000 Greene King PLC (UK) 485,461
124,686 Restaurant Group PLC (UK) 326,089
---------------
2,031,547
---------------
SEMICONDUCTOR EQUIPMENT--0.6%
15,600 ASM International NV (NE)* 261,878
14,000 Ulvac, Inc. (JA) 433,290
---------------
695,168
---------------
</Table>
20
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS--0.9%
9,300 Micronas Semiconductor Holding AG (SZ)* $ 307,853
1,536,000 Solomon Systech International Limited (HK) 638,869
---------------
946,722
---------------
SPECIALIZED FINANCE--1.3%
7,000 Deutsche Boerse AG (GE) 716,160
24,800 Ricoh Leasing Company Limited (JA) 706,559
---------------
1,422,719
---------------
SPECIALTY CHEMICALS--3.0%
14,300 Koninklijke DSM NV (NE) 584,054
105,000 Nippon Shokubai Company Limited (JA) 1,188,578
700 Sika AG (SZ)* 580,626
4,300 Umicore (BE) 507,020
45,100 Victrex PLC (UK) 516,803
---------------
3,377,081
---------------
SPECIALTY STORES--0.4%
55,000 WH Smith PLC (UK) 411,175
---------------
STEEL--3.1%
4,700 Boehler-Uddeholm AG (AT) 795,111
12,300 IPSCO, Inc. (CA) 1,023,254
259,000 Nisshin Steel Company Limited (JA) 836,724
32,600 Rautaruukki Oyj (FI) 793,098
---------------
3,448,187
---------------
SYSTEMS SOFTWARE--0.4%
8,300 Software AG (GE) 404,928
---------------
THRIFTS & MORTGAGE FINANCE--0.3%
7,300 Hypo Real Estate Holding AG (GE) 379,735
---------------
TIRES & RUBBER--1.5%
9,300 Continental AG (GE) 824,636
60,000 Sumitomo Rubber Industries Limited (JA) 854,708
---------------
1,679,344
---------------
TRADING COMPANIES & DISTRIBUTORS--1.6%
59,300 BSS Group PLC (UK) 324,456
23,100 Hitachi High-Technologies Corporation (JA) 577,818
47,300 SIG PLC (UK) 594,098
8,000 Univar NV (NE) 312,537
---------------
1,808,909
---------------
WATER UTILITIES--0.3%
25,500 Kelda Group PLC (UK) 339,591
---------------
WIRELESS TELECOMMUNICATION SERVICES--0.8%
22,100 MobilCom AG (GE) 486,373
283,000 MobileOne Limited (SG) 360,835
---------------
847,208
---------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$98,375,386) 108,940,161
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
21
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS (FOREIGN)--1.1%
HEALTHCARE EQUIPMENT--0.5%
3,700 Fresenius AG Preferred (GE) $ 501,101
---------------
HOUSEHOLD PRODUCTS--0.6%
6,700 Henkel KGAA Preferred (GE) 674,204
---------------
TOTAL PREFERRED STOCKS (FOREIGN)
(COST--$1,116,864) 1,175,305
---------------
</Table>
<Table>
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--0.8%
SPECIAL PURPOSE ENTITY--0.8%
$ 900,000 CAFCO LLC
4.12% 1/3/06~ $ 899,794
---------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$899,794) 899,794
---------------
TOTAL INVESTMENTS--100.0%
(TOTAL COST--$100,392,044) 111,015,260
---------------
OTHER ASSETS AND LIABILITIES--(0.0%) (53,204)
---------------
NET ASSETS--100.0% $ 110,962,056
===============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
* NON-INCOME PRODUCING.
+ SECURITIES WERE ACQUIRED PURSUANT TO RULE 144A AND MAY BE DEEMED TO BE
RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO $761,184, OR 0.7%, OF
THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF
1933 AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES
AMOUNTED TO $899,794, OR 0.8%, OF THE FUND'S NET ASSETS AS OF
DECEMBER 31, 2005.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<Page>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 100,392,044
---------------
Investment securities, at market 111,015,260
Cash 206,508
Foreign currency (cost $5,205) 5,208
Receivables:
Capital shares sold 159,902
Dividends and interest 79,819
Other assets 221,627
---------------
Total Assets 111,688,324
---------------
LIABILITIES
Payables and other accrued liabilities:
Capital shares redeemed 393,774
Advisory fees 92,631
Shareholder servicing fees 14,965
Accounting fees 9,263
Distribution fees 30,292
Transfer agency fees 38,691
Custodian fees 2,429
Directors' deferred compensation 99,651
Other 44,572
---------------
Total Liabilities 726,268
---------------
Net Assets $ 110,962,056
===============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 219,057,625
Accumulated net investment loss (80,032)
Accumulated net realized loss from security and foreign currency
transactions (net of foreign taxes paid on Thailand and Indian
investments of $159,639 and $388,198, respectively) (118,655,420)
Net unrealized appreciation on investments
and foreign currency translation 10,639,883
---------------
Total $ 110,962,056
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
<Table>
CLASS A
Net Assets $ 22,106,639
Shares Outstanding 1,099,900
Net Asset Value, Redemption Price Per Share $ 20.10
Maximum offering price per share
(net asset value plus sales charge of 5.75% of offering price) $ 21.33
CLASS B
Net Assets $ 16,420,825
Shares Outstanding 858,319
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 19.13
CLASS C
Net Assets $ 7,567,754
Shares Outstanding 395,805
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 19.12
CLASS F
Net Assets $ 64,112,155
Shares Outstanding 3,188,496
Net Asset Value, Offering and Redemption Price Per Share $ 20.11
CLASS R
Net Assets $ 310,412
Shares Outstanding 15,835
Net Asset Value, Offering and Redemption Price Per Share $ 19.60
CLASS T
Net Assets $ 444,271
Shares Outstanding 23,186
Net Asset Value, Redemption Price Per Share $ 19.16
Maximum offering price per share
(net asset value plus sales charge of 4.50% of offering price) $ 20.06
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<Page>
STATEMENT OF OPERATIONS
For the year ended December 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 1,475,613
Interest 129,326
Foreign taxes withheld (119,049)
---------------
Total Investment Income 1,485,890
---------------
EXPENSES
Advisory fees--Note 2 1,129,577
Shareholder servicing fees--Note 2 175,671
Accounting fees--Note 2 112,958
Distribution fees--Note 2 355,792
Transfer agency fees--Note 2 140,350
Registration fees 61,245
Postage and mailing expenses 13,805
Custodian fees and expenses--Note 2 550,733
Printing expenses 49,750
Legal and audit fees 40,100
Directors' fees and expenses--Note 2 38,160
Other expenses 92,731
---------------
Total Expenses 2,760,872
Earning Credits (10,913)
Reimbursed/Waived Expenses (168,475)
Expense Offset to Broker Commissions (5,945)
---------------
Net Expenses 2,575,539
---------------
Net Investment Loss (1,089,649)
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITY
TRANSACTIONS AND FOREIGN CURRENCY TRANSACTIONS
Net Realized Gain (Loss) on:
Security Transactions (net of foreign taxes paid on Thailand
and Indian investments of $168,588 and $674,195, respectively) 19,783,095
Foreign Currency Transactions (114,519)
---------------
Net Realized Gain 19,668,576
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation 46,812
---------------
Net Realized and Unrealized Gain 19,715,388
---------------
Net Increase in Net Assets Resulting from Operations $ 18,625,739
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
OPERATIONS
Net Investment Loss $ (1,089,649) $ (1,171,904)
Net Realized Gain on Security and Foreign
Currency Transactions 19,668,576 20,009,742
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation 46,812 (1,026,156)
----------------- -----------------
Net Increase in Net Assets Resulting from Operations 18,625,739 17,811,682
----------------- -----------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A (1,068,075) (9,809,094)
Class B (4,356,640) (2,918,121)
Class C (3,909,744) (1,725,859)
Class F (22,526,616) (14,537,401)
Class R 73,085 22,994
Class T (144,420) (87,939)
----------------- -----------------
Net Decrease from Capital Share Transactions (31,932,410) (29,055,420)
----------------- -----------------
Net Decrease in Net Assets (13,306,671) (11,243,738)
----------------- -----------------
NET ASSETS
Beginning of Year $ 124,268,727 $ 135,512,465
----------------- -----------------
End of Year $ 110,962,056 $ 124,268,727
================= =================
Accumulated Net Investment Loss $ (80,032) $ (83,936)
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 16.76 $ 14.24 $ 8.14 $ 9.68 $ 14.18
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.14)(a) (0.11)(a) 0.10 (0.16) (0.14)
Net realized and unrealized gains
(losses) on securities 3.48 2.63 6.00 (1.38) (4.36)
----------------------------------------------------------------------
Total from investment operations 3.34 2.52 6.10 (1.54) (4.50)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 20.10 $ 16.76 $ 14.24 $ 8.14 $ 9.68
======================================================================
TOTAL RETURN(b) 19.93% 17.70% 74.94% (15.91%) (31.74%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 22,107 $ 19,726 $ 27,252 $ 9,422 $ 14,033
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.14% 1.92% 2.45% 2.24% 1.88%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.12% 1.92% 2.45% 2.24% 1.87%
Net investment loss (0.82%) (0.77%) (0.83%) (0.80%) (0.26%)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 729% 648% 707% 495% 704%
</Table>
(a). COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b). SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c). CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 2.29% (2005), 2.02% (2004), 2.54%
(2003), 2.27% (2002), AND 1.88% (2001).
(d). PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 16.09 $ 13.79 $ 7.95 $ 9.54 $ 14.08
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.28)(a) (0.23)(a) (0.31) (0.29) (0.18)
Net realized and unrealized gains
(losses) on securities 3.32 2.53 6.15 (1.30) (4.36)
----------------------------------------------------------------------
Total from investment operations 3.04 2.30 5.84 (1.59) (4.54)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 19.13 $ 16.09 $ 13.79 $ 7.95 $ 9.54
======================================================================
TOTAL RETURN(b) 18.89% 16.68% 73.46% (16.67%) (32.24%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 16,421 $ 17,917 $ 18,198 $ 12,810 $ 19,661
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.98% 2.79% 3.30% 3.09% 2.66%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.97% 2.78% 3.29% 3.09% 2.64%
Net investment loss (1.66%) (1.63%) (1.44%) (1.64%) (1.06%)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 729% 648% 707% 495% 704%
</Table>
(a). COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b). SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c). CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 3.13% (2005), 2.89% (2004), 3.38%
(2003), 3.12% (2002), AND 2.66% (2001).
(d). PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
28
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 16.07 $ 13.76 $ 7.93 $ 9.52 $ 14.06
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.27)(a) (0.22)(a) (0.01) (0.35) (0.22)
Net realized and unrealized gains
(losses) on securities 3.32 2.53 5.84 (1.24) (4.32)
----------------------------------------------------------------------
Total from investment operations 3.05 2.31 5.83 (1.59) (4.54)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 19.12 $ 16.07 $ 13.76 $ 7.93 $ 9.52
======================================================================
TOTAL RETURN(b) 18.98% 16.79% 73.52% (16.70%) (32.29%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 7,568 $ 10,249 $ 10,639 $ 5,268 $ 8,928
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.93% 2.71% 3.25% 3.06% 2.67%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.92% 2.70% 3.25% 3.05% 2.65%
Net investment loss (1.60%) (1.55%) (1.43%) (1.58%) (1.08%)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 729% 648% 707% 495% 704%
</Table>
(a). COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b). SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c). CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 3.08% (2005), 2.81% (2004), 3.34%
(2003), 3.08% (2002), AND 2.67% (2001).
(d). PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
29
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 16.76 $ 14.24 $ 8.13 $ 9.67 $ 14.17
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.13)(a) (0.11)(a) (0.14) (0.23) (0.22)
Net realized and unrealized gains
(losses) on securities 3.48 2.63 6.25 (1.31) (4.28)
----------------------------------------------------------------------
Total from investment operations 3.35 2.52 6.11 (1.54) (4.50)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 20.11 $ 16.76 $ 14.24 $ 8.13 $ 9.67
======================================================================
TOTAL RETURN 19.99% 17.70% 75.15% (15.93%) (31.76%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 64,112 $ 75,677 $ 78,759 $ 50,742 $ 78,574
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 2.10% 1.90% 2.31% 2.18% 1.92%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.08% 1.89% 2.31% 2.18% 1.90%
Net investment loss (0.76%) (0.75%) (0.45%) (0.74%) (0.30%)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 729% 648% 707% 495% 704%
</Table>
(a). COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b). CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 2.24% (2005), 2.00% (2004), 2.40%
(2003), 2.21% (2002), AND 1.92% (2001).
(c). PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
30
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 16.31 $ 13.82 $ 7.87 $ 9.56 $ 14.22
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (0.12)(a) (0.07)(a) 0.54 (0.81) (0.17)
Net realized and unrealized gains
(losses) on securities 3.41 2.56 5.41 (0.88) (4.49)
----------------------------------------------------------------------
Total from investment operations 3.29 2.49 5.95 (1.69) (4.66)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 19.60 $ 16.31 $ 13.82 $ 7.87 $ 9.56
======================================================================
TOTAL RETURN 20.17% 18.02% 75.60% (17.68%) (32.77%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 310 $ 190 $ 142 $ 37 $ 76
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 1.91% 1.68% 2.08% 3.94% 1.86%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.89% 1.68% 2.07% 3.91% 1.84%
Net investment loss (0.69%) (0.51%) (0.32%) (2.20%) (0.08%)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 729% 648% 707% 495% 704%
</Table>
(a). COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b). CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 2.08% (2005), 1.79% (2004), 2.17%
(2003), 4.65% (2002), AND 2.78% (2001).
(c). PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
31
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 16.05 $ 13.70 $ 7.87 $ 9.50 $ 14.14
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.21)(a) (0.17)(a) (0.24) (0.45) (0.22)
Net realized and unrealized gains
(losses) on securities 3.32 2.52 6.07 (1.18) (4.42)
----------------------------------------------------------------------
Total from investment operations 3.11 2.35 5.83 (1.63) (4.64)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 19.16 $ 16.05 $ 13.70 $ 7.87 $ 9.50
======================================================================
TOTAL RETURN(b) 19.38% 17.15% 74.08% (17.16%) (32.82%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 444 $ 510 $ 522 $ 345 $ 538
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.55% 2.37% 3.07% 4.03% 3.16%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.54% 2.36% 3.07% 4.03% 3.14%
Net investment loss (1.24%) (1.21%) (1.06%) (2.69%) (1.60%)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 729% 648% 707% 495% 704%
</Table>
(a). COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b). SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c). CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 2.70% (2005), 2.47% (2004), 3.16%
(2003), 4.05% (2002), AND 3.16% (2001).
(d). PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
32
<Page>
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders Passport Fund (the "Fund"). The Fund offers Class A,
Class B, Class C, Class F, Class R and Class T shares. Class A and Class T
shares are subject to a sales charge imposed at the time of purchase, Class B
shares are subject to a contingent deferred sales charge ("CDSC") imposed on
Class B shares redeemed within six years of purchase, Class C shares are subject
to a CDSC imposed on Class C shares redeemed within one year of purchase and
Class F and Class R shares are sold at net asset value per share (with Class R
shares sold only to eligible institutional investors). Other differences between
the classes include services offered to and the expenses borne by each Class.
The following significant accounting policies have been consistently followed by
the Fund in the preparation of its financial statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair value as
33
<Page>
determined in good faith by the Company's board of directors or pursuant to
procedures approved by the board of directors. These situations may include
instances where an event occurs after the close of the market on which a
security is traded but before the Fund calculates its net asset value, and it is
determined that the event has materially affected the value of the security.
Fair value of foreign equity securities may be determined with the assistance of
a pricing service using correlations between the movement of prices of foreign
securities and indexes of domestic securities and other appropriate indicators,
such as closing market prices of relevant ADRs and futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund normally will invest a
large portion of its assets in foreign securities. Foreign securities carry more
risk than U.S. securities, such as political and currency risks. In the event
the Fund executes a foreign security transaction, the Fund may enter into a
foreign currency contract to settle the foreign security transaction. The Fund
could be exposed to risk if counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably to the U.S.
dollar. The resultant foreign currency gain or loss from the contract is
recorded as foreign currency gain or loss and is presented as such in the
Statement of Operations. Foreign currency held at December 31, 2005 for settling
foreign trades is listed on the Statement of Assets and Liabilities.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each
business day. Purchases and sales of investment securities and income and
expense items denominated in foreign currencies are translated into U.S. dollar
amounts on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net unrealized gain or loss from investments and foreign
currency translations on the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar
34
<Page>
equivalent of the amounts actually received or paid. Net unrealized appreciation
or depreciation on investments and foreign currency translation arises from
changes in the values of assets and liabilities, including investments in
securities held at the date of the financial statements, resulting from changes
in the exchange rates and changes in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) and from net realized capital gains (if any)
annually. Dividends and distributions, which are determined in accordance with
income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
35
<Page>
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
Financial Corporation, a publicly-owned financial services company which
provides a comprehensive range of financial products and services in domestic
and selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
1.00% of the first $250 million of net assets, 0.80% of the next $250 million of
net assets and 0.70% of net assets in excess of $500 million.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $62,975 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $17,925 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $12.58 to $13.36, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency fees, including both the per account fees paid to
DTI and out-of-pocket charges, during the year ended December 31, 2005 were as
follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
------------------------------------------------------------
Class A $ 29,057
Class B $ 41,805
Class C $ 16,255
Class R $ 377
Class T $ 1,466
</Table>
36
<Page>
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the processing of shareholder transactions in the Funds.
During the year ended December 31, 2005, the Fund was charged $2,768 for cash
management fees, which are included in the out-of-pocket transfer agency charges
above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $33,465 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $169,073 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
---------------------------------------------------------------------
Class A N/A $ 49,696
Class B $ 125,953 $ 41,984
Class C $ 59,626 $ 19,876
Class T $ 1,140 $ 1,140
</Table>
During the year ended December 31, 2005, DSC retained $5,945 in sales
commissions from the sales of Class A shares. DSC also retained $42,377 and
$5,578 of contingent deferred sales charges relating to redemptions of Class B
and Class C shares, respectively.
37
<Page>
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance monitoring, regulatory and shareholder reporting, as well as related
facilities, equipment and clerical help. The fee is computed at the annual rate
of 0.10% of the average daily net assets of the Fund on the first $500 million,
0.065% of the average daily net assets of the Fund on the next $500 million and
0.02% of the average daily net assets of the Fund in excess of $1 billion, plus
reasonable out-of-pocket expenses. Founders has contractually agreed in writing
to waive any fees received for these services to the extent they exceed
Founders' costs in providing the services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits on the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
-----------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $168,475, which reduced the amount paid to
Mellon Bank to $382,258.
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of one or more of the Funds. The amount paid to the director under the
plan will be determined based upon the performance of the selected Funds. The
current value of these amounts is included in Other Assets and Directors'
Deferred Compensation on the Statement of Assets and Liabilities. Changes in
market value are included in the Directors' fees and expenses and the net change
in unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
OTHER--During the year ended December 31, 2005, Founders reimbursed the Fund
$16,414 for a trading error. This amount is not material to the Fund.
38
<Page>
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally accepted in the United States of America. These differences
are due to differing treatments for items such as deferral of wash sale losses,
deferred compensation, passive foreign investment corporations, foreign currency
transactions, net operating losses and capital loss carryovers. Permanent
differences identified during the year ended December 31, 2005 have been
reclassified among the components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
-----------------------------------------------------------------
$ 1,093,553 $ 947,703 $ (2,041,26)
</Table>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of December 31, 2005, represent capital loss carryovers that may be
available to offset future realized capital gains and thereby reduce future
taxable gains distributions. Post-October 31 foreign currency losses noted
below, if any, may be used to offset future net investment income and thereby
reduce future ordinary income distributions. Net capital loss carryovers
utilized during 2005 by the Fund amounted to $22,152,833. Accumulated capital
losses as of December 31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
---------------------------------------------------------
2009 $ 105,273,118
2010 $ 11,833,084
---------------
$ 117,106,202
===============
</Table>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The primary difference between book and tax appreciation or depreciation
is wash sale loss deferrals.
<Table>
Post-October Capital Loss Deferral $ (1,461,360)
Other Book/Tax Differences $ (22,487)
Federal Tax Cost $ 100,520,780
Gross Tax Appreciation of Investments $ 11,019,446
Gross Tax Depreciation of Investments $ (524,966)
Net Tax Appreciation $ 10,494,480
</Table>
39
<Page>
Certain foreign countries impose a tax on capital gains, which is accrued by the
Fund based on unrealized appreciation on affected securities. This unrealized
appreciation is not included in the table above. The tax is paid when the gain
is realized.
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 400 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 431,931 $ 7,916,442 871,718 $ 12,893,364
Redeemed (509,206) $ (8,984,517) 1,608,411) $ (22,702,458)
-------------------------------------------------------------
Net Decrease (77,275) $ (1,068,075) (736,693) $ (9,809,094)
=============================================================
CLASS B
Sold 19,176 $ 327,743 40,534 $ 591,588
Redeemed (274,566) $ (4,684,383) (246,693) $ (3,509,709)
-------------------------------------------------------------
Net Decrease (255,390) $ (4,356,640) (206,159) $ (2,918,121)
=============================================================
CLASS C
Sold 77,684 $ 1,393,853 156,715 $ 2,350,643
Redeemed (319,650) $ (5,303,597) (291,948) $ (4,076,502)
-------------------------------------------------------------
Net Decrease (241,966) $ (3,909,744) (135,233) $ (1,725,859)
=============================================================
CLASS F
Sold 456,877 $ 8,160,585 925,441 $ 13,691,198
Redeemed (1,783,478) $ (30,687,201) (1,942,721) $ (28,228,599)
-------------------------------------------------------------
Net Decrease (1,326,601) $ (22,526,616) (1,017,280) $ (14,537,401)
=============================================================
CLASS R
Sold 25,002 $ 458,697 19,297 $ 276,727
Redeemed (20,814) $ (385,612) (17,956) $ (253,733)
-------------------------------------------------------------
Net Increase 4,188 $ 73,085 1,341 $ 22,994
=============================================================
CLASS T
Sold 4,248 $ 79,625 2,301 $ 33,146
Redeemed (12,834) $ (224,045) (8,628) $ (121,085)
-------------------------------------------------------------
Net Decrease (8,586) $ (144,420) (6,327) $ (87,939)
=============================================================
</Table>
40
<Page>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $797,777,980 and $826,404,342, respectively.
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
41
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders Passport Fund (one
of the portfolios constituting Dreyfus Founders Funds, Inc., hereafter referred
to as the "Fund") at 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 Sates of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
42
<Page>
FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
43
<Page>
The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services
being provided to the Funds are satisfactory, as evidenced in part by the
recent performance records of the Funds, to which the directors gave
significant attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to
the Funds, but also recognize that Founders or its affiliates have provided
the highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive
fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
44
<Page>
small group of funds selected by Lipper and a larger universe of funds also
selected by Lipper. The Lipper materials further included graphs depicting each
Fund's Class F one-year and annualized performance results for two-, three-,
four-, five-, and ten-year periods, if applicable, in comparison to the Fund's
performance group and performance universe.
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
Passport Fund's performance for the one-year period ended December 31, 2004
placed it in the fifth quintile of its Lipper performance group, with the Fund
ranking eighth out of nine Lipper-selected "peer funds," and in the fifth
quintile of its Lipper international small/mid-cap growth fund performance
universe, ranking 68th of 76 funds. The directors further observed that the
Fund's longer-term performance rankings were significantly better, with the Fund
ranking in the first quintile of its Lipper performance group and universe in
calendar year 2003. The Fund's three-year performance results ended December 31,
2004 placed it in the third quintile of its Lipper performance group and in the
second quintile of its Lipper performance universe.(1) The directors expressed
concern that Passport Fund ranked in the lowest quintile of its Lipper group for
the one-year period ended December 31, 2004 with respect to the Fund's
performance, total expenses, brokerage commissions and portfolio turnover rate.
The directors determined that it would be preferable for the Fund to be managed
in a manner that would reduce its portfolio turnover rate to assist in
addressing these issues, and asked Founders to report back to them with possible
alternatives. Subsequently, Founders, in consultation with the directors,
determined to have a new team manage the Fund's portfolio. This new team assumed
portfolio management responsibilities for the Fund in November 2005.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS REFLECT APPLICABLE FEE WAIVERS, BUT
DO NOT REFLECT THE FRONT-END SALES CHARGES THAT APPLY TO OTHER SHARE
CLASSES.
45
<Page>
After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance
difficulties, more recent performance results generally have shown
significant improvement; Founders has focused its efforts upon improving
the performance records of the Funds and will continue to seek improvement;
and
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing
in the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY
FOUNDERS AND ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, Passport Fund's
management fees ranked in the third quintile of its Lipper competitive expense
group, with the Fund's fees the fifth lowest of nine "peer funds." The Fund's
contractual management fees at a common asset level were determined by Lipper to
be lower than five of the nine funds in its group. The Fund's management fees
were in the third quintile of its Lipper expense universe, placing 15th lowest
of 25 funds.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
46
<Page>
Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain
efficiencies in performing the portfolio management, trading and
operational functions related to those accounts (the directors recognized
that in determining its profitability from providing investment management
and other services to the Funds, Founders allocated its expenses between
the Funds and other accounts in a manner which was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment
services to any of the clients it advises, not just the Funds. The
directors recognized that Founders' profitability would be lower if it did
not receive research and brokerage services in connection with these
brokerage transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders' Management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
47
<Page>
Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the investment advisory fees received by
Founders. However, the directors noted that Founders' profitability is expected
to decline in 2005 as a result of declines in Fund asset levels. The directors
also considered the risks assumed by Founders in providing management services
to the Funds, including the risk that the management agreement can be terminated
by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of
investment advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially
fees which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than
fees arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in
48
<Page>
recognition of the quality service which Founders has provided and continues to
provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of scale if the assets of the Funds were to increase. Among other information,
the directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into
increased profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of
an increase in the assets of a particular Fund or a group of Funds would
not be passed along on a dollar-for-dollar basis to the shareholders of
other Funds that did not experience increases in their assets to points
above their breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is
consistent with its objective of sharing its economies of scale with the
Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
49
<Page>
restrictions. The directors determined that Founders is dedicated to compliance
with all applicable rules and regulations and that the systems of controls which
are in place to ensure that the service providers to the Funds, including
Founders, and the Funds themselves, maintain strict adherence to the law are
excellent.
OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years and that efforts are being and will continue to be
made to enhance such improvement and to maintain Fund expense ratios at
reasonable and competitive levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
50
<Page>
YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
51
<Page>
Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice
President--Compliance since 2002. Formerly, Founders' Manager of Compliance
(2000 to 2002) and Securities Compliance Examiner, Staff Accountant and Team
Leader for the U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
52
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54
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<Page>
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
DREYFUS FOUNDERS TRANSFER AGENT &
PASSPORT FUND DIVIDEND DISBURSING AGENT
MANAGER Dreyfus Transfer, Inc.
200 Park Avenue
Founders Asset New York, NY 10166
Management LLC
210 University Boulevard DISTRIBUTOR
Suite 800
Denver, CO 80206 Dreyfus Service Corporation
200 Park Avenue
New York, NY 10166
- -------------------------------------------------------------------------------
TELEPHONE Call your financial representative or 1-800-554-4611
MAIL Dreyfus Founders Funds, Inc.
144 Glenn Curtiss Boulevard, Uniondale, NY 11556-0144
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The fund's Forms N-Q are available on the SEC's website at
http://www.sec.gov and may be reviewed and copied at 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.
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities, and information regarding how
the fund voted these proxies for the 12-month period ended June 30, 2005, is
available at http://www.dreyfus.com and on the SEC's website at
http://www.sec.gov. The description of the policies and procedures is
also available without charge, upon request, by calling 1-800-645-6561.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE
GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Dreyfus Founders Funds are managed by Founders Asset Management LLC.
Founders and Founders Funds are registered trademarks of Founders
Asset Management LLC.
[LION GRAPHIC]
(C)2006 Founders Asset Management LLC 0281AR1205
<Page>
Dreyfus Founders
Worldwide Growth Fund
ANNUAL REPORT December 31, 2005
[LION GRAPHIC]
YOU, YOUR ADVISOR AND
(R) [DREYFUS LOGO]
A MELLON FINANCIAL COMPANY (SM)
<Page>
TABLE OF CONTENTS
<Table>
Management Overview 3
Fund Expenses 10
Statement of Investments 12
Statement of Assets and Liabilities 19
Statement of Operations 21
Statements of Changes in Net Assets 22
Financial Highlights 23
Notes to Financial Statements 29
Report of Independent Registered Public Accounting Firm 38
Factors Considered in Renewing the Advisory Agreement 39
Your Board Representatives 47
</Table>
-----------------------------------------------------------
Save time. Save paper. View your next shareholder report
online as soon as it's available. Log into www.dreyfus.com
and sign up for Dreyfus eCommunications. It's simple and
only takes a few minutes.
-----------------------------------------------------------
INVESTMENT MANAGER DISTRIBUTOR
Founders Asset Management LLC Dreyfus Service Corporation
A MELLON FINANCIAL COMPANY(SM) 200 Park Avenue
210 University Boulevard, Suite 800 New York, NY 10166
Denver, CO 80206
The views expressed in the management overview reflect those of the portfolio
managers only through the end of the period covered and do not necessarily
represent the views of Founders or any other person in the Founders
organization. Any such views are subject to change at any time based upon market
or other conditions and Founders disclaims any responsibility to update such
views. These views may not be relied on as investment advice and, because
investment decisions for a Dreyfus Founders Fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Dreyfus
Founders Fund. Companies appearing in bold print on pages 3-9 were owned by the
Fund on December 31, 2005. The amounts of these holdings are included in the
Statement of Investments.
NOT FDIC-INSURED - NOT BANK-GUARANTEED - MAY LOSE VALUE
<Page>
MANAGEMENT OVERVIEW
(UNAUDITED)
[PHOTO OF REMI J. BROWNE]
[PHOTO OF DANIEL B. LEVAN]
[PHOTO OF JEFFREY R. SULLIVAN]
[PHOTO OF JOHN B. JARES]
A DISCUSSION WITH CO-PORTFOLIO MANAGERS REMI J. BROWNE, CFA, LEFT; DANIEL B.
LEVAN, CFA, SECOND FROM LEFT; JEFFREY R. SULLIVAN, CFA, THIRD FROM LEFT; AND
JOHN B. JARES, CFA, RIGHT, REGARDING FUND PERFORMANCE FOR THE 12-MONTH PERIOD
ENDED DECEMBER 31, 2005.
STRONG GLOBAL EQUITY MARKETS
Markets were strong around the world in 2005 as 21 of 23 countries and 9 of 10
economic sectors posted gains in the Morgan Stanley Capital International (MSCI)
World Index. Japan was one of the best performing markets during the year with a
25.6% return, as investors became increasingly convinced the Japanese economy is
on a sustained growth path, following years of deflation and a prolonged period
of underperformance in the international equity markets. Among the global
sectors, energy was the best performer in the Index with a 29% return, driven
primarily by strong demand for oil and natural gas. The lone weak spot was found
in the Index's telecommunications services sector, which declined nearly 9% as
investors grew impatient with the size of investments telecom companies were
making and the lack of returns they were providing.
In the United States, robust corporate profit growth and a strong economy
led to positive performance from equity markets. Moderate inflation and a
still-strong housing market combined to positively impact numerous economic
indicators. The actions of the Federal Reserve in raising the federal funds rate
to 4.25% by the end of the period did dampen investor sentiment somewhat;
however analysts expected an end to the tightening cycle by mid-2006.
[SIDENOTE]
"OUR STOCK-BY-STOCK RESEARCH APPROACH SERVED THE FUND WELL OVERALL, AS IT
PRODUCED A POSITIVE IMPACT TO THE FUND'S RELATIVE RETURN."
3
<Page>
The Fund's investment strategy did not change during the 12-month period.
Although we are benchmark-aware, we continued to analyze companies individually
through proprietary analysis, Wall Street data and meetings with company
management, among other resources, to seek high-growth opportunities at
attractive valuations. This stock-by-stock research approach served the Fund
well overall, as the Dreyfus Founders Worldwide Growth Fund's return exceeded
the 9.49% return of its benchmark, the Morgan Stanley Capital International
(MSCI) World Index, for the 12-month period ended December 31, 2005.(1)
STANDOUT MARKET PERFORMERS
The energy and materials sectors exhibited strong performance during the year.
Performance was driven by surging commodity prices--crude oil prices topped $70
a barrel, copper rose above $2 a pound and gold increased to over $500 an
ounce--and robust demand in the emerging markets such as China and India. At the
industry level, drilling firms in the energy sector and mining companies in the
materials sector performed exceptionally well during the year.
COUNTRY PERFORMANCE IMPACTED FUND
On a country level, underweight exposures to the United States and Hong Kong,
paired with strong stock selection, boosted the Fund's relative return. An
overweight position coupled with solid stock picking in Switzerland also
produced positive results for the Fund. Fund performance was weakened by stock
selection in Japan and the United Kingdom, and a relative underweight position
in Canada.
INDUSTRIALS, IT AND CONSUMER DISCRETIONARY OUTPERFORMED
The Fund's main investment approach, to search stock-by-stock for the greatest
opportunities for growth, helped the Fund as every sector except energy
benefited from positive stock selection. The industrials sector led the pack,
with names such as U.S.-based airlines companies US AIRWAYS GROUP,
- ----------
(1) Excluding sales charges, which result in lower returns for certain share
classes. Please see page 7 for Average Annual Total Returns for all share
classes, including and excluding sales charges.
[SIDENOTE]
SECTORS BENEFITING THE FUND
Industrials
Information Technology
Consumer Discretionary
4
<Page>
INC. and AMR CORPORATION, parent company of American Airlines, and Japanese
commodity-trading company MITSUBISHI CORPORATION all exhibiting strong
performance during the period. AMR and US Airways experienced
better-than-expected financial returns due to improved pricing driven by
industry consolidation and cost controls. The Fund benefited from its exposure
to Mitsubishi, which saw a 71% price increase during the Fund's holding period.
The information technology (IT) sector also positively impacted the Fund's
annual performance through strong-performing issues such as APPLE COMPUTER, INC.
The popularity of Apple's iPod digital music products and Macintosh computers
helped drive the company's stock price.
An effective selection of consumer discretionary stocks also aided the
Fund's performance. Japanese consumer electronics retailer YAMADA DENKI advanced
after the firm reported results that included a 41% rise in consolidated
recurring profit, exceeding the company's initial target.
In addition, noteworthy individual issues were found across nearly all
sectors. Among the top performers were consumer staples name Gillette Company
and healthcare holding Genentech, Inc. Gillette was acquired by Procter & Gamble
Company during the period for a significant premium, boosting Gillette's return,
and Genentech showed solid revenue and earnings growth.
<Table>
LARGEST EQUITY HOLDINGS (country of origin; ticker symbol)
1. ACCENTURE LIMITED CLASS A (United States; ACN) 1.82%
2. ROYAL CARIBBEAN CRUISES LIMITED (United States; RCL) 1.80%
3. MICROSOFT CORPORATION (United States; MSFT) 1.60%
4. LINEAR TECHNOLOGY CORPORATION (United States; LLTC) 1.59%
5. APPLE COMPUTER, INC. (United States; AAPL) 1.52%
6. AMR CORPORATION (United States; AMR) 1.49%
7. HOME DEPOT, INC. (United States; HD) 1.45%
8. PIXAR, INC. (United States; PIXR) 1.39%
9. MITSUBISHI CORPORATION (Japan; 8058) 1.33%
10. SLM CORPORATION (United States; SLM) 1.31%
</Table>
Portfolio holdings are subject to change, and should not be construed as a
recommendation of any security.
5
<Page>
GROWTH OF $10,000 INVESTMENT
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATA QUOTED. PLEASE CALL 1-800-525-2440 TO OBTAIN THE MOST
RECENT MONTH-END PERFORMANCE DATA.
[CHART TO COME]
The above graph compares a $10,000 investment made in Class F shares of Dreyfus
Founders Worldwide Growth Fund on 12/31/95 to a $10,000 investment made in an
unmanaged securities index on that date. The Fund's performance assumes the
reinvestment of dividends and capital gain distributions, but does not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or
redemption of Fund shares. The Fund offers multiple classes of shares.
Performance shown is for Class F, which is open only to grandfathered investors.
The Fund's performance in the graph takes into account all applicable Class F
fees and expenses, subject to applicable fee waivers. THESE FIGURES DO NOT
REFLECT THE MAXIMUM SALES CHARGES APPLICABLE TO CLASS A, B, C, OR T SHARES OF
THE FUND. FOR THESE SHARE CLASSES, APPLYING THESE CHARGES WILL RESULT IN LOWER
RETURNS FOR INVESTORS.
The Morgan Stanley Capital International (MSCI) World Index measures global
developed market equity performance. The total return figures cited for this
index assume change in security prices and reinvestment of dividends, but do not
reflect the costs of managing a mutual fund. Further information related to Fund
performance is contained elsewhere in this report.
6
<Page>
AVERAGE ANNUAL TOTAL RETURN as of 12/31/05
<Table>
<Caption>
1 5 10 SINCE
CLASS (INCEPTION DATE) YEAR YEARS YEARS INCEPTION
- ---------------------------------------------------------------------------
A SHARES (12/31/99)
With sales charge (5.75%) 4.49% (3.22%) -- (6.61%)
Without sales charge 10.84% (2.07%) -- (5.68%)
B SHARES (12/31/99)
With redemption* 6.14% (3.09%) -- (6.48%)
Without redemption 10.14% (2.70%) -- (6.35%)
C SHARES (12/31/99)
With redemption** 9.18% (3.08%) -- (6.66%)
Without redemption 10.18% (3.08%) -- (6.66%)
F SHARES (12/29/89) 10.89% (1.89%) 3.81% 7.65%
R SHARES (12/31/99) 11.88% (1.38%) -- (5.15%)
T SHARES (12/31/99)
With sales charge (4.50%) 5.47% (4.08%) -- (7.40%)
Without sales charge 10.46% (3.19%) -- (6.68%)
</Table>
Average annual total returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or redemption of Fund shares, but do
reflect the reinvestment of dividends and capital gain distributions, fee
waivers for certain share classes, and adjustments for financial statement
purposes. Investments in foreign securities entail unique risks, including
political, market, and currency risks.
* The maximum contingent deferred sales charge for Class B shares is 4% and is
reduced to 0% after six years, at which time the Class B shares convert to
Class A shares.
** The maximum contingent deferred sales charge for Class C shares is 1% for
shares redeemed within one year of the date of purchase.
7
<Page>
ENERGY AND FINANCIALS POSITIONS HURT RETURN
The Fund's relative performance was negatively impacted by both an underweight
position and poor stock selection in the energy sector. Also, an underweight
position in the financials sector hurt relative performance for the Fund.
SELECT ISSUES HAMPERED THE FUND
Although the Fund fared well in the industrials, information technology,
consumer discretionary and telecommunications services sectors, select issues in
these sectors hampered the Fund's return. Industrials name W.W. Grainger, Inc.
negatively impacted the Fund, while information technology holdings Maxim
Integrated Products, Inc. and Xilinx, Inc. declined during the period. Favorable
demand and trends for Maxim's analog semiconductor offerings were offset by
concerns over the company's deteriorating gross margins.
Consumer discretionary offering COMCAST CORPORATION experienced a slow
ramp-up into its cable telephony offering and sluggish trends in video services.
ROYAL CARIBBEAN CRUISES LIMITED also experienced a decline as investors grew
concerned with the effect high oil prices may have on the company. DreamWorks
Animation SKG, Inc. had a revenue shortfall from its DVD sales. Higher spending
levels also resulted in materially lower earnings-per-share results for the
company, and the Fund exited its position based on this
[CHART]
PORTFOLIO COMPOSITION OF NET ASSETS
<Table>
United States 46.68%
Japan 12.64%
United Kingdom 9.95%
France 4.19%
Switzerland 3.94%
Germany 3.70%
Netherlands 2.70%
Canada 2.48%
Other Countries 10.98%
Cash & Equivalents 2.74%
</Table>
The Fund's portfolio composition is subject to change, and there is no assurance
the Fund will continue to hold any particular security. Opinions regarding
sectors, industries, companies, and/or themes are those of the portfolio
managers and are subject to change at any time, based on market and other
conditions, and should not be construed as a recommendation of any specific
security.
8
<Page>
decline. The Fund, however, retained a position in Comcast and Royal
Caribbean at the end of the period, as we believed these companies' respective
growth opportunities remained viable.
Telecommunications giant VODAFONE GROUP PLC slid after announcing its
commitment to the highly competitive Japanese market. Vodafone emphasized its
plan to increase market share in Japan through more aggressive marketing, which
was expected to cause further margin deterioration. Although the Fund did not
sell its full position in Vodafone, it ended the period with a smaller position
in the company.
IN CONCLUSION
As we enter 2006, global growth appears to be strong and gaining traction as
monetary policies around the world continue to be accommodative. The market is
suggesting that we may be near the end of the U.S. Federal Reserve's tightening
cycle, lending further support to equity markets. Naturally, any gains in the
global equity markets could be tempered if negative events occur on the
geopolitical landscape.
As always, our focus is on seeking companies with improving business
momentum and attractive valuations, regardless of sector or country, or the
direction of the market.
/s/ Remi J. Browne /s/ Daniel B. LeVan
Remi J. Browne, CFA Daniel B. LeVan, CFA
Co-Portfolio Manager Co-Portfolio Manager
/s/ Jeffrey R. Sullivan /s/ John B. Jares
Jeffrey R. Sullivan, CFA John B. Jares, CFA
Co-Portfolio Manager Co-Portfolio Manager
[SIDE NOTE]
SECTORS DETRACTING FROM THE FUND
Energy
Financials
Utilities
9
<Page>
FUND EXPENSES
(UNAUDITED)
As a shareholder of the Fund, depending on the class of shares of the Fund you
own, you incur two types of costs: (1) transaction costs, including front-end
and contingent deferred sales charges; and (2) ongoing costs, including
management fees, Rule 12b-1 fees, shareholder services fees, and other expenses.
The expense example shown below 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 expense example is based on an investment of $1,000 on July 1, 2005 and
held through December 31, 2005.
ACTUAL EXPENSES The numbers included in the expense example in the rows with the
word "Actual" in the title provide information about actual account values and
actual expenses. You may use this information, 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 = 8.60), then multiply the result by the number under the column heading
entitled "Expenses Paid During Period" for the class of shares you own to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXPENSES FOR COMPARISON PURPOSES The numbers included in the
expense example in the rows with the word "Hypothetical" in the title provide
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio for each class of shares, 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 the hypothetical expenses in the expense example for
the class of shares you own with the hypothetical expenses that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the expense example are meant to
highlight your ongoing costs only and do not reflect the transaction costs
described above. Therefore, the hypothetical expenses in the expense example are
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if the transaction
costs were included, your costs would have been higher.
10
<Page>
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05-12/31/05)
- -------------------------------------------------------------------------------
CLASS A ACTUAL $ 1,000.00 $ 1,060.39 $ 10.02
CLASS A HYPOTHETICAL 1,000.00 1,015.35 9.85
CLASS B ACTUAL 1,000.00 1,058.88 13.86
CLASS B HYPOTHETICAL 1,000.00 1,011.58 13.63
CLASS C ACTUAL 1,000.00 1,058.78 13.91
CLASS C HYPOTHETICAL 1,000.00 1,011.53 13.68
CLASS F ACTUAL 1,000.00 1,060.60 10.08
CLASS F HYPOTHETICAL 1,000.00 1,015.30 9.90
CLASS R ACTUAL 1,000.00 1,064.22 7.49
CLASS R HYPOTHETICAL 1,000.00 1,017.85 7.35
CLASS T ACTUAL 1,000.00 1,059.74 11.84
CLASS T HYPOTHETICAL 1,000.00 1,013.57 11.64
</Table>
*Expenses are equal to each Class's respective annualized expense ratio, shown
below, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
EXPENSE RATIOS
These expense ratios reflect reimbursements and/or waivers of expenses by the
Fund's investment adviser or its affiliates, earnings credits and brokerage
offsets.
<Table>
<Caption>
EXPENSE RATIO
- ---------------------------------------------------
CLASS A 1.93%
CLASS B 2.67%
CLASS C 2.68%
CLASS F 1.94%
CLASS R 1.44%
CLASS T 2.28%
</Table>
11
<Page>
STATEMENT OF INVESTMENTS
December 31, 2005
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
COMMON STOCKS (DOMESTIC)--46.4%
AIRLINES--2.2%
38,538 AMR Corporation* $ 856,702
11,685 US Airways Group, Inc.* 433,981
---------------
1,290,683
---------------
APPLICATION SOFTWARE--0.7%
9,198 Autodesk, Inc. 395,054
---------------
ASSET MANAGEMENT & CUSTODY BANKS--0.6%
6,524 Northern Trust Corporation 338,074
---------------
BIOTECHNOLOGY--0.9%
3,939 Amgen, Inc.* 310,630
5,330 ImClone Systems, Inc.* 182,499
---------------
493,129
---------------
BROADCASTING & CABLE TV--0.9%
20,874 Comcast Corporation Special Class A* 536,253
---------------
COMMUNICATIONS EQUIPMENT--0.6%
16,685 Motorola, Inc. 376,914
---------------
COMPUTER & ELECTRONICS RETAIL--1.0%
13,326 Best Buy Company, Inc. 579,414
---------------
COMPUTER HARDWARE--2.5%
12,152 Apple Computer, Inc.* 873,607
20,998 Hewlett-Packard Company 601,173
---------------
1,474,780
---------------
COMPUTER STORAGE & PERIPHERALS--1.0%
41,314 EMC Corporation* 562,697
---------------
CONSUMER FINANCE--1.3%
13,743 SLM Corporation 757,102
---------------
DATA PROCESSING & OUTSOURCED SERVICES--0.6%
7,273 Automatic Data Processing, Inc. 333,758
---------------
DEPARTMENT STORES--2.1%
5,525 J.C. Penney Company, Inc. 307,190
14,151 Kohl's Corporation* 687,739
5,579 Nordstrom, Inc. 208,655
---------------
1,203,584
---------------
</Table>
AU Australia
AT Austria
BE Belgium
CA Canada
CN China
DE Denmark
FI Finland
FR France
GE Germany
GR Greece
HK Hong Kong
IE Ireland
IT Italy
JA Japan
KR South Korea
NE Netherlands
NW Norway
PT Portugal
SG Singapore
SP Spain
SW Sweden
SZ Switzerland
UK United Kingdom
12
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
GENERAL MERCHANDISE STORES--0.5%
5,450 Target Corporation $ 299,587
---------------
HEALTHCARE SERVICES--0.6%
6,346 Omnicare, Inc. 363,118
---------------
HEALTHCARE SUPPLIES--0.5%
5,490 DENTSPLY International, Inc. 294,758
---------------
HOME ENTERTAINMENT SOFTWARE--0.8%
9,300 Electronic Arts, Inc.* 486,483
---------------
HOME IMPROVEMENT RETAIL--1.5%
20,588 Home Depot, Inc. 833,402
---------------
HOTELS, RESORTS & CRUISE LINES--0.8%
8,292 Carnival Corporation 443,373
---------------
HOUSEHOLD PRODUCTS--2.4%
12,616 Clorox Company 717,724
13,047 Colgate-Palmolive Company 715,628
---------------
1,433,352
---------------
HYPERMARKETS & SUPER CENTERS--0.5%
6,595 Wal-Mart Stores, Inc. 308,646
---------------
INDUSTRIAL CONGLOMERATES--1.3%
21,533 General Electric Company 754,732
---------------
INTEGRATED OIL & GAS--1.3%
2,888 ConocoPhillips 168,024
10,321 ExxonMobil Corporation 579,731
---------------
747,755
---------------
INTEGRATED TELECOMMUNICATION SERVICES--1.3%
5,116 Alltel Corporation 322,820
19,305 Sprint Nextel Corporation 450,965
---------------
773,785
---------------
INTERNET SOFTWARE & SERVICES--0.7%
1,034 Google, Inc. Class A* 428,965
---------------
INVESTMENT BANKING & BROKERAGE--0.7%
2,995 Goldman Sachs Group, Inc. 382,491
---------------
IT CONSULTING & OTHER SERVICES--1.8%
36,435 Accenture Limited Class A 1,051,878
---------------
LEISURE FACILITIES--1.8%
23,000 Royal Caribbean Cruises Limited 1,036,380
---------------
MOVIES & ENTERTAINMENT--1.4%
15,205 Pixar, Inc.* 801,608
---------------
OTHER DIVERSIFIED FINANCIAL SERVICES--0.9%
13,369 JPMorgan Chase & Company 530,616
---------------
PACKAGED FOODS & MEATS--0.3%
3,155 Hershey Foods Corporation 174,314
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
13
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
PERSONAL PRODUCTS--0.6%
9,430 Estee Lauder Companies, Inc. Class A $ 315,716
---------------
PHARMACEUTICALS--4.4%
7,850 Covance, Inc.* 381,118
4,011 Eli Lilly and Company 226,982
9,733 Johnson & Johnson 584,953
28,700 MGI Pharma, Inc.* 492,492
11,038 Pfizer, Inc. 257,406
13,387 Wyeth 616,739
---------------
2,559,690
---------------
RAILROADS--1.2%
8,235 Union Pacific Corporation 663,000
---------------
SEMICONDUCTORS--2.8%
28,658 Intel Corporation 715,304
25,360 Linear Technology Corporation 914,735
---------------
1,630,039
---------------
SPECIALTY CHEMICALS--0.5%
4,577 Sigma-Aldrich Corporation 289,678
---------------
SPECIALTY STORES--0.3%
5,455 Office Depot, Inc.* 171,287
---------------
STEEL--0.6%
5,348 Nucor Corporation 356,819
---------------
SYSTEMS SOFTWARE--1.6%
35,279 Microsoft Corporation 922,546
---------------
THRIFTS & MORTGAGE FINANCE--0.9%
12,371 The PMI Group, Inc. 508,077
---------------
TOTAL COMMON STOCKS (DOMESTIC)
(COST--$23,689,682) 26,903,537
---------------
COMMON STOCKS (FOREIGN)--50.6%
AEROSPACE & DEFENSE--0.7%
21,604 BAE Systems PLC (UK) 141,902
36,578 Rolls-Royce Group PLC (UK) 269,048
---------------
410,950
---------------
APPAREL, ACCESSORIES & LUXURY GOODS--1.0%
6,656 Compagnie Financiere Richemont AG (SZ) 289,722
7,000 Gildan Activewear, Inc. (CA)* 301,075
---------------
590,797
---------------
APPLICATION SOFTWARE--0.7%
45,348 Sage Group PLC (UK) 201,304
1,091 SAP AG (GE) 197,845
---------------
399,149
---------------
ASSET MANAGEMENT & CUSTODY BANKS--0.3%
9,341 Schroder's PLC (UK) 152,683
---------------
AUTO PARTS & EQUIPMENT--0.4%
6,200 Denso Corporation (JA) 213,965
---------------
</Table>
14
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
AUTOMOBILE MANUFACTURERS--1.1%
2,852 DaimlerChrysler AG (GE) $ 145,453
8,600 Honda Motor Company Limited (JA) 490,762
---------------
636,215
---------------
BREWERS--1.5%
53,761 Foster's Group Limited (AU) 219,915
8,926 InBev NV (BE) 388,551
6,000 Orkla ASA (NW) 248,470
---------------
856,936
---------------
BROADCASTING & CABLE TV--0.8%
11,408 Gestevision Telecinco SA (SP) 287,935
77 TV Asahi Corporation (JA) 191,300
---------------
479,235
---------------
COMMUNICATIONS EQUIPMENT--1.1%
20,950 Nokia Oyj (FI) 383,186
66,000 Telefonaktiebolaget LM Ericsson (SW) 226,798
---------------
609,984
---------------
COMPUTER & ELECTRONICS RETAIL--1.0%
4,600 Yamada Denki (JA) 575,707
---------------
COMPUTER HARDWARE--0.9%
34,000 Fujitsu Limited (JA) 258,888
41,000 Toshiba Corporation (JA) 244,745
---------------
503,633
---------------
COMPUTER STORAGE & PERIPHERALS--0.3%
3,435 Logitech International SA (SZ)* 161,412
---------------
CONSTRUCTION MATERIALS--0.7%
33,445 Rinker Group Limited (AU) 403,321
---------------
CONSTRUCTION, FARM MACHINERY & HEAVY TRUCKS--0.9%
10,700 Volvo AB Class B (SW) 504,393
---------------
CONSUMER ELECTRONICS--0.5%
16,000 Matsushita Electric Industrial Company Limited (JA) 308,645
---------------
CONSUMER FINANCE--0.3%
2,420 Sanyo Shinpan Finance Company Limited (JA) 173,597
---------------
DISTILLERS & VINTNERS--0.6%
23,597 Diageo PLC (UK) 342,059
---------------
DIVERSIFIED BANKS--3.2%
60,097 Banca Intesa SPA (IT) 318,378
11,693 Banco Santander Central Hispano SA (SP) 154,347
14,953 Barclays PLC (UK) 157,197
4,084 BNP Paribas SA (FR) 330,462
25,669 Capitalia SPA (IT) 148,599
13,903 HBOS PLC (UK) 237,537
4,900 Royal Bank of Scotland Group PLC (UK) 147,961
2,866 Societe Generale (FR) 352,524
---------------
1,847,005
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
15
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
DIVERSIFIED CAPITAL MARKETS--1.2%
9,667 Credit Suisse Group (SZ) $ 492,876
2,028 UBS AG (SZ) 193,062
---------------
685,938
---------------
DIVERSIFIED CHEMICALS--0.8%
5,791 BASF AG (GE) 443,769
---------------
DIVERSIFIED METALS & MINING--2.2%
22,389 BHP Billiton Limited (AU) 373,396
7,100 Teck Cominco Limited Class B (CA) 378,972
21,046 Xstrata PLC (UK) 492,474
---------------
1,244,842
---------------
ELECTRIC UTILITIES--1.0%
3,550 E.ON AG (GE) 367,566
56,211 International Power PLC (UK) 231,633
---------------
599,199
---------------
ELECTRICAL COMPONENTS & EQUIPMENT--1.1%
1,854 Schneider Electric SA (FR) 165,383
30,000 Sumitomo Electric Industries Limited (JA) 455,590
---------------
620,973
---------------
ELECTRONIC EQUIPMENT MANUFACTURERS--0.8%
12,500 Hoya Corporation (JA) 449,400
---------------
FOOD RETAIL--0.3%
31,872 Tesco PLC (UK) 181,789
---------------
HEAVY ELECTRICAL EQUIPMENT--0.3%
21,000 Mitsubishi Electric Corporation (JA) 148,684
---------------
INTEGRATED OIL & GAS--3.0%
65,127 BP PLC (UK) 693,627
4,600 Husky Energy, Inc. (CA) 233,462
8,911 Repsol YPF SA (SP) 260,251
5,847 Royal Dutch Shell PLC Class A (NE) 178,167
1,412 Total SA (FR) 354,713
---------------
1,720,220
---------------
INTEGRATED TELECOMMUNICATION SERVICES--1.3%
72,371 BT Group PLC (UK) 277,368
15,600 Telenor ASA (NW) 153,127
7,100 Telus Corporation (CA) 292,306
---------------
722,801
---------------
INVESTMENT BANKING & BROKERAGE--0.6%
16,000 Daiwa Securities Group, Inc. (JA) 181,388
2,923 Macquarie Bank Limited (AU) 146,032
---------------
327,420
---------------
LIFE & HEALTH INSURANCE--0.4%
73,868 Old Mutual PLC (UK) 209,390
---------------
</Table>
16
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
MARINE--0.5%
30 AP Moller-Maersk AS (DE) $ 310,378
---------------
MOVIES & ENTERTAINMENT--0.8%
14,145 Vivendi Universal SA (FR) 443,088
---------------
MULTI-LINE INSURANCE--0.9%
11,979 Aviva PLC (UK) 145,306
2,923 Baloise Holding Limited (SZ) 170,718
856 Zurich Financial Services AG (SZ) 182,391
---------------
498,415
---------------
OFFICE ELECTRONICS--0.9%
9,300 Canon, Inc. (JA) 544,113
---------------
OIL & GAS EXPLORATION & PRODUCTION--1.0%
9,483 Eni SPA (IT) 263,036
1,860 Norsk Hydro ASA (NW) 190,980
51,908 Oil Search Limited (AU) 140,415
---------------
594,431
---------------
OTHER DIVERSIFIED FINANCIAL SERVICES--1.5%
17,952 ING Groep NV (NE) 622,699
5,600 Sun Life Financial, Inc. (CA) 225,108
---------------
847,807
---------------
PACKAGED FOODS & MEATS--0.4%
812 Nestle SA Registered (SZ) 242,840
---------------
PHARMACEUTICALS--6.8%
6,400 Astellas Pharma, Inc. (JA) 249,629
14,659 AstraZeneca Group PLC (UK) 713,529
8,700 Eisai Company Limited (JA) 365,159
10,400 GlaxoSmithKline PLC (UK) 262,863
6,706 Novartis AG (SZ) 352,370
6,520 Novo Nordisk AS Class B (DE) 366,763
1,255 Roche Holding AG (SZ) 188,427
5,689 Sanofi-Aventis (FR) 498,385
7,100 Santen Pharmaceutical Company Limited (JA) 196,261
4,563 Schering AG (GE) 305,478
7,500 Takeda Pharmaceuticals Company Limited (JA) 405,732
---------------
3,904,596
---------------
PRECIOUS METALS & MINERALS--0.2%
4,849 ThyssenKrupp AG (GE) 101,262
---------------
SEMICONDUCTOR EQUIPMENT--1.6%
37,612 ASM Lithography Holding NV NY Shares (NE)* 755,249
3,100 Tokyo Electron Limited (JA) 194,777
---------------
950,026
---------------
SOFT DRINKS--0.7%
13,600 Coca-Cola Hellenic Bottling Company SA (GR) 400,578
---------------
</Table>
SEE NOTES TO STATEMENT OF INVESTMENTS.
17
<Page>
<Table>
<Caption>
SHARES MARKET VALUE
- ----------------------------------------------------------------------------------------
STEEL--0.7%
11,600 JFE Holdings, Inc. (JA) $ 389,503
---------------
TIRES & RUBBER--1.1%
4,691 Continental AG (GE) 415,953
14,000 Sumitomo Rubber Industries Limited (JA) 199,432
---------------
615,385
---------------
TOBACCO--0.8%
21,303 British American Tobacco PLC (UK) 476,495
---------------
TRADING COMPANIES & DISTRIBUTORS--1.8%
34,700 Mitsubishi Corporation (JA) 767,940
22,000 Mitsui & Company Limited (JA) 282,613
---------------
1,050,553
---------------
WIRELESS TELECOMMUNICATION SERVICES--1.9%
5,562 Bouygues SA (FR) 271,943
92,600 China Mobile (Hong Kong) Limited (HK) 438,297
186,388 Vodafone Group PLC (UK) 402,472
---------------
1,112,712
---------------
TOTAL COMMON STOCKS (FOREIGN)
(COST--$21,474,143) 29,006,293
---------------
PREFERRED STOCKS (FOREIGN)--0.3%
HEALTHCARE EQUIPMENT--0.3%
1,141 Fresenius AG Preferred (GE) 154,529
---------------
TOTAL PREFERRED STOCKS (FOREIGN)
(COST--$140,876) 154,529
---------------
<Caption>
PRINCIPAL AMOUNT AMORTIZED COST
- ----------------------------------------------------------------------------------------
CORPORATE SHORT-TERM NOTES--2.6%
SPECIAL PURPOSE ENTITY--2.6%
$ 1,500,000 CAFCO LLC
4.12% 1/3/06~ $ 1,499,657
---------------
TOTAL CORPORATE SHORT-TERM NOTES
(AMORTIZED COST--$1,499,657) 1,499,657
---------------
TOTAL INVESTMENTS--99.9%
(TOTAL COST--$46,804,358) 57,564,016
---------------
OTHER ASSETS AND LIABILITIES--0.1% 82,451
---------------
NET ASSETS--100.0% $ 57,646,467
===============
</Table>
NOTES TO STATEMENT OF INVESTMENTS
* NON-INCOME PRODUCING.
~ SECURITY WAS ACQUIRED PURSUANT TO SECTION 4(2) OF THE SECURITIES ACT OF 1933
AND MAY BE DEEMED TO BE RESTRICTED FOR RESALE. THESE SECURITIES AMOUNTED TO
$1,499,657 OR 2.6%, OF THE FUND'S NET ASSETS AS OF DECEMBER 31, 2005.
SEE NOTES TO FINANCIAL STATEMENTS.
18
<Page>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
<Table>
ASSETS
Investment securities, at cost $ 46,804,358
---------------
Investment securities, at market 57,564,016
Cash 102,470
Receivables:
Investment securities sold 1,103,246
Capital shares sold 120,085
Dividends and interest 80,124
Other assets 126,613
---------------
Total Assets 59,096,554
---------------
LIABILITIES
Payables and other accrued liabilities:
Investment securities purchased 775,205
Capital shares redeemed 455,829
Advisory fees 50,194
Shareholder servicing fees 8,248
Accounting fees 4,070
Distribution fees 15,270
Transfer agency fees 6,564
Custodian fees 796
Directors' deferred compensation 89,142
Other 44,769
---------------
Total Liabilities 1,450,087
---------------
Net Assets $ 57,646,467
===============
COMPOSITION OF NET ASSETS
Capital (par value and paid-in surplus) $ 106,933,421
Accumulated net investment loss (28,758)
Accumulated net realized loss from security and foreign currency
transactions (60,027,368)
Net unrealized appreciation on investments and foreign
currency translation 10,769,172
---------------
Total $ 57,646,467
===============
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<Page>
<Table>
CLASS A
Net Assets $ 619,010
Shares Outstanding 43,558
Net Asset Value, Redemption Price Per Share $ 14.21
Maximum offering price per share
(net asset value plus sales charge of 5.75% of offering price) $ 15.08
CLASS B
Net Assets $ 1,803,276
Shares Outstanding 132,825
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 13.58
CLASS C
Net Assets $ 308,216
Shares Outstanding 23,162
Net Asset Value, Offering and Redemption Price
(excluding applicable contingent deferred sales charge) Per Share $ 13.31
CLASS F
Net Assets $ 53,184,353
Shares Outstanding 3,728,772
Net Asset Value, Offering and Redemption Price Per Share $ 14.26
CLASS R
Net Assets $ 1,701,449
Shares Outstanding 115,848
Net Asset Value, Offering and Redemption Price Per Share $ 14.69
CLASS T
Net Assets $ 30,163
Shares Outstanding 2,266
Net Asset Value, Redemption Price Per Share $ 13.31
Maximum offering price per share
(net asset value plus sales charge of 4.50% of offering price) $ 13.94
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<Page>
STATEMENT OF OPERATIONS
For the year ended December 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 1,496,352
Interest 39,837
Foreign taxes withheld (121,340)
--------------
Total Investment Income 1,414,849
--------------
EXPENSES
Advisory fees--Note 2 808,338
Shareholder servicing fees--Note 2 91,308
Accounting fees--Note 2 64,287
Distribution fees--Note 2 154,879
Transfer agency fees--Note 2 81,731
Registration fees 59,835
Postage and mailing expenses 14,710
Custodian fees and expenses--Note 2 52,039
Printing expenses 45,639
Legal and audit fees 28,677
Directors' fees and expenses--Note 2 26,071
Other expenses 63,277
--------------
Total Expenses 1,490,791
Earnings Credits (5,182)
Reimbursed/Waived Expenses (19,539)
Expense Offset to Broker Commissions (12,370)
--------------
Net Expenses 1,453,700
--------------
Net Investment Loss (38,851)
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITY
TRANSACTIONS AND FOREIGN CURRENCY TRANSACTIONS
Net Realized Gain (Loss) on:
Security Transactions 14,158,749(1)
Foreign Currency Transactions (16,234)
--------------
Net Realized Gain 14,142,515
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation (6,260,128)
--------------
Net Realized and Unrealized Gain 7,882,387
--------------
Net Increase in Net Assets Resulting from Operations $ 7,843,536
==============
</Table>
(1) INCLUDES $4,048,548 OF REALIZED GAINS RESULTING FROM A REDEMPTION IN KIND.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
OPERATIONS
Net Investment Loss $ (38,851) $ (42,516)
Net Realized Gain on Security and Foreign
Currency Transactions 14,142,515 14,019,429
Net Change in Unrealized Appreciation/Depreciation
of Investments and Foreign Currency Translation (6,260,128) (3,533,551)
----------------- -----------------
Net Increase in Net Assets Resulting
from Operations 7,843,536 10,443,362
----------------- -----------------
CAPITAL SHARE TRANSACTIONS
Net Increase (Decrease)--Note 4
Class A 31,644 (195,731)
Class B (430,097) 21,999
Class C 8,837 (26,743)
Class F (13,367,715) (16,782,781)
Class R (25,021,636)(1) 383,468
Class T (26,282) (14,130)
----------------- -----------------
Net Decrease from Capital Share Transactions (38,805,249) (16,613,918)
----------------- -----------------
Net Decrease in Net Assets (30,961,713) (6,170,556)
----------------- -----------------
NET ASSETS
Beginning of Year $ 88,608,180 $ 94,778,736
----------------- -----------------
End of Year $ 57,646,467 $ 88,608,180
================= =================
Accumulated Net Investment Loss $ (28,758) $ (17,206)
</Table>
(1) ON NOVEMBER 30, 2005, CLASS R DISBURSED PORTFOLIO SECURITIES AND CASH VALUED
AT $23,196,136 IN PAYMENT OF A REDEMPTION BY AN AFFILIATE OF THE FUND.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 12.82 $ 11.38 $ 8.32 $ 11.71 $ 15.78
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.02)(a) (0.21) (0.10) (0.15) (0.09)
Net realized and unrealized gains
(losses) on securities 1.41 1.65 3.16 (3.24) (3.98)
------------------------------------------------------------------------
Total from investment operations 1.39 1.44 3.06 (3.39) (4.07)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 14.21 $ 12.82 $ 11.38 $ 8.32 $ 11.71
========================================================================
TOTAL RETURN(b) 10.84% 12.65% 36.78% (28.95%) (25.79%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 619 $ 519 $ 656 $ 543 $ 1,003
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.95% 1.81% 2.03% 2.06% 2.10%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.92% 1.81% 2.03% 2.06% 2.09%
Net investment loss (0.19%) (0.18%) (0.55%) (0.77%) (0.96%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 130% 138% 211% 145%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 1.98% (2005), 1.83% (2004), 2.04% (2003),
2.06% (2002), AND 2.10% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS B SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 12.33 $ 11.02 $ 8.12 $ 11.52 $ 15.57
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.11)(a) (0.09) (0.16) (0.14) (0.15)
Net realized and unrealized gains
(losses) on securities 1.36 1.40 3.06 (3.26) (3.90)
------------------------------------------------------------------------
Total from investment operations 1.25 1.31 2.90 (3.40) (4.05)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.58 $ 12.33 $ 11.02 $ 8.12 $ 11.52
========================================================================
TOTAL RETURN(b) 10.14% 11.89% 35.71% (29.51%) (26.01%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,803 $ 2,061 $ 1,821 $ 1,459 $ 2,089
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.69% 2.52% 2.80% 2.71% 2.54%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.66% 2.52% 2.80% 2.70% 2.53%
Net investment loss (0.93%) (0.87%) (1.30%) (1.41%) (1.43%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 130% 138% 211% 145%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 2.72% (2005), 2.54% (2004), 2.82% (2003),
2.71% (2002), AND 2.54% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
24
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
----------------------------------------------------------------------
CLASS C SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 12.08 $ 10.81 $ 7.96 $ 11.34 $ 15.56
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.07) (0.20) (0.20) (0.30) (0.30)
Net realized and unrealized gains
(losses) on securities 1.30 1.47 3.05 (3.08) (3.92)
------------------------------------------------------------------------
Total from investment operations 1.23 1.27 2.85 (3.38) (4.22)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.31 $ 12.08 $ 10.81 $ 7.96 $ 11.34
========================================================================
TOTAL RETURN(a) 10.18% 11.75% 35.80% (29.81%) (27.12%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 308 $ 272 $ 271 $ 218 $ 380
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 2.70% 2.60% 2.82% 3.33% 4.18%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.66% 2.59% 2.82% 3.33% 4.17%
Net investment loss (0.93%) (0.97%) (1.34%) (2.05%) (3.07%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 120% 130% 138% 211% 145%
</Table>
(a) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN OR REIMBURSED BY THE MANAGEMENT
COMPANY OR ITS AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE
EXPENSE RATIOS WOULD HAVE BEEN 2.72% (2005), 2.62% (2004), 2.84% (2003),
3.40% (2002), AND 4.18% (2001).
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS F SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 12.86 $ 11.41 $ 8.33 $ 11.72 $ 15.69
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.02)(a) (0.21) (0.13) (0.13) (0.14)
Net realized and unrealized gains
(losses) on securities 1.42 1.66 3.21 (3.26) (3.83)
------------------------------------------------------------------------
Total from investment operations 1.40 1.45 3.08 (3.39) (3.97)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 14.26 $ 12.86 $ 11.41 $ 8.33 $ 11.72
========================================================================
TOTAL RETURN 10.89% 12.71% 36.97% (28.92%) (25.30%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 53,184 $ 61,038 $ 70,566 $ 59,890 $ 101,592
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(b) 1.94% 1.78% 1.97% 1.84% 1.61%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.91% 1.77% 1.97% 1.84% 1.60%
Net investment loss (0.17%) (0.13%) (0.47%) (0.55%) (0.50%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(c) 120% 130% 138% 211% 145%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 1.96% (2005), 1.80% (2004), 1.98% (2003),
1.84% (2002), AND 1.61% (2001).
(c) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
26
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS R SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 13.13 $ 11.60 $ 8.44 $ 11.81 $ 15.75
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.05(b) 0.03 0.00(a) (0.01) (0.02)
Net realized and unrealized gains
(losses) on securities 1.51 1.50 3.16 (3.36) (3.92)
------------------------------------------------------------------------
Total from investment operations 1.56 1.53 3.16 (3.37) (3.94)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 14.69 $ 13.13 $ 11.60 $ 8.44 $ 11.81
========================================================================
TOTAL RETURN 11.88% 13.19% 37.44% (28.54%) (25.02%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 1,701 $ 24,665 $ 21,404 $ 14,060 $ 19,193
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 1.45% 1.37% 1.51% 1.41% 1.25%
Expenses with reimbursements,
earnings credits and brokerage offsets 1.44% 1.37% 1.51% 1.41% 1.24%
Net investment income (loss) 0.35% 0.28% (0.03%) (0.13%) (0.14%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 130% 138% 211% 145%
</Table>
(a) NET INVESTMENT LOSS FOR THE YEAR ENDED DECEMBER 31, 2003 AGGREGATED LESS
THAN $0.01 ON A PER SHARE BASIS.
(b) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN. HAD THESE FEES NOT BEEN WAIVED,
THE EXPENSE RATIOS WOULD HAVE BEEN 1.47% (2005), 1.39% (2004), 1.53% (2003),
1.41% (2002), AND 1.25% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2005 2004 2003 2002 2001
------------------------------------------------------------------------
CLASS T SHARES
PER SHARE OPERATING DATA
Net Asset Value, beginning of year $ 12.05 $ 10.73 $ 7.89 $ 11.46 $ 15.65
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.07)(a) (0.36) (0.14) (0.59) (0.26)
Net realized and unrealized gains
(losses) on securities 1.33 1.68 2.98 (2.98) (3.93)
------------------------------------------------------------------------
Total from investment operations 1.26 1.32 2.84 (3.57) (4.19)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
From net investment income 0.00 0.00 0.00 0.00 0.00
From net realized gains 0.00 0.00 0.00 0.00 0.00
------------------------------------------------------------------------
Total distributions 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 13.31 $ 12.05 $ 10.73 $ 7.89 $ 11.46
========================================================================
TOTAL RETURN(b) 10.46% 12.30% 35.99% (31.15%) (26.77%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $ 30 $ 54 $ 61 $ 47 $ 90
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses with reimbursements,
but no earnings credits or brokerage offsets(c) 2.33% 2.14% 2.54% 4.60% 3.75%
Expenses with reimbursements,
earnings credits and brokerage offsets 2.30% 2.14% 2.54% 4.60% 3.74%
Net investment loss (0.56%) (0.50%) (1.05%) (2.88%) (2.72%)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(d) 120% 130% 138% 211% 145%
</Table>
(a) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
(b) SALES CHARGES ARE NOT REFLECTED IN THE TOTAL RETURN.
(c) CERTAIN FEES WERE WAIVED BY THE CUSTODIAN OR REIMBURSED BY THE MANAGEMENT
COMPANY OR ITS AFFILIATES. HAD THESE FEES NOT BEEN REIMBURSED OR WAIVED, THE
EXPENSE RATIOS WOULD HAVE BEEN 2.35% (2005), 2.16% (2004), 2.56% (2003),
5.48% (2002), AND 10.02% (2001).
(d) PORTFOLIO TURNOVER RATE IS A MEASURE OF PORTFOLIO ACTIVITY THAT IS
CALCULATED BY DIVIDING THE LESSER OF PURCHASES OR SALES OF SECURITIES,
EXCLUDING SECURITIES HAVING MATURITY DATES AT ACQUISITION OF ONE YEAR OR
LESS, BY THE AVERAGE VALUE OF THE PORTFOLIO SECURITIES HELD DURING THE
PERIOD, WHICH IS A ROLLING 12-MONTH PERIOD.
SEE NOTES TO FINANCIAL STATEMENTS.
28
<Page>
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dreyfus Founders Funds, Inc. (the "Company") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). Ten series of shares are currently issued: Balanced, Discovery,
Equity Growth, Government Securities, Growth, International Equity, Mid-Cap
Growth, Money Market, Passport and Worldwide Growth Funds (the "Funds"). All of
the Company's series Funds are diversified portfolios. The following notes
pertain to Dreyfus Founders Worldwide Growth Fund (the "Fund"). The Fund offers
Class A, Class B, Class C, Class F, Class R and Class T shares. Class A and
Class T shares are subject to a sales charge imposed at the time of purchase,
Class B shares are subject to a contingent deferred sales charge ("CDSC")
imposed on Class B shares redeemed within six years of purchase, Class C shares
are subject to a CDSC imposed on Class C shares redeemed within one year of
purchase and Class F and Class R shares are sold at net asset value per share
(with Class R shares sold only to eligible institutional investors). Other
differences between the classes include services offered to and the expenses
borne by each Class. The following significant accounting policies have been
consistently followed by the Fund in the preparation of its financial
statements.
SECURITY VALUATIONS--A domestic equity security listed or traded on a securities
exchange or in the over-the-counter market is valued at its last sale price on
the exchange or market where it is principally traded or, in the case of a
security traded on Nasdaq, at its official closing price. Lacking any sales on
that day, the security is valued at the current closing bid price, or by quotes
from dealers making a market in the security if the closing bid price is not
available, or in the case of written call options, at the mean between the
highest bid and lowest asked quotations obtained from at least two securities
dealers.
A foreign equity security traded on a foreign exchange is valued at the last
quoted official closing price available before the time when the Fund's assets
are valued, or at the last quoted sales price if the exchange does not provide
an official closing price or if the foreign market has not yet closed. Lacking
any sales that day, the security is valued at the current closing bid price, or
by quotes from dealers making a market in the security if the closing bid price
is not available. Since February 22, 2005, New York closing exchange rates have
been used to convert foreign currencies to U.S. dollars. Previously, London
closing exchange rates were used to convert foreign currencies to U.S. dollars.
A debt security with a remaining maturity greater than 60 days at the time of
purchase is valued in accordance with the evaluated bid price supplied by a
pricing service approved by the Company's board of directors or, if such price
is not available, at the mean between the highest bid and lowest asked
quotations obtained from at least two securities dealers. A debt security with a
remaining maturity of 60 days or less at the time of purchase is valued at
amortized cost, which approximates market value, unless it is determined that
amortized cost would not represent market value, in which case the securities
would be marked to market. The Fund amortizes premiums and discounts on all debt
securities.
If market quotations or official closing prices are not readily available or are
determined not to reflect accurately fair value, securities will be valued at
their fair
29
<Page>
value as determined in good faith by the Company's board of directors or
pursuant to procedures approved by the board of directors. These situations may
include instances where an event occurs after the close of the market on which a
security is traded but before the Fund calculates its net asset value, and it is
determined that the event has materially affected the value of the security.
Fair value of foreign equity securities may be determined with the assistance of
a pricing service using correlations between the movement of prices of foreign
securities and indexes of domestic securities and other appropriate indicators,
such as closing market prices of relevant ADRs and futures contracts.
Using fair value to price securities requires the use of estimates, and as such,
may result in a value that is different from a security's most recent closing
price and from the prices used by other mutual funds to calculate their net
asset values. In addition, it is possible that the fair value determined for a
security may be different from the value that may be realized upon the
security's sale, and that these differences may be material to the net asset
value of the Fund.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the date
the securities are purchased or sold (trade date). Net realized gains and losses
are determined on the basis of identified cost, which is also used for federal
income tax purposes.
FOREIGN SECURITIES AND CURRENCY TRANSACTIONS--The Fund normally will invest a
significant portion of its assets in foreign securities. Foreign securities
carry more risk than U.S. securities, such as political and currency risks. In
the event the Fund executes a foreign security transaction, the Fund may enter
into a foreign currency contract to settle the foreign security transaction. The
Fund could be exposed to risk if counterparties are unable to meet the terms of
the contracts or if the value of the currency changes unfavorably to the U.S.
dollar. The resultant foreign currency gain or loss from the contract is
recorded as foreign currency gain or loss and is presented as such in the
Statement of Operations. Foreign currency held at December 31, 2005 for settling
foreign trades is listed on the Statement of Assets and Liabilities.
The accounting records of the Fund are maintained in U.S. dollars. The market
values of foreign securities, currency holdings and other assets and liabilities
are translated into U.S. dollars based on the current exchange rates each
business day. Purchases and sales of investment securities and income and
expense items denominated in foreign currencies are translated into U.S. dollar
amounts on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net unrealized gain or loss from investments and foreign
currency translations on the Statement of Operations.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized appreciation or depreciation on investments and foreign
currency translation arises from changes in
30
<Page>
the values of assets and liabilities, including investments in securities held
at the date of the financial statements, resulting from changes in the exchange
rates and changes in market prices of securities held.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes since
it is the policy of the Fund to comply with the requirements of Subchapter M of
the Internal Revenue Code that are applicable to regulated investment companies
and to make distributions of income and capital gains sufficient to relieve it
from all income taxes. The Fund is treated as a separate tax entity for federal
income tax purposes.
INVESTMENT INCOME--Dividend income is recognized on the ex-dividend date.
Certain dividends from foreign securities are recorded as soon as the Fund is
informed of the dividend, if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily, as earned, and includes the
accretion of discounts and the amortization of premiums over the lives of the
respective securities. Withholding taxes on foreign dividends have been provided
for in accordance with the applicable country's tax rules and rates.
DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares and distributes dividends from
net investment income (if any) and from net realized capital gains (if any)
annually. Dividends and distributions, which are determined in accordance with
income tax regulations, are recorded on the ex-dividend date.
EXPENSES--Each Class of the Fund bears expenses incurred specifically on its
behalf and, in addition, each Class bears a portion of general expenses based on
the relative net assets or the number of shareholder accounts of the Class. The
type of expense determines the allocation method.
The Company's board of directors has authorized the payment of certain Fund
expenses with commissions on Fund portfolio transactions. These commissions
reduce Other Expenses and are included in the Expense Offset to Broker
Commissions in the Statement of Operations.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
INDEMNIFICATIONS--In the normal course of business, the Company enters into
contracts that contain provisions indemnifying other parties against specified
potential liabilities. Each Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Funds expect the
risk of loss to be remote.
OTHER--Certain prior year information has been reformatted, without substantive
change, to conform with the current year presentation.
31
<Page>
2. FEES AND TRANSACTIONS WITH AFFILIATES
ADVISORY FEES--Founders Asset Management LLC ("Founders") serves as investment
adviser to the Fund. Founders is an indirect wholly-owned subsidiary of Mellon
Financial Corporation, a publicly-owned financial services company which
provides a comprehensive range of financial products and services in domestic
and selected international markets.
In accordance with an investment advisory agreement between the Company and
Founders, the Fund compensates Founders for its services as investment adviser
by the payment of fees computed daily and paid monthly at the annual rate equal
to a percentage of the average daily value of the Fund's net assets. The fee is
1.00% of the first $250 million of net assets, 0.80% of the next $250 million of
net assets and 0.70% of net assets in excess of $500 million.
SHAREHOLDER SERVICING AND TRANSFER AGENCY FEES FOR CLASS F SHARES--The Company
has a shareholder services agreement with Dreyfus Service Corporation ("DSC"),
the direct owner of Founders and a wholly-owned subsidiary of The Dreyfus
Corporation ("Dreyfus", an affiliate of Founders), whereby the Funds have agreed
to compensate DSC for providing certain shareholder servicing functions to
holders of Class F shares. The Fund paid DSC a monthly fee equal, on an annual
basis, to $24.00 per Class F shareholder account considered to be an open
account at any time during a given month. During the year ended December 31,
2005, Class F shares were charged $84,389 pursuant to this shareholder services
agreement.
Dreyfus Transfer, Inc. ("DTI"), a wholly-owned subsidiary of Dreyfus, is the
transfer and dividend disbursing agent for all of the Fund's share classes. With
the exception of out-of-pocket charges, the fees charged by DTI with respect to
the Fund's Class F shares are paid by DSC. The out-of-pocket charges from DTI
are paid by the Fund. During the year ended December 31, 2005, Class F shares
were charged $34,862 for out-of-pocket transfer agent charges.
TRANSFER AGENCY FEES FOR CLASS A, CLASS B, CLASS C, CLASS R AND CLASS T
SHARES--The fees charged by DTI with respect to the Fund's Class A, B, C, R and
T shares are paid by the Fund. The Fund paid DTI a monthly fee ranging, on an
annual basis, from $12.58 to $13.36, per shareholder account considered to be an
open account at any time during a given month, plus out-of-pocket charges.
Class-specific transfer agency fees, including both the per account fees paid to
DTI and out-of-pocket charges, during the year ended December 31, 2005 were as
follows:
<Table>
<Caption>
TRANSFER
AGENCY FEES
------------------------------------------------------------
Class A $ 1,398
Class B $ 3,952
Class C $ 545
Class R $ 6,001
Class T $ 138
</Table>
32
<Page>
CASH MANAGEMENT FEES--The Funds also pay Mellon Bank N.A. ("Mellon Bank"), a
wholly-owned subsidiary of Mellon Financial Corporation and an affiliate of
Founders, fees for certain cash management services. These include various
services related to the processing of shareholder transactions in the Funds.
During the year ended December 31, 2005, the Fund was charged $2,029 for cash
management fees, which are included in the out-of-pocket transfer agency charges
above.
OTHER TRANSFER AGENCY FEES--Various broker-dealers, retirement plan
administrators and other entities have established omnibus accounts with the
Fund, and provide sub-transfer agency, recordkeeping or similar services to
persons holding Fund shares through those accounts. During the year ended
December 31, 2005, the Fund paid $34,835 to these entities for such services.
This amount is included in the transfer agency fees shown on the Statement of
Operations.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS--DSC also is the distributor of the
Fund's shares. The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act applicable to its Class F shares. Under the plan, the Fund is
authorized to reimburse DSC for expenses paid for distributing or servicing its
Class F shares at an annual rate of up to 0.25% of the value of the average
daily net assets of the Fund's Class F shares. During the year ended December
31, 2005, Class F shares were charged $138,956 pursuant to this Distribution
Plan.
The Fund also has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act applicable to its Class B, Class C and Class T shares. Under this plan,
the Fund pays DSC a fee for distributing its Class B and C shares at the annual
rate of 0.75% of the value of the average daily net assets of its Class B and C
shares, respectively, and pays DSC a fee for distributing its Class T shares at
the annual rate of 0.25% of the average daily net assets of its Class T shares.
In addition, the Fund has adopted a Shareholder Services Plan applicable to its
Class A, Class B, Class C and Class T shares. Under the Shareholder Services
Plan, Class A, Class B, Class C and Class T shares pay DSC an annual fee of
0.25% of the value of their average daily net assets for the provision of
certain services.
Distribution and shareholder servicing fees paid to DSC by the Fund's Class A,
B, C and T shares for the year ended December 31, 2005, were as follows:
<Table>
<Caption>
DISTRIBUTION SHAREHOLDER
FEES SERVICING FEES
--------------------------------------------------------------
Class A N/A $ 1,548
Class B $ 13,850 $ 4,617
Class C $ 1,979 $ 660
Class T $ 94 $ 94
</Table>
During the year ended December 31, 2005, DSC retained $146 in sales commissions
from the sales of Class A shares. DSC also retained $3988 and $2 of contingent
deferred sales charges relating to redemptions of Class B and Class C shares,
respectively.
33
<Page>
FUND ACCOUNTING AND ADMINISTRATIVE SERVICES FEES--The Funds have agreed to
compensate Founders for providing accounting services, administration,
compliance monitoring, regulatory and shareholder reporting, as well as related
facilities, equipment and clerical help. The fee is computed by applying the
following rates, as applicable, to the domestic assets and foreign assets, with
the proportions of domestic and foreign assets recalculated monthly, plus
reasonable out-of-pocket expenses.
<Table>
<Caption>
ON ASSETS IN BUT NOT DOMESTIC FOREIGN
EXCESS OF EXCEEDING FEE FEE
-----------------------------------------------------------------------
$ 0 $ 500 million 0.06% 0.10%
$ 500 million $ 1 billion 0.04% 0.065%
$ 1 billion 0.02% 0.02%
</Table>
Founders has contractually agreed in writing to waive any fees received for
these services to the extent they exceed Founders' costs in providing the
services.
CUSTODIAN FEES--Mellon Bank serves as custodian for the Fund. The fees for the
custody services are subject to reduction by credits earned on the cash balances
of the Fund held by the custodian, which are shown as earnings credits on the
Statement of Operations. The Fund could have employed these assets elsewhere to
produce income had it not entered into this arrangement. The custodian has
contractually agreed in writing to a fee waiver for the Funds during the time
periods and in the amounts set forth below:
<Table>
<Caption>
TIME PERIOD AMOUNT OF WAIVER
------------------------------------------------------------
9/1/04 to 8/31/05 $ 200,000
9/1/05 to 8/31/06 $ 200,000
</Table>
The fee waiver is allocated among the Funds in proportion to their respective
shares of the total custodian fee. For the year ended December 31, 2005, the
Fund's portion of the fee waiver was $19,539, which reduced the amount paid to
Mellon Bank to $32,500.
DIRECTORS COMPENSATION--The Company's board of directors has adopted a deferred
compensation plan for Company directors that enables directors to elect to defer
receipt of all or a portion of the annual compensation that they are entitled to
receive from the Company. Under the plan, the compensation deferred is invested
in shares of one or more of the Funds. The amount paid to the director under the
plan will be determined based upon the performance of the selected Funds. The
current value of these amounts is included in Other Assets and Directors'
Deferred Compensation on the Statement of Assets and Liabilities. Changes in
market value are included in the Directors' fees and expenses and the net change
in unrealized appreciation/depreciation of investments on the Statement of
Operations. Deferral of directors' fees under the plan does not affect the net
assets of the Fund.
Certain officers of the Company are also officers and/or directors of Founders,
which pays their compensation. The affairs of the Fund, including services
provided by Founders, are subject to the supervision and general oversight of
the Company's board of directors.
34
<Page>
3. FEDERAL TAX INFORMATION
Net investment income and capital gains distributions are determined in
accordance with income tax regulations that may differ from accounting
principles generally accepted in the United States of America. These differences
are due to differing treatments for items such as deferral of wash sale losses,
deferred compensation, redemptions-in-kind, foreign currency transactions, net
operating losses and capital loss carryovers. Permanent differences identified
during the year ended December 31, 2005 have been reclassified among the
components of net assets as follows:
<Table>
<Caption>
UNDISTRIBUTED NET UNDISTRIBUTED NET PAID-IN
INVESTMENT INCOME REALIZED GAINS AND LOSSES CAPITAL
------------------------------------------------------------
$ 27,299 $ (3,971,207) $ 3,943,908
</Table>
The tax components of capital represent distribution requirements the Fund must
satisfy under the income tax regulations and losses or tax deductions the Fund
may be able to offset against income and capital gains realized in future years.
Accumulated capital losses and post-October 31 capital losses noted below, if
any, as of December 31, 2005, represent capital loss carryovers that may be
available to offset future realized capital gains and thereby reduce future
taxable gains distributions. Post-October 31 foreign currency losses noted
below, if any, may be used to offset future net investment income and thereby
reduce future ordinary income distributions. Net capital loss carryovers
utilized during 2005 by the Fund amounted to $10,043,805. Accumulated capital
losses as of December 31, 2005 were:
<Table>
<Caption>
EXPIRATION AMOUNT
------------------------------------------------------
2009 $ 34,530,988
2010 $ 22,200,649
2011 $ 3,142,525
---------------
$ 59,874,162
===============
</Table>
The aggregate cost of investments and the composition of unrealized appreciation
and depreciation of investment securities for federal income tax purposes as of
December 31, 2005 are noted below. Unrealized appreciation/depreciation in the
table below excludes appreciation/depreciation on foreign currency translation,
if any. The primary difference between book and tax appreciation or depreciation
is wash sale loss deferrals.
<Table>
Post-October Foreign Currency Loss Deferral $ (2,399)
Other Book/Tax Differences $ (16,845)
Federal Tax Cost $ 46,957,564
Gross Tax Appreciation of Investments $ 10,806,488
Gross Tax Depreciation of Investments $ (200,036)
Net Tax Appreciation $ 10,606,452
</Table>
35
<Page>
4. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 450 million shares of $0.01 par value capital
stock. Transactions in shares of the Fund for the periods indicated were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
SHARES AMOUNT SHARES AMOUNT
CLASS A
Sold 22,521 $ 293,185 14,460 $ 169,930
Redeemed (19,415) $ (261,541) (31,674) $ (365,661)
-------------------------------------------------------------
Net Increase (Decrease) 3,106 $ 31,644 (17,214) $ (195,731)
=============================================================
CLASS B
Sold 8,028 $ 98,777 31,752 $ 357,137
Redeemed (42,268) $ (528,874) (29,868) $ (335,138)
-------------------------------------------------------------
Net Increase (Decrease) (34,240) $ (430,097) 1,884 $ 21,999
=============================================================
CLASS C
Sold 10,078 $ 128,403 8,384 $ 94,894
Redeemed (9,465) $ (119,566) (10,901) $ (121,637)
-------------------------------------------------------------
Net Increase (Decrease) 613 $ 8,837 (2,517) $ (26,743)
=============================================================
CLASS F
Sold 210,093 $ 2,732,978 837,712 $ 9,854,038
Redeemed (1,227,387) $ (16,100,693) (2,275,773) $ (26,636,819)
-------------------------------------------------------------
Net Decrease (1,017,294) $ (13,367,715) (1,438,061) $ (16,782,781)
=============================================================
CLASS R
Sold 256,421 $ 3,470,964 209,694 $ 2,478,822
Redeemed (2,018,994) $ (28,492,600) (175,936) $ (2,095,354)
-------------------------------------------------------------
Net Increase (Decrease) (1,762,573) $ (25,021,636) 33,758 $ 383,468
=============================================================
CLASS T
Sold 8 $ 100 1,421 $ 15,509
Redeemed (2,190) $ (26,382) (2,672) $ (29,639)
-------------------------------------------------------------
Net Decrease (2,182) $ (26,282) (1,251) $ (14,130)
=============================================================
</Table>
5. INVESTMENT TRANSACTIONS
For the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term securities and U.S. government obligations)
were $95,597,237 and $134,484,922, respectively.
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<Page>
6. LINE OF CREDIT
The Company has a line of credit arrangement ("LOC") with State Street Bank and
Trust Company, to be used for temporary or emergency purposes, primarily for
financing redemption payments. Each Fund's borrowings are limited to the lesser
of (a) $50 million, or (b) the lesser of 25% of the Fund's total net assets or
the maximum amount which the Fund is permitted to borrow pursuant to the
prospectus, any law or any other agreement. Combined borrowings are subject to
the $50 million cap on the total LOC. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the LOC. At December 31, 2005, the Fund did not have any borrowings under the
LOC.
37
<Page>
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Dreyfus Founders Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Dreyfus Founders Worldwide Growth
Fund (one of the portfolios constituting Dreyfus Founders Funds, Inc., hereafter
referred to as the "Fund") at 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 Sates of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where securities purchased had not been received, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
February 10, 2006
38
<Page>
FACTORS CONSIDERED IN
RENEWING THE ADVISORY AGREEMENT
(UNAUDITED)
At a meeting of the board of directors of Dreyfus Founders Funds, Inc. (the
"Funds" and, in reference to any one of the Funds' ten portfolios, a "Fund")
held on August 11 and 12, 2005, the Funds' directors unanimously approved the
continuation of the Investment Advisory Agreement ("management agreement")
between each of the Funds and Founders Asset Management LLC, the Funds'
investment adviser ("Founders"), for a one-year term ending August 31, 2006. The
board of directors of the Funds ("board") is comprised entirely of individuals
who have no affiliation with Founders or any affiliates of Founders (the
"directors").
Prior to the directors' August 2005 meeting, Founders had provided the directors
with extensive materials related to the renewal of the management agreement,
including performance and expense information for other investment companies
with similar investment objectives to each Fund derived from data compiled by
Lipper Inc., an independent third party ("Lipper").
During their meeting, the directors discussed the proposed continuance of the
management agreement with the senior management personnel of Founders. At the
conclusion of these discussions, the directors and their independent counsel met
in a private session at which no representatives of Founders were present, to
continue their discussion of continuance of the agreement. In determining to
continue the management agreement, the directors considered all factors which
they believed to be relevant, including the following:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED AND TO BE PROVIDED BY FOUNDERS
The directors' analysis of the nature, extent, and quality of Founders' services
to the Funds took into account the knowledge gained from the directors' regular
meetings with management held throughout the prior year. In addition, the
directors reviewed the organizational structure of Founders' senior management
team and Founders' operating departments, including its investment department.
The directors were advised that the Funds' portfolio managers had strong
internal analytical and related support available to them.
The directors were satisfied that Founders is managing the investment of the
assets of the Funds in accordance with each Fund's respective investment
objective, policies and restrictions, subject to the directors' overall
supervision. The directors noted that Founders' responsibilities include placing
the Funds' portfolio transactions with broker-dealers and exercising the Funds'
voting rights and rights to participate in corporate actions.
The directors considered that Founders also provides many non-investment related
services to the Funds in fulfilling its responsibilities under the management
agreement, including: providing office space, furnishings, and equipment
required to conduct the Funds' business; providing administrative services to
the Funds and maintaining the Funds' books and records; compensating the
personnel necessary to provide the foregoing services, as well as the officers
of the Funds (including the Funds' chief compliance officer); preparing the
Funds' securities registration statement amendments, shareholder reports and
other regulatory documents; administering the Funds' compliance program; and
monitoring the outside agents used by the Funds.
39
<Page>
The directors recognized that they have had the opportunity to evaluate the
investment and non-investment related services which Founders provides to the
Funds primarily through their quarterly review of all of the operations of the
Funds during Fund committee and Fund board meetings held throughout the past
twelve months. At each such meeting, extensive discussions of Fund operations
are held with senior management personnel of Founders and a large volume of
documentation with respect to these operations is provided to and reviewed by
the directors. Such discussions and documentation afford the directors the
continual opportunity to evaluate the nature, extent, and quality of the
services provided by Founders and its affiliates to the Funds.
The directors also considered that Founders has made significant expenditures in
the past year and in prior years to ensure that it has the sophisticated systems
and the highly trained personnel necessary for it to be able to continue to
provide quality service to the Funds' shareholders, including the dedication of
substantial resources to Founders' investment and trading departments.
Following further discussion and review, the directors reached the following
conclusions:
- - That the breadth and quality of investment advisory and other services being
provided to the Funds are satisfactory, as evidenced in part by the recent
performance records of the Funds, to which the directors gave significant
attention as indicated below; and
- - That the directors are satisfied not only with the research, long-term
portfolio management, and trading services being provided by Founders to the
Funds, but also recognize that Founders or its affiliates have provided the
highest quality accounting, compliance and regulatory, administrative,
underwriting, custody, shareholder, transfer agent and cash management
services to the Funds, while charging fair, reasonable and competitive fees.
INVESTMENT PERFORMANCE
On a quarterly basis, the directors hold in-person meetings with the portfolio
managers of each Fund, during which each portfolio manager reviews, among other
items, performance information, attribution analyses, and the portfolio
manager's investment outlook. The directors also receive quarterly performance
reviews from Founders' president and chief executive officer and from its senior
vice president/director of investments, as well as monthly and quarterly written
performance information from Founders. On a quarterly basis, the directors also
have received a performance analysis report from Lipper, which highlights each
Fund's performance rankings and quintile positions for various periods of time
from the most recent quarter through five years, in comparison to a relatively
small group of similar funds selected by Lipper and to a larger universe of
similar funds also selected by Lipper.
In conjunction with their consideration of renewal of the management agreement,
the directors received a more detailed report from Lipper which included an
executive summary highlighting each Fund's Class F expense and performance
rankings and quintile positions for current and earlier periods, also in
comparison to a relatively
40
<Page>
small group of funds selected by Lipper and a larger universe of funds also
selected Class F by Lipper. The Lipper materials further included graphs
depicting each Fund's one-year and annualized performance results for two-,
three-, four-, five-, and ten-year periods, if applicable, in comparison to the
Fund's performance group and performance universe.
Worldwide Growth Fund's performance for the one-year period ended December 31,
2004 placed it in the second quintile of its Lipper performance group, with the
Fund ranking third out of six Lipper-selected "peer funds," and in the third
quintile of its Lipper global large-cap growth fund performance universe,
ranking 24th of 56 funds. The directors noted that the Fund's performance had
improved significantly since the current managers of the foreign portion of the
Fund's portfolio assumed their duties in March 2003, with the Fund placing in
the first quintile of its Lipper-selected universe for the two-year period ended
December 31, 2004. The directors deemed these relative performance results to be
satisfactory, and stressed the importance to Founders of the need to seek to
maintain a strong performance record.(1)
The Lipper report also included brokerage commission and portfolio turnover
information with respect to each equity Fund, comparing each Fund's commissions
paid on portfolio securities transactions (as a percentage of average net assets
for the most recent fiscal year) and each Fund's portfolio turnover for the most
recent fiscal period, with similar data concerning the relatively small group of
funds selected by Lipper that had been used in making comparisons with respect
to Fund performance.
At their request and in conjunction with the directors' consideration of
continuance of the management agreement, Founders had provided comparisons of
the returns for each of the Funds (with the exception of Money Market Fund) to
the returns of an index fund (with the exception of Government Securities Fund)
and an exchange-traded fund ("ETF"). The index funds and ETFs that were used in
the comparisons were those that Fund management had determined most closely
resembled the primary benchmark of each of the Funds. The directors had
requested these comparisons as supplemental information to assist them in
evaluating Founders' investment management services.
Founders had advised the directors that when compared to each Fund's Lipper
competitive peer group, the Funds overall achieved better relative performance
results in 2003 and 2004 than in the previous three years. The directors were
informed that Founders' investment department has continued to maintain the
resources necessary to provide high quality investment management services to
the Funds.
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PLEASE VISIT
www.founders.com TO SEE THE MOST RECENT QUARTER-END LIPPER RANKINGS FOR THE
FUND'S CLASS F SHARES. THE RANKINGS CAN BE FOUND ON PAGE 2 OF THE FUND'S
QUARTERLY COMMENTARY. CLASS F RANKINGS DO NOT REFLECT THE FRONT-END SALES
CHARGES THAT APPLY TO OTHER SHARE CLASSES.
41
<Page>
After consideration of all relevant information and data, the directors
concluded that although past performance cannot be a guaranty of future
performance, each Fund and its shareholders would continue to benefit from
Founders' investment management of the Fund. The directors further determined:
- - That although certain of the Funds have experienced performance
difficulties, more recent performance results generally have shown
significant improvement; Founders has focused its efforts upon improving the
performance records of the Funds and will continue to seek improvement; and
- - That the materials provided by Lipper demonstrated that most of the Funds
maintained satisfactory performance quintile rankings in their respective
comparison groups and comparison universes in calendar year 2004 when
compared to their respective 2003 rankings, with 60% of the Funds placing in
the top two quintiles of their respective comparison groups in 2004.
COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY
FOUNDERS AND ITS AFFILIATES FROM FOUNDERS' RELATIONSHIP WITH THE FUNDS
The directors recognized that on a quarterly basis, they receive information
with respect to each Fund's expenses, including receipt of expense ratio
analysis reports that disclose detailed information regarding the expense
components which collectively aggregate the expense ratio of each Fund's Class F
shares. The directors carefully review and discuss the expense ratios for all
classes of shares of each Fund at each of their quarterly meetings throughout
the year.
In conjunction with their annual consideration of renewal of the Funds'
management agreement and other service arrangements, the directors received
information from Lipper which included graphs for each Fund that provided
outlines of contractual management fees at common asset levels, actual
management fees, actual non-management expenses and actual total Fund expenses,
each graph comparing the relevant information of each Fund with each Fund's
competitive peer group as selected by Lipper. As to each Fund, the Lipper
materials further provided contractual fee rates and an overview table of
management fee schedules for each of the funds which comprised each Fund's
competitive group.
The directors noted that for the period ended December 31, 2004, Worldwide
Growth Fund's management fees ranked in the third quintile of its Lipper
competitive expense group, with the Fund's fees the sixth lowest of 11 "peer
funds." The Fund's contractual management fees at a common asset level were
determined by Lipper to be lower than five of the 11 funds in its group. The
Fund's management fees were in the fourth quintile of its Lipper expense
universe, placing 34th lowest of 48 funds.
The directors also considered a brochure provided by Lipper which included
information with respect to the profitability of the mutual fund advisory
activities conducted by a number of publicly-held corporations. Lipper also
prepared an analysis providing detailed information with respect to the types of
services rendered to various mutual fund complexes under their respective
investment advisory contracts.
42
<Page>
Lastly, the directors had been provided with extensive materials with respect to
the profitability derived by Founders from providing investment advisory and
other services to the Funds and to each Fund.
The directors further considered certain indirect benefits received by Founders
from providing investment advisory services to the Funds. These included the
following:
- - Since Founders manages several non-Fund accounts in a style that is similar
to that used for certain of the Funds, Founders realizes certain
efficiencies in performing the portfolio management, trading and operational
functions related to those accounts (the directors recognized that in
determining its profitability from providing investment management and other
services to the Funds, Founders allocated its expenses between the Funds and
other accounts in a manner which was reasonable);
- - Founders may execute brokerage transactions for the Funds with brokers that
provide research and brokerage services to Founders. These research and
brokerage services may be useful to Founders in providing investment
services to any of the clients it advises, not just the Funds. The directors
recognized that Founders' profitability would be lower if it did not receive
research and brokerage services in connection with these brokerage
transactions; and
- - Founders receives fees for providing accounting services to the Funds, and
affiliates of Founders receive various fees for providing underwriting,
shareholder, transfer agency, custody and cash management services to the
Funds (the directors have determined that the services provided by Founders
and its affiliates to the Funds are satisfactory, and that the profits
derived from providing the services are reasonable).
The directors reviewed a table listing the Funds and corresponding subadvisory
and separate accounts managed by Founders, and their respective fee schedules.
In their review of this table, the directors noted that Founders provides many
services to the Funds in fulfilling its responsibilities under the management
agreement that it does not provide to entities for which Founders has assumed
subadvisory duties. The directors concluded that the fees paid to Founders under
the management agreement are reasonable in relation to the nature and extent of
the services provided by Founders to the Funds under the agreement.
In reviewing the overall expense ratios of the Funds, the directors noted that
the expense ratios in 2004 generally were less than the expense ratios
occasioned in 2003, with only one Fund having experienced an increase in 2004
expenses which had an effect on its shareholders. The directors were advised
that in all probability, the Funds' 2005 expense ratios will be higher than
their expense ratios in 2004, primarily due to a decline in the asset levels of
the Funds.
The directors received operating revenue and expense analyses for Founders for
the fiscal year ended December 31, 2004, and estimated investment advisory
profitability to Founders on a before-tax and after-tax basis and on a
Fund-by-Fund basis. The directors were advised that, based on discussions held
by Founders' management with an independent entity, the methodology used to
calculate profitability appeared to be within reasonable norms and was not
inconsistent with that utilized by others within the industry.
43
<Page>
Founders had also provided the directors with a report which presented an
analysis of Founders' 2004 before-tax and after-tax profitability from providing
services to all of its managed accounts, including Fund and non-Fund accounts.
The analysis also described Founders' pro-forma profitability for calendar year
2005.
The directors observed that Founders had experienced an increase in
profitability from providing services to the Funds from calendar year 2003 to
2004, which was the result of an increase in the aggregate assets of the Funds
and, accordingly, an increase in the investment advisory fees received by
Founders. However, the directors noted that Founders' profitability is expected
to decline in 2005 as a result of declines in Fund asset levels. The directors
also considered the risks assumed by Founders in providing management services
to the Funds, including the risk that the management agreement can be terminated
by the directors at any time.
After deliberation and discussion of Fund fees and expenses, the directors
determined:
- - That upon review of the advisory fee structures of the Funds in comparison
with the competitive fund groups selected by Lipper, the levels of
investment advisory fees paid by the Funds are competitive;
- - That the expense ratios of the Funds are competitive and that Founders
continually reviews each Fund's total expense ratio and has initiated
voluntarily expense caps and fee waivers for certain Funds to reduce their
expense ratios;
- - That the majority of the Funds' expense ratios decreased in 2004 from those
experienced in 2003, primarily as a result of an increase in Fund assets,
although expense ratios are expected to increase in 2005 as a result of
declines in Fund assets; and
- - That the comparative fee and expense information included in the materials
provided by Lipper supports the determination that the advisory and other
fees payable by the Funds to Founders and its affiliates are essentially
fees which would be similar to those which would have resulted solely from
"arm's-length" bargaining, and in some instances may well be lower than fees
arrived at solely from such arm's-length negotiation.
With respect to profitability to Founders, the directors reviewed the adviser
profitability analysis provided by Lipper, which included current and historical
information with respect to the profitability of the mutual fund advisory
activities conducted by 13 publicly-held corporations, accounting for
approximately 15% of total investment company industry assets under management
as of December 31, 2004. The Lipper analysis demonstrated that Founders' 2004
profitability from providing management services to the Funds was reasonable in
comparison to the entities included in the Lipper analysis.
The directors were also advised by independent counsel of the profitability
percentage ranges determined by court cases to be reasonable, given the services
rendered to the applicable investment companies by the advisers to these
companies. The directors noted that Founders' profitability percentage for
providing management and other services to the Funds was reasonable,
particularly in relationship to the overall improvement in performance which the
Funds had realized in recent years and in
44
<Page>
recognition of the quality service which Founders has provided and continues to
provide to the Funds.
After continuing their review and discussion of the extensive profitability
analyses which had been provided by Founders, the directors determined that
Founders' profits from providing management services to the Funds were
reasonable in relationship to the overall services which Founders provides.
ECONOMIES OF SCALE
The directors reviewed information provided by Founders which summarized the
extent, if any, that both Founders and the Funds would achieve certain economies
of scale if the assets of the Funds were to increase. Among other information,
the directors considered the following:
- - Increased revenues associated with a larger Fund asset base, coupled with
substantially the same cost structure, likely would translate into increased
profits for Founders;
- - If the assets of a particular Fund were to increase significantly, the
economic benefits of the increase would be shared with that Fund's
shareholders through existing breakpoints in the Fund's investment advisory
fee schedule;
- - Since breakpoints are applied on a Fund-by-Fund basis, economies of scale
that might be realized by Founders in its overall business as a result of an
increase in the assets of a particular Fund or a group of Funds would not be
passed along on a dollar-for-dollar basis to the shareholders of other Funds
that did not experience increases in their assets to points above their
breakpoints;
- - However, the Funds generally have seen their expense ratios drop during
periods when their asset levels have been higher due to the breakpoints in
their fee schedules and the fact that certain of their other expenses, such
as directors', auditors', and legal fees, were being spread across a larger
asset base; and
- - Founders believes that the current schedule of Fund breakpoints is
consistent with its objective of sharing its economies of scale with the
Funds.
After review and discussion, the directors considered the extent to which
economies of scale and common management are shared with each Fund, including
the economies that are realized from the growth of each Fund's assets and, after
such consideration, determined that all of the Funds have structured breakpoints
in their advisory fees, which result in fee reductions as the assets of each
Fund reach defined levels; that such fee reductions, when implemented, would
benefit all of the applicable Fund's shareholders through decreases in the
Fund's expense ratio.
DEDICATION TO REGULATORY REQUIREMENTS AND RESTRICTIONS
An important factor in the directors' consideration of renewal of the Funds'
management agreement with Founders included the directors' recognition of the
dedication by Founders of stringent adherence to regulatory requirements and
45
<Page>
restrictions. The directors determined that Founders is dedicated to compliance
with all applicable rules and regulations and that the systems of controls which
are in place to ensure that the service providers to the Funds, including
Founders, and the Funds themselves, maintain strict adherence to the law are
excellent.
OVERALL CONCLUSIONS
In concluding their deliberations with respect to consideration of continuance
of the Funds' management agreement with Founders, the directors determined that
they are generally satisfied with the performance of the Funds and with the
quality of the advisory and other services being provided by Founders and its
affiliates to the Funds. The directors recognized that overall Fund performance
has improved in recent years and that efforts are being and will continue to be
made to enhance such improvement and to maintain Fund expense ratios at
reasonable and competitive levels.
The directors concluded that continuation of the current management agreement
between each Fund and Founders, which would enable each Fund to continue to
receive investment advisory services from Founders, is in the best interests of
each Fund and its shareholders, the services to be performed under the
management agreement are services required for the operations of the Funds,
Founders has provided satisfactory investment management services to the Funds
in the past, and the fees for the management services which Founders will
perform will be within the range of what would have been negotiated at arm's
length in light of the circumstances.
46
<Page>
YOUR BOARD REPRESENTATIVES
(UNAUDITED)
The Board of Directors of the Company oversees all 10 Dreyfus Founders Funds.
The business and affairs of the Company are managed under the direction of the
Board. The directors serving on the Board perform their responsibilities in the
manner which they reasonably believe to be in the best interests of the Funds
and their shareholders.
All of the directors, as listed below, are independent directors. They are not
affiliated with the Fund's adviser, its parent company, or its affiliates. The
directors have no official term of office and generally serve until they retire
(normally at age 75, but subject to extension to age 80), resign, or are not
re-elected. As you can see from their backgrounds, the directors have broad
experience as active or former business and community leaders.
DIRECTORS
EUGENE H. VAUGHAN, CFA, 72. Year elected to the Board: 1970
Board Chairman. Founding Chairman and, formerly (1970 to 2000), President and
CEO, Vaughan Nelson Investment Management, LP, an investment counseling firm.
Director, Encore Bank. Founding Chairman, Center for Houston's Future, a
non-profit organization. Founding Chairman and former Governor, CFA Institute.
Past Chairman and Trustee, Institute of Chartered Financial Analysts. Past
Chairman and Director, Financial Analysts Federation.
ALAN S. DANSON, 66. Year elected to the Board: 1991
Private investor. Formerly, President and Director, D.H. Management, Inc., the
general partner of a limited partnership with technology company holdings (1996
to 2003). Director, Gore Range Natural Science School and The Les Streeter
Program, Inc., both of which are non-profit organizations.
ROBERT P. MASTROVITA, 61. Year elected to the Board: 1998
Private investor. Chairman of a private charitable foundation (1997 to present).
Formerly, Chairman and Director, Hagler, Mastrovita & Hewitt, Inc., a registered
investment adviser (1982 to 1997). Member, Boston Society of Security Analysts.
Trustee, Partridge Academy.
TRYGVE E. MYHREN, 69. Year elected to the Board: 1996
President, Myhren Media, Inc., a firm that invests in and advises media,
telecommunications, Internet and software companies. Special Limited Partner and
member of Investment Committee, Megunticook Funds, a venture capital firm (1998
to present). Director, Advanced Marketing Services, Inc. Trustee and Chairman of
Finance Committee, the University of Denver. Trustee, Denver Art Museum. Member,
Cable Television Hall of Fame. Formerly, President (1990 to 1996) and Director
(1992 to 2001) of the Providence Journal Company, a diversified media and
communications company. Formerly, Chairman and Chief Executive Officer of
American Television and Communications Corporation (now Timer Warner Cable)
(1981 to 1988). Formerly, Chairman of the National Cable Television Association
(1986-1987).
GEORGE W. PHILLIPS, 67. Year elected to the Board: 1998
Retired. Vice Chairman of the Board, Chairman of the Finance Committee, and
Chairman of the Investment Committee, Children's Medical Center of Boston.
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Formerly, President and Chief Executive Officer (1992 to 1997) and Director
(1992 to 2002) of Warren Bancorp, Inc. Formerly, President, Chief Executive
Officer and Director of Warren Five Cents Savings Bank (1992 to 1997).
MARTHA A. SOLIS-TURNER, 45. Year elected to the Board: 2005
Formerly, Telecommunications Director, Wholesale Markets (1995 to 2001), and
Manager (1990 to 1995), Qwest Communications International Inc. Board member and
Treasurer, Mile High Montessori Early Learning Centers, and formerly, Board
member (1995 to 2004) and Vice President (2002 to 2004), Curtis Park Community
Center, both of which are non-profit organizations.
PRINCIPAL OFFICERS
RICHARD W. SABO, 48. President of the Funds since 2000 and Principal Executive
Officer of the Funds since 2002. Founders' President and Chief Executive
Officer, Member of Founders' Board of Managers and Director of Dreyfus (1998 to
present). Executive Vice President of DSC since 2003. Formerly, Senior Vice
President and Regional Director for Prudential Securities, Inc. (1991 to 1998).
DAVID L. RAY, 48. Vice President of the Funds since 2000, and from 1990 to 1998.
Founders' Senior Vice President--Administration and Treasurer. Vice President of
DSC since 2003. Employed by Founders and its predecessor company since 1990.
Formerly, Treasurer of the Funds (1990 to 1998).
KENNETH R. CHRISTOFFERSEN, 50. Secretary of the Funds since 2000, and from 1996
to 1998. Founders' Senior Vice President--Legal, General Counsel and Secretary.
Assistant Secretary of DSC since 2003. Employed by Founders and its predecessor
company since 1996.
JANELLE E. BELCHER, 47. Chief Compliance Officer of the Funds since 2004 and
Assistant Secretary of the Funds since 2002. Founders' Vice President--
Compliance since 2002. Formerly, Founders' Manager of Compliance (2000 to 2002)
and Securities Compliance Examiner, Staff Accountant and Team Leader for the
U.S. Securities and Exchange Commission (1990 to 2000).
ROBERT T. KELLY, 36. Treasurer, Principal Financial Officer, and Principal
Accounting Officer of the Funds since 2003. Founders' Vice President of
Portfolio Accounting since 2000. Formerly, Assistant Treasurer of the Funds
(2000 to 2003), and Head of Equity Desk for ABN Amro Trust Company (Cayman)
Limited (1998 to 2000).
WILLIAM G. GERMENIS, 35. Anti-Money Laundering Compliance Officer ("AMLCO") for
the Class A, Class B, Class C, Class R, and Class T shares of the Funds since
2002 and for the Class F shares of the Funds since 2003. Vice President and
AMLCO of MBSC, LLC since 2002. Vice President and AMLCO of DSC and AMLCO of
investment companies managed by Dreyfus. Employed by DSC since 1998.
The directors and officers may be contacted at Founders' address appearing on
the inside front cover, except for Mr. Germenis who can be contacted at The
Dreyfus Corporation, 200 Park Avenue, New York, New York 10166. Additional
information about the Company's directors is available in the Statement of
Additional Information, which can be obtained free of charge by calling the toll
free number on the back cover.
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FOR MORE INFORMATION
- -------------------------------------------------------------------------------
DREYFUS FOUNDERS TRANSFER AGENT &
WORLDWIDE GROWTH FUND DIVIDEND DISBURSING AGENT
MANAGER Dreyfus Transfer, Inc.
200 Park Avenue
Founders Asset New York, NY 10166
Management LLC
210 University Boulevard DISTRIBUTOR
Suite 800
Denver, CO 80206 Dreyfus Service Corporation
200 Park Avenue
New York, NY 10166
- -------------------------------------------------------------------------------
TELEPHONE Call your financial representative or 1-800-554-4611
MAIL Dreyfus Founders Funds, Inc.
144 Glenn Curtiss Boulevard, Uniondale, NY 11556-0144
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The fund's Forms N-Q are available on the SEC's website at
http://www.sec.gov and may be reviewed and copied at 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.
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities, and information regarding how
the fund voted these proxies for the 12-month period ended June 30, 2005, is
available at http://www.dreyfus.com and on the SEC's website at
http://www.sec.gov. The description of the policies and procedures is
also available without charge, upon request, by calling 1-800-645-6561.
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE
GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Dreyfus Founders Funds are managed by Founders Asset Management LLC.
Founders and Founders Funds are registered trademarks of Founders
Asset Management LLC.
[LION GRAPHIC]
(C)2006 Founders Asset Management LLC 0351AR1205
ITEM 2. CODE OF ETHICS
(a) As of the end of the period covered by this report, Dreyfus Founders
Funds, Inc. (the "Funds") has adopted a code of ethics that applies to
the Funds' principal executive officer, principal financial officer,
and principal accounting officer.
(c) During the period covered by this report, no amendments have been made
to a provision of the code of ethics that applies to the Funds'
principal executive officer, principal financial officer, or principal
accounting officer, and that relates to any element of the code of
ethics definition enumerated in paragraph (b) of Item 2 of Form N-CSR.
(d) During the period covered by this report, the Funds have not granted a
waiver, including an implicit waiver, from a provision of the code of
ethics to the Funds' principal executive officer, principal financial
officer, or principal accounting officer that relates to one or more
of the items set forth in paragraph (b) of Item 2 of Form N-CSR.
(f)(1) A copy of the code of ethics is filed as an exhibit to this report,
pursuant to Item 12(a)(1) of Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
(a)(1) The board of directors of the Funds has determined that the Funds
have an "audit committee financial expert" serving on its audit
committee, as that term is defined in paragraph (b) of Item 3 of Form
N-CSR.
(a)(2) The name of the audit committee financial expert is George W.
Phillips. Mr. Phillips is an "independent" member of the audit
committee as that term is defined in Item 3(a)(2) of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(a) Audit Fees - The aggregate fees billed to the Funds by their principal
accountant for professional services rendered for the audit of the Funds'
annual financial statements or services that are normally provided by the
accountant in connection with statutory and regulatory filings or
engagements for the fiscal years ending December 31, 2005 and December 31,
2004 were $244,000 and $222,000, respectively.
(b) Audit-Related Fees - The aggregate fees billed to the Funds by their
principal accountant for assurance and related services that are reasonably
related to the performance of the audit of the Funds' financial statements
and that are not reported under paragraph (a) of this Item 4 for the fiscal
years ending December 31, 2005 and December 31, 2004 were $5,000 and
$10,000, respectively. These fees were for agreed-upon procedures performed
relating to trade allocation, initial or secondary public offerings,
brokerage commissions, and Rule 17a-7 transactions.
The aggregate fees billed for assurance and related services by the
Funds' principal accountant to the Funds' investment adviser, and any
entity controlling, controlled by, or under common control with the adviser
that provides ongoing services to the Funds (collectively, the "Service
Providers"), that were reasonably related to the performance of the annual
audit of the Service Provider, which required pre-approval by the Audit
Committee for the fiscal years ending December 31, 2005 and December 31,
2004 were $69,000 and $42,000, respectively. These fees were for a review
of the internal controls of the transfer agent.
(c) Tax Fees - The aggregate fees billed to the Funds by their principal
accountant for professional services rendered by the accountant for tax
compliance, tax advice, and tax planning ("tax fees") for the fiscal years
ending December 31, 2005 and December 31, 2004 were $55,800 and $50,800,
respectively. These fees were for excise tax distribution calculations,
preparation of tax returns, and related consultations.
The aggregate tax fees billed by the Funds' principal accountant to
the Service Providers for services which required pre-approval by the Audit
Committee for the fiscal years ending December 31, 2005 and December 31,
2004 were $0 and $0, respectively.
(d) All Other Fees - The aggregate fees billed to the Funds by their
principal accountant for products and services provided by the accountant,
other than the services reported in paragraphs (a), (b), and (c) of this
Item 4 ("all other fees"), for the fiscal years ending December 31, 2005
and December 31, 2004 were $0 and $0, respectively.
The aggregate of all other fees billed by the Funds' principal
accountant for products and services provided to the Service Providers
which required pre-approval by the Audit Committee for the fiscal years
ending December 31, 2005 and December 31, 2004 were $124,820 and
$2,074,500, respectively. These fees were for transfer agent fee
benchmarking, AIMR verification services, risk assessment of material
compliance functions, evaluation of voice communications over network
communications link, review of corporate-wide risk management and
compliance activities, and network vulnerability testing.
(e)(1) Approval is required of all audit and significant permitted
non-audit engagements of the Funds' principal accountant, prior to the
commencement of any such engagement, including pre-approval not only of
services provided directly to the Funds but also services provided to the
Service Providers where the nature of the services provided has a direct
relationship to the operations or financial reporting of the Funds;
pre-approval may be given up to one year in advance of the audit or
non-audit activity for which pre-approval is sought.
In any instance in which it may become necessary or desirable for the
audit committee to grant immediate pre-approval of a non-audit service to
be provided either by the Funds' principal accountant or by another audit
firm, such pre-approval may be procured in writing from the chair of the
Funds' audit committee or, in the event of his or her unavailability, from
the chair of the Funds' board of directors. Any such pre-approval shall be
subject to consideration and review by the audit committee at its next
regularly scheduled quarterly meeting.
(e)(2) None of the services described in paragraphs (b) through (d) of this
Item 4 were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not applicable.
(g) For the fiscal years ending December 31, 2005 and December 31, 2004,
the aggregate non-audit fees billed by the Funds' principal accountant to
the Funds and the Service Providers were $581,800 and $2,177,300,
respectively.
(h) The Funds' Audit Committee has considered whether the provision of
non-audit services that were rendered to the Service Providers which were
not pre-approved (not requiring pre-approval) is compatible with
maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
Schedule I - Investments in securities of unaffiliated issuers is included
as part of the reports to shareholders filed under Item 1 of this report on
Form N-CSR.
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. PURCHASE 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
No material changes have been made to the procedures by which shareholders
may recommend nominees to the board of directors of the Funds, where those
changes were implemented after the Funds last provided disclosure in
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A or this
Item 10.
ITEM 11. CONTROLS AND PROCEDURES
(a) Based on an evaluation of the Funds' Disclosure Controls and
Procedures as of a date within 90 days of the filing date of this
report, the Funds' Principal Executive Officer ("PEO") and Principal
Financial Officer ("PFO") have concluded that the Funds' Disclosure
Controls and Procedures are effectively designed to ensure that
information required to be disclosed by the Funds in the report is
recorded, processed, summarized, and reported within required time
periods, and to ensure that information required to be disclosed in
the report is accumulated and communicated to the Funds' management,
including the Funds' PEO and PFO, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
(b) During the quarter ended December 31, 2005, there has been no change
in the Funds' internal control over financial reporting that has
materially affected, or that is reasonably likely to materially
affect, the Funds' internal control over financial reporting.
ITEM 12. EXHIBITS
(a)(1) Attached hereto as Exhibit EX-99.CODE ETH.
(a)(2) Attached hereto as Exhibit EX-99.CERT.
(a)(3) Not applicable.
(b) Attached hereto as Exhibit EX-99.906CERT.
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.
DREYFUS FOUNDERS FUNDS, INC.
By: /s/ Richard W. Sabo
--------------------------------------------
Richard W. Sabo, President
Date: February 24, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Richard W. Sabo
--------------------------------------------
Richard W. Sabo, Principal Executive Officer
Date: February 24, 2006
By: /s/ Robert T. Kelly
--------------------------------------------
Robert T. Kelly, Principal Financial Officer
Date: February 24, 2006