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: 811-4984 AMERICAN BEACON FUNDS (Exact name of registrant as specified in charter) 4151 Amon Carter Boulevard, MD 2450 Fort Worth, Texas 76155 (Address of principal executive offices)-(Zip code) WILLIAM F. QUINN, PRESIDENT 4151 Amon Carter Boulevard, MD 2450 Fort Worth, Texas 76155 (Name and address of agent for service) Registrant's telephone number, including area code: (817) 967-3509 Date of fiscal year end: October 31, 2006 Date of reporting period: October 31, 2006 ITEM 1. REPORT TO STOCKHOLDERS. G U I D A N C E | V I S I O N | E X P E R I E N C E [AMERICAN BEACON FUNDS LOGO] ANNUAL REPORT [PHOTO] OCTOBER 31, 2006 EQUITY FUNDS BALANCED FUND LARGE CAP GROWTH FUND MID-CAP VALUE FUND SMALL CAP VALUE OPPORTUNITY FUND EMERGING MARKETS FUND BOND FUNDS HIGH YIELD BOND FUND ENHANCED INCOME FUND INTERMEDIATE BOND FUND SHORT-TERM BOND FUND About American Beacon - -------------------------------------------------------------------------------- Since 1986, American Beacon Advisors has offered a variety of products and investment advisory services to numerous institutional and retail clients, including a variety of mutual funds, corporate cash management, and separate account management. Our clients include defined benefit plans, defined contribution plans, foundations, endowments, corporations, financial planners, and other institutional investors. With American Beacon Advisors, you can put the experience of a multi-billion dollar asset management firm to work for your company Contents - -------------------------------------------------------------------------------- <Table> President's Message........................... 1 American Beacon Funds' Performance............ 2 Market and Performance Overviews.............. 3-23 American Beacon Schedules of Investments Balanced Fund............................... 27 Large Cap Growth Fund....................... 35 Mid-Cap Value Fund.......................... 39 Small Cap Value Opportunity Fund............ 42 Emerging Markets Fund....................... 46 High Yield Bond Fund........................ 52 Enhanced Income Fund........................ 60 Intermediate Bond Fund...................... 65 Short-Term Bond Fund........................ 72 Additional Information....................Back Cover </Table> Any opinions herein, including forecasts, reflect our judgement as of the end of the reporting period and are subject to change. Each advisor's strategies and each Fund's portfolio composition will change depending on economic and market conditions. This report is not a complete analysis of market conditions and therefore, should not be relied upon as investment advice. Although economic and market information has been compiled from reliable sources, American Beacon Advisors, Inc. makes no representation as to the completeness or accuracy of the statements contained herein. American Beacon Funds October 31, 2006 (BILL QUINN PICTURE) FELLOW SHAREHOLDERS, Iam pleased to present to you the American Beacon Funds Annual Report for the twelve months ended October 31, 2006. The U.S. equity markets finished the period on a positive note due to the continuing strong performance of the economy, lower oil prices, and the Federal Reserve ("Fed") taking a neutral policy on interest rates. The S&P 500(R) and Dow Jones Industrial Average indices reported one-year returns of 16.34% and 18.47%, respectively. The American Beacon equity funds posted strong returns in both absolute and relative terms for the fiscal year as many funds reported double-digit returns. The American Beacon Mid-Cap Value and Balanced Funds reported one-year returns of 18.94%(1) and 13.60%, respectively, surpassing their Lipper peer groups. Our Large Cap Growth Fund beat the Lipper Large-Cap Growth Funds Index with a total return of 12.04%, and our Emerging Markets Fund recorded a double-digit one-year total return of 34.49%. All fund returns are for the Institutional Class for the one-year period ended October 31, 2006. The bond market, as defined by the Lehman Brothers Aggregate Index, ended October 31, 2006 with a one-year return of 5.19%. A pause in the raising of interest rates by the Fed helped to create positive returns for the Index as well as our Enhanced Income, High Yield Bond, Intermediate Bond, and Short-Term Bond Funds for the one-year period. Please review the enclosed market overviews, portfolio listings, and detailed financial data. As always, we welcome the opportunity to serve your financial needs. To obtain further details about the American Beacon Funds family or to access your account information, please visit our website at www.americanbeaconfunds.com. Thank you for your continued confidence in the American Beacon Funds. Sincerely, -s- William F. Quinn William F. Quinn President, American Beacon Funds (1) The Mid-Cap Value Fund's one-year return represents the total return achieved by the AMR Class of the Fund from 10/31/05 up to 11/30/05, the inception date of the Institutional Class, and the returns of the Institutional Class since its inception. Expenses of the Institutional Class are higher than those of the AMR Class. As a result, the return shown may be higher then it would have been had the Institutional Class been in existence for the one-year period. 1 AMERICAN BEACON FUNDS OCTOBER 31, 2006 (Unaudited) - -------------------------------------------------------------------------------- <Table> <Caption> AVERAGE ANNUALIZED TOTAL RETURN AS OF OCTOBER 31, 2006 --------------------------------------- INCEPTION TICKER 1 3 5 10 YEAR/ DATE SYMBOL YEAR YEAR YEAR SINCE INCEP. --------- ------ ------ ------ ------ ------------ Balanced Fund -- Institutional 7/17/87 AADBX 13.60% 12.33% 10.00% 8.77% Balanced Fund -- PlanAhead 8/1/94 AABPX 13.31% 11.95% 9.69% 8.48% Balanced Fund -- Service 5/31/05 ABLSX 13.01% 11.75% 9.57% 8.42% Balanced Fund -- AMR 8/1/94 AABNX 13.98% 12.57% 10.29% 9.07% Lipper Mixed-Asset Tgt Alloc Gr Funds Index 7/15/87 13.59% 10.37% 8.27% 8.11% Large Cap Value Fund -- Institutional 7/17/87 AADEX 18.69% 17.97% 13.26% 10.21% Large Cap Value Fund -- PlanAhead 8/1/94 AAGPX 18.44% 17.67% 12.96% 9.91% Large Cap Value Fund -- Service 5/31/05 AVASX 18.18% 17.53% 12.87% 9.86% Large Cap Value Fund -- AMR 8/1/94 AAGAX 19.08% 18.30% 13.56% 10.50% Lipper Large-Cap Value Funds Index 7/31/87 18.41% 13.32% 8.51% 8.69% Large Cap Growth Fund -- Institutional 7/31/00 ALCGX 12.04% 8.57% 4.41% -5.48% Large Cap Growth Fund -- AMR 7/31/00 ALFIX 12.52% 8.84% 4.59% -5.31% Lipper Large-Cap Growth Funds Index 7/31/00 6.23% 6.91% 3.34% -6.23% Mid-Cap Value Fund -- Institutional 11/30/05 AACIX 18.94% N/A N/A 15.51% Mid-Cap Value Fund -- PlanAhead 2/28/06 AMPAX 18.72% N/A N/A 15.42% Mid-Cap Value Fund -- AMR 6/30/04 AMDIX 19.16% N/A N/A 15.60% Lipper Mid-Cap Value Funds Index 6/30/04 17.06% N/A N/A 13.32% Small Cap Value Fund -- Institutional 12/31/98 AVFIX 15.80% 16.15% 19.00% 14.86% Small Cap Value Fund -- PlanAhead 3/1/99 AVPAX 15.56% 15.88% 18.71% 14.57% Small Cap Value Fund -- Service 5/1/03 AASSX 15.23% 15.57% 18.48% 14.43% Small Cap Value Fund -- AMR 3/1/99 AASVX 16.12% 16.46% 19.32% 15.17% Lipper Small-Cap Value Funds Index 12/31/98 17.83% 16.56% 16.81% 13.21% Small Cap Value Opportunity Fund -- Institutional 3/31/06 ASOIX N/A N/A N/A 2.60% Small Cap Value Opportunity Fund -- PlanAhead 3/31/06 ASOPX N/A N/A N/A 2.60% Lipper Small-Cap Value Funds Index 3/31/06 N/A N/A N/A 1.19% International Equity Fund -- Institutional 8/7/91 AAIEX 27.49% 21.57% 16.17% 10.40% International Equity Fund -- PlanAhead 8/1/94 AAIPX 27.20% 21.25% 15.98% 10.16% International Equity Fund -- Service 5/1/03 AAISX 26.89% 20.96% 15.75% 10.05% International Equity Fund -- AMR 8/1/94 AAIAX 27.88% 21.90% 16.46% 10.68% Lipper International Funds Index 8/7/91 27.27% 20.83% 14.90% 9.21% Emerging Markets Fund -- Institutional 7/31/00 AEMFX 34.49% 27.93% 27.83% 14.03% Emerging Markets Fund -- PlanAhead 10/1/02 AAEPX 34.16% 27.66% 27.56% 13.84% Emerging Markets Fund -- AMR 7/31/00 AAMRX 34.87% 28.28% 28.17% 14.33% Lipper Emerging Markets Funds Index 7/31/00 34.61% 29.59% 28.17% 14.06% High Yield Bond Fund -- Institutional 12/29/00 AYBFX 8.78% 7.29% 9.53% 9.07% High Yield Bond Fund -- PlanAhead 3/1/02 AHYPX 8.63% 7.04% 9.25% 8.83% Lipper High Current Yield Funds Index 12/31/00 9.19% 8.10% 9.11% 7.04% Enhanced Income Fund -- PlanAhead 7/1/03 AANPX 6.36% 4.11% N/A 3.79% Lipper Interm. Investment Grade Index 6/30/03 5.08% 3.88% N/A 3.25% Intermediate Bond Fund -- Institutional 9/15/97 AABDX 4.96% 3.85% 4.14% 5.74% Intermediate Bond Fund -- PlanAhead 3/2/98 AAPAX 4.33% 3.23% 3.60% 5.28% Lipper Interm. Investment Grade Index 9/15/97 5.08% 3.88% 4.38% 5.77% Short-Term Bond Fund -- Institutional 12/3/87 AASBX 4.56% 2.64% 3.07% 4.85% Short-Term Bond Fund -- PlanAhead 8/1/94 AALPX 4.01% 2.09% 2.56% 4.35% Lipper Short Investment Gr Bond Funds Index 12/1/87 4.39% 2.53% 2.69% 4.49% </Table> Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1-800-967-9009. Performance shown for the PlanAhead and AMR Classes prior to their inception dates is that of the Institutional Class. Performance shown for the Service Class prior to its inception date is that of the Institutional and PlanAhead Classes since their inception dates. Fund performance does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. A portion of fees have been waived and/or expenses reimbursed for certain Funds. Returns prior to fee waivers and expense reimbursements were lower than the actual returns shown. Please see each Fund's Financial Highlights for waiver and reimbursement information. 2 DOMESTIC EQUITY MARKET OVERVIEW OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- The U.S. stock market proved resilient in the final two months of 2005, posting mid-single digit total returns despite events in early 2005 of geopolitical tensions, rising interest rates, soaring oil prices, and a devastating hurricane. Continued expansion in the manufacturing sector, heightened productivity, and employment gains contributed to solid results and helped the year end on a positive note. The stock market continued its fourth quarter 2005 rally into the first quarter of 2006, even in the face of more rate increases by the Federal Reserve. The gains were due in large part to continued growth in the industrial economy, modest unemployment, and minimal inflation. Furthermore, value stocks in the Russell indices outpaced their growth counterparts in the first quarter, as they have over the past few years. With regard to size, small cap stocks performed the best, followed by mid-caps, with large cap issues bringing up the rear for the first quarter as well as the trailing one-, three- and five-year periods. While nine of the ten economic sectors in the S&P 500(R) Index advanced, sector performance varied widely in the first quarter, with more than 15 percentage points separating the leader from the laggard. Telecommunication Services and Energy posted the largest gains, with total returns of 14.5% and 9.1%, respectively. At the opposite end of the spectrum was the Utilities sector at - 1.2%. During the second quarter of 2006, several key U.S. stock market indices, including the S&P 500 Index and the Nasdaq Composite, declined. While economic and earnings growth remained strong, concerns about inflation and the direction of monetary policy under the leadership of new Federal Reserve Chairman Ben Bernanke pressured equity prices. The Federal Reserve raised short-term interest rates in May and again in June, but stocks rallied late in the quarter on expectations that the end of the tightening cycle was near. As measured by various Russell indices, value stocks again outperformed growth stocks in the second quarter, while large cap equities outpaced their midcap and small cap counterparts, as is often the case in a down market. Investors also preferred defensive stocks in the weak market environment, and Utilities, Energy, and Consumer Staples were the only sectors in the S&P 500 Index to advance during the second quarter. Negative market sentiment took its toll on the more volatile Information Technology sector, which was the S&P 500 Index's worst performer. In the third quarter of 2006, the U.S. stock market indices rebounded. Equity investors set aside concerns about the effects of a slowing housing market, auto industry turmoil, and a heightened homeland security alert. After 17 increases in interest rates over the past two-plus years, the Federal Reserve held interest rates steady at both of its rate-setting meetings during the quarter. This pause, combined with moderate economic growth and strong corporate earnings, contributed to a stock market rally. As had been the case in recent quarters, value stocks outperformed their growth counterparts within the Russell universe during the third quarter. Large cap issues outperformed smaller and mid-cap companies, but continue to lag over the three-, five- and ten-year periods. In a reversal of the second quarter, seven of the ten sectors in the S&P 500 Index provided a positive total return during the third quarter. After performing well over the previous quarter, the Energy sector declined, reflecting the sharp decline in commodity energy prices in September. Telecommunication Services and Health Care rebounded sharply during the third quarter, as both sectors advanced more than 10%. The U.S. stock market posted low- to mid-single-digit gains in October 2006. Overall, growth stocks narrowly outperformed their value counterparts during the month. In general, stock performance was inversely related to size, as small cap stocks were the strongest performers, followed by mid-caps, with large cap issues trailing the pack. All ten economic sectors in the S&P 500 Index advanced in October. Both the Consumer Discretionary and Materials sectors posted total returns in excess of 6%, while Health Care was the laggard, gaining just 0.5% for the month. 3 PERFORMANCE OVERVIEW AMERICAN BEACON BALANCED FUND(SM) OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- The Balanced Fund's Institutional Class returned 13.60% for the twelve months ended October 31, 2006, trailing the 60% S&P 500 Citigroup Value/40% Lehman Brothers Aggregate Index benchmark return of 14.44% and slightly ahead of the Lipper Mixed-Asset Target Allocation Growth Funds Index return of 13.59%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 10/31/96 THROUGH 10/31/06 (PERFORMANCE GRAPH) <Table> <Caption> LIPPER MIXED ASSET TARGET LINKED S&P 500/ BALANCED INSTITUTIONAL ALLOCATION GROWTH S&P 500 CITIGROUP BARRA LEHMAN BROS. COMPOSITE CLASS FUNDS INDEX INDEX VALUE INDEX AGG INDEX INDEX ------------- ----------------- ------- --------------- ------------ --------- 10/96 10000 10000 10000 10000 10000 10000 10/97 12004 12025 13211 12970 10892 12120 10/98 13089 13319 16116 14493 11907 13515 10/99 13159 14993 20253 17248 11970 15068 10/00 13834 16179 21487 18917 12844 16247 10/01 14397 14763 16136 15433 14714 15425 10/02 13657 13638 13698 12997 15581 14348 10/03 16357 15849 16547 16223 16346 16775 10/04 18462 17149 18106 18569 17250 18596 10/05 20406 18377 19685 20458 17445 19820 10/06 23181 20637 22902 24740 18350 22682 </Table> <Table> <Caption> ANNUALIZED TOTAL RETURNS ------------------------- VALUE OF PERIODS ENDED 10/31/06 $10,000 ------------------------- 10/31/96- 1 YEAR 5 YEARS 10 YEARS 10/31/06 ------ ------- -------- --------- Institutional Class(1).................. 13.60% 10.00% 8.77% $23,181 PlanAhead Class(1)...................... 13.31% 9.69% 8.48% $22,566 Service Class(1,2)...................... 13.01% 9.57% 8.42% $22,443 AMR Class(1)............................ 13.98% 10.29% 9.07% $23,818 Lipper Mixed-Asset Target Allocation Growth Funds(3)....................... 13.59% 8.27% 8.11% $21,798 S&P 500 Index(3)........................ 16.34% 7.26% 8.64% $22,902 Linked S&P 500/ Citigroup Value Index(3).............................. 20.93% 9.90% 9.48% $24,740 Lehman Bros. Aggregate Index(3)......... 5.19% 4.51% 6.26% $18,350 Balanced Composite Index(4)............. 14.44% 8.02% 8.53% $22,682 </Table> 1. Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1- 800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. 2. Fund performance for the one-year, five-year and ten-year periods represents the total returns achieved by the PlanAhead Class from 10/31/96 up to 5/31/05, the inception date of the Service Class, and the returns of the Service Class since its inception. Expenses of the Service Class are higher than those of the PlanAhead Class. Therefore, total returns shown may be higher than they would have been had the Service Class been in existence since 10/31/96. A portion of the fees charged to the Service Class of the Fund has been waived. Performance prior to waiving fees was lower than the actual returns shown. 3. The S&P 500 Index is an unmanaged index of common stocks publicly traded in the United States. The Linked S&P 500/Citigroup Value Index represents returns of the S&P 500/Barra Value Index ("Barra Value") up to October 31, 2005 and the S&P 500/Citigroup Value Style Index ("Citigroup Index") thereafter. The Barra Index is a market value weighted index of stocks with book-to-price ratios in the top 50% of the S&P 500 Index. The Citigroup Index is a market value weighted index of stocks in the S&P 500 that score highest based on an average book-to-price ratio, cash flow-to- price ratio, sales to price ratio, and dividend yield, representing 50% of the total market value of the S&P 500. The Lehman Brothers Aggregate Index is a market value weighted index of government, corporate, mortgage-backed and asset-backed fixed-rate debt securities of all maturities. The Lipper Mixed-Asset Target Allocation Growth Funds Index tracks the results of the 30 largest mutual funds in the Lipper Mixed-Asset Target Allocation Funds category. Lipper is an independent mutual fund research and ranking service. One cannot directly invest in an index. 4. To reflect the Fund's allocation of its assets between investment grade fixed-income securities and equity securities, the returns of the Linked S&P 500/Citigroup Value Index and the Lehman Brothers Aggregate Index have been combined in a 60%/40% proportion. During the twelve-month period, the Fund's assets on average were invested 65% in equities (including equitized cash) and 35% in fixed-income securities, ending the period with 64% in equities/equitized cash and 36% in fixed-income securities. The equity portion of the Fund (excluding equitized cash) returned 18.7%, underperforming the Linked S&P 500/Citigroup Value Index ("Linked Index") return of 20.9%. The Fund's equities outperformed the Linked Index in six out of ten sectors. However, poor stock selection mainly in the Consumer Discretionary and Financials sectors contributed to the Fund's underperformance. In the Consumer Discretionary sector, Centex (down 18.5%), Pulte Homes (down 17.6%) and Home Depot (down 11.0%) detracted from Fund performance while the Fund's positions in SLM (down 10.8%) and Citigroup (up 14.1%) accounted for a large portion of the Financial sector's underperformance. The Fund's Energy sector holdings also had a negative impact on performance where ConocoPhillips (down 5.7%), BP (up 2.0%) and Devon Energy (up 11.5%) were the largest detractors. Equity sector allocation detracted modestly from the Fund's relative returns during the twelve-month period, mainly due to a large underweight in the 4 PERFORMANCE OVERVIEW AMERICAN BEACON BALANCED FUND(SM) -- CONTINUED OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- Telecommunication Services sector, the best performing sector of the Linked Index. The fixed-income portion of the Fund returned 6.1% for the period, outperforming the Lehman Brothers Aggregate Index ("Lehman Index") return of 5.2%. The Fund's average duration was shorter than the Lehman Index during the first half of the twelve-month period (3.3 years versus the Lehman Index average duration of 4.6 years) and longer during the latter half (5.0 years versus the Lehman Index average duration of 4.7 years), which helped performance as interest rates rose during the first half of the period and declined in the latter half. The sub-advisors continue to focus on the disciplined selection of attractive securities with a goal of long-term added value. TOP TEN EQUITY HOLDINGS <Table> <Caption> % OF EQUITIES -------- Bank of America Corporation 3.6% Citigroup, Incorporated 2.5% ConocoPhillips 2.4% JP Morgan Chase & Co. 2.3% Exelon Corporation 2.2% Altria Group, Incorporated 1.8% Pfizer, Incorporated 1.7% Verizon Communications, Inc. 1.7% CA, Incorporated 1.7% The St. Paul Travelers Companies, Incorporated 1.7% </Table> EQUITY SECTOR ALLOCATION <Table> <Caption> % OF EQUITIES -------- Financials 29.2% Industrials 14.0% Consumer Discretionary 11.0% Information Technology 9.4% Health Care 8.0% Consumer Staples 7.3% Energy 7.0% Utilities 5.8% Materials 4.7% Telecommunication Services 3.6% </Table> FIXED-INCOME SECTOR ALLOCATION <Table> <Caption> % OF FIXED INCOME ---------- U.S. Treasury 31.4% Mortgage-Backed 28.9% Corporates 20.5% Agency 18.0% Asset-Backed 1.2% </Table> 5 PERFORMANCE OVERVIEW AMERICAN BEACON LARGE CAP GROWTH FUND(SM) OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- The Institutional Class of the Large Cap Growth Fund returned 12.04% for the twelve months ended October 31, 2006, outpacing the Russell 1000 Growth Index ("Index") return of 10.84% and the Lipper Large-Cap Growth Funds Index return of 6.23%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 7/31/00* THROUGH 10/31/06 (PERFORMANCE GRAPH) <Table> <Caption> LIPPER LARGE-CAP GROWTH FUNDS RUSSELL 1000 INSTITUTIONAL CLASS INDEX GROWTH INDEX ------------------- ---------------- ------------ 7/00 10000.00 10000.00 10000.00 10/00 9540.00 9505.00 9407.00 10/01 5665.00 5678.00 5649.00 10/02 4534.00 4620.00 4541.00 10/03 5493.00 5476.00 5531.00 10/04 5862.00 5620.00 5718.00 10/05 6276.00 6299.00 6222.00 10/06 7031.00 6692.00 6897.00 </Table> * Inception of Fund <Table> <Caption> ANNUALIZED TOTAL RETURNS ----------------------------- VALUE OF PERIODS ENDED 10/31/06 $10,000 ----------------------------- 7/31/00- 1 YEAR 5 YEARS SINCE INCEP. 10/31/06 ------ ------- ------------ -------- Institutional Class(1)................ 12.04% 4.41% -5.48% $7,031 AMR Class(1).......................... 12.52% 4.59% -5.31% $7,110 Lipper Large-Cap Growth Funds Index(2)............................ 6.23% 3.34% -6.23% $6,692 Russell 1000(R) Growth Index(2)....... 10.84% 4.07% -5.77% $6,897 </Table> 1. Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1- 800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. A portion of the fees charged to the Institutional Class of the Fund has been waived. Performance prior to waiving fees was lower than the actual returns shown. 2. The Russell 1000 Growth Index is an unmanaged index of those stocks in the Russell 1000 Index with above-average price-to-book ratios and above- average forecasted growth values. Russell 1000(R) Growth Index is a service mark of the Frank Russell Company. The Lipper Large-Cap Growth Funds Index tracks the results of the 30 largest mutual funds in the Lipper Large-Cap Growth Funds category. Lipper is an independent mutual fund research and ranking service. One cannot directly invest in an index. This has been a positive period for U.S. growth stocks overall. During the Fund's fiscal year, all ten sectors in the Index posted positive returns. While sector weighting decisions were additive in seven out of ten sectors and mildly beneficial overall for the Fund, stock selection had by far the largest impact on relative returns. In terms of stock selection, the largest value-added sectors for the Fund relative to the Index were Consumer Discretionary and Information Technology. Positions in Circuit City (up 52.2%), Choice Hotels International (up 28.2%) and News Corp. (up 38.8% during the time the Fund owned the security) had the largest positive impact in the Consumer Discretionary sector. In the Information Technology sector, overweighting Corning (up 21.5% during the time the Fund owned the security), Cisco Systems (up 38.3%), and Western Digital (up 51.1%) was very positive for the Fund. The sectors that detracted most from relative performance were Health Care and Energy. The Fund was hurt by positions in Express Scripts and St. Jude Medical (down 29.7% and 26.6%, respectively, during the time the Fund owned the security) in the Health Care sector and Sunoco and Diamond Offshore (down 10.2% and 4.2%, respectively, during the time the Fund owned the security) in the Energy sector. The Fund's sub-advisors will continue to maintain a disciplined, long-term approach to equity investing in larger stocks with above average-growth potential. TOP TEN HOLDINGS <Table> <Caption> % OF NET ASSETS -------- Cisco Systems, Incorporated 2.9% Johnson & Johnson 2.7% Amgen, Incorporated 2.1% General Electric Company 2.1% Texas Instruments, Incorporated 2.0% The Boeing Company 2.0% Merck & Company, Incorporated 1.9% Microsoft Corporation 1.7% Google, Incorporated 1.5% CVS Corporation 1.5% </Table> 6 PERFORMANCE OVERVIEW AMERICAN BEACON LARGE CAP GROWTH FUND(SM) -- CONTINUED OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- SECTOR ALLOCATION <Table> <Caption> % OF EQUITIES -------- Information Technology 22.5% Health Care 18.4% Consumer Discretionary 16.2% Industrials 15.7% Financials 9.5% Consumer Staples 6.9% Materials 4.9% Energy 3.5% Utilities 1.2% Telecommunication Services 1.2% </Table> 7 PERFORMANCE OVERVIEW AMERICAN BEACON MID-CAP VALUE FUND(SM) OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- The Institutional Class of the Mid-Cap Value Fund returned 18.94% for the twelve-month period ended October 31, 2006. The Fund trailed the Russell Midcap Value Index ("Index") return of 20.51% but outperformed the Lipper Mid-Cap Value Funds Index return of 17.06%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 6/30/04* THROUGH 10/31/06 (PERFORMANCE GRAPH) <Table> <Caption> LIPPER MID-CAP VALUE FUNDS RUSSELL MIDCAP INSTITUTIONAL CLASS INDEX VALUE INDEX ------------------- -------------- -------------- 6/04 10000.00 10000.00 10000.00 10/04 10270.00 10058.00 10409.00 10/05 11773.00 11439.00 12439.00 10/06 14002.00 13390.00 14990.00 </Table> * Inception of AMR Class of Fund <Table> <Caption> TOTAL RETURNS -------------- PERIODS ENDED 10/31/06 VALUE OF -------------- $10,000 SINCE 6/30/04- 1 YEAR INCEP. 10/31/06 ------ ------ -------- Institutional Class(1,3).............................. 18.94% 15.51% $14,002 PlanAhead Class (1,2)................................. 18.72% 15.42% $13,976 AMR Class(1).......................................... 19.16% 15.60% $14,028 Lipper Mid-Cap Value Funds Index(4)................... 17.06% 13.32% $13,390 Russell Midcap(R) Value Index(4)...................... 20.51% 18.95% $14,990 </Table> 1. Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1- 800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. A portion of the fees charged to the PlanAhead and AMR Classes of the Fund has been waived. Performance of each class prior to waiving fees was lower than the actual returns shown. 2. Fund performance represents the total returns achieved by the AMR Class from 6/30/04 up to 3/1/06, the inception date of the PlanAhead Class, and the returns of the PlanAhead Class since its inception. Expenses of the PlanAhead Class are higher than those of the AMR Class. As a result, total returns shown may be higher than they would have been had the PlanAhead Class been in existence since 6/30/04. 3. Fund performance represents the total returns achieved by the AMR Class from 6/30/04 up to 11/30/05, the inception date of the Institutional Class, and the returns of the Institutional Class since its inception. Expenses of the Institutional Class are higher than those of the AMR Class. As a result, total returns shown may be higher than they would have been had the Institutional Class been in existence since 6/30/04. 4. The Lipper Mid-Cap Value Funds Index tracks the results of the 30 largest mutual funds in the Lipper Mid-Cap Value Funds category. Lipper is an independent mutual fund research and ranking service. One cannot invest in an index. The Russell Midcap Value Index is an unmanaged index of those stocks in the Russell Midcap Index with below-average price-to-book ratios and below-average forecasted growth values. The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000(R) Index. Russell Midcap(R) Value Index is a service mark, and Russell 1000 Index is a service mark, of the Frank Russell Company. The Fund underperformed the Index due to sector allocation, as stock selection was positive. A large overweight in the Consumer Discretionary sector, one of the poorer performing sectors in the Index, and an underweight in Materials, the second best performing sector in the Index, were the largest detractors through sector allocation. The Fund's absence of Telecommunication Services stocks, the best performing sector of the Index, also hurt relative performance. The Fund outperformed the Index in every sector except Financials. Stock selection in the Consumer Staples sector contributed most. In this sector, holdings in Carolina Group (up 46.0%), NBTY (up 39.0%) and Reynolds American (up 56.0% during the time the Fund owned the security) accounted for most of the sector's excess performance. The Fund's holdings in the Materials sector also added value relative to the Index. Lafarge provided most of the added value in the Materials sector, as it was up 51.1% over the period the Fund owned it. The Fund's investments in the Financials sector hurt performance most. The largest detractor was First American Financial (down 5.2%), followed by Willis Group Holdings (up 5.1%), Radian Group (up 2.4%) and AON (up 4.5%). The sub-advisors' philosophy of investing in undervalued companies that exhibit improving profitability and earnings growth potential should allow the Fund to benefit longer-term. 8 PERFORMANCE OVERVIEW AMERICAN BEACON MID-CAP VALUE FUND(SM) -- CONTINUED OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- TOP TEN HOLDINGS <Table> <Caption> % OF NET ASSETS -------- Whirlpool Corporation 2.8% XL Capital Limited 1.9% Carolina Group 1.8% American Power Conversion Corp. 1.8% Wisconsin Energy Corp. 1.8% CA, Inc. 1.7% Lucent Technologies, Inc. 1.7% Torchmark Corp. 1.6% The First American Corp. 1.6% Advance Auto Parts, Inc. 1.6% </Table> SECTOR ALLOCATION <Table> <Caption> % OF EQUITIES -------- Financials 28.7% Consumer Discretionary 22.9% Industrials 12.2% Health Care 11.7% Utilities 9.1% Information Technology 7.6% Consumer Staples 5.0% Energy 2.1% Materials 0.7% </Table> 9 PERFORMANCE OVERVIEW AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND(SM) OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- The Institutional Class of the Small Cap Value Opportunity Fund returned 2.60% for the seven-month period from its inception on March 31 through October 31, 2006. The Fund underperformed the Russell 2000 Value Index ("Index") return of 4.86% but outperformed the Lipper Small-Cap Value Funds Index return of 1.19% for the same period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 3/31/06* THROUGH 10/31/06 (PERFORMANCE GRAPH) <Table> <Caption> LIPPER SMALL-CAP VALUE FUNDS RUSSELL 2000 INSTITUTIONAL CLASS INDEX VALUE INDEX ------------------- ---------------- ------------ 3/06 10000.00 10000.00 10000.00 10/06 10260.00 10119.00 10486.00 </Table> * Inception of Fund <Table> <Caption> ANNUALIZED TOTAL RETURNS ------------------------ PERIODS ENDED 10/31/06 ------------------------ VALUE OF SINCE $10,000 INCEP. 3/31/06-10/31/06 ------ ---------------- Institutional Class(1)................ 2.60% $10,260 PlanAhead Class(1).................... 2.60% $10,260 Lipper Small-Cap Value Funds Index(2)............................ 1.19% $10,119 Russell 2000(R) Value Index(2)........ 4.86% $10,486 </Table> 1. Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1- 800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. A portion of the fees charged to the Institutional and PlanAhead Classes of the Fund has been waived. Performance of each class prior to waiving fees was lower than the actual returns shown. 2. The Russell 2000 Value Index is an unmanaged index of those stocks in the Russell 2000 Index with below-average price-to-book ratios and below- average forecasted growth values. Russell 2000(R) Value Index is a service mark of the Frank Russell Company. The Lipper Small-Cap Value Funds Index tracks the results of the 30 largest mutual funds in the Lipper Small-Cap Value Funds category. Lipper is an independent mutual fund research and ranking service. One cannot directly invest in an index. The Fund trailed the Index mostly due to stock selection, as sector allocation detracted only a minimal amount. Stock selection in the Materials sector detracted the most value relative to the Index, followed by the Financials and Industrials sectors. The Fund's holdings in the Materials sector that had the largest impact for the period that the Fund held the securities were Eagle Materials (down 41.9%) and Quanex (down 31.1%). The largest detractors in the Financials sector were Accredited Home Lenders (down 40.2%), Corus Bankshares (down 29.6%), and Stewart Information (down 21.3%). In the Industrials sector, most of the underperformance came from United Rentals (down 31.3% during the time the Fund owned the security) and Universal Forest Products (down 28.5%). Sector weightings detracted a small amount from performance relative to the Index. An overweight in the Industrials sector, which was one of the poorer performing sectors of the Index during the seven-month period, accounted for the majority of the underperformance. The sub-advisor's disciplined approach of investing in a diversified portfolio of small cap value companies should position the Fund to generate competitive performance over longer periods of time. TOP TEN HOLDINGS <Table> <Caption> % OF NET ASSETS -------- FirstFed Financial Corp. 1.1% Argonaut Group, Inc. 1.0% Kennametal, Inc. 1.0% Payless Shoesource, Inc. 1.0% Greif, Inc. 1.0% First Community Bancorp, Inc. 1.0% Innkeepers USA Trust 1.0% Delphi Financial Group, Inc. 1.0% Irwin Financial Corp. 0.9% FelCor Lodging Trust, Inc. 0.9% </Table> SECTOR ALLOCATION <Table> <Caption> % OF EQUITIES -------- Financials 35.4% Consumer Discretionary 15.8% Industrials 13.4% Information Technology 10.9% Materials 5.8% Utilities 4.9% Health Care 4.8% Energy 3.9% Consumer Staples 3.5% Telecommunication Services 1.6% </Table> 10 EMERGING MARKETS OVERVIEW OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- Emerging markets have delivered solid returns over the twelve months ended October 31, 2006 driven by strength in China and the Materials and Industrials sectors. The fourth quarter of 2005 marked a strong finish to the year for emerging market equities as the MSCI Emerging Markets Index gained 7.2%. First quarter 2006 returns surged over 12%, most of which was captured in January alone with a record amount of inflows into the asset class. A material correction occurred in the second quarter during the May to mid-June time period, which was triggered by U.S. inflation fears and tighter monetary policy. This 25% correction was "sandwiched" by strong momentum in April and the latter part of June, which minimized the quarterly loss to just over 5%. Third quarter returns were up modestly with a key driver being the sharp sell-off in oil, down 20% from its August peak. Premium valuations and strong relative performance continue to be key attributes for the large and mega-capitalization securities (stocks over $10 billion and $50 billion in market cap respectively) in the MSCI Emerging Markets Index. 11 PERFORMANCE OVERVIEW AMERICAN BEACON EMERGING MARKETS FUND(SM) OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- The Institutional Class of the Emerging Markets Fund returned 34.49% for the twelve months ended October 31, 2006. The Fund underperformed the MSCI Emerging Markets Index ("Index") return of 35.00% and the Lipper Emerging Market Funds Index return of 34.61%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 7/31/00* THROUGH 10/31/06 (PERFORMANCE GRAPH) <Table> <Caption> LIPPER EMG MSCI EMG MKT FUNDS MKTS FREE INSTITUTIONAL CLASS INDEX INDEX ------------------- ---------- --------- 7/00 10000.00 10000.00 10000.00 10/00 8170.00 8455.00 8499.00 10/01 6657.00 6578.00 6488.00 10/02 7309.00 7047.00 7023.00 10/03 10851.00 10456.00 10417.00 10/04 12983.00 12713.00 12398.00 10/05 16892.00 16904.00 16589.00 10/06 22718.00 22755.00 22395.00 </Table> * Inception of Institutional Class of Fund <Table> <Caption> ANNUALIZED TOTAL RETURNS ----------------------- PERIODS ENDED 10/31/06 VALUE OF ----------------------- $10,000 SINCE 7/31/00- 1 YEAR 5 YEARS INCEP. 10/31/06 ------ ------- ------ -------- Institutional Class(1)................................ 34.49% 27.83% 14.03% $22,718 PlanAhead Class(1,2).................................. 34.16% 27.56% 13.84% $22,485 AMR Class(1).......................................... 34.87% 28.17% 14.33% $23,090 Lipper Emg Mkt Funds Index(3)......................... 34.61% 28.17% 14.06% $22,755 MSCI Emg Mkts Index(3)................................ 35.00% 28.11% 13.77% $22,395 </Table> 1. Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1- 800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. 2. Fund performance for the five-year and since inception periods represents the total returns achieved by the Institutional Class from 7/31/00 up to 10/1/02, the inception date of the PlanAhead Class, and the returns of the PlanAhead Class since its inception. Expenses of the PlanAhead Class are higher than those of the Institutional Class. Therefore, total returns shown may be higher than they would have been had the PlanAhead Class been in existence since 7/31/00. A portion of the fees charged to the PlanAhead Class of the Fund has been waived and recouped. Performance prior to fee waivers and fee recoupment is different than the actual returns shown. See the Financial Highlight tables for more information. 3. The MSCI Emerging Markets Index is a market capitalization weighted index composed of companies that are representative of the market structure of developing countries in Latin America, Asia, Eastern Europe, the Middle East and Africa. The Lipper Emerging Market Funds Index tracks the results of the 30 largest mutual funds in the Lipper Emerging Market Funds category. Lipper is an independent research and ranking service. One cannot directly invest in an index. The Fund returned less than the Index over the twelve-month time period due to Fund expenses, unfavorable stock selection and lower than Index returns in the cash equitization account. These factors more than offset favorable country allocation achieved by the Fund during the period. Despite very strong relative stock selection in Turkey and Russia, poor selections in China, Taiwan and Brazil negatively impacted the Fund's performance during its fiscal year. In Turkey, BIM Birlesik Magazalar gained 86.9%, while Dogan Yayin Holding returned just over 50%. Also returning just over 50% were Russian companies, Savings Bank of the Russian Federation (Sberbank Rossii) and Novatek. In China, Global Bio-chem Technology Group fell 25.5%, while Benq Corp dropped 45.4% in Taiwan. Finally in Brazil, Brasil Telecom lost 16.9%, and Empresa Brasileira de Aeronautica (Embraer) gained less than 10%. Country allocation added value as the Fund underweighted Israel, which was the second worst performing market for the twelve-month period with a gain of 4.0%, and overweighted India, which was the fourth best performing market for the period with a return of 63.7%. The Fund's basic philosophy remains focused on investing in undervalued companies with above-average earnings growth expectations. 12 PERFORMANCE OVERVIEW AMERICAN BEACON EMERGING MARKETS FUND(SM) -- CONTINUED OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- TOP TEN HOLDINGS <Table> <Caption> % OF NET ASSETS -------- Petroleo Brasileiro S.A., ADR 2.9% Samsung Electronics Company Limited 2.1% LUKOIL Oil Company, ADR 2.0% RAO Gazprom 1.9% America Movil, S.A. de C.V., ADR 1.7% Wal-Mart de Mexico, S.A. de C.V. 1.6% Grupo Televisa, S.A. 1.4% United Microelectronics Corporation 1.3% Kookmin Bank 1.1% Unibanco -- Uniao de Bancos Brasileiros S.A. 1.1% </Table> SECTOR ALLOCATION <Table> <Caption> % OF EQUITIES -------- Financials 21.8% Consumer Discretionary 14.4% Energy 12.0% Telecommunications Services 10.9% Information Technology 10.8% Industrials 10.1% Materials 7.7% Utilities 5.5% Consumer Staples 4.9% Health Care 1.9% </Table> COUNTRY ALLOCATION* (PIE CHART) * Shown as a percentage of equities. <Table> <Caption> SOUTH SOUTH HONG KOREA BRAZIL TAIWAN AFRICA MEXICO INDIA RUSSIA KONG CHINA MALAYSIA TURKEY POLAND THAILAND ----- ------ ------ ------ ------ ----- ------ ---- ----- -------- ------ ------ -------- 15.5% 13.1 12.6% 11.0% 8.4% 8.1% 7.5% 3.7% 3.5% 2.8% 2.7% 2.5% 2.3% <Caption> CZECH INDONESIA HUNGARY ISRAEL MOROCCO PHILIPPINES AUSTRIA CHILE COLOMBIA REPUBLIC PERU ARGENTINA --------- ------- ------ ------- ----------- ------- ----- -------- -------- ---- --------- 1.9% 1.0% 0.9% 0.6% 0.6% 0.4% 0.4% 0.2% 0.2% 0.1% 0.0% </Table> Investing in foreign equities entails additional risk not associated with domestic equities, such as currency fluctuations, economic and political instability and differences in accounting standards. The risks of investing in foreign equities are heightened when investing in emerging markets. 13 DOMESTIC BOND MARKET OVERVIEW OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- For the twelve-month period ended October 31, 2006, the investment grade fixed income market, as defined by the Lehman Brothers Aggregate Index (the "Index"), produced a 5.19% total return. Although short-term interest rates rose significantly during the period as the Federal Reserve Bank (the "Fed") raised rates, longer-term rates were up only modestly, which allowed for reasonably attractive total returns from the broad fixed income market. <Table> <Caption> TOTAL RETURNS --------------------- PERIODS ENDED 10/31/06 --------------------- 6 MONTH 12 MONTH ------- -------- Lehman Aggregate 4.60% 5.19% Lehman Gov/Credit 4.75% 4.88% - ------------------------------------------------------ SECTOR U.S. Treasury 4.57% 4.43% U.S. Agency 4.02% 4.93% Mortgage-Backed 4.38% 5.68% Commercial MBS 4.73% 5.53% Asset-Backed 3.55% 4.96% U.S. Credit 5.32% 5.36% - ------------------------------------------------------ CREDIT RATING Aaa 4.39% 5.12% Aa 5.13% 5.36% A 5.53% 5.36% Baa 5.46% 5.60% - ------------------------------------------------------ U.S. TREASURY YIELD 2 Year 2.59 3.88 3 Year 3.04 4.16 5 Year 3.73 3.46 10 Year 5.76 3.30 30 Year 9.91 3.31 </Table> (source: Lehman Brothers) During the period, the Fed raised the Federal Funds Rate by 1.50%, from 3.75% to a final rate of 5.25%, which marked the end of their monetary policy tightening campaign. The yield curve began the period very flat and ended the period inverted with every point along the Treasury curve below the target Federal Funds Rate. While the inversion was only mild, many economists saw it as a presage of slower economic growth. Following in Alan Greenspan's footsteps, Ben Bernanke, the first new Fed Chairman in 18 years, oversaw the final 75 basis points (.75%) of interest rate hikes before pausing to monitor the incoming economic data. The transition to a new Fed governor was smooth, but it led to renewed speculation about the Fed's approach towards monetary policy and the path of interest rates. (PERFORMANCE GRAPH) <Table> 3.88 5.04 4.21 5.11 4.24 5.04 4.27 4.97 4.29 4.90 4.32 4.83 4.35 4.76 2 Yr. 4.37 4.69 4.38 4.68 4.39 4.67 4.39 4.66 4.40 4.65 4.40 4.64 4.41 4.63 4.41 4.62 4.42 4.61 4.42 4.59 4.43 4.58 5 Yr. 4.44 4.57 4.44 4.56 4.45 4.56 4.45 4.56 4.46 4.57 4.46 4.57 4.47 4.57 4.47 4.57 4.48 4.57 4.49 4.58 4.49 4.58 4.50 4.58 4.50 4.58 4.51 4.58 4.51 4.59 4.52 4.59 4.52 4.59 4.53 4.59 4.53 4.59 4.54 4.59 10 Yr. 4.55 4.60 4.55 4.60 4.55 4.60 4.56 4.60 4.56 4.60 4.56 4.60 4.56 4.61 4.57 4.61 4.57 4.61 4.57 4.61 4.57 4.61 4.58 4.61 4.58 4.61 4.58 4.62 4.58 4.62 4.59 4.62 4.59 4.62 4.59 4.62 4.59 4.62 4.60 4.62 4.60 4.63 4.60 4.63 4.60 4.63 4.61 4.63 4.61 4.63 4.61 4.63 4.61 4.63 4.62 4.64 4.62 4.64 4.62 4.64 4.62 4.64 4.63 4.64 4.63 4.64 4.63 4.64 4.63 4.65 4.64 4.65 4.64 4.65 4.64 4.65 4.64 4.65 4.65 4.65 4.65 4.66 4.65 4.66 4.66 4.66 4.66 4.66 4.66 4.66 4.66 4.66 4.67 4.66 4.67 4.67 4.67 4.67 4.67 4.67 4.68 4.67 4.68 4.67 4.68 4.67 4.68 4.67 4.69 4.68 4.69 4.68 4.69 4.68 4.69 4.68 4.70 4.68 4.70 4.68 4.70 4.68 4.70 4.69 4.71 4.69 4.71 4.69 4.71 4.69 4.71 4.69 4.72 4.69 4.72 4.69 4.72 4.70 4.72 4.70 4.73 4.70 4.73 4.70 4.73 4.70 4.73 4.70 4.74 4.70 4.74 4.71 4.74 4.71 4.74 4.71 30 Yr. 4.75 4.71 4.75 4.71 4.75 4.71 4.75 4.72 </Table> Within the investment grade fixed income markets, yield played the largest role in determining relative total returns. The impact of duration was minor during the period as longer-term interest rates were largely unchanged. Longer- term rates were volatile in the interim, rising sharply in early '06 and declining in late '06, but they ended nearly where they began. Likewise, credit spreads were also largely unchanged during the period, although their path was range-bound throughout the year. With stability in the spread sectors, investors benefited from the incremental yield available from those securities. The highest total return among the major asset classes during the twelve months ended October 31, 2006 came from mortgages, which returned 5.68%. A combination of moderating refinancing activity and spread improvement helped this sector to outperform. The rise in interest rates during the middle of this period and the flattening yield curve slowed refinancing activity and reduced the amount of new mortgage issuance entering the market -- both of which contributed to this sector's outperformance. The credit markets experienced a period of relative calm during the past year. With the auto manufacturers firmly planted in the high yield sector in late 2005, their impact on the broader investment grade market was minimal. There were still periods of uncertainty prompted by private equity and leveraged buyout investors, but these stories were issuer-specific and did not affect the broad market averages. To be fair, the Lehman Credit sector spread averages are market-weighted averages, and smaller issuers are generally more prone to leveraged transactions than 14 DOMESTIC BOND MARKET OVERVIEW -- CONTINUED OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- are large issuers. In other words, the spread markets felt more volatile than they actually were. Credit fundamentals were solid during the period -- debt levels were up only modestly, balance sheets were strong, and profitability remained strong. Companies with flat stock prices were the primary targets of takeover speculation, but other than issuer-specific stories, the broad credit technicals were positive. As a result, the highest-yielding, or triple-B rated, issuers outperformed during the period. (PERFORMANCE GRAPH) <Table> <Caption> INDEX AAA CREDIT AA CREDIT A CREDIT BAA CREDIT ----- ---------- --------- -------- ---------- 10/1/04 84 34 43 70 121 10/8/04 84 34 43 70 121 10/15/04 84 33 42 69 122 10/22/04 86 33 42 69 126 10/29/04 84 33 42 68 123 11/5/04 80 31 39 65 117 11/12/04 79 30 39 64 115 11/19/04 78 29 39 64 115 11/26/04 76 28 37 61 113 12/3/04 77 29 39 63 113 12/10/04 76 28 38 60 112 12/17/04 76 28 38 61 112 12/24/04 76 28 38 61 111 12/31/04 75 28 38 61 110 1/7/05 74 28 37 59 109 1/14/05 76 28 38 61 113 1/21/05 77 28 37 61 115 1/28/05 74 28 37 59 111 2/4/05 74 28 38 60 110 2/11/05 74 28 38 59 110 2/18/05 73 28 38 58 108 2/25/05 71 28 36 57 106 3/4/05 71 28 37 57 106 3/11/05 70 27 36 56 105 3/18/05 76 29 39 59 116 3/25/05 78 29 40 59 120 4/1/05 86 32 44 67 132 4/8/05 86 31 44 65 133 4/15/05 98 34 47 72 158 4/22/05 93 34 47 69 145 4/29/05 96 34 47 72 151 5/6/05 80 35 47 71 115 5/13/05 85 35 49 77 121 5/20/05 83 35 48 75 120 5/27/05 80 33 47 72 115 6/3/05 87 33 57 76 132 6/10/05 87 34 56 76 132 6/17/05 86 34 55 76 131 6/24/05 88 33 54 76 136 7/1/05 85 32 54 74 131 7/8/05 84 32 53 73 130 7/15/05 82 31 52 71 125 7/22/05 80 31 51 70 123 7/29/05 79 32 51 69 119 8/5/05 79 32 51 69 120 8/12/05 80 33 52 69 120 8/19/05 80 33 53 69 121 8/26/05 77 32 53 68 115 9/2/05 83 34 55 72 123 9/9/05 81 34 54 71 120 9/16/05 81 34 54 72 120 9/23/05 81 33 54 71 122 9/30/05 81 32 53 72 120 10/7/05 82 33 55 73 122 10/14/05 86 32 55 75 131 10/21/05 83 32 55 74 125 10/28/05 84 33 56 75 126 11/4/05 84 34 57 75 126 11/10/05 85 34 57 76 127 11/18/05 87 35 58 77 131 11/25/05 88 35 57 77 132 12/2/05 88 36 58 78 133 12/9/05 89 37 59 78 134 12/16/05 89 37 59 79 134 12/23/05 82 36 59 78 116 12/30/05 83 37 60 80 116 1/6/06 84 37 60 80 117 1/13/06 84 37 60 80 117 1/20/06 83 36 59 79 116 1/27/06 81 36 59 78 113 2/3/06 80 36 59 77 113 2/10/06 80 36 58 77 113 2/17/06 79 36 57 76 111 2/24/06 78 35 57 76 109 3/3/06 78 35 56 76 109 3/10/06 79 35 57 77 111 3/17/06 80 37 58 78 111 3/24/06 81 36 58 78 113 3/31/06 81 37 59 79 113 4/7/06 82 38 59 79 114 4/14/06 82 37 60 80 113 4/21/06 81 38 59 79 112 4/28/06 80 37 58 77 109 5/5/06 79 37 58 77 108 5/12/06 79 37 59 78 109 5/19/06 82 38 61 80 114 5/26/06 83 39 61 81 116 6/2/06 85 39 61 82 118 6/9/06 86 39 61 82 121 6/16/06 87 40 62 85 123 6/23/06 89 41 62 86 125 6/30/06 88 41 63 86 122 7/7/06 87 41 63 86 121 7/14/06 89 40 63 87 124 7/21/06 88 40 63 87 123 7/28/06 88 40 62 86 122 8/4/06 89 40 63 87 124 8/11/06 88 39 62 86 123 8/18/06 87 38 61 86 123 8/25/06 87 38 61 85 122 9/1/06 87 37 62 85 123 9/8/06 87 38 61 85 123 9/15/06 86 38 61 84 121 9/22/06 88 37 61 84 124 9/29/06 87 37 61 84 124 10/6/06 86 37 60 83 123 10/13/06 86 37 60 83 121 10/20/06 85 37 61 81 120 10/27/06 85 36 61 81 120 </Table> Within the government sectors, Agencies outperformed Treasuries due to their incremental yield and modest spread tightening. Headlines were relatively quiet for the government agencies during this period, and the regulatory bodies appear to have finished their investigative work. The challenges now lie ahead of the agencies rather than behind them. New issuance remained low since their balance sheet growth is restricted, and spreads improved slightly. The Asset-Backed and Commercial Mortgage-Backed sectors produced returns similar to high quality Credit securities on a duration-adjusted basis. While these sectors posted reasonably attractive returns, they were a relatively small portion of the Index. Overall, the domestic bond markets continued to post positive total returns despite the Fed's impact on the short end of the curve. Going forward, with the yield curve inverted and the Fed on hold, bond market returns will likely be dictated by the fluctuations in longer-term interest rates. 15 HIGH YIELD BOND MARKET OVERVIEW OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- The past year has seen two major factors emerge as the key drivers in the high yield market: the significant amounts of capital that private equity sponsors and, to a lesser degree, hedge funds have available for leveraged buyout (LBO) activity, and the performance of General Motors Corp. (GM) and Ford Motor Co. (Ford). Additionally, the significant outperformance of lower-quality credits has re-emerged. After GM and Ford were downgraded and their large amounts of debt moved into the high yield universe, developments at both companies promised to have a major impact on the market's performance this year. In fact, the most dominant concern for investors (in both the high yield and investment grade markets) over the first six months of the year had been the state of the auto market in general and the potential for problems at GM and Ford specifically. On April 3, GM announced plans to sell a 51% interest in GMAC Financial Services (GMAC) to a consortium led by Cerberus Capital. While GMAC bonds improved modestly, this may not have been the best possible outcome, as bondholders were apparently hoping for a sale of GMAC to an investment grade company. The voracious appetite for leveraged buyouts was made apparent in July when a group led by Bain Capital and Kohlberg Kravis Roberts & Co. (KKR) agreed to take HCA private in a transaction valued at $33 billion, the largest ever of its kind. The repercussions for the high yield market were distinctly negative. First, all of HCA's $8.2 billion of debt has "high grade" covenants, even the bonds issued after the company was downgraded to high yield. These bonds represent 1.2% of the Lehman Brothers Corporate High Yield Index and 3.0% of the BB segment of that index. Most HCA bonds dropped in value as investors anticipated a levering up of the company and a downgrade from BB to B or lower. In addition, the deal will require about $20 billion of additional bank and bond financing which could put further pressure on HCA, healthcare and all high yield securities. By August, most of the auto news was positive. The planned GMAC sale to a Cerberus consortium moved forward. GM agreed to consider an alliance with Renault and Nissan. Ford, feeling the pressure to do something, hinted that its luxury brands (Aston-Martin, Jaguar, Land Rover and Volvo) or a piece of Ford Motor Credit might be sold. Meanwhile, Ford continued to downsize its North American operations amidst slumping sales. GM and Ford are certainly two of the most prominent "fallen angels" to enter the high yield market, but they won't be the last. With economic conditions strong, downgrades due to slumping profitability have subsided. However, downgrades from levering LBO transactions are picking up. Since these transactions take time to consummate, the impact on the high yield market will be seen in the coming months. 16 PERFORMANCE OVERVIEW AMERICAN BEACON HIGH YIELD BOND FUND(SM) OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- The Institutional Class of the High Yield Bond Fund returned 8.78% for the twelve months ended October 31, 2006. The Fund trailed its main indices for the period as the Lipper High Current Yield Funds Index returned 9.19%, the Citigroup High Yield Market Capped Index ("Citigroup Index") gained 9.30%, and the JP Morgan Global High-Yield Index posted a return of 10.11% for the twelve- month period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 12/29/00* THROUGH 10/31/06 (PERFORMANCE GRAPH) <Table> <Caption> LIPPER HIGH JP MORGAN CITIGROUP HIGH CURRENT YIELD HIGH YIELD YIELD MARKET INSTITUTIONAL CLASS FUNDS INDEX INDEX INDEX ------------------- ------------- ---------- -------------- 12/00 10000 10000 10000 10000 10/01 10533 9618 10262 10224 10/02 11194 9045 10185 9531 10/03 13446 11773 13290 13042 10/04 14816 13081 15008 14644 10/05 15265 13620 15635 15163 10/06 16605 14871 17216 16672 </Table> * Inception of Institutional Class of Fund <Table> <Caption> ANNUALIZED TOTAL RETURNS ---------------------------------- PERIODS ENDED 10/31/06 ---------------------------------- VALUE OF $10,000 SINCE 12/29/00- 1 YEAR 5 YEARS INCEP. 10/31/06 ------ ------- ------ --------- Institutional Class(1)................ 8.78% 9.53% 9.07% $16,605 PlanAhead Class(1,2).................. 8.63% 9.25% 8.83% $16,275 Lipper High Current Yield Funds Index(3)............................ 9.19% 9.11% 7.04% $14,871 Citigroup High-Yield Market Index(3).. 9.95% 10.28% 9.16% $16,672 Citigroup High-Yield Market Capped Index(3)............................ 9.30% N/A N/A N/A JP Morgan Global High-Yield Index(3)................. 10.11% 10.90% 9.76% $17,216 </Table> 1. Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1- 800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. A portion of the fees charged to the Institutional Class of the Fund was waived through 2004. Performance prior to waiving fees was lower than the actual returns shown for periods prior to 2004. 2. Fund performance for the five-year and since inception periods represents the total returns achieved by the Institutional Class from 12/29/00 up to 3/1/02, the inception date of the PlanAhead Class, and the returns of the PlanAhead Class since its inception. Expenses of the PlanAhead Class are higher than those of the Institutional Class. As a result, total returns shown may be higher than they would have been had the PlanAhead Class been in existence since 12/29/00. 3. The JPMorgan Global High-Yield Index ("JPMorgan Index") has replaced the Citigroup High-Yield Market Index as the Fund's broad-based market index, because the Manager has access to better statistical and performance information for the JP Morgan Index. The JPMorgan Index is an unmanaged index of fixed income securities with a maximum credit rating of BB+ or Ba1. Issues must be publicly registered or issued under Rule 144A under the Securities Act of 1933, with a minimum issue size of $75 million (par amount). A maximum of two issues per issuer are included in the JPMorgan Index. Convertible bonds, preferred stock, and floating-rate bonds are excluded from the JPMorgan Index. The Citigroup High-Yield Market Index is an unmanaged index of fixed income securities with a maximum credit rating of BB+, a minimum amount outstanding of $100 million, and at least one year to maturity. The Citigroup High-Yield Market Capped Index ("Citigroup Index") is an unmanaged index of fixed income securities with a maximum credit rating of BB+, a minimum amount outstanding of $100 million, and at least one year to maturity. The total par amount outstanding for each issuer in the Citigroup Index is capped at $5 billion, which results in a more diversified index of securities that more closely reflects the Fund's issuer diversification. The Citigroup Index has an inception date of 1/2/02. The Lipper High Current Yield Funds Index tracks the results of the 30 largest mutual funds in the Lipper High Current Yield Funds category. Lipper is an independent mutual fund research and ranking service. One cannot directly invest in an index. The Fund underperformed the Citigroup Index over the twelve-month period due to sector allocation, fund expenses and the Fund's cash component return. These factors more than offset strong issue selection achieved by the Fund during the period. Issue selection was strong in the Manufacturing and Consumer sectors, and more than offset poor issue selection in the Service and Cable/Media sectors. From a sector allocation perspective, the Fund was negatively impacted by underweighting the two best performing sectors for the period. Transportation was the top performing sector for the period with a gain of 18.1%, while Telecommunications ranked second with a return of 14.6%. However, the Fund added value by underweighting the two worst performing sectors, Energy and Other Corporate, as both sectors gained 6.8%. The sub-advisors' bottom-up, research intensive investment process, which focuses on companies with strong cash flow and fundamental credit strength, remains in place. 17 PERFORMANCE OVERVIEW AMERICAN BEACON HIGH YIELD BOND FUND(SM) -- CONTINUED OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- TOP TEN HOLDINGS <Table> <Caption> % OF NET ASSETS -------- Encore Medical IHC, Inc., 9,750% Due 10/1/2012 1.3% Turning Stone Resort & Casino, 9.125%, Due 12/15/2010 1.2% General Motors Acceptance Corp., 6.875%, Due 9/15/2011 1.1% Chesapeake Energy Corp., 7.625%, Due 7/15/2013 1.1% Crystal US Holdings 3LLC/Crystal US Sub 3 Corp, 10.500%, Due 10/1/2014 1.1% E*Trade Financial Corp., 8.000%, Due 6/15/2011 1.0% PetroQuest Energy, Inc., 10.375%, Due 5/15/2012 1.0% Insight Communications, Inc., 12.250%, Due 2/15/2011 1.0% TRW Automotive, Inc., 9.375%, Due 2/15/2013 1.0% Kinetek Inc., 10.750%, Due 11/15/2006 1.0% </Table> SECTOR ALLOCATION <Table> <Caption> % OF FIXED INCOME ---------- Corporate 100.0% </Table> 18 PERFORMANCE OVERVIEW AMERICAN BEACON ENHANCED INCOME FUND(SM) OCTOBER 31, 2006 (Unaudited) - -------------------------------------------------------------------------------- The PlanAhead Class of the Enhanced Income Fund returned 6.36% for the twelve months ended October 31, 2006. Its benchmark, a blend of 75% Lehman Brothers Gov/Credit Intermediate Index and 25% Merrill Lynch All U.S. Convertibles Index ("Benchmark"), returned 6.75%. The Fund's peer group, the Lipper Intermediate Investment Grade Index, returned 5.08% over the period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 7/1/03* THROUGH 10/31/06 (PERFORMANCE GRAPH) <Table> <Caption> LIPPER INTERMEDIATE LEHMAN BROTHERS MERRILL LYNCH INVESTMENT GRADE GOV./CREDIT INTERMEDIATE ALL U.S. PLANAHEAD CLASS INDEX GRADE INDEX CONVERTIBLES INDEX --------------- ------------------- ------------------------ ------------------ 7/03 10000 10000 10000 10000 10/03 10032 9924 9904 10647 10/04 10504 10440 10333 11512 10/05 10642 10586 10360 12028 10/06 11319 11124 10844 13608 <Caption> ENHANCED INCOME COMPOSITE INDEX --------------- 7/03 10000 10/03 10088 10/04 10622 10/05 10768 10/06 11495 </Table> * Inception of Fund. <Table> <Caption> ANNUALIZED TOTAL RETURNS ----------------------- PERIODS ENDED 10/31/06 VALUE OF ----------------------- $10,000 SINCE 12/29/00- 1 YEAR 3 YEARS INCEP. 10/31/06 ------ ------- ------ --------- PlanAhead Class(1).................... 6.36% 4.11% 3.79% $11,319 Lipper Intermediate Investment Grade Index(2)............................ 5.08% 3.88% 3.25% $11,124 Lehman Bros. Gov/Credit Intermediate Index(2)............................ 4.67% 3.06% 2.46% $10,844 Merrill Lynch All U.S. Convertibles Index(2)............................ 13.13% 8.52% 9.68% $13,608 Enhanced Income Composite Index(3).... 6.75% 4.45% 4.27% $11,495 </Table> 1. Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1- 800-967-9009. Fund performance shown in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. 2. The Lehman Bros. Gov./Credit Intermediate Index is an unmanaged index of investment grade corporate and government debt issues with maturities between one and ten years. The Merrill Lynch All U.S. Convertibles Index is an unmanaged index of domestic securities of all quality grades that are convertible into U.S. dollar-denominated common stock, ADRs or cash equivalents. The Lipper Intermediate Investment Grade Index tracks the results of the 30 largest mutual funds in the Lipper Intermediate Investment Grade Funds category. Lipper is an independent mutual fund research and ranking service. One cannot directly invest in an index. 3. To reflect the Fund's allocation of its assets between investment grade fixed-income securities and convertible securities, the returns of the Lehman Brothers Gov./Credit Intermediate Index and the Merrill Lynch Convertibles Index have been combined in a 75%/25% proportion. Effective November 1, 2006, the benchmark for the portion of Fund assets invested in investment grade fixed-income securities will change from the Lehman Brothers Gov./Credit Intermediate Index to the Lehman Brothers Aggregate Index. The Fund's assets have been allocated approximately 75% to American Beacon Advisors, Inc. (the "Manager") which invests primarily in income producing, short- and intermediate-term, investment grade bonds, and 25% to a sub-advisor that invests in securities including convertible bonds, convertible preferreds, high yield bonds and equities with the intent of enhancing the return of the overall Fund. For the twelve-month period, the investment grade bond portion of the Fund returned 5.0% on a gross basis compared to a 4.7% return for its portion of the Benchmark. The Manager added value through security selection in the Asset- Backed and Corporate sectors and by being substantially overweighted in Corporates, the best performing sector for the period. The remaining portion of the Fund managed by the Fund's sub-advisor generated a gross return of 14.7%. This return not only beat the 13.1% return of the relevant portion of the Benchmark but also enhanced the return of the investment grade bond portion of the Fund. Lower quality speculative grade issues outperformed investment grade for the period, so the higher credit quality of the sub-advisor's portion of the Fund somewhat limited its return. The sub-advisor favored securities with good equity sensitivity, which benefited the Fund. Issues with greater equity sensitivity (low conversion premiums) performed well, reflecting the positive equity markets for the one-year period. The Manager and the Fund's sub-advisor remain focused on the Fund's investment objectives of generating income and capital appreciation. 19 PERFORMANCE OVERVIEW AMERICAN BEACON ENHANCED INCOME FUND(SM) -- CONTINUED OCTOBER 31, 2006 (Unaudited) - -------------------------------------------------------------------------------- TOP TEN HOLDINGS <Table> <Caption> % OF NET ASSETS -------- U.S. Treasury Note, 4.375%, Due 8/15/2012 5.5% U.S. Treasury Note, 4.000%, Due 2/15/2014 3.8% U.S. Treasury Note, 4.875%, Due 4/30/2011 3.5% U.S. Treasury Notes, 4.750%, Due 5/15/2014 2.8% U.S. Treasury Notes, 4.875%, Due 8/15/2016 2.3% HSBC Finance Corp., 5.250%, Due 1/14/2011 1.8% Federal Home Loan Mortgage Corp., 5.500%, Due 7/18/2016 1.7% American Express Credit Account Master Trust, 5.350%, Due 1/15/2014 1.6% John Deere Owner Trust, 5.390%, Due 6/17/2013 1.6% Chase Manhattan Auto Owner Trust, 5.360%, Due 1/15/2013 1.6% </Table> FIXED-INCOME SECTOR ALLOCATION <Table> <Caption> % OF FIXED INCOME ---------- Corporate Bonds 41.7% Treasury 24.9% Corporate Convertibles 15.6% Asset-Backed 11.7% Mortgage-Backed 3.6% U.S. Agency 2.5% </Table> EQUITY SECTOR ALLOCATION <Table> <Caption> % OF EQUITIES -------- Financials 45.7% Information Technology 32.4% Industrials 10.8% Consumer Discretionary 8.0% Health Care 3.1% </Table> 20 PERFORMANCE OVERVIEW AMERICAN BEACON INTERMEDIATE BOND FUND(SM) OCTOBER 31, 2006 (Unaudited) - -------------------------------------------------------------------------------- The Institutional Class of the Intermediate Bond Fund returned 4.96% for the twelve months ended October 31, 2006, trailing the Lehman Brothers Aggregate Index ("Index") return of 5.19% and the Lipper Intermediate Investment Grade Index return of 5.08%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 9/15/97* THROUGH 10/31/06 (PERFORMANCE GRAPH) <Table> <Caption> LIPPER INTERMEDIATE INVESTMENT GRADE LEHMAN BROTHERS INSTITUTIONAL CLASS INDEX AGGREGATE INDEX ------------------- ------------------- --------------- 9/97 10000 10000 10000 10/97 10241 10211 10295 10/98 11215 11045 11254 10/99 11143 11074 11314 10/00 11855 11775 12140 10/01 13584 13462 13908 10/02 14204 13952 14727 10/03 14861 14884 15450 10/04 15660 15658 16304 10/05 15858 15878 16489 10/06 16644 16684 17344 </Table> * Inception of Institutional Class of Fund <Table> <Caption> ANNUALIZED TOTAL RETURNS ----------------------- PERIODS ENDED 10/31/06 VALUE OF ----------------------- $10,000 SINCE 9/15/97- 1 YEAR 5 YEARS INCEP. 10/31/06 ------ ------- ------ -------- Institutional Class(1)................ 4.96% 4.14% 5.74% $16,644 PlanAhead Class(1,2).................. 4.33% 3.60% 5.28% $15,988 Lipper Intermediate Inv. Grade Index(3)............................ 5.08% 4.38% 5.77% $16,684 Lehman Bros. Agg. Index(3)............ 5.19% 4.51% 6.19% $17,344 </Table> 1. Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1- 800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. 2. Fund performance for the since inception period represents the total returns achieved by the Institutional Class from 9/15/97 up to 3/2/98, the inception date of the PlanAhead Class, and the returns of the PlanAhead Class since its inception. Expenses of the PlanAhead Class are higher than those of the Institutional Class. As a result, total returns shown may be higher than they would have been had the PlanAhead Class been in existence since 9/15/97. A portion of the fees charged to the PlanAhead Class of the Fund has been waived. Performance prior to waiving fees was lower than the actual returns shown. 3. Since inception return for the Lehman Brothers Aggregate Index is from 8/31/97. The Lehman Brothers Aggregate Index is a market value weighted index of government, corporate, mortgage-backed and asset-backed fixed- rate debt securities of all maturities. The Lipper Intermediate Investment Grade Index tracks the results of the 30 largest mutual funds in the Lipper Intermediate Investment Grade Funds category. Lipper is an independent research and ranking service. One cannot directly invest in an index. Prior to the deduction of expenses, the Fund slightly outperformed the Index. However, the Fund did not generate enough excess performance to offset its expenses. The Fund added value through positive security selection in Collateralized Mortgage Obligations (CMOs), and in the Corporate and Asset- Backed sectors. The Fund's duration was similar to that of the Index over the course of the twelve-month period and, therefore, had minimal impact on the Fund's relative performance. The Fund's investment managers remain focused on a conservative approach toward investing in the bond market, focusing on issuer-specific opportunities. TOP TEN HOLDINGS <Table> <Caption> % OF NET ASSETS -------- U.S. Treasury Note, 4.875%, Due 8/15/2016 3.3% U.S. Treasury Note, 3.875%, Due 5/15/2010 3.0% Federal National Mortgage Association, Pool #886371, 6.00%, Due 8/1/2036 2.8% U.S. Treasury Note, 4.750%, Due 5/15/2014 2.1% U.S. Treasury Bond, 4.500%, Due 2/15/2036 1.8% U.S. Treasury Note, 4.375%, Due 8/15/2012 1.5% Federal National Mortgage Association, Pool #735224, 5.50%, Due 2/1/2035 1.4% U.S. Treasury Note, 4.875%, Due 7/31/2011 1.3% Chase Mortgage Finance Corp., 6.072%, Due 9/25/2036 1.3% Federal Home Loan Mortgage Corp., 5.250%, Due 2/24/2011 1.3% </Table> SECTOR ALLOCATION <Table> <Caption> % OF FIXED INCOME ---------- Mortgage-Backed 43.1% Corporates 29.4% U.S. Treasury 21.0% U.S. Agency 4.5% Asset-Backed 2.0% </Table> 21 PERFORMANCE OVERVIEW AMERICAN BEACON SHORT-TERM BOND FUND(SM) OCTOBER 31, 2006 (Unaudited) - -------------------------------------------------------------------------------- The Institutional Class of the Short-Term Bond Fund returned 4.56% for the twelve months ended October 31, 2006, which outperformed the Merrill Lynch 1-3 Year Gov/Corp Index (the "Index") return of 4.36% and the Lipper Short Investment Grade Bond Funds Index ("Lipper") return of 4.39%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 10/31/96 THROUGH 10/31/06 (PERFORMANCE GRAPH) <Table> <Caption> LIPPER SHORT INV. GRADE MERRILL LYNCH BOND FUNDS 1-3 YR. INSTITUTIONAL CLASS INDEX GOV./CORP. INDEX ------------------- ------------ ---------------- 10/96 10000.00 10000.00 10000.00 10/97 10657.00 10657.00 10655.00 10/98 11396.00 11289.00 11464.00 10/99 11718.00 11659.00 11834.00 10/00 12432.00 12345.00 12564.00 10/01 13808.00 13592.00 13985.00 10/02 14305.00 13955.00 14662.00 10/03 14851.00 14397.00 15119.00 10/04 15206.00 14699.00 15435.00 10/05 15358.00 14864.00 15562.00 10/06 16059.00 15516.00 16241.00 </Table> <Table> <Caption> ANNUALIZED TOTAL RETURNS ------------------------- VALUE OF PERIODS ENDED 10/31/06 $10,000 ------------------------- 10/31/96- 1 YEAR 5 YEARS 10 YEARS 10/31/06 ------ ------- -------- --------- Institutional Class(1)................ 4.56% 3.07% 4.85% $16,059 PlanAhead Class(1).................... 4.01% 2.56% 4.35% $15,301 Lipper Short Inv. Grade Index(2)...... 4.39% 2.69% 4.49% $15,516 Merrill Lynch 1-3 Yr. Gov./Corp. Index(2)............................ 4.36% 3.04% 4.97% $16,241 </Table> 1. Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1- 800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. A portion of the fees charged to the PlanAhead Class of the Fund has been waived. Performance prior to waiving fees was lower than the actual returns shown. 2. The Merrill Lynch 1-3 Yr. Gov./Corp. Index is a market value weighted performance benchmark for government and corporate fixed-rate debt securities with maturities between one and three years. The Lipper Short Investment Grade Bond Funds Index tracks the results of the 30 largest mutual funds in the Lipper Short Investment Grade Bond Funds category. Lipper is an independent mutual fund research and ranking service. One cannot directly invest in an index. The Fund's outperformance during the period was due to its short duration and its overweight positions in the Corporate and Asset-Backed sectors. With the Federal Reserve Bank (the "Fed") raising interest rates during much of the period, the Fund's duration averaged approximately 1.6 years versus 1.8 years for the Index, or around 90% of benchmark duration. Longer-term interest rates were largely unchanged during the period, but short-term rates rose markedly. The Fund also maintained its overweight position in the Corporate and Asset- Backed sectors as the credit environment was stable and economic growth was reasonably good. Duration played the largest role in the Fund's outperformance as the Fed raised short-term rates by 1.50% (from 3.75% to 5.25%) before pausing to monitor incoming economic data. Longer-term rates ended the period unchanged resulting in an inverted yield curve. Since the Fed began raising rates in mid-2004, the Fund's short duration was the primary contributor to its outperformance; however, with the Fed on hold and economic growth moderating, a new approach towards duration became appropriate. Near period end, we moved the Fund's duration to neutral in anticipation of range-bound short-term rates and will hold that position until the economic situation develops further. The Fund also benefited from its overweight position in the Corporate sector which produced the highest returns of the major sectors. Credit spreads improved slightly during the period, but the primary advantage of this sector was its incremental yield to maturity over Treasuries and Agencies. Returns across the credit spectrum were mixed, but in general, lower quality outperformed higher quality due to strong demand for yield. Likewise, the Fund's overweight position in the Asset-Backed sector (autos and credit cards) also performed well due primarily to its incremental yield over government equivalents. The Fund was invested in high-quality corporate and asset-backed securities, and we will monitor the credit markets for signs of moderation as the economic situation develops. These sectors were strong both fundamentally and technically throughout the period, but with spreads reaching relatively tight levels and the economy potentially leveling off, the risk/reward ratio rose slightly near period end. In general, however, these sectors have played a major role in generating incremental yield for the Fund through the interest rate cycles. 22 PERFORMANCE OVERVIEW AMERICAN BEACON SHORT-TERM BOND FUND(SM) -- CONTINUED OCTOBER 31, 2006 (Unaudited) - -------------------------------------------------------------------------------- TOP TEN HOLDINGS <Table> <Caption> % OF NET ASSETS -------- General Electric Capital Corp., 4.125%, Due 3/4/2008 3.7% Banc of America Securities Auto Trust 2005, 4.080%, Due 4/18/2010 3.7% Citibank Credit Card Issuance Trust 2004-A4 A4, 3.20%, Due 8/24/2009 3.7% DaimlerChrysler Auto Trust, 3.28%, Due 12/8/2009 3.6% Wachovia Corp., 6.40%, Due 4/1/2008 3.2% FleetBoston Financial Corp., 3.850%, Due 2/15/2008 3.0% Wells Fargo Financial Auto Owner Trust, 2.670%, Due 8/16/2010 3.0% Comerica Bank, 6.000%, Due 10/1/2008 2.8% Washington Mutual, Inc., 8.250%, Due 4/1/2010 2.7% SLM Corp., 4.000%, Due 1/15/2009 2.7% </Table> SECTOR ALLOCATION <Table> <Caption> % OF FIXED INCOME ---------- Corporate Bonds 67.3% Asset-Backed 25.1% Mortgage-Backed 7.6% </Table> 23 FUND EXPENSES ACTUAL EXPENSES OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- FUND EXPENSE EXAMPLE As a shareholder of a Fund, you incur two types of costs: (1) transaction costs, including redemption fees if applicable, and (2) ongoing costs, including management fees, administrative service fees, and other Fund expenses. The examples below are intended to help you understand the ongoing cost (in dollars) of investing in a particular Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the period in each Class and held for the entire period from May 1, 2006 through October 31, 2006. ACTUAL EXPENSES The "Actual" lines of the table provide information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Shareholders of the PlanAhead and Institutional Classes that invest in a Fund through an IRA may be subject to a custodial IRA fee of $12 that is typically deducted each December. If your account was subject to a custodial IRA fee during the period, your costs would have been $12 higher. <Table> <Caption> LARGE CAP MID-CAP SMALL CAP VALUE EMERGING HIGH YIELD INTERMEDIATE SHORT-TERM INSTITUTIONAL CLASS BALANCED GROWTH VALUE OPPORTUNITY MARKETS BOND BOND BOND - ------------------- --------- --------- ----------- --------------- ---------- ---------- ------------ ---------- Beginning Account Value 5/1/06.................. $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 Ending Account Value 10/31/06................ $1,059.57 $1,034.53 $1,070.23 $1,005.88 $ 989.21 $1,035.68 $1,045.20 $1,028.49 Expenses Paid During Period* 5/1/06-10/31/06......... $ 3.04 $ 4.73 $ 6.70 $ 5.19 $ 7.94 $ 4.39 $ 1.91 $ 1.82 Annualized Expense Ratio.. 0.58% 0.92% 1.28% 1.03% 1.58% 0.86% 0.37% 0.36% <Caption> MID-CAP SMALL CAP EMERGING HIGH YIELD ENHANCED INTERMEDIATE SHORT-TERM PLANAHEAD CLASS BALANCED VALUE OPPORTUNITY MARKETS BOND INCOME BOND BOND - --------------- --------- --------- ----------- --------------- ---------- ---------- ------------ ---------- Beginning Account Value 5/1/06.................. $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 Ending Account Value 10/31/06................ $1,057.45 $1,068.25 $1,006.87 $ 987.97 $1,034.53 $1,032.91 $1,042.02 $1,026.97 Expenses Paid During Period* 5/1/06-10/31/06......... $ 4.40 $ 7.76 $ 6.49 $ 10.36 $ 5.52 $ 4.96 $ 4.89 $ 4.45 Annualized Expense Ratio.. 0.85% 1.49% 1.28% 2.07% 1.08% 0.97% 0.95% 0.87% <Caption> SERVICE CLASS BALANCED - ------------- --------- Beginning Account Value 5/1/06.................. $1,000.00 Ending Account Value 10/31/06................ $1,056.98 Expenses Paid During Period* 5/1/06-10/31/06......... $ 6.34 Annualized Expense Ratio.. 1.22% <Caption> LARGE CAP EMERGING MID-CAP AMR CLASS BALANCED GROWTH MARKETS VALUE - --------- --------- --------- ----------- --------------- Beginning Account Value 5/1/06.................. $1,000.00 $1,000.00 $1,000.00 $1,000.00 Ending Account Value 10/31/06................ $1,061.15 $1,037.31 $ 990.96 $ 1070.94 Expenses Paid During Period* 5/1/06-10/31/06......... $ 1.69 $ 3.12 $ 6.72 $ 5.50 Annualized Expense Ratio.. 0.33% 0.61% 1.34% 1.05% </Table> - -------- * Expenses are equal to the Fund's annualized expense ratios for the six-month period multiplied by the average account value over the period, multiplied by the number derived by dividing the number of days in the most recent fiscal half-year (184) by days in the year (365) to reflect the half-year period. 24 FUND EXPENSES HYPOTHETICAL EXPENSES OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The "Hypothetical" lines of the table provide information about hypothetical account values and hypothetical expenses based on a Fund's actual expense ratio and an assumed 5% per year rate of return before expenses (not the Fund's actual return). You may compare the ongoing costs of investing in a particular Fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. Shareholders of the PlanAhead and Institutional Classes that invest in a Fund through an IRA may be subject to a custodial IRA fee of $12 that is typically deducted each December. If your account was subject to a custodial IRA fee during the period, your costs would have been $12 higher. You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs charged by a Fund. Similarly, the expense examples for other funds do not reflect any transaction costs charged by those funds, such as sales charges (loads), redemption fees or exchange fees. Therefore, the "Hypothetical" lines of the table are useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. If you were subject to any transaction costs during the period, your costs would have been higher. <Table> <Caption> LARGE CAP MID-CAP SMALL CAP EMERGING HIGH YIELD INTERMEDIATE SHORT-TERM INSTITUTIONAL CLASS BALANCED GROWTH VALUE VALUE OPP. MARKETS BOND BOND BOND - ------------------- --------- --------- --------- ---------- ---------- ---------- ------------ ---------- Beginning Account Value 5/1/06................. $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 Ending Account Value 10/31/06............... $1,022.26 $1,020.56 $1,018.73 $1,020.03 $1,017.22 $1,020.89 $1,023.34 $1,023.42 Expenses Paid During Period* 5/1/06-10/31/06........ $ 2.98 $ 4.70 $ 6.53 $ 5.23 $ 8.05 $ 4.36 $ 1.89 $ 1.81 Annualized Expense Ratio.................. 0.58% 0.92% 1.28% 1.03% 1.58% 0.86% 0.37% 0.36% <Caption> MID-CAP SMALL CAP EMERGING HIGH YIELD ENHANCED INTERMEDIATE SHORT-TERM PLANAHEAD CLASS BALANCED VALUE VALUE OPP MARKETS BOND INCOME BOND BOND - --------------- --------- --------- --------- ---------- ---------- ---------- ------------ ---------- Beginning Account Value 5/1/06................. $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 Ending Account Value 10/31/06............... $1,020.93 $1,017.70 $1,018.74 $1,018.74 $1,019.78 $1,020.32 $1,020.42 $1,020.82 Expenses Paid During Period* 5/1/06-10/31/06........ $ 4.32 $ 7.57 $ 5.36 $ 6.53 $ 5.48 $ 4.93 $ 4.84 $ 4.43 Annualized Expense Ratio.................. 0.85% 1.49% 1.05% 1.28% 1.08% 0.97% 0.95% 0.87% <Caption> SERVICE CLASS BALANCED - ------------- --------- Beginning Account Value 5/1/06................. $1,000.00 Ending Account Value 10/31/06............... $1,019.04 Expenses Paid During Period* 5/1/06-10/31/06........ $ 6.22 Annualized Expense Ratio.................. 1.22% <Caption> LARGE CAP MID-CAP EMERGING AMR CLASS BALANCED GROWTH VALUE MARKETS - --------- --------- --------- --------- ---------- Beginning Account Value 5/1/06................. $1,000.00 $1,000.00 $1,000.00 $1,000.00 Ending Account Value 10/31/06............... $1,023.57 $1,022.15 $1,019.89 $1,018.45 Expenses Paid During Period* 5/1/06-10/31/06........ $ 1.66 $ 3.09 $ 5.37 $ 6.81 Annualized Expense Ratio.................. 0.33% 0.61% 1.05% 1.34% </Table> - -------- * Expenses are equal to the Fund's annualized expense ratios for the six-month period multiplied by the average account value over the period, multiplied by the number derived by dividing the number of days in the most recent fiscal half-year (184) by days in the year (365) to reflect the half-year period. 25 AMERICAN BEACON FUNDS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - -------------------------------------------------------------------------------- To the Shareholders and Board of Trustees of American Beacon Funds: We have audited the accompanying statements of assets and liabilities of American Beacon Funds (comprised of American Beacon Balanced Fund, American Beacon Emerging Markets Fund, American Beacon Enhanced Income Fund, American Beacon High Yield Bond Fund, American Beacon Intermediate Bond Fund, American Beacon Large Cap Growth Fund, American Beacon Mid-Cap Value Fund, American Beacon Short-Term Bond Fund, and American Beacon Small Cap Value Opportunity Fund) (collectively the "Funds"), including the schedules of investments, as of October 31, 2006, and the related statements of operations, the statements of changes in net assets, and financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Funds' internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of each Funds' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2006, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of American Beacon Funds as of October 31, 2006, the results of their operations for the year then ended and the changes in their net assets and financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles. -s- Ernst & Young LLP Dallas, Texas December 28, 2006 See accompanying notes - -------------------------------------------------------------------------------- 26 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE ------- ------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 58.27% CONSUMER DISCRETIONARY - 6.41% AUTO COMPONENTS - 0.17% Magna International, Inc. ............................. 22,000 $ 1,646 ------- HOTELS, RESTAURANTS & LEISURE - 1.24% Carnival Corp. ........................................ 90,000 4,394 Harrah's Entertainment, Inc. .......................... 42,000 3,122 McDonald's Corp. ...................................... 24,600 1,031 Wyndham Worldwide Corp. ^ ............................. 49,260 1,453 Yum! Brands, Inc. ..................................... 30,200 1,796 ------- 11,796 ------- HOUSEHOLD DURABLES - 1.83% Centex Corp. + ........................................ 141,900 7,421 Fortune Brands, Inc. .................................. 43,900 3,378 Koninklijke (Royal) Philips Electronics NV ............ 40,531 1,412 Newell Rubbermaid, Inc. + ............................. 50,900 1,465 Pulte Homes, Inc. + ................................... 121,700 3,772 ------- 17,448 ------- LEISURE EQUIPMENT & PRODUCTS - 0.27% Mattel, Inc. .......................................... 113,200 2,562 ------- MEDIA - 0.85% CBS Corp. ............................................. 67,800 1,962 The Interpublic Group of Companies, Inc. ^ + .......... 348,500 3,802 The Walt Disney Company Ltd. .......................... 75,500 2,375 ------- 8,139 ------- MULTILINE RETAIL - 1.01% Federated Department Stores, Inc. ..................... 102,254 4,490 Target Corp. .......................................... 54,200 3,208 Wal-Mart Stores, Inc. ................................. 38,400 1,892 ------- 9,590 ------- SPECIALTY RETAIL - 0.85% The Home Depot, Inc. .................................. 217,800 8,130 ------- TEXTILES & APPAREL - 0.19% Liz Claiborne, Inc. ................................... 43,400 1,830 ------- TOTAL CONSUMER DISCRETIONARY 61,141 ------- CONSUMER STAPLES - 4.27% BEVERAGES - 0.48% Constellation Brands, Inc. ^ .......................... 12,800 352 Diageo plc, ADR ....................................... 56,100 4,178 ------- 4,530 ------- FOOD & DRUG RETAILING - 0.27% Safeway, Inc. ......................................... 87,300 2,563 ------- SHARES VALUE ------- ------- (DOLLARS IN THOUSANDS) FOOD PRODUCTS - 1.13% ConAgra Foods, Inc. ................................... 176,200 $ 4,607 General Mills, Inc. ................................... 33,300 1,892 Sara Lee Corp. ........................................ 39,300 672 Unilever plc, ADR + ................................... 149,580 3,632 ------- 10,803 ------- TOBACCO - 2.39% Altria Group, Inc. .................................... 119,600 9,727 Gallaher Group plc, ADR + ............................. 33,400 2,275 Imperial Tobacco Group plc, ADR + ..................... 98,600 7,034 UST, Inc. + ........................................... 70,100 3,755 ------- 22,791 ------- TOTAL CONSUMER STAPLES 40,687 ------- ENERGY - 4.08% OIL & GAS - 4.08% Chevron Corp. ......................................... 77,728 5,223 ConocoPhillips ........................................ 217,976 13,131 Devon Energy Corp. .................................... 91,800 6,136 Duke Energy Corp. ..................................... 196,600 6,221 Occidental Petroleum Corp. ............................ 130,300 6,116 Petro-Canada + ........................................ 39,400 1,678 Sunoco, Inc. .......................................... 6,100 403 ------- TOTAL ENERGY 38,908 ------- FINANCIALS - 17.00% BANKS - 4.87% Bank of America Corp. ................................. 368,296 19,840 Comerica, Inc. ........................................ 31,100 1,810 First Horizon National Corp. + ........................ 21,800 857 KeyCorp ............................................... 63,000 2,340 SunTrust Banks, Inc. .................................. 10,000 790 U.S. Bancorp .......................................... 111,260 3,765 UnionBanCal Corp. ..................................... 14,800 852 Wachovia Corp. ........................................ 66,900 3,713 Washington Mutual, Inc. + ............................. 159,000 6,726 Wells Fargo & Co. ..................................... 159,500 5,788 ------- 46,481 ------- DIVERSIFIED FINANCIALS - 6.07% The Bear Stearns Cos, Inc. ............................ 21,500 3,254 Capital One Financial Corp. ........................... 37,400 2,967 Citigroup, Inc. ....................................... 274,042 13,746 Federal Home Loan Mortgage Corp. ...................... 83,900 5,788 Federal National Mortgage Association ................. 45,000 2,667 The Goldman Sachs Group, Inc. ......................... 18,500 3,511 JP Morgan Chase & Co. ................................. 269,334 12,777 Merrill Lynch & Co., Inc. ............................. 43,500 3,803 Morgan Stanley Dean Witter & Co. ...................... 52,800 4,035 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE ------- ------- (DOLLARS IN THOUSANDS) SLM Corp. ............................................ 108,400 $ 5,277 ------- 57,825 ------- INSURANCE - 5.62% ACE Ltd. ............................................. 73,700 4,219 The Allstate Corp. ................................... 83,800 5,142 American International Group, Inc. ................... 63,100 4,239 AON Corp. ............................................ 29,000 1,009 Assurant, Inc. + ..................................... 31,700 1,669 Conseco, Inc. ^ + .................................... 90,000 1,831 Genworth Financial, Inc. ............................. 143,300 4,792 The Hartford Financial Services Group, Inc. .......... 10,200 889 MetLife, Inc. ........................................ 145,180 8,294 MGIC Investment Corp. ................................ 47,500 2,791 Prudential Financial, Inc. ........................... 17,500 1,346 The St. Paul Travelers Companies, Inc. ............... 181,300 9,270 UnumProvident Corp. .................................. 126,800 2,508 XL Capital Ltd. ...................................... 79,700 5,623 ------- 53,622 ------- REAL ESTATE - 0.44% Realogy Corp. ^ ...................................... 70,775 1,825 The St. Joe Co. + .................................... 43,500 2,339 ------- 4,164 ------- TOTAL FINANCIALS 162,092 ------- HEALTH CARE - 4.67% HEALTH CARE EQUIPMENT & SUPPLIES - 0.47% Baxter International, Inc. ........................... 98,200 4,514 ------- HEALTH CARE PROVIDERS & SERVICES - 1.53% Cigna Corp. .......................................... 29,200 3,416 HCA, Inc. + .......................................... 45,300 2,289 Tenet Healthcare Corp. ^ ............................. 231,700 1,636 UnitedHealth Group, Inc. ............................. 26,600 1,297 WellPoint, Inc. ^ .................................... 78,100 5,961 ------- 14,599 ------- PHARMACEUTICALS - 2.67% Bristol-Myers Squibb Co. ............................. 240,100 5,943 Eli Lilly & Co. ...................................... 9,500 532 Johnson & Johnson .................................... 21,000 1,415 Merck & Co., Inc. .................................... 27,800 1,263 Pfizer, Inc. ......................................... 364,200 9,706 Schering-Plough Corp. ................................ 168,800 3,737 Wyeth ................................................ 55,600 2,837 ------- 25,433 ------- TOTAL HEALTH CARE 44,546 ------- SHARES VALUE ------- ------- (DOLLARS IN THOUSANDS) INDUSTRIALS - 8.14% AEROSPACE & DEFENSE - 1.84% The Boeing Co. ....................................... 51,200 $ 4,089 Lockheed Martin Corp. ................................ 29,200 2,538 Northrop Grumman Corp. ............................... 70,900 4,707 Raytheon Co. ......................................... 66,600 3,327 United Technologies Corp. ............................ 44,300 2,911 ------- 17,572 ------- AIR FREIGHT & COURIERS - 0.15% FedEx Corp. .......................................... 12,100 1,386 ------- COMMERCIAL SERVICES & SUPPLIES - 0.63% Mastercard, Inc. + ................................... 44,000 3,260 Waste Management, Inc. ............................... 74,407 2,789 ------- 6,049 ------- ELECTRICAL EQUIPMENT - 0.45% American Power Conversion Corp. ...................... 141,500 4,278 ------- INDUSTRIAL CONGLOMERATES - 2.90% 3M Co. ............................................... 31,300 2,468 General Electric Co. ................................. 192,900 6,773 Honeywell International, Inc. ........................ 178,900 7,535 Textron, Inc. ........................................ 30,500 2,773 Tyco International Ltd. .............................. 274,900 8,090 ------- 27,639 ------- MACHINERY - 1.65% Caterpillar, Inc. .................................... 57,100 3,467 Flowserve Corp. ^ .................................... 63,500 3,365 Illinois Tool Works, Inc. ............................ 113,600 5,445 ITT Industries, Inc. ................................. 63,300 3,443 ------- 15,720 ------- RENTAL AUTO/EQUIPMENT - 0.05% Avis Budget Group, Inc. .............................. 24,630 488 ------- TRANSPORTATION INFRASTRUCTURE - 0.47% Burlington Northern Santa Fe Corp. ................... 58,200 4,512 ------- TOTAL INDUSTRIALS 77,644 ------- INFORMATION TECHNOLOGY - 5.47% COMMUNICATIONS EQUIPMENT - 0.80% Nokia Corp., ADR ..................................... 382,700 7,608 ------- COMPUTERS & PERIPHERALS - 1.48% Hewlett-Packard Co. .................................. 193,000 7,477 International Business Machines Corp. ................ 71,700 6,620 ------- 14,097 ------- IT CONSULTING & SERVICES - 1.13% Computer Sciences Corp. ^ + .......................... 28,900 1,527 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE ------- -------- (DOLLARS IN THOUSANDS) Electronic Data Systems Corp. ...................... 365,500 $ 9,258 -------- 10,785 -------- SEMICONDUCTOR EQUIPMENT & PRODUCTS - 0.18% Intel Corp. ........................................ 81,600 1,741 -------- SOFTWARE - 1.88% BMC Software, Inc. ^ ............................... 61,500 1,864 CA, Inc. ........................................... 375,474 9,297 Microsoft Corp. .................................... 234,100 6,721 -------- 17,882 -------- TOTAL INFORMATION TECHNOLOGY 52,113 -------- MATERIALS - 2.75% CHEMICALS - 1.79% Air Products & Chemicals, Inc. ..................... 26,300 1,832 Dow Chemical Co. ................................... 38,500 1,570 E. I. du Pont de Nemours & Co. ..................... 45,300 2,075 Eastman Chemical Co. + ............................. 33,500 2,041 Lyondell Chemical Co. .............................. 147,600 3,789 The Mosaic Co. ^ + ................................. 206,700 3,870 PPG Industries, Inc. + ............................. 26,100 1,785 Tronox, Inc. + ..................................... 4,128 54 -------- 17,016 -------- METALS & MINING - 0.65% Alcoa, Inc. ........................................ 215,496 6,230 -------- PAPER & FOREST PRODUCTS - 0.31% Sappi Ltd., ADR + .................................. 60,000 849 Weyerhaeuser Co. ................................... 32,800 2,086 -------- 2,935 -------- TOTAL MATERIALS 26,181 -------- TELECOMMUNICATION SERVICES - 2.09% DIVERSIFIED TELECOMMUNICATION - 2.09% AT&T, Inc. ......................................... 97,000 3,322 BellSouth Corp. .................................... 154,700 6,977 Verizon Communications, Inc. ....................... 259,228 9,592 -------- TOTAL TELECOMMUNICATION SERVICES 19,891 -------- UTILITIES - 3.39% ELECTRIC UTILITIES - 3.39% CenterPoint Energy, Inc. + ......................... 137,300 2,125 Dominion Resources, Inc. ........................... 24,600 1,992 DTE Energy Co. + ................................... 54,800 2,490 Entergy Corp. ...................................... 65,300 5,605 Exelon Corp. ....................................... 197,800 12,260 FPL Group, Inc. .................................... 131,500 6,706 SHARES VALUE ------- -------- (DOLLARS IN THOUSANDS) Public Service Enterprise Group, Inc. .............. 19,100 $ 1,166 -------- TOTAL UTILITIES 32,344 -------- TOTAL COMMON STOCKS 555,547 -------- PAR AMOUNT ------- CORPORATE OBLIGATIONS - 7.34% BANKS - 1.03% Banco Popular North America, Inc., 4.25%, Due 4/1/2008 ..................................... $ 500 490 Bank of America Corp., 3.375%, Due 2/17/2009 + .......................... 450 434 5.375%, Due 8/15/2011 ............................ 1,015 1,026 Bank One Corp., 5.90%, Due 11/15/2011 ............................ 700 718 4.90%, Due 4/30/2015 ............................. 450 433 Capital One Bank, 6.70%, Due 5/15/2008 ............................. 450 459 5.125%, Due 2/15/2014 + .......................... 450 443 Credit Suisse First Boston, 6.50%, Due 5/1/2008++ ....................................... 750 763 ING Bank, NV, 5.125%, Due 5/1/2015++ ............... 450 442 National City Bank, 4.50%, Due 3/15/2010 ........... 1,000 976 PNC Funding Corp., 4.20%, Due 3/10/2008 + .......... 745 732 Synovus Financial Corp., 4.875%, Due 2/15/2013 ........................................ 450 441 Wachovia Corp., 5.70%, Due 8/1/2013 ................ 585 599 Washington Mutual Finance Corp., 6.875%, Due 5/15/2011 .................................... 535 571 Washington Mutual, Inc., 8.25%, Due 4/1/2010 .............................. 350 379 4.625%, Due 4/1/2014 ............................. 950 890 -------- 9,796 -------- COMMUNICATIONS - 0.28% Comcast Cable Communications Holdings, Inc., 8.375%, Due 3/15/2013 ...................... 950 1,085 Comcast Corp., 7.625%, Due 2/15/2008 ............................ 300 308 5.30%, Due 1/15/2014 ............................. 710 694 Time Warner, Inc., 7.70%, Due 5/1/2032 ............. 550 627 -------- 2,714 -------- CONSUMER DISCRETIONARY - 0.22% Carnival Corp., 3.75%, Due 11/15/2007 .............. 715 702 Wal-Mart Stores, Inc., 4.55%, Due 5/1/2013 .............................. 635 615 7.55%, Due 2/15/2030 ............................. 650 802 -------- 2,119 -------- ELECTRIC/GAS - 0.68% Canadian Natural Resources Ltd., 6.00%, Due 8/15/2016 .................................... 505 512 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ------- -------- (DOLLARS IN THOUSANDS) Columbus Southern Power Co., 5.50%, Due 3/1/2013 .............................................. $ 710 $ 712 FPL Group Capital, Inc., 5.551%, Due 2/16/2008 ................................. 550 551 5.625%, Due 9/1/2011 .................................. 615 623 MidAmerican Energy Holdings Co., 5.875%, Due 10/1/2012 ................................. 940 962 6.125%, Due 4/1/2036 .................................. 700 720 PSI Energy, Inc., 6.05%, Due 6/15/2016 .................. 520 533 Public Service Enterprise Group, Inc., 6.95%, Due 6/1/2012 ............................ 800 850 Puget Sound Energy, Inc., 6.274%, Due 3/15/2037 ............................................. 370 382 Xcel Energy, Inc., 7.00%, Due 12/1/2010 ................. 600 637 ------ 6,482 ------ FINANCE - 1.02% American General Finance Corp., 5.375%, Due 9/1/2009 + ................................ 840 844 4.875%, Due 5/15/2010 ................................. 500 493 Ameriprise Financial, Inc., 5.35%, Due 11/15/2010 ............................................ 850 854 The Bear Stearns Cos., Inc., 2.875%, Due 7/2/2008 .............................................. 800 771 General Electric Capital Corp., 4.375%, Due 3/3/2012 .............................................. 865 832 The Goldman Sachs Group, Inc., 4.75%, Due 7/15/2013 ............................................. 400 386 HSBC Finance Corp., 4.75%, Due 4/15/2010 .................................. 570 563 5.25%, Due 1/14/2011 .................................. 2,000 2,004 International Lease Finance Corp., 6.375%, Due 3/15/2009 + ....................................... 1,025 1,051 Merrill Lynch & Co., Inc., 6.00%, Due 2/17/2009 .................................. 1,000 1,017 5.45%, Due 7/15/2014 .................................. 400 402 SLM Corp., 5.45%, Due 4/25/2011 ......................... 520 523 ------ 9,740 ------ INDUSTRIALS - 2.09% Abbott Laboratories, 5.60%, Due 5/15/2011 ............... 395 403 Amgen, Inc., 4.00%, Due 11/18/2009 + .................... 415 403 Baxter International, Inc., 5.90%, Due 9/1/2016 .............................................. 620 639 BHP Billiton Finance USA Ltd., 4.80%, Due 4/15/2013 ............................................. 450 437 Bunge Ltd Finance Corp., 7.80%, Due 10/15/2012 ................................. 400 438 5.35%, Due 4/15/2014 .................................. 150 145 Caterpillar, Inc., 6.05%, Due 8/15/2036 ................. 350 367 Cisco Systems, Inc., 5.25%, Due 2/22/2011 .................................. 950 956 PAR AMOUNT VALUE ------- -------- (DOLLARS IN THOUSANDS) 5.50%, Due 2/22/2016 .................................. $ 600 $ 607 Con-way, Inc., 8.875%, Due 5/1/2010 ..................... 1,850 2,031 CRH America, Inc., 6.00%, Due 9/30/2016 ................. 315 317 DaimlerChrysler NA Holding Corp., 4.75%, Due 1/15/2008 .................................. 720 713 DaimlerChrysler NA Holding Corp., 7.75%, Due 1/18/2011 .................................. 1,000 1,076 5.875%, Due 3/15/2011 ................................. 450 453 EOG Resources, Inc., 4.75%, Due 3/15/2014 ++ ............ 425 410 John Deere Capital Corp., 5.40%, Due 4/7/2010 .............................................. 525 529 Lockheed Martin Corp., 7.20%, Due 5/1/2036 .............. 385 462 Martin Marietta Materials, Inc., 6.90%, Due 8/15/2007 ............................................. 200 201 Masco Corp., 6.125%, Due 10/3/2016 ...................... 310 311 Motorola, Inc., 8.00%, Due 11/1/2011 .................... 580 647 Nissan Motor Acceptance Corp., 5.625%, Due 3/14/2011 ++ ........................................ 700 704 Northrop Grumman Corp., 4.079%, Due 11/16/2006 ............................................ 850 850 Pemex Project Funding Master Trust, 8.50%, Due 2/15/2008 ............................. 610 633 Schering-Plough Corp., 6.75%, Due 12/1/2033 ............................................. 790 880 Unilever Capital Corp., 7.125%, Due 11/1/2010 + ........................................... 2,000 2,138 Union Pacific Corp., 3.875%, Due 2/15/2009 ................................. 775 753 6.50%, Due 4/15/2012 .................................. 450 475 Weatherford International Ltd., 6.50%, Due 8/1/2036 .............................................. 310 318 WellPoint, Inc., 3.75%, Due 12/14/2007 .................. 490 481 Weyerhaeuser Co., 5.95%, Due 11/1/2008 .................. 340 343 Wyeth Corp., 5.50%, Due 2/1/2014 ........................ 780 785 ------ 19,905 ------ INSURANCE - 0.87% Aegon Funding Corp., 5.75%, Due 12/15/2020 .............. 450 457 American International Group, Inc., 6.25%, Due 5/1/2036 + ........................................ 700 749 ASIF Global Financing, 3.90%, Due 10/22/2008 ++ ......................................... 700 683 The Chubb Corp., 4.934%, Due 11/16/2007 ................. 880 877 Hartford Financial Services Group, Inc., 5.663%, Due 11/16/2008 .......................... 730 735 Liberty Mutual Insurance Co., 7.875%, Due 10/15/2026 +++ ........................................ 1,500 1,747 Lincoln National Corp., 4.75%, Due 2/15/2014 ............................................. 200 191 MetLife, Inc., 5.375%, Due 12/15/2012 ................................ 540 545 5.00%, Due 6/15/2015 ................................... 485 470 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ------- -------- (DOLLARS IN THOUSANDS) Metropolitan Life Global Funding I, 4.625%, Due 8/19/2010 ++ ................................... $ 700 $ 686 Prudential Financial, Inc., 3.75%, Due 5/1/2008 ................................. 335 328 Prudential Financial, Inc., 4.50%, Due 7/15/2013 ................................ 400 380 5.10%, Due 9/20/2014 ................................ 410 402 ------- 8,250 ------- REAL ESTATE - 0.34% EOP Operating Limited Partnership, 4.75%, Due 3/15/2014 ...................................... 450 428 Equity Residential, 5.125%, Due 3/15/2016 ............. 385 374 iStar Financial, Inc., 5.875%, Due 3/15/2016 .......... 700 698 ProLogis Trust, 7.10%, Due 4/15/2008 .................. 470 480 ProLogis, 5.50%, Due 4/1/2012 ......................... 450 450 Simon Property Group LP, 6.375%, Due 11/15/2007 .............................. 400 403 5.375%, Due 6/1/2011 ................................ 450 451 ------- 3,284 ------- TELEPHONE - 0.81% America Movil S.A. de C.V., 6.375%, Due 3/1/2035 ........................................... 895 876 AT&T, Inc., 5.10%, Due 9/15/2014 ................................ 485 473 AT&T, Inc., 5.625%, Due 6/15/2016 ............................... 450 450 6.80%, Due 5/15/2036 + .............................. 360 388 Cingular Wireless Services, Inc., 8.75%, Due 3/1/2031 ........................................... 445 583 Deutsche Telekom AG, 8.00%, Due 6/15/2010 ............. 380 415 France Telecom SA, 7.75%, Due 3/1/2011 ................ 550 604 Nextel Communications, Inc., 6.875%, Due 10/31/2013 ......................................... 615 629 Sprint Capital Corp., 6.00%, Due 1/15/2007 ................................ 800 800 8.375%, Due 3/15/2012 ............................... 450 506 Telecom Italia S.p.A., 4.00%, Due 11/15/2008 ......................................... 580 564 Telefonica Emisiones SAU, 5.984%, Due 6/20/2011 .......................................... 380 388 Telefonos de Mexico, S.A. de C.V., 5.50%, Due 1/27/2015 ...................................... 500 487 Verizon Global Funding Corp., 4.00%, Due 1/15/2008 .......................................... 545 537 ------- 7,700 ------- TOTAL CORPORATE OBLIGATIONS 69,990 ------- PAR AMOUNT VALUE ------- -------- (DOLLARS IN THOUSANDS) NON-AGENCY MORTGAGE-BACKED OBLIGATIONS - 1.68% COMMERCIAL MORTGAGE-BACKED SECURITY - 0.57% Banc of America Commercial Mortgage, Inc., 2005-6, 5.001%, Due 9/10/2047 ................ $ 896 $ 894 Bear Stearns Commercial Mortgage Securities, Inc., 2004-PWR5, 4.831%, Due 7/11/2042 ................... 1,015 992 2005, 5.127%, Due 10/12/2042 ....................... 630 630 Citigroup Commercial Mortgage Trust, 2004-C2, 4.38%, Due 10/15/2041 .............. 760 734 General Electric Capital Commercial Mortgage Corp., 2003-C2, 4.17%, Due 7/10/2037 .......................................... 430 422 JP Morgan Chase Commercial Mortgage Securities Corp., 2004-CBX, 4.529%, Due 11/12/2039 ................... 555 540 JP Morgan Chase Commercial Mortgage Securities Corp., 4.655%, Due 8/15/2042 .............................. 369 366 4.625%, Due 3/15/2046 .............................. 845 833 ------- 5,411 ------- WHOLE LOAN COLLATERALIZED MORTGAGE OBLIGATIONS - 1.11% Banc of America Mortgage Securities, 5.25%, Due 10/25/2019 .................. 1,086 1,077 Bear Stearns Adjustable Rate Mortgage Trust, 2005-11, 4.509%, Due 12/25/2035 # ........... 857 848 Bear Stearns Commercial Mortgage Securities, Inc., 5.467%, Due 4/12/2038 ............ 590 598 Bear Stearns Commercial Mortgage Securities, 2006-PW A4, 5.54%, Due 9/11/2041 .......................................... 1,160 1,181 Capital One Multi-Asset Execution Trust, 2006 A, 5.15%, Due 6/15/2014 ................ 1,450 1,462 Chase Mortgage Finance Corp., 2006A1 A1, 6.072%, Due 9/25/2036 # ............................ 1,244 1,247 Chase Mortgage Financial Trust, 2004-S1 A3, 5.50%, Due 2/25/2019 ........................... 78 78 Countrywide Home Loan, Inc., 2005-HYB8, 5.414%, Due 12/20/2035 ............................. 838 838 JP Morgan Chase Commercial Mortgage Securities Corp., 4.613%, Due 10/15/2042 ........... 302 300 Prime Mortgage Trust, 2005-2, 5.25%, Due 7/25/2020 .......................................... 1,892 1,881 Wells Fargo Mortgage Backed Securities Trust, 2006-11 A8, 6.00%, Due 9/25/2036 ............ 1,081 1,080 ------- 10,590 ------- TOTAL NON-AGENCY MORTGAGE-BACKED OBLIGATIONS 16,001 ------- See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ------- -------- (DOLLARS IN THOUSANDS) ASSET-BACKED SECURITIES - 0.44% OTHER ASSET-BACKED - 0.44% American Express Credit Account Master Trust, 2006-2 A, 5.35%, Due 1/15/2014 ................ $ 1,450 $ 1,474 Capital Auto Receivables Asset Trust, 2006-1A, 5.32%, Due 3/20/2010++ ............... 700 702 CarMax Auto Owner Trust, 2005-3, 4.91%, Due 1/18/2011 ........................................ 1,000 996 Volkswagen Auto Loan Enhanced Trust, 2005-1, 4.86%, Due 4/20/2012 .................. 1,000 996 ------- TOTAL ASSET-BACKED SECURITIES ........................... 4,168 ------- U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS - 8.64% FEDERAL HOME LOAN MORTGAGE CORPORATION - 3.05% 6.50%, Due 3/1/2008 .................................. 237 237 5.50%, Due 8/1/2017 .................................. 78 78 5.50%, Due 9/1/2017 .................................. 401 402 5.00%, Due 3/1/2018 .................................. 945 932 5.00%, Due 6/1/2018 .................................. 511 504 5.50%, Due 6/1/2018 .................................. 169 170 5.50%, Due 10/1/2018 ................................. 1,468 1,472 5.00%, Due 2/1/2019 .................................. 560 552 4.50%, Due 3/1/2019 .................................. 1,070 1,036 5.00%, Due 10/1/2020 ................................. 1,530 1,506 5.50%, Due 5/1/2021 .................................. 919 920 5.00%, Due 9/1/2021 .................................. 392 386 5.50%, Due 9/1/2021 .................................. 493 494 6.50%, Due 5/1/2029 .................................. 72 74 6.50%, Due 6/1/2029 .................................. 14 14 6.50%, Due 7/1/2029 .................................. 246 253 6.00%, Due 8/1/2029 .................................. 127 128 5.00%, Due 8/1/2033 .................................. 1,901 1,841 5.50%, Due 2/1/2034 .................................. 3,207 3,178 5.00%, Due 3/1/2034 .................................. 1,492 1,445 6.00%, Due 6/1/2034 .................................. 1,187 1,196 6.00%, Due 8/1/2034 .................................. 1,069 1,077 5.50%, Due 10/1/2034 ................................. 1,085 1,075 5.50%, Due 1/1/2035 .................................. 934 926 5.50%, Due 6/1/2035 .................................. 3,869 3,829 5.00%, Due 8/1/2035 .................................. 1,310 1,266 5.00%, Due 9/1/2035 .................................. 1,871 1,808 6.00%, Due 9/1/2036 .................................. 2,283 2,298 ------- 29,097 ------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 4.44% Pool # 488099, 5.50%, Due 2/1/2014 ................... 266 268 Pool # 323789, 6.00%, Due 6/1/2014 ................... 196 199 Pool # 535846, 6.00%, Due 4/1/2016 ................... 477 485 Pool # 254545, 5.00%, Due 12/1/2017 .................. 1,153 1,138 Pool # 555549, 5.00%, Due 6/1/2018 ................... 2,384 2,353 PAR AMOUNT VALUE ------- -------- (DOLLARS IN THOUSANDS) Pool # 254865, 4.50%, Due 9/1/2018 .................... $ 1,775 $ 1,721 Pool # 747844, 5.50%, Due 12/1/2018 ................... 107 108 Pool # 761337, 5.00%, Due 4/1/2019 .................... 305 301 Pool # 811328, 5.00%, Due 2/1/2020 .................... 3,417 3,366 Pool # 837219, 4.00%, Due 8/1/2020 .................... 1,264 1,197 Pool # 745562, 5.50%, Due 4/1/2021 .................... 1,457 1,460 Pool # 252211, 6.00%, Due 1/1/2029 .................... 651 659 Pool # 555531, 5.50%, Due 6/1/2033 .................... 561 556 Pool # 555880, 5.50%, Due 11/1/2033 ................... 1,464 1,451 Pool # 725238, 5.00%, Due 3/1/2034 .................... 1,974 1,911 Pool # 255225, 5.50%, Due 6/1/2034 .................... 627 621 Pool # 793062, 5.00%, Due 8/1/2034 # .................. 229 228 Pool # 800422, 5.023%, Due 8/1/2034 # ................. 743 731 Pool # 725866, 4.50%, Due 9/1/2034 .................... 1,098 1,032 Pool # 815762, 6.50%, Due 3/1/2035 .................... 329 336 Pool # 828377, 5.50%, Due 6/1/2035 .................... 1,937 1,915 Pool # 835760, 4.50%, Due 9/1/2035 .................... 971 911 Pool # 844809, 5.00%, Due 11/1/2035 ................... 955 922 Pool # 849299, 5.50%, Due 1/1/2036 .................... 1,824 1,804 Pool # 866593, 5.50%, Due 1/1/2036 .................... 2,479 2,451 Pool # 256101, 5.50%, Due 2/1/2036 .................... 1,179 1,166 Pool # 745418, 5.50%, Due 4/1/2036 .................... 1,912 1,891 Pool # 872306, 6.50%, Due 5/1/2036 .................... 890 907 Pool # 872317, 6.50%, Due 5/1/2036 .................... 1,616 1,647 Pool # 884032, 6.50%, Due 5/1/2036 .................... 697 710 Pool # 256369, 6.00%, Due 8/1/2036 .................... 1,056 1,063 Pool # 886371, 6.00%, Due 8/1/2036 .................... 3,876 3,900 Pool # 886395, 6.00%, Due 8/1/2036 .................... 687 691 Pool # 893523, 6.00%, Due 9/1/2036 .................... 273 274 Pool # 893688, 6.00%, Due 10/1/2036 ................... 1,686 1,696 Pool # 831806, 6.50%, Due 10/1/2036 ................... 260 265 ------- 42,334 ------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.15% Pool # 780400, 7.00%, Due 12/15/2025 .................. 411 426 2006-9 A, 4.201%, Due 8/16/2026 ....................... 858 839 Pool # 780615, 6.50%, Due 8/15/2027 ................... 192 198 Pool # 780651, 7.00%, Due 10/15/2027 .................. 206 213 Pool # 780680, 6.50%, Due 11/15/2027 .................. 505 520 Pool # 780747, 6.50%, Due 3/15/2028 ................... 188 194 Pool # 780788, 6.50%, Due 4/15/2028 ................... 177 183 Pool # 780936, 7.50%, Due 12/15/2028 .................. 389 407 Pool # 781035, 6.50%, Due 5/15/2029 ................... 176 182 Pool # 781273, 6.00%, Due 4/15/2031 ................... 289 293 Pool # 781288, 6.50%, Due 5/15/2031 ................... 305 314 Pool # 781564, 6.00%, Due 2/15/2033 ................... 845 858 Pool # 781589, 5.50%, Due 4/15/2033 ................... 1,549 1,544 Pool # 781603, 5.00%, Due 5/15/2033 ................... 712 696 Pool # 781636, 5.50%, Due 7/15/2033 ................... 1,291 1,287 Pool # 781690, 6.00%, Due 12/15/2033 .................. 1,055 1,071 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ------------- --------- (DOLLARS IN THOUSANDS) Pool # 003515, 5.50%, Due 2/20/2034 ................ $ 1,696 $ 1,685 --------- 10,910 --------- TOTAL U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS 82,341 --------- U.S. AGENCY OBLIGATIONS - 6.42% FEDERAL HOME LOAN BANK - 0.24% 5.00%, Due 10/16/2009 .............................. 2,280 2,277 --------- FEDERAL HOME LOAN MORTGAGE CORPORATION - 3.96% 5.25%, Due 2/24/2011 ............................... 2,860 2,867 5.625%, Due 3/15/2011 + ............................ 1,000 1,029 5.875%, Due 3/21/2011 + ............................ 610 629 4.50%, Due 1/15/2015 + ............................. 34,290 33,253 --------- 37,778 --------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 2.22% 4.375%, Due 9/7/2007 ............................... 5,000 4,964 4.375%, Due 9/15/2012 + ............................ 1,450 1,412 5.125%, Due 1/2/2014 + ............................. 820 818 6.25%, Due 5/15/2029 + ............................. 12,200 13,987 --------- 21,181 --------- TOTAL U.S. AGENCY OBLIGATIONS 61,236 --------- U.S. TREASURY OBLIGATIONS - 10.65% U.S. TREASURY BONDS - 5.41% 9.125%, Due 5/15/2018 + ............................ 1,750 2,434 7.875%, Due 2/15/2021 + ............................ 500 658 6.25%, Due 8/15/2023 + ............................. 650 757 6.875%, Due 8/15/2025 + ............................ 1,580 1,979 6.50%, Due 11/15/2026 + ............................ 4,615 5,611 5.25%, Due 11/15/2028 + ............................ 1,000 1,063 5.25%, Due 2/15/2029 + ............................. 30,585 32,492 6.25%, Due 5/15/2030 + ............................. 2,050 2,475 4.50%, Due 2/15/2036 + ............................. 4,210 4,063 --------- 51,532 --------- U.S. TREASURY NOTES - 5.24% 4.875%, Due 5/31/2008 + ............................ 6,080 6,090 4.875%, Due 8/15/2009 + ............................ 2,115 2,129 3.50%, Due 11/15/2009 + ............................ 5,850 5,668 3.875%, Due 5/15/2010 + ............................ 5,000 4,886 4.25%, Due 1/15/2011 + ............................. 4,500 4,443 4.875%, Due 4/30/2011 + ............................ 1,000 1,012 4.875%, Due 7/31/2011 + ............................ 5,930 6,004 4.375%, Due 8/15/2012 + ............................ 3,500 3,468 4.75%, Due 5/15/2014 + ............................. 3,350 3,383 4.125%, Due 5/15/2015 + ............................ 3,000 2,901 PAR AMOUNT VALUE ------------- --------- (DOLLARS IN THOUSANDS) 4.875%, Due 8/15/2016 + ............................ $ 9,775 $ 9,978 --------- 49,962 --------- TOTAL U.S. TREASURY OBLIGATIONS 101,494 --------- SHARES ------------- SHORT TERM INVESTMENTS - 7.33% American Beacon Money Market Select Fund ss ............................................ 64,378,562 64,379 PAR AMOUNT ------------- U.S. Treasury Bill, 4.90%, Due 12/7/2006 * ............................. $ 5,490 5,463 --------- TOTAL SHORT TERM INVESTMENTS 69,842 --------- SHARES ------------- SECURITIES LENDING COLLATERAL - 19.95% American Beacon Cash Plus Trust ss ................... 130,889,021 130,889 American Beacon Money Market Select Fund ss ............................................ 59,321,564 59,322 --------- TOTAL SECURITIES LENDING COLLATERAL 190,211 --------- TOTAL INVESTMENTS 120.72% - (COST $1,012,151) 1,150,830 LIABILITIES, NET OF OTHER ASSETS - (20.72%) (197,511) --------- TOTAL NET ASSETS - 100.00% $ 953,319 ========= See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- Percentages are stated as a percent of net assets. ^ Non-income producing security. + All or a portion of this security is on loan at October 31, 2006. ++ Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $6,137 or 0.64% of net assets. The Fund has no right to demand registration of these securities. # The coupon rate shown on floating or adjustable rate securities represents the rate at period end. The due date on these types of securities reflects the final maturity date. ss. The Fund/Trust is affiliated by having the same investment advisor. * At October 31, 2006, security pledged as collateral for open futures contracts. FUTURES CONTRACTS (DOLLARS IN THOUSANDS) UNREALIZED NUMBER OF EXPIRATION MARKET APPRECIATION/ CONTRACTS DATE VALUE (DEPRECIATION) --------- ---------- --------- -------------- Emini S&P 500 Index ..... 979 Dec 2006 $ 67,708 $ 2,643 ========= ========= See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON LARGE CAP GROWTH FUND SCHEDULE OF INVESTMENTS October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE -------- ---------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 93.55% CONSUMER DISCRETIONARY - 15.18% AUTOMOBILES - 0.97% Harley-Davidson, Inc. + ........................... 11,600 $ 796 --------- HOTELS, RESTAURANTS & LEISURE - 2.66% Choice Hotels International, Inc. ................. 6,600 277 Marriott International, Inc. ...................... 1,900 79 McDonald's Corp. .................................. 18,383 771 Starbucks Corp. ^ ................................. 14,100 532 Wyndham Worldwide Corp. ^ ......................... 17,800 525 --------- 2,184 --------- HOUSEHOLD DURABLES - 0.10% American Greetings Corp. .......................... 2,300 55 Furniture Brands International, Inc. + ............ 1,400 26 --------- 81 --------- MEDIA - 3.99% CBS Corp. ......................................... 25,345 734 The DIRECTV Group, Inc. ^ ......................... 6,900 154 Liberty Media Holding Corp. ^ ..................... 800 71 The McGraw-Hill Companies, Inc. ................... 5,500 353 Omnicom Group, Inc. ............................... 7,900 801 Time Warner, Inc. ................................. 42,300 846 The Walt Disney Company Ltd. ...................... 10,300 324 --------- 3,283 --------- MULTILINE RETAIL - 3.19% Costco Wholesale Corp. ............................ 5,500 294 Kohl's Corp. ^ .................................... 10,800 762 Nordstrom, Inc. ................................... 16,700 791 Wal-Mart Stores, Inc. ............................. 15,750 776 --------- 2,623 --------- SPECIALTY RETAIL - 3.10% American Eagle Outfitters, Inc. ................... 1,700 78 AnnTaylor Stores Corp. ^ .......................... 18,235 803 AutoNation, Inc. ^ + .............................. 7,601 152 Circuit City Stores, Inc. + ....................... 29,160 787 Office Depot, Inc. ^ .............................. 17,300 726 --------- 2,546 --------- TEXTILES & APPAREL - 1.17% Jones Apparel Group, Inc. + ....................... 6,200 207 Nike, Inc. ........................................ 8,200 754 --------- 961 --------- TOTAL CONSUMER DISCRETIONARY 12,474 --------- CONSUMER STAPLES - 6.44% BEVERAGES - 1.93% The Coca-Cola Co. ................................. 17,400 813 SHARES VALUE -------- ---------- (DOLLARS IN THOUSANDS) PepsiCo, Inc. ..................................... 12,200 $ 774 --------- 1,587 --------- FOOD & DRUG RETAILING - 1.55% CVS Corp. ......................................... 39,361 1,235 The Kroger Co. ^ .................................. 1,600 36 --------- 1,271 --------- FOOD PRODUCTS - 1.10% Archer-Daniels-Midland Co. ........................ 21,600 832 Corn Products Internatiional, Inc. ................ 2,000 72 --------- 904 --------- HOUSEHOLD PRODUCTS - 0.99% Colgate-Palmolive Co. ............................. 12,750 816 --------- TOBACCO - 0.87% UST, Inc. + ....................................... 13,300 712 --------- TOTAL CONSUMER STAPLES 5,290 --------- ENERGY - 3.24% ENERGY EQUIPMENT & SERVICES - 0.95% Dresser-Rand Group, Inc. ^ ........................ 1,800 39 Halliburton Co. ................................... 22,903 741 --------- 780 --------- OIL & GAS - 2.29% EOG Resources, Inc. ............................... 500 33 Exxon Mobil Corp. ................................. 5,800 414 Holly Corp. ....................................... 4,700 223 Sunoco, Inc. + .................................... 5,500 364 XTO Energy, Inc. .................................. 18,100 845 --------- 1,879 --------- TOTAL ENERGY 2,659 --------- FINANCIALS - 8.85% BANKS - 1.05% Hudson City Bancorp, Inc. + ....................... 6,900 95 Wells Fargo & Co. ................................. 21,100 766 --------- 861 --------- DIVERSIFIED FINANCIALS - 3.13% AmeriCredit Corp. ^ + ............................. 5,600 143 Franklin Resources, Inc. .......................... 6,900 786 JP Morgan Chase & Co. ............................. 900 43 Merrill Lynch & Co., Inc. ......................... 2,800 245 SEI Investments Co. ............................... 3,700 208 T Rowe Price Group, Inc. .......................... 19,500 923 The Western Union Co. ^ ........................... 10,200 225 --------- 2,573 --------- INSURANCE - 3.62% American International Group, Inc. ................ 10,900 732 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON LARGE CAP GROWTH FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE -------- ---------- (DOLLARS IN THOUSANDS) Loews Corp. ....................................... 20,100 $ 782 MBIA, Inc. + ...................................... 10,995 682 The Progressive Corp. ............................. 29,100 704 Radian Group, Inc. ................................ 700 37 W. R. Berkley Corp. ............................... 1,000 37 --------- 2,974 --------- REAL ESTATE - 1.05% Jones Lang LaSalle, Inc. .......................... 5,800 533 SL Green Realty Corp. ............................. 2,700 327 --------- 860 --------- TOTAL FINANCIALS ................................... 7,268 --------- HEALTH CARE - 17.25% BIOTECHNOLOGY - 3.37% Amgen, Inc. ^ ..................................... 23,100 1,753 Celgene Corp. ^ + ................................. 6,600 353 Genentech, Inc. ^ ................................. 5,200 433 Idexx Laboratories, Inc. ^ ........................ 2,700 225 --------- 2,764 --------- HEALTH CARE EQUIPMENT & SUPPLIES - 1.77% Applera Corp - Applied Biosystems Group ........... 9,200 343 Becton, Dickinson and Co. ......................... 14,500 1,015 Boston Scientific Corp. ^ ......................... 3,700 59 Dade Behring Holdings, Inc. ....................... 900 33 --------- 1,450 --------- HEALTH CARE PROVIDERS & SERVICES - 4.82% AmerisourceBergen Corp. ........................... 16,500 779 Express Scripts, Inc. ^ ........................... 4,000 255 Humana, Inc. ^ .................................... 10,300 618 McKesson Corp. .................................... 15,100 756 UnitedHealth Group, Inc. .......................... 16,300 795 WellPoint, Inc. ^ ................................. 9,950 760 --------- 3,963 --------- PHARMACEUTICALS - 7.29% Eli Lilly & Co. ................................... 12,700 711 Johnson & Johnson ................................. 32,900 2,217 Merck & Co., Inc. ................................. 34,400 1,562 Pfizer, Inc. ...................................... 29,100 776 Wyeth ............................................. 14,200 725 --------- 5,991 --------- TOTAL HEALTH CARE 14,168 --------- INDUSTRIALS - 14.72% AEROSPACE & DEFENSE - 3.95% The Boeing Co. .................................... 20,700 1,653 Northrop Grumman Corp. ............................ 11,400 757 Raytheon Co. ...................................... 1,700 85 SHARES VALUE -------- ---------- (DOLLARS IN THOUSANDS) United Technologies Corp. ......................... 11,400 $ 749 --------- 3,244 --------- AIR FREIGHT & COURIERS - 0.93% FedEx Corp. + ..................................... 6,700 767 --------- BUILDING PRODUCTS - 0.04% Crane Co. ^ ....................................... 900 35 --------- COMMERCIAL SERVICES & SUPPLIES - 1.72% Manpower, Inc. .................................... 9,200 623 Waste Management, Inc. ............................ 21,100 791 --------- 1,414 --------- ELECTRICAL EQUIPMENT - 0.91% Emerson Electric Co. .............................. 8,900 751 --------- INDUSTRIAL CONGLOMERATES - 3.02% 3M Co. ............................................ 9,700 765 General Electric Co. .............................. 48,800 1,713 --------- 2,478 --------- MACHINERY - 2.49% AGCO Corp. ^ ...................................... 7,700 206 Caterpillar, Inc. ................................. 14,100 856 Illinois Tool Works, Inc. ......................... 16,100 772 SPX Corp. ......................................... 3,700 213 --------- 2,047 --------- MARINE - 0.53% Overseas Shipholding Group, Inc. .................. 6,900 432 --------- ROAD & RAIL - 1.13% CSX Corp. ......................................... 11,500 410 Norfolk Southern Corp. ............................ 6,900 363 Union Pacific Corp. ............................... 1,700 154 --------- 927 --------- TOTAL INDUSTRIALS 12,095 --------- INFORMATION TECHNOLOGY - 21.08% COMMERCIAL SERVICES & SUPPLIES - 0.30% First Data Corp. .................................. 10,200 247 --------- COMMUNICATIONS EQUIPMENT - 4.62% Cisco Systems, Inc. ^ ............................. 97,902 2,362 Motorola, Inc. .................................... 32,500 750 Qualcomm, Inc. .................................... 18,800 684 --------- 3,796 --------- COMPUTERS & PERIPHERALS - 4.73% Hewlett-Packard Co. ............................... 30,100 1,166 International Business Machines Corp. ............. 8,800 813 Lexmark International, Inc. ^ ..................... 13,600 865 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON LARGE CAP GROWTH FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE -------- ---------- (DOLLARS IN THOUSANDS) NVIDIA Corp. ^ .................................... 23,900 $ 833 Western Digital Corp. ^ ........................... 11,400 208 --------- 3,885 --------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.09% Waters Corp. ^ .................................... 1,400 70 --------- INTERNET SOFTWARE & SERVICES - 1.54% Google, Inc. ^ .................................... 2,650 1,262 --------- IT CONSULTING & SERVICES - 0.65% Computer Sciences Corp. ^ + ....................... 10,100 534 --------- SEMICONDUCTOR EQUIPMENT & PRODUCTS - 5.06% Applied Materials, Inc. ........................... 42,200 734 Atmel Corp. ^ ..................................... 18,800 108 Freescale Semiconductor, Inc. ^ ................... 1,000 39 Lam Research Corp. ^ .............................. 17,200 851 Micron Technology, Inc. ^ ......................... 52,600 760 Texas Instruments, Inc. ........................... 55,300 1,669 --------- 4,161 --------- SOFTWARE - 4.09% Cadence Design Systems, Inc. ^ .................... 32,800 586 Intuit, Inc. ^ .................................... 1,100 39 Microsoft Corp. ................................... 49,200 1,412 Oracle Corp. ^ .................................... 42,600 787 Synopsys, Inc. ^ .................................. 23,800 536 --------- 3,360 --------- TOTAL INFORMATION TECHNOLOGY 17,315 --------- MATERIALS - 4.54% CHEMICALS - 2.01% Monsanto Co. ...................................... 19,700 871 Praxair, Inc. ..................................... 12,950 780 --------- 1,651 --------- METALS & MINING - 2.53% Freeport-McMoRan Copper & Gold, Inc. .............. 14,000 847 Newmont Mining Corp. .............................. 1,300 59 Nucor Corp. ....................................... 15,100 882 Southern Copper Corp. ^ + ......................... 5,700 293 --------- 2,081 --------- TOTAL MATERIALS 3,732 --------- TELECOMMUNICATION SERVICES - 1.12% DIVERSIFIED TELECOMMUNICATION - 0.99% AT&T, Inc. ........................................ 22,000 754 Sprint Nextel Corp. ............................... 3,500 65 --------- 819 --------- SHARES VALUE -------- ---------- (DOLLARS IN THOUSANDS) WIRELESS TELECOMMUNICATION SERVICES - 0.13% Leap Wireless International, Inc. ^ + ............. 1,900 $ 105 --------- TOTAL TELECOMMUNICATION SERVICES 924 --------- UTILITIES - 1.13% ELECTRIC UTILITIES - 1.13% TXU Corp. ......................................... 14,700 928 --------- TOTAL COMMON STOCKS 76,853 --------- SHORT TERM INVESTMENTS - 6.08% American Beacon Money Market Select Fund ++ .......................................... 4,782,480 4,783 PAR AMOUNT ---------- U.S. Treasury Bill, 4.90%, Due 12/7/2006 # ........................... $ 215 214 --------- TOTAL SHORT TERM INVESTMENTS 4,997 --------- SHARES ---------- SECURITIES LENDING COLLATERAL - 6.68% American Beacon Cash Plus Trust ++ ................ 3,777,772 3,778 American Beacon Money Market Select Fund ++ ........................................... 1,712,163 1,712 --------- TOTAL SECURITIES LENDING COLLATERAL 5,490 --------- TOTAL INVESTMENTS 106.31% - (COST $79,959) 87,340 LIABILITIES, NET OF OTHER ASSETS - (6.31%) (5,188) --------- TOTAL NET ASSETS - 100.00% $ 82,152 ========= See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON LARGE CAP GROWTH FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- Percentages are stated as a percent of net assets. ^ Non-income producing security. + All or a portion of this security is on loan at October 31, 2006. ++ The Fund/Trust is affiliated by having the same investment advisor. # At October 31, 2006, security pledged as collateral for open futures contracts. FUTURES CONTRACTS (DOLLARS IN THOUSANDS) UNREALIZED NUMBER OF EXPIRATION MARKET APPRECIATION/ CONTRACTS DATE VALUE (DEPRECIATION) --------- ---------- ------ -------------- Emini S&P 500 Index ...... 72 Dec 2006 $ 4,980 $ 54 ======== ======= See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON MID-CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) COMMON STOCKS - 82.17% CONSUMER DISCRETIONARY - 18.83% AUTO COMPONENTS - 4.09% Advance Auto Parts, Inc. ................. 43,800 $ 1,534 Lear Corp. + ............................. 39,250 1,186 Magna International, Inc. ................ 16,675 1,247 ------------ 3,967 ------------ AUTOMOBILES - 0.63% Winnebago Industries, Inc. + .............. 18,200 606 ------------ HOTELS, RESTAURANTS & LEISURE - 1.33% Royal Caribbean Cruises Ltd. + ............ 31,700 1,284 ------------ HOUSEHOLD DURABLES - 4.23% The Stanley Works ......................... 28,100 1,339 Whirlpool Corp. + ......................... 31,775 2,762 ------------ 4,101 ------------ LEISURE EQUIPMENT & PRODUCTS - 1.96% Hasbro, Inc. + ............................ 53,500 1,387 Mattel, Inc. .............................. 22,600 511 ------------ 1,898 ------------ MULTILINE RETAIL - 1.50% Family Dollar Stores, Inc. ................ 49,500 1,458 ------------ SPECIALTY RETAIL - 5.09% AutoZone Inc. ^ ........................... 11,775 1,319 Rent-A-Center, Inc. ^ ..................... 41,550 1,195 The Sherwin-Williams Co. .................. 19,700 1,167 The TJX Companies, Inc. ................... 43,425 1,257 ------------ 4,938 ------------ TOTAL CONSUMER DISCRETIONARY 18,252 ------------ CONSUMER STAPLES - 4.11% FOOD PRODUCTS - 1.30% Del Monte Foods Co. ....................... 116,475 1,256 ------------ PERSONAL PRODUCTS - 0.42% NBTY, Inc. ^ .............................. 14,550 405 ------------ TOBACCO - 2.39% Loews Corp. - Carolina Group .............. 30,900 1,787 UST, Inc. + ............................... 9,900 530 ------------ 2,317 ------------ TOTAL CONSUMER STAPLES 3,978 ------------ SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) ENERGY - 1.69% OIL & GAS - 1.69% El Paso Corp. + .......................... 32,000 $ 438 Murphy Oil Corp. ......................... 25,500 1,203 ------------ TOTAL ENERGY 1,641 ------------ FINANCIALS - 23.58% BANKS - 4.75% Comerica, Inc. ............................ 21,375 1,244 New York Community Bancorp, Inc. + ........ 41,400 677 Peoples Bank + ............................ 27,250 1,109 Popular, Inc. + ........................... 41,750 760 The South Financial Group, Inc. + ......... 30,800 817 ------------ 4,607 ------------ FINANCIAL - 0.84% The First Marblehead Corp + ............... 12,100 816 ------------ INSURANCE - 14.56% AON Corp. ................................. 17,275 601 Axis Capital Holdings Ltd. ................ 30,500 1,002 Delphi Financial Group, Inc. .............. 11,225 441 The First American Corp. .................. 38,325 1,565 IPC Holdings Ltd. + ....................... 26,675 801 Old Republic International Corp. .......... 54,962 1,238 Protective Life Corp. ..................... 29,900 1,323 Radian Group, Inc. ........................ 21,000 1,119 RenaissanceRe Holdings Ltd. ............... 21,900 1,191 Torchmark Corp. + ......................... 25,725 1,587 Willis Group Holdings Ltd. + .............. 37,000 1,407 XL Capital Ltd. ........................... 25,975 1,833 ------------ 14,108 ------------ REAL ESTATE - 3.43% American Financial Realty Trust + ......... 81,800 955 American Home Mortgage Investment Corp. + .. 34,900 1,192 Annaly Capital Management, Inc. ........... 32,600 428 First Industrial Realty Trust, Inc. + ..... 16,300 749 ------------ 3,324 ------------ TOTAL FINANCIALS 22,855 ------------ HEALTH CARE - 9.60% BIOTECHNOLOGY - 0.75% Charles River Laboratories International, Inc. ^ + ............................... 16,975 729 ------------ HEALTH CARE EQUIPMENT & SUPPLIES - 2.40% Hillenbrand Industries, Inc. .............. 25,275 1,483 IMS Health, Inc. + ........................ 30,175 840 ------------ 2,323 ------------ See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON MID-CAP VALUE FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) HEALTH CARE PROVIDERS & SERVIC - 0.96% HealthSouth Corp. ^ + ..................... 38,480 $ 933 ------------ HEALTH CARE PROVIDERS & SERVICES - 4.71% AmerisourceBergen Corp. ................... 26,925 1,271 Coventry Health Care, Inc. ^ .............. 25,900 1,216 Omnicare, Inc. + .......................... 24,000 909 Triad Hospitals, Inc. ^ ................... 31,600 1,170 ------------ 4,566 ------------ PHARMACEUTICALS - 0.78% Valeant Pharmaceuticals International + ... 40,200 751 ------------ TOTAL HEALTH CARE .......................... 9,302 ------------ INDUSTRIALS - 10.02% AEROSPACE & DEFENSE - 1.33% Goodrich Corp. ............................ 29,200 1,288 ------------ AIR FREIGHT & COURIERS - 1.22% Ryder System, Inc. ........................ 22,400 1,179 ------------ COMMERCIAL SERVICES & SUPPLIES - 1.54% Mastercard, Inc. + ........................ 8,900 660 United Stationers, Inc. ^ ................. 17,450 833 ------------ 1,493 ------------ ELECTRICAL EQUIPMENT - 1.79% American Power Conversion Corp. ........... 57,400 1,735 ------------ INDUSTRIAL CONGLOMERATES - 1.49% Reynolds American, Inc. + ................. 22,900 1,446 ------------ MACHINERY - 1.90% ITT Industries, Inc. ...................... 17,700 963 Kennametal, Inc. .......................... 14,325 884 ------------ 1,847 ------------ TRADING COMPANIES & DISTRIBUTORS - 0.75% Genuine Parts Co. ......................... 16,000 728 ------------ TOTAL INDUSTRIALS 9,716 ------------ INFORMATION TECHNOLOGY - 6.30% COMMUNICATIONS EQUIPMENT - 1.74% Lucent Technologies, Inc. ^ + ............. 693,525 1,685 ------------ ELECTRONIC EQUIPMENT & INSTRUMENTS - 1.47% Tech Data Corp. ^ ......................... 36,135 1,422 ------------ IT CONSULTING & SERVICES - 1.34% Affiliated Computer Services, Inc. ^ ...... 16,425 878 SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) Computer Sciences Corp. ^ + ............... 8,075 $ 427 ------------ 1,305 ------------ SOFTWARE - 1.75% CA, Inc. + ................................ 68,500 1,696 ------------ TOTAL INFORMATION TECHNOLOGY ............... 6,108 ------------ MATERIALS - 0.57% CHEMICALS - 0.57% FMC Corp. ................................. 8,050 552 ------------ UTILITIES - 7.47% ELECTRIC UTILITIES - 5.28% CenterPoint Energy, Inc. + ................ 42,400 656 Pinnacle West Capital Corp. + ............. 28,700 1,372 Wisconsin Energy Corp. .................... 37,625 1,729 Xcel Energy, Inc. ......................... 61,800 1,364 ------------ 5,121 ------------ GAS UTILITIES - 2.19% MDU Resources Group, Inc. ................. 41,850 1,075 Sempra Energy ............................. 19,750 1,047 ------------ 2,122 ------------ TOTAL UTILITIES 7,243 ------------ TOTAL COMMON STOCKS 79,647 ------------ SHORT TERM INVESTMENTS - 17.38% American Beacon Money Market Select Fund++ ................................... 15,620,227 15,621 PAR AMOUNT ------------ U.S. Treasury Bill, 4.815%, Due 12/7/2006 # .................. $ 1,235 1,229 ------------ TOTAL SHORT TERM INVESTMENTS 16,850 ------------ SHARES ------------ SECURITIES LENDING COLLATERAL - 17.25% American Beacon Cash Plus Trust++ ......... 11,502,802 11,503 American Beacon Money Market Select Fund++ ................................... 5,213,304 5,213 ------------ TOTAL SECURITIES LENDING COLLATERAL ........ 16,716 ------------ TOTAL INVESTMENTS 116.80% - (COST $107,753) . 113,213 ------------ LIABILITIES, NET OF OTHER ASSETS - (16.80%) . (16,287) ------------ TOTAL NET ASSETS - 100.00% .................. $ 96,926 ============ See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON MID-CAP VALUE FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 Percentages are stated as a percent of net assets. ^ Non-income producing security. + All or a portion of this security is on loan at October 31, 2006. ++ The Fund/Trust is affiliated by having the same investment advisor. # At October 31, 2006, security pledged as collateral for open futures contracts. FUTURES CONTRACTS (DOLLARS IN THOUSANDS) UNREALIZED NUMBER OF EXPIRATION MARKET APPRECIATION/ CONTRACTS DATE VALUE (DEPRECIATION) --------- ---------- ------- -------------- Emini S&P 400 Index ......................... 213 Dec 2006 $16,799 $512 ======= ==== - -------------------------------------------------------------------------------- See accompanying notes AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND SCHEDULE OF INVESTMENTS October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE --------- --------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 97.82% CONSUMER DISCRETIONARY - 15.49% HOTELS, RESTAURANTS & LEISURE - 1.83% Domino's Pizza, Inc. ........................ 1,120 $ 30 Jack in the Box, Inc. ^ ..................... 730 41 Landry's Restaurants, Inc. + ................ 545 16 --------- 87 --------- HOUSEHOLD DURABLES - 0.80% Ethan Allen Interiors, Inc. + ............... 565 20 Stanley Furniture Co., Inc. + ............... 390 9 Technical Olympic USA, Inc. + ............... 835 9 --------- 38 --------- INTERNET & CATALOG RETAIL - 0.77% Insight Enterprises, Inc. ^ ................. 1,715 37 --------- LEISURE EQUIPMENT & PRODUCTS - 0.55% MarineMax, Inc. ^ + ......................... 915 26 --------- SPECIALTY RETAIL - 7.93% Charming Shoppes, Inc. ^ + .................. 2,750 41 Genesco, Inc. ^ + ........................... 860 32 Group 1 Automotive, Inc. + .................. 585 34 Haverty Furniture Companies, Inc. + ......... 2,480 39 The Men's Wearhouse, Inc. ................... 955 38 Payless Shoesource, Inc. ^ .................. 1,795 48 Regis Corp. ................................. 940 35 Rent-A-Center, Inc. ^ ....................... 1,535 44 Tween Brands, Inc. ^ ........................ 620 26 United Auto Group, Inc. + ................... 1,760 41 --------- 378 --------- TEXTILES & APPAREL - 3.61% Brown Shoe Company, Inc. .................... 955 37 Hartmarx Corp. ^ + .......................... 2,770 20 Movado Group, Inc. + ........................ 1,240 32 Perry Ellis International, Inc. ^ + ......... 1,185 43 Phillips-Van Heusen Corp. ................... 520 24 Unifirst Corp. .............................. 445 16 --------- 172 --------- TOTAL CONSUMER DISCRETIONARY ................. 738 --------- CONSUMER STAPLES - 3.40% FOOD & DRUG RETAILING - 1.77% Casey's General Stores, Inc. + .............. 1,010 24 Ruddick Corp. ............................... 750 21 Spartan Stores, Inc. ........................ 1,870 39 --------- 84 --------- SHARES VALUE --------- --------- (DOLLARS IN THOUSANDS) FOOD PRODUCTS - 0.73% Central Garden and Pet Co. ^ + .............. 695 $ 35 --------- PERSONAL PRODUCTS - 0.90% NBTY, Inc. ^ ................................ 1,535 43 --------- TOTAL CONSUMER STAPLES ....................... 162 --------- ENERGY - 3.78% ENERGY EQUIPMENT & SERVICES - 1.87% Oil States International, Inc. ^ + .......... 600 17 Parker Drilling Co. ^ ....................... 5,305 44 Trico Marine Services, Inc. ^ ............... 825 28 --------- 89 --------- OIL & GAS - 1.91% Comstock Resources, Inc. ^ .................. 760 21 The Houston Exploration Co. ^ ............... 705 38 Swift Energy Co. ^ .......................... 675 32 --------- 91 --------- TOTAL ENERGY ................................. 180 --------- FINANCIALS - 34.62% BANKS - 12.55% Accredited Home Lenders Holding Co. ^ + ..... 750 23 Bankunited Financial Corp. + ................ 1,185 32 Central Pacific Financial Corp. + ........... 1,070 39 Corus Bankshares, Inc. + .................... 1,500 31 Cybertel Capital Corp. + .................... 725 34 First Community Bancorp, Inc. ............... 885 47 First Niagara Financial Group, Inc. + ....... 1,591 23 First Republic Bank + ....................... 935 37 FirstFed Financial Corp. ^ + ................ 825 51 Franklin Bank Corp. ^ + ..................... 1,535 31 Hanmi Financial Corp. + ..................... 1,325 28 Irwin Financial Corp. + ..................... 2,035 45 Pacific Capital Bancorp + ................... 445 14 Provident Bankshares Corp. + ................ 785 28 Sterling Bancshares, Inc. ................... 835 15 Sterling Financial Corp. + .................. 1,225 41 TierOne Corp. ............................... 915 29 Trustmark Corp. ............................. 675 22 Umpqua Holdings Corporation + ............... 990 28 --------- 598 --------- DIVERSIFIED FINANCIALS - 3.68% Advanta Corp., Class A Shares ............... 380 14 Advanta Corp., Class B Shares ............... 525 20 Cash America International, Inc. ............ 730 30 CompuCredit Corp. ^ + ....................... 955 33 Investment Technology Group, Inc. ^ ......... 620 29 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE --------- --------- (DOLLARS IN THOUSANDS) MCG Capital Corp. ........................... 685 $ 12 Ocwen Financial Corp. ^ + ................... 705 11 World Acceptance Corp. ^ .................... 520 26 --------- 175 --------- INSURANCE - 7.47% Argonaut Group, Inc. ^ ...................... 1,440 49 Delphi Financial Group, Inc. ................ 1,185 47 FPIC Insurance Group, Inc. ^ ................ 980 35 Harleysville Group, Inc. .................... 1,140 41 LandAmerica Financial Group, Inc. + ......... 360 23 The Navigators Group, Inc. ^ ................ 825 39 Ohio Casualty Corp. ......................... 880 24 SeaBright Insurance Holdings, Inc. ^ ........ 915 15 Stewart Information Services Corp. .......... 675 25 Triad Guaranty, Inc. ^ + .................... 370 19 Universal American Financial Corp. ^ + ...... 2,115 39 --------- 356 --------- REAL ESTATE - 10.92% Arbor Realty Trust, Inc. .................... 730 20 Ashford Hospitality Trust, Inc. ............. 3,035 39 Capital Trust, Inc. ......................... 565 25 Entertainment Properties Trust + ............ 280 15 Equity Inns, Inc. + ......................... 2,260 38 Equity Lifestyle Properties, Inc. ........... 600 30 FelCor Lodging Trust, Inc. .................. 2,130 44 Gramercy Capital Corp. ...................... 695 19 Highland Hospitality Corp. .................. 3,135 43 Innkeepers USA Trust + ...................... 2,740 47 Nationwide Health Properties, Inc. .......... 705 20 NorthStar Realty Finance Corp. .............. 2,510 38 PS Business Parks, Inc. ..................... 280 19 RAIT Investment Trust + ..................... 1,215 37 Redwood Trust, Inc. ......................... 700 39 Sunstone Hotel Investors, Inc. .............. 1,140 34 Tanger Factory Outlet Centers, Inc. + ....... 360 13 --------- 520 --------- TOTAL FINANCIALS 1,649 --------- HEALTH CARE - 4.74% HEALTH CARE EQUIPMENT & SUPPLIES - 0.54% STERIS Corp. ................................ 1,055 26 --------- HEALTH CARE PROVIDERS & SERVICES - 3.32% Centene Corp. ^ + ........................... 1,110 26 Gentiva Health Services, Inc. ^ + ........... 2,105 39 Owens & Minor, Inc. ......................... 860 27 PSS World Medical, Inc. ^ ................... 1,555 31 Res-Care, Inc. ^ ............................ 1,785 35 --------- 158 --------- SHARES VALUE --------- --------- (DOLLARS IN THOUSANDS) PHARMACEUTICALS - 0.88% Sciele Pharma, Inc. ^ + ..................... 1,910 $ 41 --------- TOTAL HEALTH CARE 225 --------- INDUSTRIALS - 13.05% BUILDING PRODUCTS - 2.81% Griffon Corp. ^ + ........................... 1,510 37 Lennox International, Inc. .................. 955 26 NCI Building Systems, Inc. ^ + .............. 620 37 Universal Forest Products, Inc. + ........... 520 24 Watsco, Inc. + .............................. 205 10 --------- 134 --------- COMMERCIAL SERVICES & SUPPLIES - 2.26% Consolidated Graphics, Inc. ^ ............... 500 31 eFunds Corp. ^ .............................. 575 14 Ennis, Inc. + ............................... 1,855 43 United Stationers, Inc. ^ ................... 415 20 --------- 108 --------- COMMUNICATIONS - 0.68% Aeroflex, Inc. ^ ............................ 2,985 32 --------- ELECTRICAL EQUIPMENT - 1.94% AO Smith Corp. + ............................ 665 23 Belden CDT, Inc. ............................ 990 36 Paxar Corp. ^ ............................... 1,445 29 Regal-Beloit Corp. .......................... 91 5 --------- 93 --------- MACHINERY - 2.41% Albany International Corp. .................. 44 2 Applied Industrial Technologies, Inc. ....... 1,065 31 The Greenbrier Companies, Inc. + ............ 910 34 Kennametal, Inc. ............................ 785 48 --------- 115 --------- RENTAL AUTO/EQUIPMENT - 1.20% Dollar Thrifty Automotive Group, Inc. ^ ..... 805 32 United Rentals, Inc. ^ + .................... 1,055 25 --------- 57 --------- ROAD & RAIL - 1.22% Celadon Group, Inc. ^ ....................... 1,030 19 Saia, Inc. ^ ................................ 1,440 39 --------- 58 --------- TRANSPORT-SERVICES - 0.53% Bristow Group, Inc. ^ + ..................... 760 25 --------- TOTAL INDUSTRIALS 622 --------- See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE --------- --------- (DOLLARS IN THOUSANDS) INFORMATION TECHNOLOGY - 10.64% COMMUNICATIONS EQUIPMENT - 1.41% Black Box Corp. ............................. 575 $ 26 CommScope, Inc. ^ + ......................... 1,295 41 --------- 67 --------- COMPUTERS & PERIPHERALS - 0.44% Komag, Inc. ^ + ............................. 545 21 --------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 4.88% Anixter International, Inc. ^ + ............. 705 42 Benchmark Electronics, Inc. ^ ............... 1,095 29 Checkpoint Systems, Inc. ^ .................. 1,240 23 CTS Corp. + ................................. 1,640 23 Global Imaging Systems, Inc. ^ .............. 1,835 40 MTS Systems Corp. ........................... 600 20 Park Electrochemical Corp. .................. 880 27 Technitrol, Inc. ............................ 1,135 29 --------- 233 --------- IT CONSULTING & SERVICES - 2.04% Agilysys, Inc. .............................. 1,370 20 Keane, Inc. ^ ............................... 1,220 14 Ness Technologies, Inc. ^ + ................. 2,620 39 SYKES Enterprises, Inc. ^ ................... 1,195 24 --------- 97 --------- SEMICONDUCTOR EQUIPMENT & PRODUCTS - 1.87% Advanced Energy Industries, Inc. ^ .......... 1,780 28 ON Semiconductor Corp. ^ + .................. 6,260 39 Photronics, Inc. ^ .......................... 1,585 22 --------- 89 --------- TOTAL INFORMATION TECHNOLOGY 507 --------- MATERIALS - 5.72% BASIC MATERIALS - 0.60% AMCOL International Corp. + ................. 1,085 28 --------- CHEMICALS - 0.69% H.B. Fuller Co. ............................. 1,325 33 --------- CONTAINERS & PACKAGING - 2.15% Greif, Inc. ................................. 505 47 Jarden Corp. ^ + ............................ 545 20 Silgan Holdings, Inc. ....................... 860 35 --------- 102 --------- METALS & MINING - 2.28% Carpenter Technology Corp. + ................ 130 14 Commercial Metals Co. ....................... 1,270 34 Gibraltar Industries, Inc. .................. 1,815 38 SHARES VALUE --------- --------- (DOLLARS IN THOUSANDS) NN, Inc. .................................... 2,000 $ 23 --------- 109 --------- TOTAL MATERIALS 272 --------- TELECOMMUNICATION SERVICES - 1.58% DIVERSIFIED TELECOMMUNICATION - 1.58% General Communication, Inc. ^ ............... 1,270 16 Golden Telecom, Inc. + ...................... 860 32 Premiere Global Services, Inc. ^ ............ 3,230 27 --------- TOTAL TELECOMMUNICATION SERVICES 75 --------- UTILITIES - 4.80% ELECTRIC UTILITIES - 3.73% Black Hills Corp. + ......................... 630 22 Cleco Corp. + ............................... 860 22 CMS Energy Corp. ^ + ........................ 1,055 16 El Paso Electric Co. ^ ...................... 1,425 33 Empire District Electric Co. ................ 1,760 42 PNM Resources, Inc. + ....................... 1,530 43 --------- 178 --------- GAS UTILITIES - 1.07% Atmos Energy Corp. + ........................ 785 24 Southwest Gas Corp. ......................... 750 27 --------- 51 --------- TOTAL UTILITIES 229 --------- TOTAL COMMON STOCKS 4,659 --------- SHORT TERM INVESTMENTS - 3.23% American Beacon Money Market Select Fund ++ ................................... 48,688 49 iShares Russell 2000 Value Index Fund + ..... 1,360 105 --------- TOTAL SHORT TERM INVESTMENTS 154 --------- SECURITIES LENDING COLLATERAL - 25.44% American Beacon Cash Plus Trust ++ .......... 833,612 834 American Beacon Money Market Select Fund ++ ................................... 377,810 378 --------- TOTAL SECURITIES LENDING COLLATERAL 1,212 --------- TOTAL INVESTMENTS 126.49% - (COST $5,875) 6,025 LIABILITIES, NET OF OTHER ASSETS - (26.49%) (1,262) --------- TOTAL NET ASSETS - 100.00% $ 4,763 ========= See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- Percentages are stated as a percent of net assets. ^ Non-income producing security. + All or a portion of this security is on loan at October 31, 2006. ++ The Fund/Trust is affiliated by having the same investment advisor. See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) ARGENTINA - 0.10% COMMON STOCKS - 0.10% Petrobras Energia Participaciones SA, ADR ^ + ................................... 14,100 $ 161 ---------- AUSTRIA - 0.44% COMMON STOCKS - 0.44% Raiffeisen International Bank-Holding AG .... 6,095 697 ---------- BRAZIL - 11.41% COMMON STOCKS - 8.04% Banco Itau Holding Financeira S.A., ADR ..... 36,080 1,198 Brasil Telecom Participacoes S.A., ADR + .... 24,800 830 Braskem SA, ADR + ........................... 9,000 128 Centrais Eletricas Brasileiras S.A. ......... 5,474,000 115 Companhia Brasileira de Distribuicao Group, ADR + ..................................... 8,900 266 Companhia de Saneamento Basico do Estado de Sao Paulo, ADR + ................ 7,800 236 Companhia Energetica de Minas Gerais, ADR ^ + ................................... 7,100 307 Companhia Vale do Rio Doce, ADR ............. 56,828 1,270 Cyrela Brazil Realty S/A ^ .................. 13,000 265 Empresa Brasileira de Aeronautica S.A. ...... (Embraer), ADR ............................ 10,640 443 Gerdau S.A., ADR + .......................... 17,825 263 Grendene S.A. ............................... 40,600 341 Natura Cosmeticos S.A. ...................... 22,475 310 Petroleo Brasileiro S.A., ADR ............... 34,842 3,092 Petroleo Brasileiro S.A., A Shares, ADR ..... 18,316 1,483 Unibanco - Uniao de Bancos Brasileiros S.A. . 15,378 122 Unibanco - Uniao de Bancos Brasileiros S.A., ADR ....................................... 20,855 1,642 Votorantim Celulose e Papel S.A, ADR + ...... 19,500 356 ---------- TOTAL COMMON STOCKS .......................... 12,667 ---------- PREFERRED STOCKS - 3.37% All America Latina Logistica S.A. ........... 34,800 304 Banco Itau Holding Financeira S.A. .......... 7,824 257 Braskem SA .................................. 67,600 478 Centrais Eletricas Brasileiras S.A. ......... 16,046,400 321 Companhia de Tecidos Norte de Minas ......... 4,530,300 427 Companhia Energetica de Minas Gerais ........ 10,421,913 450 Companhia Paranaense de Energia ............. 32,469,700 370 Companhia Vale do Rio Doce, A Shares ........ 3,752 81 Gerdau S.A. ................................. 11,150 163 Itausa - Investimentos Itau S.A. ............ 79,928 363 Klabin S.A. ................................. 78,400 169 Lojas Americanas SA ......................... 11,476,200 520 Petrol Brasileiro S.A. ...................... 7,160 144 Tele Norte Leste Participacoes S.A., ADR + .. 40,500 586 </Table> <Table> <Caption> SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) Telemar Norte Leste S.A. .................... 7,800 $ 174 Telemig Celular Participacoes S.A. .......... 161,711,789 275 Telesp - Telecommunicacoes de Sao Paulo S.A ....................................... 9,592 225 --------- TOTAL PREFERRED STOCKS ....................... 5,307 --------- TOTAL BRAZIL ................................. 17,974 --------- CHILE - 0.59% COMMON STOCKS - 0.59% Grupo Enersis SA, ADR ....................... 35,020 483 MASISA S.A., ADR ............................ 8,400 75 United Breweries Co, Inc., ADR .............. 13,300 366 --------- TOTAL CHILE .................................. 924 --------- COLOMBIA - 0.25% COMMON STOCKS - 0.25% BanColombia SA, ADR ......................... 13,100 400 --------- CZECH REPUBLIC - 1.40% COMMON STOCKS - 1.40% Central European Media Enterprises Ltd. ^ + .................................. 10,100 746 CEZ, a.s. ^ ................................. 21,900 867 Komercni Banka, A S ^ ....................... 3,800 591 --------- TOTAL CZECH REPUBLIC ......................... 2,204 --------- HONG KONG/CHINA - 8.30% COMMON STOCKS - 8.30% Brilliance China Automotive Holdings Ltd. + .................................... 1,130,000 176 BYD Company Ltd. ............................ 6,900 19 China Construction Bank + ++ ................ 1,290,000 582 China Life Insurance Company Ltd. + ......... 264,000 556 China Mobile Ltd. + ......................... 163,000 1,331 China Petroleum & Chemical Corp. + .......... 1,178,800 815 China Ping'an Insurance Company Ltd. ........ 85,000 296 China Resources Power Holdings Co. .......... 294,000 372 China Shipping Development Co Ltd. .......... 336,000 365 China Telecom Corp. Ltd. + .................. 2,901,100 1,093 CNOOC Ltd. + ................................ 1,171,400 985 Denway Motors Ltd. + ........................ 1,720,700 637 Global Bio-chem Technology Group Co. Ltd. ... 1,506,800 442 GOME Electrical Appliances Holdings Ltd. + .. 507,000 437 Huandian Power International Corp. .......... 2,861,800 960 Huaneng Power International, Inc. + ......... 569,900 448 Industrial & Commercial Bank of China ^ ..... 662,000 296 Moulin Global Eyecare Holdings Ltd. ^ # ..... 96,000 -- Panva Gas Holdings Ltd. ^ ................... 337,000 160 PetroChina Company Ltd. + ................... 507,000 558 PICC Property and Casualty Company Ltd. ^ + .................................. 898,000 321 Shanghai Industrial Holdings Ltd. ........... 232,900 453 </Table> See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) Shenzhen Investment Ltd. + .................. 701,000 $ 276 Sinotrans Ltd. .............................. 1,130,000 386 Texwinca Holdings Ltd. ...................... 302,000 198 Weiqiao Textile Co. Ltd. .................... 421,600 579 Yanzhou Coal Mining Co Ltd. + ............... 519,800 341 --------- TOTAL HONG KONG/CHINA ........................ 13,082 --------- HUNGARY - 0.64% COMMON STOCKS - 0.64% Gedeon Richter Rt. .......................... 2,371 497 Magyar Telekom Telecommunications PLC ^ ..... 109,100 508 --------- TOTAL HUNGARY ................................ 1,005 --------- INDIA - 7.72% COMMON STOCKS - 7.72% ABB Ltd. .................................... 6,200 493 Andhra Bank ^ ............................... 52,010 108 Bharat Electronics Ltd. ..................... 22,100 1,186 Bharat Petroleum Corporation Ltd. ^ ......... 67,633 605 Bharti Airtel Ltd. ^ ........................ 24,700 291 Cipla, Ltd. ................................. 41,375 241 Container Corp. ^ ........................... 5,900 266 GAIL (India) Ltd. ^ ......................... 32,000 181 GAIL India Ltd., GDR ++ ..................... 6,700 225 Glenmark Pharmaceuticals Ltd. ............... 22,300 206 Gujarat Ambuja Cements Ltd. ................. 68,750 180 HCL Technologies Ltd. ^ ..................... 19,000 263 HDFC Bank Ltd. .............................. 19,700 439 Hindalco Industries Ltd. ^ .................. 19,080 80 Hindalco Industries Ltd., GDR ++ ............ 162,100 673 Hindalco Industries Ltd., Sponsored GDR ++ .. 19,250 45 Hindustan Lever Ltd. ........................ 84,900 446 Hindustan Petroleum Corporation Ltd. ^ ...... 83,900 605 Housing Development Finance Corp. ........... 8,700 283 ICICI Bank Ltd., ADR ........................ 6,100 214 Infosys Technologies Ltd. ^ ................. 16,800 781 ITC Ltd. .................................... 39,000 165 ITC Ltd., GDR ^ ............................. 22,500 94 Mahanagar Telephone Nigam Ltd. .............. 133,680 417 Mahanagar Telephone Nigam Ltd., ADR ......... 4,500 29 Mahindra & Mahindra Ltd. .................... 25,600 445 Oil & Natural Gas Corp. Ltd. ................ 38,091 689 Punjab National Bank Ltd. ................... 20,000 230 Reliance Energy Ltd. ^ ...................... 11,295 121 Reliance Industries Ltd. ^ .................. 17,560 478 Siemens India Ltd. ^ ........................ 17,300 467 State Bank of India Ltd., GDR ++ ............ 15,000 945 Union Bank of India ^ ....................... 4,241 12 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) UTI Bank Ltd. ............................... 26,000 $ 252 --------- TOTAL INDIA .................................. 12,155 --------- INDONESIA - 2.07% COMMON STOCKS - 2.07% Bank Central Asia ........................... 508,500 260 Indosat Tbk PT .............................. 386,900 221 PT Astra International Tbk .................. 225,400 331 PT Bank Mandiri ............................. 868,500 260 PT Bank Rakyat Indonesia .................... 472,500 254 PT Gudang Garam Tbk ......................... 347,800 376 PT Indofood Sukses Makmur Tbk ............... 1,236,100 180 PT Perusahaan Gas Negara .................... 151,500 190 PT Telekomunikasi Indonesia Tbk ............. 1,038,000 957 United Tractors Tbk PT ...................... 322,000 231 --------- TOTAL INDONESIA .............................. 3,260 --------- ISRAEL - 1.34% COMMON STOCKS - 1.34% Bank Hapoalim BM ............................ 55,680 277 Bank Leumi le-Israel B.M. ................... 53,300 220 Check Point Software Technologies Ltd. ^ .... 23,000 477 Super-Sol Ltd. ^ ............................ 42,590 160 Taro Pharmaceuticals Industries ^ + ......... 16,800 175 Teva Pharmaceutical Industries Ltd., ADR .... 24,100 795 --------- TOTAL ISRAEL ................................. 2,104 --------- LUXEMBOURG - 0.25% COMMON STOCKS - 0.25% Tenaris SA, ADR ............................. 10,100 390 --------- MALAYSIA - 2.38% COMMON STOCKS - 2.38% AMMB Holdings Berhad ........................ 453,000 331 Bandar Raya Developments Berhad ............. 77,000 24 Commerce Asset-Holding Berhad ............... 47,300 89 Gamuda Berhad ............................... 334,600 363 Genting Berhad .............................. 68,200 500 Malayan Banking Berhad ...................... 252,500 774 MK Land Holdings Berhad ..................... 103,300 14 Proton Holdings Berhad ...................... 85,100 111 Resorts World Berhad ........................ 145,800 475 Sime Darby Berhad ........................... 559,100 941 Tenaga Nasional Berhad ...................... 44,500 122 --------- TOTAL MALAYSIA ............................... 3,744 --------- MEXICO - 8.18% COMMON STOCKS - 8.18% America Movil S.A. de C.V., ADR ............. 63,865 2,738 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) Cemex SAB de CV ^ + ......................... 115,368 $ 355 Coca-Cola Femsa, S.A. de C.V., ADR .......... 25,135 873 Consorcio Ara, S.A. de C.V. ................. 14,400 82 Controladora Commercial Mexicana S.A. de C.V. ...................................... 314,500 639 Corp GEO SA de CV ^ + ....................... 82,000 376 Desc S.A. de C.V. ^ + ....................... 23,700 29 Embotelladoras Arca S.A. + .................. 73,400 225 Grupo Aeroportuario del Sureste SAB de CV, ADR ....................................... 11,780 447 Grupo Continential, S.A. .................... 224,450 459 Grupo Financiero Banorte, S.A. de C.V. ...... 156,900 569 Grupo Televisa, S.A., ADR ................... 90,900 2,243 Kimberly-Clark de Mexico, S.A. de C.V. + .... 67,400 282 Organizacion Soriana SAB de CV .............. 17,000 98 Telefonos de Mexico, S.A. de C.V., ADR ...... 36,980 976 Wal-Mart de Mexico, S.A. de C.V. ............ 634,284 2,206 Wal-Mart de Mexico, S.A. de C.V., ADR ....... 8,355 290 --------- TOTAL MEXICO ................................. 12,887 --------- MOROCCO - 0.42% COMMON STOCKS - 0.42% Banque Maroc du Commerce Exterieur .......... 2,790 354 ONA (Omnium Nord Africain) .................. 1,940 308 --------- TOTAL MOROCCO ................................ 662 --------- PERU - 0.25% COMMON STOCKS - 0.25% Credicorp Ltd. .............................. 9,300 392 --------- PHILIPPINES - 0.93% COMMON STOCKS - 0.93% ABS-CBN Broadcasting Corp. ^ ................ 271,500 116 Ayala Corp. ................................. 16,980 167 Banco De Oro Universal Bank ^ ............... 130,600 113 Banco De Oro Universal Bank, GDR ^ ++ ....... 5,500 93 Bank of the Philippine Islands .............. 347,723 432 Manila Electric Co. ^ ....................... 218,000 138 Philippine Long Distance Telephone Co. ^ .... 3,800 180 SM Prime Holdings, Inc. ..................... 1,208,000 221 --------- TOTAL PHILIPPINES ............................ 1,460 --------- POLAND - 1.93% COMMON STOCKS - 1.93% Bank Millennium SA .......................... 119,093 272 Bank Pekao SA ............................... 11,083 748 Polski Koncern Naftowy Orlen S.A. ........... 12,087 192 Powszechna Kasa Oszczednosci Bank Polski .... 48,015 606 Telekomunikacja Polska SA ................... 67,600 497 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) TVN SA ^ .................................... 19,321 $ 733 --------- TOTAL POLAND ................................. 3,048 --------- RUSSIA - 8.30% COMMON STOCKS - 8.30% CTC Media, Inc. ^ ........................... 24,100 585 Efes Breweries International NV ^ + ......... 6,282 192 JSC Surgutneftegaz, ADR + ................... 6,770 428 LUKOIL Oil Co., ADR ......................... 39,588 3,203 Mining and Metallurgical Company Norilsk Nickel, ADR ............................... 2,900 428 NovaTek OAO, GDR + .......................... 21,407 1,246 Novolipetsk Steel, GDR ++ ................... 11,700 236 RAO Gazprom, ADR ............................ 72,349 3,065 Sberbank RF, GDR + .......................... 7,600 1,710 Trubnaya Metallurgicheskaya Kompaniya Oao, GDR ^ ++ .................................. 17,623 395 Unified Energy System, GDR .................. 12,558 946 Wimm-Bill-Dann Foods, ADR + ................. 15,200 641 --------- TOTAL RUSSIA ................................. 13,075 --------- SOUTH AFRICA - 7.14% COMMON STOCKS - 7.14% African Oxygen Ltd. ......................... 62,100 260 Alexander Forbes Ltd. ....................... 144,087 295 Aspen Pharmacare Holdings Ltd. .............. 101,620 462 Aveng Ltd. .................................. 129,570 549 Bidvest Group Ltd. .......................... 30,704 509 Edgars Consolidated Stores Ltd. ............. 77,000 384 Gold Fields Ltd. ............................ 19,000 315 Gold Fields Ltd., ADR + ..................... 20,870 350 Group Five Ltd. ............................. 52,511 269 Harmony Gold Mining Company Ltd. ^ .......... 9,729 147 Harmony Gold Mining Company Ltd., ADR ^ + ... 4,787 74 Impala Platinum Holdings Ltd. ............... 1,619 285 Massmart Holdings Ltd. ...................... 51,000 411 Murray & Roberts Holdings Ltd. .............. 68,050 351 Nampak Ltd. ................................. 262,600 688 Naspers Ltd. ................................ 47,950 868 Nedbank Group Ltd. .......................... 76,372 1,264 Reunert Ltd. ................................ 39,190 420 Sanlam Ltd. ................................. 361,980 860 Sappi Ltd. .................................. 74,420 1,062 Sasol Ltd. .................................. 21,430 735 Steinhoff International Holdings Ltd. ....... 65,659 214 Tiger Brands Ltd. ........................... 22,657 471 --------- TOTAL SOUTH AFRICA ........................... 11,243 --------- See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) SOUTH KOREA - 14.88% COMMON STOCKS - 14.49% Amorepacific Corp. ^ ........................ 500 $ 259 CDNetworks Co. Ltd. ^ ....................... 2,310 77 Cheil Communications, Inc. .................. 915 201 Cheil Industries, Inc. ...................... 6,200 258 Daelim Industrial Company Ltd. .............. 4,322 331 Daewoo Heavy Industries and Machinery Ltd. .. 7,630 147 GS Holdings Corp. ........................... 5,470 191 Hanwha Chemical Corp. ....................... 44,390 499 The Hite Co., Ltd. .......................... 2,115 251 Hynix Semiconductor, Inc. ^ ................. 11,910 432 Hyundai Department Store Co. Ltd. ........... 6,076 509 Hyundai Engineering & Construction Co. Ltd. . 1,982 263 Hyundai Heavy Industries .................... 470 69 Hyundai Mobis ............................... 3,530 345 Hyundai Motor Company Ltd. .................. 9,160 745 Industrial Bank of Korea .................... 11,070 194 Kookmin Bank ................................ 18,071 1,436 Kookmin Bank, ADR ........................... 4,350 345 Korea Electric Power Corp. .................. 33,295 1,286 Korea Electric Power Corp., ADR ............. 7,000 138 Korea Exchange Bank Credit ^ ................ 9,410 125 Korea Zinc Co. Ltd. ......................... 2,740 302 KT Corp. .................................... 2,790 127 KT Corp., ADR ............................... 38,600 864 Kumho Tire Co., Inc. ........................ 43,380 525 Kumho Tire Company, Inc., GDR++ ............. 9,900 56 LG Chemical ................................. 17,520 715 LG Construction Co. ......................... 5,850 455 LG Electronics, Inc. ........................ 13,670 827 LG Telecom Ltd. ^ ........................... 23,816 276 LG.Philips LCD Co. Ltd. ^ ................... 11,610 370 LG.Philips LCD Co. Ltd., ADR ^ + ............ 1,500 24 Lotte Shopping Co. Ltd. ..................... 2,299 871 NHN Corp. ................................... 2,710 269 Orion Corp. ................................. 1,455 394 POSCO ....................................... 2,420 672 POSCO, ADR .................................. 3,170 224 Samsung Electronics Co. Ltd. ................ 4,592 2,978 Samsung Fire & Marine Insurance Co. Ltd. .... 2,900 449 Samsung SDI Co. Ltd. ........................ 3,336 241 Shinhan Financial Group Company Ltd. ........ 25,930 1,196 Shinsegae Co. Ltd. .......................... 482 278 SK Corp. .................................... 9,636 707 SK Telecom Co. Ltd., ADR .................... 39,430 949 SK Telecom Company Ltd. ..................... 3,097 672 Woongjin Coway Co. Ltd. ..................... 11,230 295 --------- TOTAL COMMON STOCKS 22,837 --------- SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) PREFERRED STOCKS - 0.39% Hyundai Motor Co. ........................... 4,750 $ 224 Samsung Electronics Co. Ltd. ................ 798 387 --------- TOTAL PREFERRED STOCKS 611 --------- TOTAL SOUTH KOREA 23,448 --------- TAIWAN - 10.29% COMMON STOCKS - 10.29% Accton Technology Corp. ^ ................... 9,000 5 Acer, Inc. .................................. 131,000 237 Advanced Semiconductor Engineering, Inc. .... 92,118 85 Asustek Computer, Inc. ...................... 36,000 87 Benq Corp. .................................. 603,550 299 Catcher Technology Co. Ltd. ................. 30,734 265 Cathay Financial Holding Co. Ltd. ........... 84,910 165 Chang Hwa Commercial Bank ^ ................. 240,000 149 China Motor Corp. ........................... 432,707 371 Chinatrust Financial Holding Co. Ltd. ....... 996,149 723 Chunghwa Telecom Co. Ltd., ADR .............. 50,470 923 Compal Electronics, Inc. .................... 1,149,065 962 Delta Electronics, Inc. ..................... 282,966 800 Everlight Electronics Co. Ltd. .............. 109,140 287 Far Eastern Textile Co. Ltd. ................ 405,900 308 First Financial Holding Co. Ltd. ............ 1,201,506 824 Fubon Financial Holding Co. Ltd. ............ 463,000 377 High Tech Computer Corp. .................... 19,200 476 HON HAI Precision Industry Co. Ltd. ......... 10,006 65 InnoLux Display Corp. ^ ..................... 10,000 16 King Slide Works Co., Ltd ................... 13,200 69 Largan Precision Co. Ltd. ................... 16,965 338 MediaTek, Inc. .............................. 58,300 569 Nien Hsing Textile Co. Ltd. ................. 296,000 164 Nien Made Enterprise Company Ltd. ........... 211,380 180 Optimax Technology Corp. .................... 284,090 190 Powerchip Semiconductor Corp. ............... 346,617 214 Quanta Computer, Inc. ....................... 717,113 1,063 Radiant Opto-Electronics Corp. .............. 124,650 170 Shin Kong Financial Holding Company Ltd. .... 246,391 218 SinoPac Financial Holdings Co. Ltd. ......... 1,894,987 957 Sunplus Technology Co. Ltd. ................. 347,662 344 Taishin Financial Holdings Co. Ltd. ......... 102,758 53 Taiwan Cement Corp. ......................... 364,827 288 Taiwan Mobile Co. Ltd. ...................... 98,662 98 Taiwan Semiconductor Manufacturing Co. Ltd. ...................................... 339,000 622 Transcend Information, Inc. ................. 94,485 217 Tripod Technology Corp. ..................... 68,820 214 Tsann Keun Enterprise Co. Ltd. .............. 96,677 81 United Microelectronics Corp. ............... 3,558,106 1,984 United Microelectronics Corp., ADR + ........ 22,124 67 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) Wistron Corp. ............................... 154,422 $ 179 Yaego Corp. ^ ............................... 1,402,000 514 --------- TOTAL TAIWAN 16,217 --------- THAILAND - 2.02% COMMON STOCKS - 2.02% Advanced Info Services PCL .................. 23,000 57 Bangkok Bank PCL ............................ 50,400 165 Charoen Pokphand Foods PCL # ................ 2,160,400 292 CP Seven Eleven PCL # ....................... 1,424,800 250 Delta Electronics PCL ....................... 289,200 143 Kasikornbank PCL ............................ 367,200 721 Krung Thai Bank PCL ......................... 1,607,700 574 PTT Exploration & Production PCL ............ 30,600 89 PTT Public Company Ltd. ..................... 32,800 197 Siam Commercial Bank PCL .................... 320,500 568 Siam Makro PCL # ............................ 59,000 126 --------- TOTAL THAILAND 3,182 --------- TURKEY - 2.00% COMMON STOCKS - 2.00% BIM Birlesik Magazalar A.S. ................. 9,880 437 Dogan Yayin Holding ^ ....................... 133,163 512 Turkiye Garanti Bankasi A.S. ................ 171,042 628 Turkiye Is Bankasi (Isbank) ................. 142,370 923 Turkiye Vakiflar Bankasi T.A.O. ............. 63,400 333 Yapi ve Kredi Bankasi A.S. ^ ................ 163,856 315 --------- TOTAL TURKEY 3,148 --------- SHORT TERM INVESTMENTS - 5.51% American Beacon Money Market Select Fund ss ................................... 8,171,897 8,172 PAR AMOUNT --------- U.S. Treasury Bill, 4.71%, Due 12/7/2006 * .................... $ 515 512 --------- TOTAL SHORT TERM INVESTMENTS 8,684 --------- SHARES ------------ SECURITIES LENDING COLLATERAL - 7.53% American Beacon Cash Plus Trust ss .......... 8,164,059 8,164 American Beacon Money Market Select Fund ss ................................... 3,700,117 3,700 --------- TOTAL SECURITIES LENDING COLLATERAL 11,864 --------- TOTAL INVESTMENTS 106.27% - (COST $131,367) 167,410 LIABILITIES, NET OF OTHER ASSETS - (6.27%) (9,871) --------- TOTAL NET ASSETS - 100.00% $ 157,539 ========= See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- Percentages are stated as a percent of net assets. ^ Non-income producing security. + All or a portion of this security is on loan at October 31, 2006. ++ Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $3,250 or 2.06% of net assets. The Fund has no right to demand registration of these securities. # Valued at fair value pursuant to procedures approved by the Board of Trustees. ss. The Fund/Trust is affiliated by having the same investment advisor. * At October 31, 2006, security pledged as collateral for open futures contracts. FUTURES CONTRACTS (DOLLARS IN THOUSANDS) UNREALIZED NUMBER OF EXPIRATION MARKET APPRECIATION/ CONTRACTS DATE VALUE (DEPRECIATION) --------------- -------------- -------------- -------------- Emini S&P 500 Index .... 148 Dec 2006 $ 10,236 $ 362 ============== ============== FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS (DOLLARS IN THOUSANDS) SETTLEMENT MARKET UNREALIZED DATE VALUE GAIN/(LOSS) ---------- ---------- ----------- CONTRACTS TO DELIVER 4,518 Brazilian Real ....... 12/13/2006 $ 2,092 $ (54) 15,642 South African Rand ... 11/14/2006 2,121 165 TOTAL CONTRACTS TO DELIVER ---------- ----------- (RECEIVABLE AMOUNT $4,324) $ 4,213 $ 111 ---------- ----------- NET CURRENCY FLUCTUATION $ 111 =========== SECTOR DIVERSIFICATION Percent of Net Assets ---------- Consumer Discretionary .............. 13.39% Consumer Staples .................... 4.63% Energy .............................. 11.23% Financials .......................... 20.31% Health Care ......................... 1.79% Industrials ......................... 9.41% Information Technology .............. 10.05% Materials ........................... 7.14% Telecommunication Services .......... 10.17% Utilities ........................... 5.11% Short Term Investments .............. 13.04% Liabilities, Net of Other Assets .... (6.27)% ----------- 100.00% =========== See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ----------- ----------- (DOLLARS IN THOUSANDS) CORPORATE OBLIGATIONS - 93.98% AUTO COMPONENTS - 3.78% Asbury Automotive Group, Inc., 9.00%, Due 6/15/2012 ............. $ 2,075 $ 2,148 The Goodyear Tire & Rubber Co., 11.25%, Due 3/1/2011 ............ 1,000 1,100 Pep Boys, Inc., 7.50%, Due 12/15/2014 ........................... 1,700 1,522 Stanadyne Corp., 10.00%, Due 8/15/2014 .......................... 1,000 1,020 Tenneco, Inc., 10.25%, Due 7/15/2013 ......................................... 1,400 1,533 8.625%, Due 11/15/2014 + ...................................... 1,000 1,007 TriMas Corp., 9.875%, Due 6/15/2012 ............................. 1,250 1,178 United Components, Inc., 9.375%, Due 6/15/2013 .................. 2,250 2,272 ----------- 11,780 ----------- BASIC MATERIALS - 1.38% Huntsman International LLC, 7.875%, Due 11/13/2014 ++ ........... 100 100 Johnson Diversey, Inc., 9.625%, Due 5/15/2012 ................... 200 204 Lyondell Chemical Co., 8.00%, Due 9/15/2014 .......................................... 300 307 8.25%, Due 9/15/2016 .......................................... 1,250 1,287 NewMarket Corp., 8.875%, Due 5/1/2010 ........................... 1,000 1,040 PNA Group, Inc., 10.75%, Due 9/1/2016 ++ ........................ 1,025 1,056 Verso Paper Holdings LLC, 9.125%, Due 8/1/2014 ++ ............... 300 305 ----------- 4,299 ----------- COMMERCIAL SERVICES - 1.04% Iron Mountain, Inc., 6.625%, Due 1/1/2016 .......................................... 2,000 1,900 8.75%, Due 7/15/2018 .......................................... 300 317 Mobile Services Group, Inc., 9.75%, Due 8/1/2014 ++ ............. 1,000 1,036 ----------- 3,253 ----------- COMMUNICATIONS - 11.64% Cadmus Communications Corp., 8.375%, Due 6/15/2014 .............. 1,700 1,645 CanWest Media, Inc., 8.00%, Due 9/15/2012 ....................... 2,325 2,351 Cch I LLC, 11.00%, Due 10/1/2015 ................................ 100 96 Charter Communications Holdings, 10.25%, Due 9/15/2010 .......... 2,725 2,814 CSC Holdings, Inc., 7.25%, Due 7/15/2008 .......................................... 2,150 2,174 7.625%, Due 4/1/2011 .......................................... 200 202 Dex Media, Inc., 9.875%, Due 11/15/2009 ........................................ 500 526 9.875%, Due 8/15/2013 ......................................... 100 109 Zero Coupon, Due 11/15/2013 ^ # ............................... 2,250 1,960 Echostar DBS Corp., 6.375%, Due 10/1/2011 ......................................... 100 99 7.00%, Due 10/1/2013 ++ ....................................... 2,000 1,982 6.625%, Due 10/1/2014 ......................................... 1,500 1,447 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ----------- ----------- (DOLLARS IN THOUSANDS) 7.125%, Due 2/1/2016 ++ ....................................... $ 200 $ 196 FTD, Inc., 7.75%, Due 2/15/2014 ................................. 923 918 Houghton Mifflin Co., 8.25%, Due 2/1/2011 ....................... 2,405 2,477 Insight Communications Co., Inc., 12.25%, Due 2/15/2011 ......... 2,875 3,033 Intelsat Bermuda Ltd., 9.25%, Due 6/15/2016 ++ .................. 1,600 1,708 Intelsat Subsidiary Holding Co Ltd., 8.25%, Due 1/15/2013 ....... 800 815 Kabel Deutschland GMBH, 10.625%, Due 7/1/2014 ++ ................ 2,125 2,298 L-3 Communications Corp., 6.125%, Due 7/15/2013 ................. 400 394 Lamar Media Corp., 7.25%, Due 1/1/2013 .......................... 300 301 Level 3 Communications, Inc., 11.00%, Due 3/15/2008 ............. 1,400 1,438 Liberty Media LLC, 5.70%, Due 5/15/2013 ......................... 300 283 LIN Television Corp., 6.50%, Due 5/15/2013 ...................... 300 285 Mastec, Inc., 7.75%, Due 2/1/2008 ............................... 1,500 1,500 Network Communications, Inc., 10.75%, Due 12/1/2013 ............. 1,000 1,006 Nortel Networks Ltd., 9.624%, Due 7/15/2011 ++ # ................ 1,750 1,807 Quebecor Media, Inc., 7.75%, Due 3/15/2016 ...................... 100 101 Qwest Communications International, Inc., 7.50%, Due 2/15/2014 .. 300 306 Radio One, Inc., 6.375%, Due 2/15/2013 .......................... 200 186 Rogers Wireless, Inc., 7.25%, Due 12/15/2012 .................... 200 210 West Corp., 9.50%, Due 10/15/2014 ++ ............................ 1,650 1,646 ----------- 36,313 ----------- CONSTRUCTION & ENGINEERING - 1.29% Beazer Homes USA, Inc., 8.375%, Due 4/15/2012 ......................................... 1,250 1,278 8.125%, Due 6/15/2016 + ....................................... 300 305 KB Home, 7.75%, Due 2/1/2010 ........................................... 1,000 1,013 9.50%, Due 2/15/2011 .......................................... 1,200 1,242 6.25%, Due 6/15/2015 .......................................... 200 188 ----------- 4,026 ----------- CONSUMER DISCRETIONARY - 2.38% Commercial Vehicle Group, Inc., 8.00%, Due 7/1/2013 ............. 300 291 Fresenius Medical Care Capital Trust IV, 7.875%, Due 6/15/2011 .. 300 309 Levi Strauss & Co., 12.25%, Due 12/15/2012 ...................... 1,500 1,673 Simmons Bedding Co., 7.875%, Due 1/15/2014 + .................... 2,000 1,975 Spectrum Brands, Inc., 7.375%, Due 2/1/2015 ..................... 200 162 TRW Automotive, Inc., 9.375%, Due 2/15/2013 ..................... 2,825 3,026 ----------- 7,436 ----------- CONSUMER STAPLES - 2.88% Avis Budget Car Rental LLC, 7.625%, Due 5/15/2014 ++ ............ 1,000 977 Blyth, Inc., 5.50%, Due 11/1/2013 ............................... 1,500 1,230 Dole Food Co., Inc., 7.25%, Due 6/15/2010 ....................... 100 93 Encore Medical Corp., 9.75%, Due 10/1/2012 ...................... 3,500 3,929 Prestige Brands, Inc., 9.25%, Due 4/15/2012 ..................... 2,000 2,035 Royal Caribbean Cruises Ltd., 7.25%, Due 3/15/2018 .............. 400 398 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ----------- ----------- (DOLLARS IN THOUSANDS) Smithfield Foods, Inc., 7.75%, Due 5/15/2013 .................... $ 300 $ 310 ----------- 8,972 ----------- ELECTRIC/GAS - 0.40% Allegheny Energy Supply Co., LLC, 8.25%, Due 4/15/2012 ++ ....... 100 109 Aquila, Inc., 9.95%, Due 2/1/2011 ............................... 300 331 Hanover Compressor Co., 7.50%, Due 4/15/2013 .................... 200 200 Midwest Generation LLC, 8.75%, Due 5/1/2034 ..................... 300 324 TXU Corp., 5.55%, Due 11/15/2014 ................................ 300 286 ----------- 1,250 ----------- ENERGY - 9.39% AmeriGas Partners LP/AmeriGas Eagle Finance Corp., 7.125%, Due 5/20/2016 ......................................... 1,400 1,383 AmeriGas Partners, L.P., 7.25%, Due 5/20/2015 + ................. 1,225 1,222 Browning-Ferris Industries, Inc., 9.25%, Due 5/1/2021 ........... 1,250 1,313 Chesapeake Energy Corp., 7.625%, Due 7/15/2013 .................. 3,400 3,523 Copano Energy LLC, 8.125%, Due 3/1/2016 ......................... 300 305 Dynegy Holdings, Inc., 8.375%, Due 5/1/2016 ..................... 300 308 El Paso Corp., 7.875%, Due 6/15/2012 ............................ 200 208 El Paso Natural Gas Co., 7.625%, Due 8/1/2010 ................... 200 207 Energy Partners Ltd., 8.75%, Due 8/1/2010 ....................... 1,300 1,352 Holly Energy Partners, 6.25%, Due 3/1/2015 ...................... 1,450 1,352 Inergy L.P./Inergy Finance Corp., 6.875%, Due 12/15/2014 ........ 2,224 2,152 Mariner Energy, Inc., 7.50%, Due 4/15/2013 ++ ................... 300 288 MarkWest Energy Partners LP / MarkWest Energy Finance Corp., 6.875%, Due 11/1/2014 ......................................... 300 282 Massey Energy Co., 6.875%, Due 12/15/2013 ....................... 2,700 2,531 Mirant Americas Generation LLC, 8.30%, Due 5/1/2011 ............. 2,000 2,025 Mirant North America LLC, 7.375%, Due 12/31/2013 ................ 100 101 Mission Energy Holding Co., 13.50%, Due 7/15/2008 ............... 1,145 1,277 NRG Energy, Inc., 7.25%, Due 2/1/2014 ........................................... 200 202 7.375%, Due 2/1/2016 .......................................... 1,200 1,214 Peabody Energy Corp., 6.875%, Due 3/15/2013 ......................................... 100 102 7.375%, Due 11/1/2016 ......................................... 100 104 PetroHawk Energy Corp., 9.125%, Due 7/15/2013 ++ ................ 1,125 1,147 PetroQuest Energy, Inc., 10.375%, Due 5/15/2012 ................. 3,000 3,120 Pogo Producing Co., 7.875%, Due 5/1/2013 ++ ..................... 300 305 Swift Energy Co., 7.625%, Due 7/15/2011 ......................................... 900 902 9.375%, Due 5/1/2012 .......................................... 1,000 1,053 Tenaska, Inc., 6.528%, Due 12/30/2014 ++ ........................ 1,322 1,303 ----------- 29,281 ----------- FINANCE - 4.84% American Real Estate Partners, L.P., 7.125%, Due 2/15/2013 ...... 1,000 997 CPI International, Inc., 11.298%, Due 2/1/2015 # ................ 1,750 1,820 Crum & Forster Holdings Corp., 10.375%, Due 6/15/2013 + ......... 1,600 1,660 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ----------- ----------- (DOLLARS IN THOUSANDS) E*Trade Financial Corp., 8.00%, Due 6/15/2011 ................... $ 3,075 $ 3,190 National Health Investors, Inc., 7.30%, Due 7/16/2007 ........... 1,000 999 Rainbow National Services LLC, 10.375%, Due 9/1/2014 ++ ......... 950 1,057 Residential Capital Corp., 7.204%, Due 4/17/2009 ++ # ........... 1,900 1,904 Stripes Acquisition LLC, 10.625%, Due 12/15/2013 ++ ............. 1,750 1,899 Thornburg Mortgage, Inc., 8.00%, Due 5/15/2013 .................. 1,610 1,586 ----------- 15,112 ----------- FOOD & DRUG RETAILING - 0.98% Rite Aid Corp., 8.125%, Due 5/1/2010 .......................................... 2,000 2,020 9.50%, Due 2/15/2011 .......................................... 1,000 1,040 ----------- 3,060 ----------- FOOD/RESTAURANT - 1.35% Cott Beverages USA, Inc., 8.00%, Due 12/15/2011 ................. 1,700 1,738 Pilgrim's Pride Corp., 9.625%, Due 9/15/2011 .................... 2,348 2,460 ----------- 4,198 ----------- HEALTH CARE - 4.96% Athena Neurosciences Financial LLC, 7.25%, Due 2/21/2008 ........ 2,450 2,450 DaVita, Inc., 7.25%, Due 3/15/2015 .............................. 2,400 2,388 HCA, Inc., 6.50%, Due 2/15/2016 ................................. 200 159 Interactive Health, 8.00%, Due 4/1/2011 ++ ...................... 1,259 969 Omnicare, Inc., 6.875%, Due 12/15/2015 .......................... 2,050 2,009 Select Medical Corp., 7.625%, Due 2/1/2015 ...................... 850 712 Skilled Healthcare Group, Inc., 11.00%, Due 1/15/2014 ++ ........ 1,300 1,430 Tenet Healthcare Corp., 6.375%, Due 12/1/2011 ......................................... 100 88 9.875%, Due 7/1/2014 .......................................... 100 98 Triad Hospitals, Inc., 7.00%, Due 11/15/2013 .................... 1,250 1,216 US Oncology Holdings, Inc., 10.675%, Due 3/15/2015 # ............ 1,000 1,022 US Oncology, Inc., 9.00%, Due 8/15/2012 .......................................... 1,500 1,554 10.75%, Due 8/15/2014 ......................................... 1,000 1,100 Vanguard Health Holding Co. II LLC, 9.00%, Due 10/1/2014 ........ 300 290 ----------- 15,485 ----------- HOTELS, RESTAURANTS & LEISURE - 6.58% AMC Entertainment, Inc., 9.655%, Due 8/15/2010 # ....................................... 1,275 1,316 9.875%, Due 2/1/2012 .......................................... 1,300 1,344 AMF Bowling Worldwide, Inc., 10.00%, Due 3/1/2010 ............... 1,950 2,028 Cinemark, Inc., Zero Coupon, Due 3/15/2014 ^ # .................. 1,350 1,099 Host Hotels & Resorts LP, 6.875%, Due 11/1/2014 ++ .............. 100 100 Host Marriott LP, 7.125%, Due 11/1/2013 ......................... 400 405 Majestic Star Casino LLC, 9.50%, Due 10/15/2010 ................. 1,500 1,515 MGM Mirage, 6.75%, Due 4/1/2013 ........................................... 500 485 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ----------- ----------- (DOLLARS IN THOUSANDS) 6.875%, Due 4/1/2016 .......................................... $ 2,750 $ 2,612 San Pasqual Casino Development Group, 8.00%, Due 9/15/2013 ++ ... 1,800 1,836 Station Casinos, Inc., 6.875%, Due 3/1/2016 .......................................... 400 367 7.75%, Due 8/15/2016 + ........................................ 2,100 2,158 Travelport, Inc., 9.875%, Due 9/1/2014 ++ ....................................... 500 493 11.875%, Due 9/1/2016 ++ ...................................... 1,000 985 Turning Stone Casino Resort, 9.125%, Due 12/15/2010 ++ .......... 3,710 3,784 ----------- 20,527 ----------- INDUSTRIALS - 21.80% ACIH, Inc., Zero Coupon, Due 12/15/2012 ^ + ++ # ................ 1,500 1,020 Ahern Rentals, Inc., 9.25%, Due 8/15/2013 ....................... 1,500 1,541 Ainsworth Lumber Company Ltd., 6.75%, Due 3/15/2014 ............. 1,000 705 Allied Waste North America, Inc., 5.75%, Due 2/15/2011 .......... 300 289 Alpha Natural Resources, LLC, 10.00%, Due 6/1/2012 .............. 2,000 2,150 Altra Industrial Motion, Inc., 9.00%, Due 12/1/2011 ............. 1,575 1,606 BCP Crystal US Holdings Corp., 9.625%, Due 6/15/2014 ............ 200 219 Buckeye Technologies, Inc., 8.00%, Due 10/15/2010 ............... 100 98 Case New Holland, Inc., 9.25%, Due 8/1/2011 ........................................... 2,725 2,892 7.125%, Due 3/1/2014 .......................................... 100 101 Casella Waste Systems, Inc., 9.75%, Due 2/1/2013 ................ 1,545 1,622 CHC Helicopter Corp., 7.375%, Due 5/1/2014 ...................... 1,787 1,707 Clean Harbors, Inc., 11.25%, Due 7/15/2012 ...................... 650 731 Communications & Power Industries, Inc., 8.00%, Due 2/1/2012 .... 1,500 1,508 Crown Americas LLC, 7.75%, Due 11/15/2015 ....................... 300 308 Crystal US Holdings 3 LLC / Crystal US Sub 3 Corp, 10.50%, Due 10/1/2014 # ....................................... 3,990 3,352 DRS Technologies, Inc., 6.875%, Due 11/1/2013 ................... 300 300 Dycom Industries, Inc., 8.125%, Due 10/15/2015 .................. 1,500 1,553 Ford Motor Co., 8.875%, Due 1/15/2022 ........................... 200 173 Ford Motor Credit Co., 5.625%, Due 10/1/2008 ......................................... 400 385 5.80%, Due 1/12/2009 .......................................... 1,700 1,624 7.375%, Due 10/28/2009 ........................................ 1,000 973 9.875%, Due 8/10/2011 ......................................... 250 258 GenCorp, Inc., 9.50%, Due 8/15/2013 ............................. 1,500 1,560 General Motors Acceptance Corp., 6.875%, Due 9/15/2011 ......................................... 3,525 3,549 6.75%, Due 12/1/2014 + ........................................ 600 595 General Motors Corp., 7.70%, Due 4/15/2016 + .................... 1,300 1,159 Graphic Packaging International Corp., 8.50%, Due 8/15/2011 .......................................... 100 103 9.50%, Due 8/15/2013 .......................................... 200 205 The Greenbrier Companies, Inc., 8.375%, Due 5/15/2015 ........... 1,625 1,645 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ----------- ----------- (DOLLARS IN THOUSANDS) GSC Holdings Corp., 8.00%, Due 10/1/2012 ........................ $ 200 $ 207 GST Equipment Funding, Inc., 13.25%, Due 5/1/2007 ^ ss. * ....... 2,500 -- Intertape Polymer US, Inc., 8.50%, Due 8/1/2014 ................. 1,300 1,170 Jacuzzi Brands, Inc., 9.625%, Due 7/1/2010 ...................... 1,060 1,136 Jefferson Smurfit Corp., 8.25%, Due 10/1/2012 + ................. 1,000 970 Kinetek, Inc., 10.75%, Due 11/15/2006 ........................... 3,000 3,000 MGM Mirage, 6.625%, Due 7/15/2015 ............................... 500 473 NBTY, Inc., 7.125%, Due 10/1/2015 ............................... 1,800 1,751 Nell AF SARL, 8.375%, Due 8/15/2015 + ++ ........................ 1,800 1,827 Nortek, Inc., 8.50%, Due 9/1/2014 ............................... 200 191 Owens-Brockway Glass Containers, Inc., 8.75%, Due 11/15/2012 ......................................... 1,500 1,583 8.25%, Due 5/15/2013 .......................................... 1,000 1,030 6.75%, Due 12/1/2014 .......................................... 1,050 1,008 Pinnacle Entertainment, Inc., 8.25%, Due 3/15/2012 .............. 100 101 Pipe Acquisition Finance PLC, 11.67%, Due 12/15/2010 ++ # ....... 1,100 1,111 Plastipak Holdings, Inc., 8.50%, Due 12/15/2015 ++ .............. 1,475 1,527 Polypore, Inc., 8.75%, Due 5/15/2012 + .......................... 725 709 RBS Global, Inc., 9.50%, Due 8/1/2014 ++ ........................ 200 207 Reynolds American, Inc., 7.625%, Due 6/1/2016 ++ ................ 400 425 Samsonite Corp., 8.875%, Due 6/1/2011 ........................... 2,500 2,619 Sanmina-SCI Corp., 8.125%, Due 3/1/2016 ......................... 300 295 Smurfit Kappa Funding PLC, 7.75%, Due 4/1/2015 .................. 200 188 Solectron Corp., 7.97%, Due 11/15/2006 ......................................... 1,500 1,507 8.00%, Due 3/15/2016 .......................................... 300 302 Stewart & Stevenson LLC, 10.00%, Due 7/15/2014 ++ ............... 1,000 1,012 Superior Essex Communications, 9.00%, Due 4/15/2012 ............. 2,400 2,454 Terex Corp., 9.25%, Due 7/15/2011 .......................................... 1,000 1,050 7.375%, Due 1/15/2014 + ....................................... 1,760 1,786 United Rentals North America, Inc., 6.50%, Due 2/15/2012 .......................................... 1,650 1,609 7.75%, Due 11/15/2013 + ....................................... 1,800 1,795 WCA Waste Corp., 9.25%, Due 6/15/2014 ++ ........................ 1,000 1,035 ----------- 68,009 ----------- MATERIALS - 8.67% Abitibi-Consolidated, Inc., 6.00%, Due 6/20/2013 .......................................... 1,000 795 8.375%, Due 4/1/2015 .......................................... 300 261 BCI US Finance Corp., 10.874%, Due 7/15/2010 ++ # ............... 2,000 2,040 Compass Minerals International, Inc., Zero Coupon, Due 6/1/2013 ^ # .............................................. 1,825 1,729 Earle M. Jorgensen Co., 9.75%, Due 6/1/2012 ..................... 2,155 2,303 Freeport-McMoRan Copper & Gold, Inc., 6.875%, Due 2/1/2014 ...... 1,500 1,493 Hercules, Inc., 6.75%, Due 10/15/2029 ........................... 1,750 1,693 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ----------- ----------- (DOLLARS IN THOUSANDS) Hexion US Finance Corp/Hexion Nova Scotia Finance ULC, 9.75%, Due 11/15/2014 ++ ...................................... $ 1,000 $ 997 Ineos Group Holdings Plc, 8.50%, Due 2/15/2016 + ++ ............. 2,000 1,925 Lyondell Chemical Co., 10.875%, Due 5/1/2009 + .................. 2,500 2,550 Nalco Co., 8.875%, Due 11/15/2013 ............................... 400 421 Neenah Paper, Inc., 7.375%, Due 11/15/2014 + .................... 2,450 2,328 The Newark Group, Inc., 9.75%, Due 3/15/2014 .................... 2,200 2,156 Novelis, Inc., 8.25%, Due 2/15/2015 ++ .......................... 400 382 OM Group, Inc., 9.25%, Due 12/15/2011 ........................... 1,750 1,824 Phibro Animal Health Corp., 10.00%, Due 8/1/2013 ++ ............. 1,250 1,288 Rhodia SA, 10.25%, Due 6/1/2010 ................................. 2,525 2,860 ----------- 27,045 ----------- MEDIA - 3.48% Advanstar Communications, Inc., 10.75%, Due 8/15/2010 ......................................... 1,500 1,614 12.00%, Due 2/15/2011 ......................................... 1,375 1,442 Allbritton Communications Co., 7.75%, Due 12/15/2012 ............ 1,608 1,616 American Media Operations, Inc., 10.25%, Due 5/1/2009 ........... 1,750 1,662 LBI Media, Inc., 10.125%, Due 7/15/2012 ......................... 1,000 1,064 R.H. Donnelley Corp., 8.875%, Due 1/15/2016 ..................... 300 309 The Sheridan Group, Inc., 10.25%, Due 8/15/2011 ................. 2,125 2,168 WMG Acquisition Corp., 7.375%, Due 4/15/2014 .................... 1,000 978 ----------- 10,853 ----------- REAL ESTATE - 0.07% Forest City Enterprises, Inc., 7.625%, Due 6/1/2015 ............. 200 203 ----------- RETAIL - 2.23% Jostens Holding, 10.25%, Due 12/1/2013 # ........................ 1,900 1,606 Jostens IH Corp., 7.625%, Due 10/1/2012 ......................... 1,050 1,061 Michaels Stores, Inc., 10.00%, Due 11/1/2014 ++ ................. 200 200 Phillips-Van Heusen Corp., 8.125%, Due 5/1/2013 .......................................... 735 766 7.75%, Due 11/15/2023 ......................................... 1,800 1,836 Rafaella Apparel Group, Inc., 11.25%, Due 6/15/2011 ++ .......... 1,500 1,500 ----------- 6,969 ----------- SERVICES - 0.91% Knowledge Learning Corp, Inc., 7.75%, Due 2/1/2015 ++ ........... 3,000 2,843 ----------- TECHNOLOGY - 1.53% Celestica, Inc., 7.875%, Due 7/1/2011 + ......................... 2,000 2,020 NXP b.v., 7.875%, Due 10/15/2014 ++ ............................. 400 406 Sungard Data Systems, Inc., 9.125%, Due 8/15/2013 ......................................... 1,950 2,023 10.25%, Due 8/15/2015 ......................................... 300 314 ----------- 4,763 ----------- See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ----------- ----------- (DOLLARS IN THOUSANDS) TELECOMMUNICATION SERVICES - 2.33% Block Communications, Inc., 8.25%, Due 12/15/2015 ++ ............ $ 2,000 $ 1,970 Cablevision Systems Corp., 8.00%, Due 4/15/2012 ................. 100 97 Dobson Cellular Systems, Inc., 8.375%, Due 11/1/2011 ++ ...................................... 1,800 1,870 9.875%, Due 11/1/2012 ......................................... 300 324 Inmarsat Finance PLC, Zero Coupon, Due 11/15/2012 ............... 300 268 Millicom International Cellular SA, 10.00%, Due 12/1/2013 ....... 300 323 Rural Cellular Corp., 8.25%, Due 3/15/2012 ...................... 1,000 1,029 Stratos Global Corp., 9.875%, Due 2/15/2013 ++ .................. 1,200 1,080 Windstream Corp., 8.625%, Due 8/1/2016 ++ ....................... 300 324 ----------- 7,285 ----------- TELEPHONE - 0.07% Wind Acquisition Finance SA, 10.75%, Due 12/1/2015 ++ ........... 200 222 ----------- TOTAL CORPORATE OBLIGATIONS 293,184 ----------- SHARES ----------- SHORT TERM INVESTMENTS - 4.19% American Beacon Money Market Select Fund @ ...................... 13,082,422 13,082 ----------- SECURITIES LENDING COLLATERAL - 6.49% AIM Short-Term Investment Company Liquid Asset Fund ............. 333,623 334 PAR AMOUNT ----------- Citigroup Global Markets, Inc. Master Note ...................... $ 10,000 10,000 Merrill Lynch Pierce Fenner & Smith, Inc. Tri Party Repo ........ 9,900 9,900 ----------- TOTAL SECURITIES LENDING COLLATERAL 20,234 ----------- TOTAL INVESTMENTS - 104.66% (COST $325,701) $ 326,500 LIABILITIES, NET OF OTHER ASSETS - (4.66%) (14,523) ----------- TOTAL NET ASSETS - 100.00% $ 311,977 =========== Percentages are stated as a percent of net assets. ^ Non-income producing security. + All or a portion of this security is on loan at October 31, 2006. ++ Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $55,931 or 17.93% of net assets. The Fund has no right to demand registration of these securities. # The coupon rate shown on floating or adjustable rate securities represents the rate at period end. The due date on these types of securities reflects the final maturity date. ss. In Default * Valued at fair value pursuant to procedures approved by the Board of Trustees. @ The Fund/Trust is affiliated by having the same investment advisor. See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) COMMON STOCKS - 4.55% CONSUMER DISCRETIONARY - 0.62% AUTOMOBILES - 0.28% Harley-Davidson, Inc. + ....................... 5,180 $ 356 ------------ SPECIALTY RETAIL - 0.34% The Home Depot, Inc. .......................... 11,500 429 ------------ TOTAL CONSUMER DISCRETIONARY 785 ------------ FINANCIALS - 0.89% DIVERSIFIED FINANCIALS - 0.68% The Goldman Sachs Group, Inc. + ............... 4,500 854 ------------ INSURANCE - 0.21% Manulife Financial Corp. + .................... 8,250 268 ------------ TOTAL FINANCIALS 1,122 ------------ HEALTH CARE - 0.25% PHARMACEUTICALS - 0.25% Pfizer, Inc. .................................. 11,500 306 ------------ INDUSTRIALS - 0.27% COMMERCIAL SERVICES & SUPPLIES - 0.27% Manpower, Inc. ................................ 5,000 339 ------------ INFORMATION TECHNOLOGY - 2.52% COMMUNICATIONS EQUIPMENT - 0.80% Cisco Systems, Inc. ^ ......................... 21,180 511 Nokia Corp., ADR .............................. 25,000 497 ------------ 1,008 ------------ IT CONSULTING & SERVICES - 0.74% Cognizant Technology Solutions Corp. ^ ........ 4,000 301 Infosys Technologies Ltd., ADR + .............. 12,200 636 ------------ 937 ------------ SEMICONDUCTOR EQUIPMENT & PRODUCTS - 0.40% Atmel Corp. ^ ................................. 86,500 497 ------------ SOFTWARE - 0.29% Oracle Corp. ^ ................................ 20,000 369 ------------ TECHNOLOGY - 0.29% BEA Systems, Inc. ^ ........................... 22,000 358 ------------ TOTAL INFORMATION TECHNOLOGY 3,169 ------------ TOTAL COMMON STOCKS 5,721 ------------ SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) CONVERTIBLE PREFERRED STOCKS - 3.22% FINANCIALS - 2.65% BANKS - 0.31% Washington Mutual, Inc. + ..................... 7,200 $ 389 ------------ DIVERSIFIED FINANCIALS - 1.03% Lazard Ltd. ................................... 10,250 376 Lehman Brothers Holdings, Inc. + .............. 15,300 421 Morgan Stanley Group, Inc. .................... 11,500 499 ------------ 1,296 ------------ INSURANCE - 1.31% Genworth Financial, Inc. ...................... 16,300 588 MetLife, Inc. ................................. 21,000 622 Travelers Property Casualty Corp. + ........... 17,250 448 ------------ 1,658 ------------ TOTAL FINANCIALS 3,343 ------------ INDUSTRIALS - 0.57% General Motors Corp. .......................... 30,000 712 ------------ TOTAL CONVERTIBLE PREFERRED STOCKS 4,055 ------------ PAR AMOUNT ------------ CORPORATE OBLIGATIONS - 33.72% BANKS - 6.83% Banco Popular North America, Inc., 4.25%, Due 4/1/2008 ................................. $ 300 294 Bank of America Corp., 3.375%, Due 2/17/2009 .................................... 350 337 Bank One Corp., 4.90%, Due 4/30/2015 .......... 350 337 Capital One Bank, 4.25%, Due 12/1/2008 ......................... 1,000 980 5.125%, Due 2/15/2014 ........................ 330 325 Citigroup, Inc., 5.125%, Due 2/14/2011 + ...... 1,000 1,000 Credit Suisse First Boston, 6.50%, Due 5/1/2008 ++ .................................. 500 509 ING Bank, NV, 5.125%, Due 5/1/2015 ++ ......... 300 294 National City Bank, 4.50%, Due 3/15/2010 ...... 1,500 1,464 Synovus Financial Corp., 4.875%, Due 2/15/2013 .................................... 350 343 Wachovia Corp., 6.40%, Due 4/1/2008 ........... 1,500 1,525 Washington Mutual, Inc., 8.25%, Due 4/1/2010 .......................... 500 542 4.625%, Due 4/1/2014 ......................... 700 656 ------------ 8,606 ------------ See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 PAR AMOUNT VALUE ------------ ------------ (DOLLARS IN THOUSANDS) BEVERAGES - 0.24% Constellation Brands, Inc., 7.25%, Due 9/1/2016 ..................................... $ 300 $ 305 ------------ COMMUNICATIONS - 0.63% Comcast Cable Communications Holdings, Inc., 8.375%, Due 3/15/2013 .................. 700 800 ------------ CONSUMER DISCRETIONARY - 0.38% Supervalu, Inc., 7.50%, Due 11/15/2014 ........ 325 331 Wesco Distribution, Inc., 7.50%, Due 10/15/2017 ................................... 150 151 ------------ 482 ------------ ELECTRIC/GAS - 0.62% MidAmerican Energy Holdings Co., 3.50%, Due 5/15/2008 ................................ 800 779 ------------ FINANCE - 8.76% American General Finance Corp., 4.875%, Due 5/15/2010 ................................ 300 296 The Bear Stearns Cos., Inc., 2.875%, Due 7/2/2008 ..................................... 800 771 Countrywide Home Loans, Inc., 3.25%, Due 5/21/2008 + .................................. 1,000 971 E*Trade Financial Corp., 7.375%, Due 9/15/2013 ........................ 150 154 7.875%, Due 12/1/2015 ........................ 300 317 General Electric Capital Corp., 4.125%, Due 3/4/2008 ..................................... 2,000 1,973 The Goldman Sachs Group, Inc., 4.75%, Due 7/15/2013 .................................... 350 338 HSBC Finance Corp., 5.25%, Due 1/14/2011 ...... 2,200 2,204 International Lease Finance Corp., 6.375%, Due 3/15/2009 ................................ 725 743 Lehman Brothers Holdings, Inc., 4.25%, Due 1/27/2010 .................................... 1,000 972 Merrill Lynch & Co., Inc., 6.00%, Due 2/17/2009 .................................... 1,000 1,017 SLM Corp., 4.00%, Due 1/15/2009 ............... 1,300 1,268 ------------ 11,024 ------------ HEALTH CARE - 0.21% Tenet Healthcare Corp., 9.25%, Due 2/1/2015 ..................................... 275 261 ------------ INDUSTRIALS - 6.58% AmeriPath, Inc., 10.50%, Due 4/1/2013 ......... 400 430 BHP Billiton Finance USA Ltd., 4.80%, Due 4/15/2013 .................................... 350 340 Bunge Ltd Finance Corp., 7.80%, Due 10/15/2012 ........................ 200 219 PAR AMOUNT VALUE ------------ ------------ (DOLLARS IN THOUSANDS) 5.35%, Due 4/15/2014 ....................... $ 250 $ 242 Caterpillar Financial Services Corp., 4.15%, Due 1/15/2010 ................................ 1,000 970 Cisco Systems, Inc., 5.25%, Due 2/22/2011 ..... 350 352 DaimlerChrysler NA Holding Corp., 4.75%, Due 1/15/2008 ......................... 325 322 5.875%, Due 3/15/2011 ........................ 350 353 DirecTV Holdings LLC/DirecTV Financing Co. 8.375%, Due 3/15/2013 ........................ 300 311 Dole Food Co., Inc., 8.875%, Due 3/15/2011 + .................................. 142 135 DST Systems, Inc., 3.625%, Due 8/15/2023 ...... 485 644 EOG Resources, Inc., 4.75%, Due 3/15/2014 ++ .. 350 337 Equistar Chemicals, LP, 10.625%, Due 5/1/2011 ..................................... 400 428 Expedia, Inc., 7.456%, Due 8/15/2018 .......... 300 313 Ford Motor Credit Co., 8.625%, Due 11/1/2010 .................................... 285 284 Gardner Denver, Inc., 8.00%, Due 5/1/2013 ..... 300 313 GSC Holdings Corp., 8.00%, Due 10/1/2012 + .... 225 233 John Deere Capital Corp., 4.125%, Due 1/15/2010 .................................... 1,000 969 NBTY, Inc., 7.125%, Due 10/1/2015 ............. 150 146 Nissan Motor Acceptance Corp., 4.625%, Due 3/8/2010 ++ .............................. 590 575 Union Pacific Corp., 6.50%, Due 4/15/2012 + ... 350 370 ----------- 8,286 ----------- INSURANCE - 4.61% Aegon Funding Corp., 5.75%, Due 12/15/2020 .... 350 356 ASIF Global Financing, 3.90%, Due 10/22/2008 ++ ................................ 500 488 Genworth Global Funding Trusts, 5.125%, Due 3/15/2011 ................................ 1,000 999 John Hancock Global FDG II, 3.75%, Due 9/30/2008 ++ ................................. 1,000 973 Lincoln National Corp., 4.75%, Due 2/15/2014 .................................... 200 190 MassMutual Global Funding II, 3.80%, Due 4/15/2009 ++ ................................. 1,000 970 Metropolitan Life Global Funding I, 4.625%, Due 8/19/2010 ++ ............................. 1,500 1,471 Prudential Financial, Inc., 4.50%, Due 7/15/2013 .................................... 375 357 ----------- 5,804 ----------- MATERIALS - 0.34% Freeport-McMoRan Copper & Gold, Inc., 10.125%, Due 2/1/2010 .................. 400 423 ----------- REAL ESTATE - 1.54% EOP Operating Limited Partnership, 4.75%, Due 3/15/2014 ................................ 350 333 - -------------------------------------------------------------------------------- See accompanying notes AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ------------ ------------ (DOLLARS IN THOUSANDS) iStar Financial, Inc., 5.875%, Due 3/15/2016 + .................................. $ 500 $ 498 ProLogis, 5.50%, Due 4/1/2012 ................. 350 350 Simon Property Group LP, 6.375%, Due 11/15/2007 ....................... 400 404 5.375%, Due 6/1/2011 ......................... 350 351 ----------- 1,936 ----------- TECHNOLOGY - 0.46% Celestica, Inc., 7.875%, Due 7/1/2011 + ....... 260 263 Sungard Data Systems, Inc., 9.125%, Due 8/15/2013 .................................... 300 311 ----------- 574 ----------- TELEPHONE - 2.52% AT&T, Inc., 5.625%, Due 6/15/2016 + ........... 350 350 France Telecom SA, 7.75%, Due 3/1/2011 ........ 680 747 Sprint Capital Corp., 6.00%, Due 1/15/2007 ......................... 1,200 1,200 8.375%, Due 3/15/2012 ........................ 350 394 Syniverse Technologies, Inc., 7.75%, Due 8/15/2013 .................................... 200 192 Telefonos de Mexico, S.A. de C.V., 5.50%, Due 1/27/2015 ................................ 300 292 ----------- 3,175 ----------- TOTAL CORPORATE OBLIGATIONS 42,455 ----------- CONVERTIBLE OBLIGATIONS - 13.27% BANKS - 0.54% Bank of America Corp., 0.25%, Due 1/26/2010 .................................... 265 279 Deutsche Bank Luxembourg SA, 5.689%, Due 5/1/2012 ++ # ................................ 110 132 Wachovia Corp., 0.25%, Due 12/15/2010 ......... 280 266 ----------- 677 ----------- COMMUNICATIONS - 1.07% Liberty Media LLC, 0.75%, Due 3/30/2023 ....... 505 597 Omnicom Group, Inc., Zero Coupon, Due 7/1/2038 ^ ................................... 700 745 ----------- 1,342 ----------- CONSUMER DISCRETIONARY - 1.17% Alza Corp., Zero Coupon, Due 7/28/2020 ^ ...... 350 324 Carnival Corp., 2.00%, Due 4/15/2021 .......... 510 650 Laboratory Corp of America Holdings, Zero Coupon, Due 9/11/2021 ^ ....................... 375 346 United Auto Group, Inc., 3.50%, Due 4/1/2026 ++ .................................. 135 154 ----------- 1,474 ----------- PAR AMOUNT VALUE ------------ ------------ (DOLLARS IN THOUSANDS) ELECTRIC UTILITIES - 0.42% CenterPoint Energy, Inc., 3.75%, Due 5/15/2023 .................................... $ 390 $ 533 ----------- ENERGY - 0.52% Schlumberger Ltd., 2.125%, Due 6/1/2023 ....... 400 660 ----------- FINANCE - 0.57% American Financial Group, Inc., 1.486%, Due 6/2/2033 ................................. 625 350 Fortis Insurance NV, 7.75%, Due 1/26/2008 ++ .. 275 374 ----------- 724 ----------- HEALTH CARE - 0.44% Advanced Medical Optics, Inc., 2.50%, Due 7/15/2024 ......................... 300 311 3.25%, Due 8/1/2026 ++ ....................... 250 243 ----------- 554 ----------- HOTELS, RESTAURANTS & LEISURE - 0.13% International Game Technology, Inc., Zero Coupon, Due 1/29/2033 ^ ...................... 175 158 ----------- INDUSTRIALS - 4.72% Alliant Techsystems, Inc., 2.75%, Due 9/15/2011 ++ ................................. 320 322 Armor Holdings, Inc., 2.00%, Due 11/1/2024 .... 275 318 Best Buy Co., Inc., 2.25%, Due 1/15/2022 + .... 120 149 CSG Systems International, Inc., 2.50%, Due 6/15/2024 .................................... 275 314 CSX Corp., Zero Coupon, Due 10/30/2021 ^ ...... 315 404 Danaher Corp., Zero Coupon, Due 1/22/2021 ^ .................................. 320 337 Fisher Scientific International, Inc., 3.25%, Due 3/1/2024 + ............................... 700 867 Grey Wolf, Inc., 5.322%, Due 4/1/2024 # ....... 215 278 Kaydon Corp., 4.00%, Due 5/23/2023 ............ 115 170 Lockheed Martin Corp., 5.155%, Due 8/15/2033 + # ................................ 515 654 Nabors Industries, Inc., Zero Coupon, Due 6/15/2023 ^ .................................. 280 298 Regal-Beloit Corp., 2.75%, Due 3/15/2024 ...... 210 406 SEACOR Holdings, Inc., 2.875%, Due 12/15/2024 ................................... 400 541 Vishay Intertechnology, Inc., 3.625%, Due 8/1/2023 ..................................... 150 149 The Walt Disney Co., 2.125%, Due 4/15/2023 + .................................. 650 739 ----------- 5,946 ----------- INFORMATION TECHNOLOGY - 1.30% Amdocs Ltd., 0.50%, Due 3/15/2024 + ........... 285 301 - -------------------------------------------------------------------------------- See accompanying notes AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ------------ ------------ (DOLLARS IN THOUSANDS) Cadence Design Systems, Inc., Zero Coupon, Due 8/15/2023 ^ ...................... $ 260 $ 309 CommScope, Inc., 1.00%, Due 3/15/2024 ......... 140 216 Electronic Data Systems Corp., 3.875%, Due 7/15/2023 .................................... 250 255 Symantec Corp., 0.75%, Due 6/15/2011 ++ ....... 480 555 ------------ 1,636 ------------ PHARMACEUTICALS - 0.86% Allergan, Inc., 1.50%, Due 4/1/2026 ++ ........ 260 276 Gilead Sciences, Inc., 0.50%, Due 5/1/2011 ++ .............................. 550 579 Valeant Pharmaceuticals International, 4.00%, Due 11/15/2013 + ....... 240 230 ------------ 1,085 ------------ SERVICES - 0.49% priceline.com, Inc., 0.50%, Due 9/30/2011 ++ ...................... 160 180 2.25%, Due 1/15/2025 ......................... 140 171 Quanta Services, Inc., 4.50%, Due 10/1/2023 ......................... 55 96 3.75%, Due 4/30/2026++ ....................... 150 163 ------------ 610 ------------ TECHNOLOGY - 0.23% SanDisk Corp., 1.00%, Due 5/15/2013 + ......... 320 290 ------------ TELEPHONE - 0.81% NII Holdings, Inc., 2.75%, Due 8/15/2025++ .... 700 1,024 ------------ TOTAL CONVERTIBLE OBLIGATIONS 16,713 ------------ NON-AGENCY MORTGAGE-BACKED OBLIGATIONS - 1.78% COMMERCIAL MORTGAGE-BACKED SECURITY - 0.79% Banc of America Commercial Mortgage, Inc., 2005-6, 5.001%, Due 9/10/2047 .......... 717 715 JP Morgan Chase Commercial Mortgage Securities Corp., 4.655%, Due 8/15/2042 ...... 287 285 ------------ 1,000 ------------ WHOLE LOAN COLLATERALIZED MORTGAGE OBLIGATIONS - 0.99% Capital One Multi-Asset Execution Trust, 2006 A, 5.15%, Due 6/15/2014 .......... 1,000 1,008 JP Morgan Chase Commercial Mortgage Securities Corp., 4.613%, Due 10/15/2042 ..... 235 233 ------------ 1,241 ------------ TOTAL NON-AGENCY MORTGAGE-BACKED OBLIGATIONS 2,241 ------------ ASSET-BACKED SECURITIES - 9.55% AUTO LOAN - 2.38% Banc of America Securities Auto Trust, 2005-WF1, 4.08%, Due 4/18/2010 ........ 1,000 984 PAR AMOUNT VALUE ------------ ------------ (DOLLARS IN THOUSANDS) Chase Manhattan Auto Owner Trust, 2006-A A4, 5.36%, Due 1/15/2013 ..................... $ 2,000 $ 2,016 ------------ 3,000 ------------ OTHER ASSET-BACKED - 7.17% American Express Credit Account Master Trust, 2006-2 A, 5.35%, Due 1/15/2014 ........ 2,000 2,033 Capital Auto Receivables Asset Trust, 2006-1A, 5.32%, Due 3/20/2010 ++ ...... 2,000 2,007 Harley-Davidson Motorcycle Trust, 2005-1, 3.76%, Due 12/17/2012 ........................ 1,000 982 HSBC Automotive Trust, 2005-1, 4.35%, Due 6/18/2012 .................................... 1,000 984 John Deere Owner Trust, 2006-A Class A4, 5.39%, Due 6/17/2013 ......................... 2,000 2,024 Volkswagen Auto Loan Enhanced Trust, 2005-1, 4.86%, Due 4/20/2012 .......... 1,000 996 ------------ 9,026 ------------ TOTAL ASSET-BACKED SECURITIES 12,026 ------------ U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS - 1.18% FEDERAL NATIONAL MORTGAGE ASSOCIATION - 0.48% Pool # 545759, 6.50%, Due 7/1/2032 ........... 593 608 ------------ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.70% Pool # 780921, 7.00%, Due 11/15/2013 ......... 220 227 2006-9 A, 4.201%, Due 8/16/2026 .............. 668 652 ------------ 879 ------------ TOTAL U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS 1,487 ------------ U.S. AGENCY OBLIGATIONS - 2.08% FEDERAL HOME LOAN MORTGAGE CORPORATION - 1.66% 5.50%, Due 7/18/2016 + ....................... 2,000 2,081 ------------ FEDERAL NATIONAL MORTGAGE ASSOCIATION - 0.42% 6.625%, Due 11/15/2010 ....................... 500 532 ------------ TOTAL U.S. AGENCY OBLIGATIONS .................. 2,613 ------------ U.S. TREASURY OBLIGATIONS - 20.37% U.S. TREASURY BONDS - 0.83% 8.75%, Due 8/15/2020 + ....................... 750 1,049 ------------ U.S. TREASURY NOTES - 19.54% 3.875%, Due 5/15/2010 + ...................... 2,000 1,954 4.875%, Due 4/30/2011 + ...................... 4,350 4,402 4.375%, Due 8/15/2012 + ...................... 7,000 6,936 4.00%, Due 2/15/2014 ......................... 5,000 4,817 4.75%, Due 5/15/2014 + ....................... 3,550 3,586 - -------------------------------------------------------------------------------- See accompanying notes AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ------------ ------------ (DOLLARS IN THOUSANDS) 4.875%, Due 8/15/2016 + ...................... $ 2,850 $ 2,909 ------------ 24,604 ------------ TOTAL U.S. TREASURY OBLIGATIONS 25,653 ------------ SHARES ------------ SHORT TERM INVESTMENTS - 9.47% American Beacon Money Market Select Fund ss. .................................... 11,924,150 11,924 ------------ SECURITIES LENDING COLLATERAL - 21.41% American Beacon Cash Plus Trust ss. .......... 18,552,806 18,553 American Beacon Money Market Select Fund ss. .................................... 8,408,509 8,408 ------------ TOTAL SECURITIES LENDING COLLATERAL 26,961 ------------ TOTAL INVESTMENTS 120.60% - (COST $148,579) 151,849 LIABILITIES, NET OF OTHER ASSETS - (20.60%) (25,934) ------------ TOTAL NET ASSETS - 100.00% $ 125,915 ============ Percentages are stated as a percent of net assets. ^ Non-income producing security. + All or a portion of this security is on loan at October 31, 2006. ++ Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $11,626 or 9.23% of net assets. The Fund has no right to demand registration of these securities. # The coupon rate shown on floating or adjustable rate securities represents the rate at period end. The due date on these types of securities reflects the final maturity date. ss. The Fund/Trust is affiliated by having the same investment advisor. See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) CORPORATE OBLIGATIONS - 28.24% BANKS - 4.70% Banco Popular North America, Inc., 4.25%, Due 4/1/2008 ............................. $ 200 $ 196 Bank of America Corp., 3.375%, Due 2/17/2009 + .......................................................... 200 193 5.375%, Due 8/15/2011 ............................................................ 385 389 Bank One Corp., 5.90%, Due 11/15/2011 ............................................................ 440 452 4.90%, Due 4/30/2015 ............................................................. 200 192 Capital One Bank, 6.70%, Due 5/15/2008 ............................................................. 350 357 5.125%, Due 2/15/2014 + .......................................................... 220 216 Credit Suisse First Boston, 6.50%, Due 5/1/2008 ++ ................................. 350 356 ING Bank, NV, 5.125%, Due 5/1/2015 ++ .............................................. 250 245 National City Bank, 4.50%, Due 3/15/2010 ........................................... 500 488 PNC Funding Corp., 4.20%, Due 3/10/2008 ............................................ 355 349 Synovus Financial Corp., 4.875%, Due 2/15/2013 ..................................... 200 196 Wachovia Corp., 5.70%, Due 8/1/2013 ................................................ 245 251 Washington Mutual Finance Corp., 6.875%, Due 5/15/2011 ............................. 230 246 Washington Mutual, Inc., 8.25%, Due 4/1/2010 .............................................................. 150 163 4.625%, Due 4/1/2014 + ........................................................... 350 328 ---------- 4,617 ---------- COMMUNICATIONS - 1.16% Comcast Cable Communications Holdings, Inc., 8.375%, Due 3/15/2013 ................. 350 400 Comcast Corp., 7.625%, Due 2/15/2008 ............................................................ 230 236 5.30%, Due 1/15/2014 ............................................................. 220 215 Time Warner, Inc., 7.70%, Due 5/1/2032 ............................................. 250 285 ---------- 1,136 ---------- CONSUMER DISCRETIONARY - 1.10% Carnival Corp., 3.75%, Due 11/15/2007 .............................................. 380 373 Wal-Mart Stores, Inc., 4.55%, Due 5/1/2013 .............................................................. 280 271 7.55%, Due 2/15/2030 ............................................................. 350 432 ---------- 1,076 ---------- ELECTRIC/GAS - 2.80% Canadian Natural Resources Ltd., 6.00%, Due 8/15/2016 .............................. 215 218 Columbus Southern Power Co., 5.50%, Due 3/1/2013 ................................... 320 321 FPL Group Capital, Inc., 5.551%, Due 2/16/2008 ............................................................ 230 231 5.625%, Due 9/1/2011 ............................................................. 240 243 MidAmerican Energy Holdings Co., 5.875%, Due 10/1/2012 ............................................................ 405 414 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) 6.125%, Due 4/1/2036 ............................................................. $ 300 $ 309 PSI Energy, Inc., 6.05%, Due 6/15/2016 ............................................. 205 210 Public Service Enterprise Group, Inc., 6.95%, Due 6/1/2012 ......................... 355 377 Puget Sound Energy, Inc., 6.274%, Due 3/15/2037 .................................... 160 165 Xcel Energy, Inc., 7.00%, Due 12/1/2010 ............................................ 250 265 ---------- 2,753 ---------- FINANCE - 4.17% American General Finance Corp., 5.375%, Due 9/1/2009 + ........................................................... 385 387 4.875%, Due 5/15/2010 ............................................................ 200 197 Ameriprise Financial, Inc., 5.35%, Due 11/15/2010 .................................. 335 337 The Bear Stearns Cos., Inc., 2.875%, Due 7/2/2008 .................................. 400 386 General Electric Capital Corp., 4.375%, Due 3/3/2012 ............................... 350 337 The Goldman Sachs Group, Inc., 4.75%, Due 7/15/2013 ................................ 250 241 HSBC Finance Corp., 4.75%, Due 4/15/2010 + ........................................................... 250 247 5.25%, Due 1/14/2011 ............................................................. 800 802 International Lease Finance Corp., 6.375%, Due 3/15/2009 ........................... 250 256 Merrill Lynch & Co., Inc., 6.00%, Due 2/17/2009 ............................................................. 500 508 5.45%, Due 7/15/2014 + ........................................................... 160 161 SLM Corp., 5.45%, Due 4/25/2011 .................................................... 240 241 ---------- 4,100 ---------- INDUSTRIALS - 6.65% Abbott Laboratories, 5.60%, Due 5/15/2011 .......................................... 170 173 Amgen, Inc., 4.00%, Due 11/18/2009 + ............................................... 210 204 Baxter International, Inc., 5.90%, Due 9/1/2016 .................................... 265 273 BHP Billiton Finance USA Ltd., 4.80%, Due 4/15/2013 ................................ 200 194 Bunge Ltd Finance Corp., 7.80%, Due 10/15/2012 ............................................................ 150 164 5.35%, Due 4/15/2014 ............................................................. 100 97 Caterpillar, Inc., 6.05%, Due 8/15/2036 ............................................ 145 152 Cisco Systems, Inc., 5.25%, Due 2/22/2011 ............................................................. 425 428 5.50%, Due 2/22/2016 ............................................................. 270 273 CRH America, Inc., 6.00%, Due 9/30/2016 ............................................ 135 136 DaimlerChrysler NA Holding Corp., 4.75%, Due 1/15/2008 ............................................................. 315 312 5.875%, Due 3/15/2011 ............................................................ 200 201 EOG Resources, Inc., 4.75%, Due 3/15/2014 ++ ....................................... 225 217 John Deere Capital Corp., 5.40%, Due 4/7/2010 ...................................... 235 237 Lockheed Martin Corp., 7.20%, Due 5/1/2036 ......................................... 165 198 Martin Marietta Materials, Inc., 6.90%, Due 8/15/2007 .............................. 300 302 Masco Corp., 6.125%, Due 10/3/2016 ................................................. 135 136 Motorola, Inc., 8.00%, Due 11/1/2011 ............................................... 245 273 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Nissan Motor Acceptance Corp., 5.625%, Due 3/14/2011 ++ ............................ $ 300 $ 302 Northrop Grumman Corp., 4.079%, Due 11/16/2006 ..................................... 150 150 Pemex Project Funding Master Trust, 8.50%, Due 2/15/2008 ........................... 275 285 Schering-Plough Corp., 6.75%, Due 12/1/2033 + ...................................... 340 379 Union Pacific Corp., 3.875%, Due 2/15/2009 ............................................................ 335 325 6.50%, Due 4/15/2012 + ........................................................... 200 211 Weatherford International Ltd., 6.50%, Due 8/1/2036 ................................ 130 133 WellPoint, Inc., 3.75%, Due 12/14/2007 ............................................. 235 231 Weyerhaeuser Co., 5.95%, Due 11/1/2008 ............................................. 210 212 Wyeth Corp., 5.50%, Due 2/1/2014 ................................................... 335 337 ---------- 6,535 ---------- INSURANCE - 2.88% Aegon Funding Corp., 5.75%, Due 12/15/2020 ......................................... 200 203 American International Group, Inc., 6.25%, Due 5/1/2036 ............................ 300 321 ASIF Global Financing, 3.90%, Due 10/22/2008 ++ .................................... 300 293 The Chubb Corp., 4.934%, Due 11/16/2007 ............................................ 355 354 Hartford Financial Services Group, Inc., 5.663%, Due 11/16/2008 .................... 310 312 Lincoln National Corp., 4.75%, Due 2/15/2014 ....................................... 100 95 MetLife, Inc., 5.375%, Due 12/15/2012 ........................................................... 240 242 5.00%, Due 6/15/2015 ............................................................. 170 165 Metropolitan Life Global Funding I, 4.625%, Due 8/19/2010 ++ ....................... 300 294 Prudential Financial, Inc., 3.75%, Due 5/1/2008 .............................................................. 130 127 4.50%, Due 7/15/2013 ............................................................. 225 214 5.10%, Due 9/20/2014 ............................................................. 210 206 ---------- 2,826 ---------- REAL ESTATE - 1.52% EOP Operating Limited Partnership, 4.75%, Due 3/15/2014 ............................ 200 190 Equity Residential, 5.125%, Due 3/15/2016 .......................................... 185 180 iStar Financial, Inc., 5.875%, Due 3/15/2016 + ..................................... 300 299 ProLogis, 5.50%, Due 4/1/2012 ...................................................... 200 200 ProLogis Trust, 7.10%, Due 4/15/2008 ............................................... 220 225 Simon Property Group LP, 6.375%, Due 11/15/2007 ........................................................... 200 202 5.375%, Due 6/1/2011 ............................................................. 200 200 ---------- 1,496 ---------- TELEPHONE - 3.26% America Movil S.A. de C.V., 6.375%, Due 3/1/2035 ................................... 425 416 AT&T, Inc., 5.10%, Due 9/15/2014 ............................................................. 220 214 5.625%, Due 6/15/2016 + .......................................................... 200 200 6.80%, Due 5/15/2036 + ........................................................... 140 151 Cingular Wireless Services, Inc., 8.75%, Due 3/1/2031 .............................. 170 223 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Deutsche Telekom AG, 8.00%, Due 6/15/2010 .......................................... $ 150 $ 164 France Telecom SA, 7.75%, Due 3/1/2011 ............................................. 270 297 Nextel Communications, Inc., 6.875%, Due 10/31/2013 ................................ 290 296 Sprint Capital Corp., 6.00%, Due 1/15/2007 ............................................................. 200 200 8.375%, Due 3/15/2012 ............................................................ 200 225 Telecom Italia S.p.A., 4.00%, Due 11/15/2008 ....................................... 220 214 Telefonica Emisiones SAU, 5.984%, Due 6/20/2011 + .................................. 160 163 Telefonos de Mexico, S.A. de C.V., 5.50%, Due 1/27/2015 ............................ 200 195 Verizon Global Funding Corp., 4.00%, Due 1/15/2008 ................................. 250 246 ---------- 3,204 ---------- TOTAL CORPORATE OBLIGATIONS ........................................................ 27,743 ---------- NON-AGENCY MORTGAGE-BACKED OBLIGATIONS - 8.21% Banc of America Commercial Mortgage, Inc., 2005-6, 5.001%, Due 9/10/2047 ........... 359 358 Banc of America Mortgage Securities, 5.25%, Due 10/25/2019 ......................... 726 720 Bear Stearns Adjustable Rate Mortgage Trust, 2005-11, 4.509%, Due 12/25/2035 # ..... 361 357 Bear Stearns Commercial Mortgage Securities, 2006-PW A4, 5.54%, Due 9/11/2041 ...... 95 97 Bear Stearns Commercial Mortgage Securities, Inc., 5.467%, Due 4/12/2038 ............................................................ 265 269 2004-PWR5, 4.831%, Due 7/11/2042 ................................................. 535 522 2005, 5.127%, Due 10/12/2042 ..................................................... 430 430 Capital One Multi-Asset Execution Trust, 2006 A, 5.15%, Due 6/15/2014 .............. 550 554 Chase Mortgage Finance Corp., 2006A1 A1, 6.072%, Due 9/25/2036 # ................... 1,284 1,287 Chase Mortgage Financial Trust, 2004-S1 A3, 5.50%, Due 2/25/2019 ................... 287 286 Citigroup Commercial Mortgage Trust, 2004-C2, 4.38%, Due 10/15/2041 ................ 470 454 Countrywide Home Loan, Inc., 2005-HYB8, 5.414%, Due 12/20/2035 ..................... 390 390 General Electric Capital Commercial Mortgage Corp., 2003-C2, 4.17%, Due 7/10/20 .... 312 306 JP Morgan Chase Commercial Mortgage Securities Corp., 2004-CBX, 4.529%, Due 11/12/2039 ................................................. 255 248 4.655%, Due 8/15/2042 ............................................................ 164 163 4.613%, Due 10/15/2042 ........................................................... 134 133 4.625%, Due 3/15/2046 ............................................................ 505 498 Prime Mortgage Trust, 2005-2, 5.25%, Due 7/25/2020 ................................. 479 477 Residential Asset Mortgage Products, Inc., 2004-RS12, 3.767%, Due 2/25/2027 ........ 52 51 Wells Fargo Mortgage Backed Securities Trust, 2006-11 A8, 6.00%, Due 9/25/2036 ..... 464 464 ---------- TOTAL NON-AGENCY MORTGAGE-BACKED OBLIGATIONS ....................................... 8,064 ---------- ASSET-BACKED SECURITIES - 1.89% American Express Credit Account Master Trust, 2006-2 A, 5.35%, Due 1/15/2014 ....... 550 559 Capital Auto Receivables Asset Trust, 2006-1A, 5.32%, Due 3/20/2010 ++ ............. 300 301 CarMax Auto Owner Trust, 2005-3, 4.91%, Due 1/18/2011 .............................. 500 498 Volkswagen Auto Loan Enhanced Trust, 2005-1, 4.86%, Due 4/20/2012 .................. 500 498 ---------- TOTAL ASSET-BACKED SECURITIES ...................................................... 1,856 ---------- See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS - 33.17% FEDERAL HOME LOAN MORTGAGE CORPORATION - 9.61% 5.50%, Due 9/1/2017 .............................................................. 267 268 5.00%, Due 3/1/2018 .............................................................. 590 582 5.00%, Due 2/1/2019 .............................................................. 506 499 4.50%, Due 3/1/2019 .............................................................. 713 690 5.00%, Due 10/1/2020 ............................................................. 720 709 5.00%, Due 9/1/2021 .............................................................. 608 599 8.00%, Due 7/1/2027 .............................................................. 131 139 6.50%, Due 9/1/2028 .............................................................. 107 109 6.00%, Due 8/1/2029 .............................................................. 362 366 5.00%, Due 8/1/2033 .............................................................. 864 837 6.00%, Due 8/1/2034 .............................................................. 629 634 5.50%, Due 1/1/2035 .............................................................. 1,010 1,000 6.50%, Due 4/1/2035 .............................................................. 58 60 5.50%, Due 6/1/2035 .............................................................. 978 968 5.00%, Due 8/1/2035 .............................................................. 561 543 5.00%, Due 9/1/2035 .............................................................. 468 452 6.00%, Due 9/1/2036 .............................................................. 982 989 ---------- 9,444 ---------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 20.09% Pool # 323309, 6.00%, Due 9/1/2013 ............................................... 129 131 Pool # 488099, 5.50%, Due 2/1/2014 ............................................... 368 370 Pool # 323789, 6.00%, Due 6/1/2014 ............................................... 147 149 Pool # 545449, 6.50%, Due 2/1/2017 ............................................... 358 366 Pool # 545823, 5.50%, Due 8/1/2017 ............................................... 463 464 Pool # 254545, 5.00%, Due 12/1/2017 .............................................. 1,153 1,139 Pool # 254865, 4.50%, Due 9/1/2018 ............................................... 761 738 Pool # 747824, 5.50%, Due 11/1/2018 .............................................. 215 215 Pool # 747844, 5.50%, Due 12/1/2018 .............................................. 184 185 Pool # 761337, 5.00%, Due 4/1/2019 ............................................... 361 356 Pool # 837219, 4.00%, Due 8/1/2020 ............................................... 542 513 Pool # 811499, 5.00%, Due 9/1/2020 ............................................... 361 356 Pool # 745562, 5.50%, Due 4/1/2021 ............................................... 24 24 Pool # 100293, 9.50%, Due 8/1/2029 ............................................... 132 143 Pool # 555531, 5.50%, Due 6/1/2033 ............................................... 654 648 Pool # 555880, 5.50%, Due 11/1/2033 .............................................. 1,151 1,140 Pool # 725238, 5.00%, Due 3/1/2034 ............................................... 1,089 1,054 Pool # 725866, 4.50%, Due 9/1/2034 ............................................... 591 556 Pool # 793600, 4.988%, Due 9/1/2034 .............................................. 379 375 Pool # 735224, 5.50%, Due 2/1/2035 ............................................... 1,404 1,391 Pool # 835760, 4.50%, Due 9/1/2035 ............................................... 434 407 Pool # 844809, 5.00%, Due 11/1/2035 .............................................. 955 922 Pool # 850280, 5.50%, Due 12/1/2035 .............................................. 500 494 Pool # 849299, 5.50%, Due 1/1/2036 ............................................... 935 925 Pool # 866593, 5.50%, Due 1/1/2036 ............................................... 934 924 Pool # 745418, 5.50%, Due 4/1/2036 ............................................... 956 945 Pool # 872306, 6.50%, Due 5/1/2036 ............................................... 396 404 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Pool # 884032, 6.50%, Due 5/1/2036 ............................................... $ 1,207 $ 1,230 Pool # 256369, 6.00%, Due 8/1/2036 ............................................... 454 457 Pool # 886371, 6.00%, Due 8/1/2036 ............................................... 2,691 2,708 Pool # 893688, 6.00%, Due 10/1/2036 .............................................. 10 10 ---------- 19,739 ---------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 3.47% 2006-9 A, 4.201%, Due 8/16/2026 .................................................. 381 373 Pool # 780615, 6.50%, Due 8/15/2027 .............................................. 309 319 Pool # 780747, 6.50%, Due 3/15/2028 .............................................. 438 451 Pool # 781273, 6.00%, Due 4/15/2031 .............................................. 424 431 Pool # 781564, 6.00%, Due 2/15/2033 .............................................. 432 439 Pool # 781603, 5.00%, Due 5/15/2033 .............................................. 343 335 Pool # 781690, 6.00%, Due 12/15/2033 ............................................. 330 335 Pool # 003515, 5.50%, Due 2/20/2034 .............................................. 727 722 ---------- 3,405 ---------- TOTAL U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS 32,588 ---------- U.S. AGENCY OBLIGATIONS - 4.33% FEDERAL HOME LOAN BANK - 1.02% 5.00%, Due 10/16/2009 ............................................................ 1,005 1,003 ---------- FEDERAL HOME LOAN MORTGAGE CORPORATION - 2.21% 5.25%, Due 2/24/2011 ............................................................. 1,260 1,263 5.625%, Due 3/15/2011 + .......................................................... 500 515 5.875%, Due 3/21/2011 + .......................................................... 380 392 ---------- 2,170 ---------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 1.10% 4.375%, Due 9/15/2012 + .......................................................... 550 536 5.125%, Due 1/2/2014 + ........................................................... 545 544 ---------- 1,080 ---------- TOTAL U.S. AGENCY OBLIGATIONS 4,253 ---------- U.S. TREASURY OBLIGATIONS - 20.10% U.S. TREASURY BONDS - 5.68% 9.125%, Due 5/15/2018 + .......................................................... 300 417 7.875%, Due 2/15/2021 + .......................................................... 750 987 6.25%, Due 8/15/2023 + ........................................................... 650 757 6.875%, Due 8/15/2025 + .......................................................... 370 463 6.25%, Due 5/15/2030 + ........................................................... 950 1,147 4.50%, Due 2/15/2036 + ........................................................... 1,875 1,810 ---------- 5,581 ---------- U.S. TREASURY NOTES - 14.42% 4.875%, Due 5/31/2008 + .......................................................... 845 846 4.875%, Due 8/15/2009 + .......................................................... 685 690 3.50%, Due 11/15/2009 + .......................................................... 1,000 969 3.875%, Due 5/15/2010 + .......................................................... 3,000 2,932 4.875%, Due 4/30/2011 + .......................................................... 650 658 See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) 4.875%, Due 7/31/2011 + .......................................................... $ 1,295 $ 1,311 4.375%, Due 8/15/2012 + .......................................................... 1,500 1,486 4.75%, Due 5/15/2014 + ........................................................... 2,000 2,020 4.875%, Due 8/15/2016 + .......................................................... 3,195 3,261 ---------- 14,173 ---------- TOTAL U.S. TREASURY OBLIGATIONS 19,754 ---------- SHARES ---------- SHORT TERM INVESTMENTS - 2.94% American Beacon Money Market Select Fund ss ........................................ 2,889,649 2,890 ---------- SECURITIES LENDING COLLATERAL - 24.97% American Beacon Cash Plus Trust ss ................................................. 16,881,552 16,882 American Beacon Money Market Select Fund ss ........................................ 7,651,062 7,651 ---------- TOTAL SECURITIES LENDING COLLATERAL 24,533 ---------- TOTAL INVESTMENTS - 123.85% (COST $122,032) $ 121,681 LIABILITIES, NET OF OTHER ASSETS - (23.85%) (23,436) ---------- TOTAL NET ASSETS - 100.00% $ 98,245 ========== Percentages are stated as a percent of net assets. + All or a portion of this security is on loan at October 31, 2006. ++ Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $2,008 or 2.04% of net assets. The Fund has no right to demand registration of these securities. # The coupon rate shown on floating or adjustable rate securities represents the rate at period end. The due date on these types of securities reflects the final maturity date. ss The Fund/Trust is affiliated by having the same investment advisor. See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON SHORT-TERM BOND FUND SCHEDULE OF INVESTMENTS October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) CORPORATE OBLIGATIONS - 64.93% BANKS - 25.44% Bank One Corp., 6.00%, Due 8/1/2008 ............................. $ 2,000 $ 2,031 Capital One Bank, 6.70%, Due 5/15/2008 .......................................... 1,100 1,122 4.25%, Due 12/1/2008 .......................................... 1,000 980 Citigroup, Inc., 4.125%, Due 2/22/2010 .......................... 1,000 972 Comerica Bank, 6.00%, Due 10/1/2008 ............................. 2,200 2,223 FleetBoston Financial Corp., 3.85%, Due 2/15/2008 ............... 2,500 2,456 HSBC Bank USA NA, 3.875%, Due 9/15/2009 ......................... 2,000 1,938 National City Bank, 4.50%, Due 3/15/2010 ........................ 2,000 1,953 National Westminster Bank PLC, 7.375%, Due 10/1/2009 ............ 2,000 2,124 Wachovia Corp., 6.40%, Due 4/1/2008 ............................. 2,500 2,541 Washington Mutual, Inc., 8.25%, Due 4/1/2010 .................... 2,000 2,169 ---------- 20,509 ---------- COMMUNICATIONS - 2.53% Comcast Cable Communications, Inc., 6.20%, Due 11/15/2008 ....... 2,000 2,038 ---------- ELECTRIC/GAS - 1.45% MidAmerican Energy Holdings Co., 3.50%, Due 5/15/2008 ........... 1,200 1,169 ---------- FINANCE - 17.35% The Bear Stearns Cos., Inc., 2.875%, Due 7/2/2008 ............... 2,000 1,928 Countrywide Home Loans, Inc., 3.25%, Due 5/21/2008 .............. 2,000 1,942 Credit Suisse USA, Inc., 4.70%, Due 6/1/2009 + .................. 2,000 1,983 EOP Operating LP, 7.75%, Due 11/15/2007 ......................... 1,000 1,022 General Electric Capital Corp., 4.125%, Due 3/4/2008 ............ 3,000 2,959 Goldman Sachs Group, Inc., 6.65%, Due 5/15/2009 ................. 1,000 1,036 Lehman Brothers Holdings, Inc., 4.25%, Due 1/27/2010 + .......... 1,000 972 SLM Corp., 4.00%, Due 1/15/2009 ................................. 2,200 2,145 ---------- 13,987 ---------- INDUSTRIALS - 6.65% Bunge Limited Finance Corp., 4.375%, Due 12/15/2008 ............. 1,000 977 Caterpillar Financial Services Corp., 4.15%, Due 1/15/2010 ...... 1,000 970 DaimlerChrysler NA Holding Corp., 4.75%, Due 1/15/2008 .......... 2,050 2,031 John Deere Capital Corp., 3.375%, Due 10/1/2007 ................. 1,000 981 Nissan Motor Acceptance Corp., 4.625%, Due 3/8/2010 ++ .......... 410 400 ---------- 5,359 ---------- INSURANCE - 4.25% ASIF Global Financing, 3.90%, Due 10/22/2008 ++ ................. 2,000 1,953 Metropolitan Life Global Funding I, 4.625%, Due 8/19/2010 ++ .... 1,500 1,471 ---------- 3,424 ---------- REAL ESTATE - 2.50% Simon Property Group LP, 6.375%, Due 11/15/2007 ................. 2,000 2,017 ---------- See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON SHORT-TERM BOND FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) TELEPHONE - 4.76% AT&T Corp., 6.00%, Due 3/15/2009 + ............................................ $ 2,000 $ 2,035 Sprint Capital Corp., 6.00%, Due 1/15/2007 .................................... 1,800 1,801 ---------- 3,836 ---------- TOTAL CORPORATE OBLIGATIONS 52,339 ---------- NON-AGENCY MORTGAGE-BACKED OBLIGATIONS - 2.03% Banc of America Commercial Mortgage, Inc., 2005-6, 5.001%, Due 9/10/2047 ...... 717 715 Wachovia Bank Commercial Mortgage Trust, 2006-C23 A1, 5.203%, Due 1/15/2045 ... 918 919 ---------- TOTAL NON-AGENCY MORTGAGE-BACKED OBLIGATIONS 1,634 ---------- ASSET-BACKED SECURITIES - 24.26% Banc of America Securities Auto Trust, 2005-WF1, 4.08%, Due 4/18/2010 ......... 3,000 2,951 Capital Auto Receivables Asset Trust, 2006-1A, 5.32%, Due 3/20/2010 ++ ............................................ 2,000 2,007 2006-1 A4, 5.04%, Due 5/17/2010 ............................................. 550 549 Chase Manhattan Auto Owner Trust, 2006-A A4, 5.36%, Due 1/15/2013 ............. 2,000 2,017 Citibank Credit Card Issuance Trust, 2004-A4, 3.20%, Due 8/24/2009 ............ 3,000 2,950 DaimlerChrysler Auto Trust, 2004-C, 3.28%, Due 12/8/2009 ...................... 3,000 2,935 HSBC Automotive Trust, 2005-1, 4.35%, Due 6/18/2012 ........................... 2,000 1,969 Nissan Auto Receivables Owner Trust, 2004-A, 2.01%, Due 11/15/2007 ............ 44 44 USAA Auto Owner Trust, 2004-1, 2.06%, Due 4/15/2008 ........................... 188 187 Volkswagen Auto Loan Enhanced Trust, 2005-1, 4.86%, Due 4/20/2012 ............. 1,500 1,494 Wells Fargo Financial Auto Owner Trust, 2004-A, 2.67%, Due 8/16/2010 .......... 2,492 2,454 ---------- TOTAL ASSET-BACKED SECURITIES 19,557 ---------- U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS - 5.28% FEDERAL NATIONAL MORTGAGE ASSOCIATION - 1.42% Pool # 313430, 6.50%, Due 3/1/2012 .......................................... 176 179 Pool # 313522, 7.00%, Due 5/1/2012 .......................................... 326 335 Pool # 323980, 6.00%, Due 4/1/2014 .......................................... 336 342 Pool # 545038, 6.00%, Due 9/1/2014 .......................................... 281 285 ---------- 1,141 ---------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 3.86% 2006-18 A, 4.968%, Due 9/15/2008 ............................................ 979 974 Pool # 351992, 6.00%, Due 12/15/2008 ........................................ 278 278 2006-9 A, 4.201%, Due 8/16/2026 ............................................. 1,907 1,863 ---------- 3,115 ---------- TOTAL U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS 4,256 ---------- SHARES ---------- SHORT TERM INVESTMENTS - 2.55% American Beacon Money Market Select Fund # ................................... 2,054,175 2,054 ---------- See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON SHORT-TERM BOND FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) SECURITIES LENDING COLLATERAL - 1.47% American Beacon Cash Plus Trust # ............ $ 814,321 $ 814 American Beacon Money Market Select Fund # ... 369,067 369 ---------- TOTAL SECURITIES LENDING COLLATERAL 1,183 ---------- TOTAL INVESTMENTS - 100.52% (COST $81,508) $ 81,023 LIABILITIES, NET OF OTHER ASSETS - (0.52%) (417) ---------- TOTAL NET ASSETS - 100.00% $ 80,606 ========== Percentages are stated as a percent of net assets. + All or a portion of this security is on loan at October 31, 2006. ++ Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $5,831 or 7.23% of net assets. The Fund has no right to demand registration of these securities. # The Fund/Trust is affiliated by having the same investment advisor. See accompanying notes - -------------------------------------------------------------------------------- (This page intentionally left blank) (LIGHTHOUSE LOGO) See accompanying notes - -------------------------------------------------------------------------------- 75 AMERICAN BEACON FUNDS STATEMENTS OF ASSETS AND LIABILITIES OCTOBER 31, 2006 (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) - -------------------------------------------------------------------------------- <Table> <Caption> LARGE CAP MID-CAP BALANCED GROWTH VALUE ----------- ----------- ---------- ASSETS: Investments in unaffiliated securities, at value(A D).................................................. $ 896,240 $ 77,067 $ 80,876 Investments in affiliated securities, at value(B)..... 254,590 10,273 32,337 Foreign currency, at value(C)......................... -- -- -- Cash.................................................. -- 6 -- Receivable for investments sold....................... 233 733 -- Dividends and interest receivable..................... 4,773 47 113 Receivable for fund shares sold....................... 671 379 775 Receivable for tax reclaims........................... -- -- -- Receivable for expense reimbursement.................. -- -- 4 Net unrealized appreciation on foreign currency contracts........................................... -- -- -- Prepaid expenses...................................... 24 -- 12 ----------- ----------- ---------- TOTAL ASSETS..................................... 1,156,531 88,505 114,117 ----------- ----------- ---------- LIABILITIES: Payable for investments purchased..................... 12,186 731 178 Payable upon return of securities loaned.............. 190,211 5,490 16,716 Payable for fund shares redeemed...................... 43 -- 28 Dividends payable..................................... -- -- -- Payable under excess expense reimbursement plan....... 1 -- 22 Payable for variation margin on open futures contracts........................................... -- -- 75 Management and investment advisory fees payable (Note 2).................................................. 608 109 141 Administrative service and service fees payable....... 51 -- 10 Other liabilities..................................... 112 23 21 ----------- ----------- ---------- TOTAL LIABILITIES................................ 203,212 6,353 17,191 ----------- ----------- ---------- NET ASSETS................................................. $ 953,319 $ 82,152 $ 96,926 =========== =========== ========== ANALYSIS OF NET ASSETS: Paid-in-capital....................................... 752,765 78,104 88,887 Undistributed net investment income................... 19,982 479 479 Accumulated net realized gain (loss).................. 39,250 (3,867) 1,588 Unrealized appreciation (depreciation) of investments, futures contracts and foreign currency.............. 141,322 7,436 5,972 ----------- ----------- ---------- NET ASSETS................................................. $ 953,319 $ 82,152 $ 96,926 =========== =========== ========== Shares outstanding (no par value): Institutional Class................................... 1,427,067 15,969 314,005 =========== =========== ========== PlanAhead Class....................................... 7,499,198 N/A 2,521,851 =========== =========== ========== Service Class......................................... 105,342 N/A N/A =========== =========== ========== AMR Class............................................. 53,538,306 11,809,810 6,099,165 =========== =========== ========== Net asset value, offering and redemption price per share: Institutional Class................................... $ 15.83 $ 6.89 $ 10.81 =========== =========== ========== PlanAhead Class....................................... $ 14.91 N/A $ 10.80 =========== =========== ========== Service Class......................................... $ 14.83 N/A N/A =========== =========== ========== AMR Class............................................. $ 15.27 $ 6.95 $ 10.87 =========== =========== ========== - -------- (A) Cost of investments in unaffiliated securities........ $ 757,561 $ 69,686 $ 75,416 (B) Cost of investments in affiliated securities.......... $ 254,590 $ 10,273 $ 32,337 (C) Cost of foreign currency.............................. $ -- $ -- $ -- (D) Market value of securities on loan.................... $ 187,301 $ 5,409 $ 16,276 </Table> - -------------------------------------------------------------------------------- 76 - -------------------------------------------------------------------------------- <Table> <Caption> SMALL CAP VALUE EMERGING HIGH YIELD ENHANCED INTERMEDIATE SHORT-TERM OPPORTUNITY MARKETS BOND INCOME BOND BOND --------------- ---------- ----------- ----------- ------------ ---------- $ 4,764 $ 147,374 $ 313,418 $ 112,964 $ 94,258 $ 77,786 1,261 20,036 13,082 38,885 27,423 3,237 -- 1,538 -- -- -- -- -- -- 11 -- -- -- 24 1,277 1,158 -- -- -- 3 74 6,869 990 920 735 -- 378 600 565 213 75 -- 6 -- -- -- -- 3 -- -- -- -- -- -- 111 -- -- -- -- -- 9 25 7 8 22 -------- ---------- ----------- ----------- ---------- ---------- 6,055 170,803 335,163 153,411 122,822 81,855 -------- ---------- ----------- ----------- ---------- ---------- 54 931 1,700 341 -- -- 1,211 11,864 20,296 26,961 24,532 1,183 -- 25 228 -- 2 23 -- -- 313 -- -- 1 -- 8 35 -- -- -- -- -- -- -- -- -- 4 367 465 109 21 18 1 5 73 49 1 4 22 64 76 36 21 20 -------- ---------- ----------- ----------- ---------- ---------- 1,292 13,264 23,186 27,496 24,577 1,249 -------- ---------- ----------- ----------- ---------- ---------- $ 4,763 $ 157,539 $ 311,977 $ 125,915 $ 98,245 $ 80,606 ======== ========== =========== =========== ========== ========== 4,598 98,721 314,428 123,582 107,206 90,121 7 1,129 499 (1,012) 502 (304) 8 21,166 (3,748) 75 (9,112) (8,726) 150 36,523 798 3,270 (351) (485) -------- ---------- ----------- ----------- ---------- ---------- $ 4,763 $ 157,539 $ 311,977 $ 125,915 $ 98,245 $ 80,606 ======== ========== =========== =========== ========== ========== 457,373 950,318 22,713,520 N/A 9,711,884 8,397,951 ======== ========== =========== =========== ========== ========== 6,829 339,207 7,865,974 12,281,118 91,721 820,988 ======== ========== =========== =========== ========== ========== N/A N/A N/A N/A N/A N/A ======== ========== =========== =========== ========== ========== N/A 7,711,900 N/A N/A N/A N/A ======== ========== =========== =========== ========== ========== $ 10.26 $ 17.42 $ 10.20 N/A $ 10.02 $ 8.74 ======== ========== =========== =========== ========== ========== $ 10.26 $ 17.22 $ 10.21 $ 10.25 $ 10.09 $ 8.76 ======== ========== =========== =========== ========== ========== N/A N/A N/A N/A N/A N/A ======== ========== =========== =========== ========== ========== N/A $ 17.52 N/A N/A N/A N/A ======== ========== =========== =========== ========== ========== $ 4,614 $ 111,331 $ 312,619 $ 109,694 $ 94,609 $ 78,271 $ 1,261 $ 20,036 $ 13,082 $ 38,885 $ 27,423 $ 3,237 $ -- $ 1,536 $ -- $ -- $ -- $ -- $ 1,177 $ 11,315 $ 19,770 $ 26,456 $ 24,179 $ 1,161 </Table> See accompanying notes - -------------------------------------------------------------------------------- 77 AMERICAN BEACON FUNDS STATEMENTS OF OPERATIONS YEAR ENDED OCTOBER 31, 2006 (IN THOUSANDS) - -------------------------------------------------------------------------------- <Table> <Caption> LARGE CAP MID-CAP BALANCED GROWTH VALUE -------- --------- ------- INVESTMENT INCOME: Dividend income from unaffiliated securities (net of foreign taxes)(A)....................................... $ 11,952 $ 864 $ 923 Dividend income from affiliated securities................ 2,765 174 175 Interest income........................................... 14,590 10 13 Income derived from securities lending, net............... 195 1 22 -------- ------ ------ TOTAL INVESTMENT INCOME.............................. 29,502 1,049 1,133 -------- ------ ------ EXPENSES: Management and investment advisory fees (Note 2).......... 2,393 357 357 Administrative service fees (Note 2): Institutional Class..................................... 41 -- 5 PlanAhead Class......................................... 238 -- 5 Service Class........................................... 2 -- -- AMR Class (formerly Institutional Class prior to 11/30/05)............................................ -- -- 10 Transfer agent fees: Institutional Class..................................... 3 -- -- PlanAhead Class......................................... 26 -- 1 Service Class........................................... -- -- -- AMR Class............................................... 28 5 3 Custody and fund accounting fees.......................... 134 11 7 Professional fees......................................... 38 26 33 Registration fees and expenses............................ 55 -- 24 Service fees: PlanAhead Class (Note 2)................................ 238 -- 5 Service Class (Note 2).................................. 2 -- -- Distribution plan -- Service Class (Note 2)............... 2 -- -- Prospectus and shareholder reports........................ 64 12 10 Other expenses............................................ 112 10 10 -------- ------ ------ TOTAL EXPENSES....................................... 3,376 421 470 -------- ------ ------ Net (fees waived and expenses reimbursed)/recouped by Manager (Note 2)........................................ 1 -- 16 -------- ------ ------ NET EXPENSES......................................... 3,377 421 486 -------- ------ ------ NET INVESTMENT INCOME.......................................... 26,125 628 647 -------- ------ ------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain from:(B) Investments............................................. 42,115 3,495 1,471 Commission recapture (Note 1)........................... 18 3 11 Foreign currency transactions........................... -- -- -- Futures contracts....................................... 2,433 328 767 Change in net unrealized appreciation or depreciation of:(C) Investments............................................. 38,776 3,907 6,100 Foreign currency translations........................... -- -- -- Futures contracts....................................... 3,607 92 434 -------- ------ ------ NET GAIN (LOSS) ON INVESTMENTS....................... 86,949 7,825 8,783 -------- ------ ------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $113,074 $8,453 $9,430 ======== ====== ====== (A) Foreign taxes......................................... $ 39 $ -- $ 2 (B) Net of foreign withholding taxes on capital gains..... $ -- $ -- $ -- (C) Net of unrealized appreciation of foreign withholding taxes on capital gains............................... $ -- $ -- $ -- </Table> - -------- (1) Commencement of Operations March 31, 2006. - -------------------------------------------------------------------------------- 78 - -------------------------------------------------------------------------------- <Table> <Caption> SMALL CAP VALUE EMERGING HIGH YIELD ENHANCED INTERMEDIATE SHORT-TERM OPPORTUNITY(1) MARKETS BOND INCOME BOND BOND - --------------- -------- ---------- -------- ------------ ---------- $ 17 $ 2,906 $ -- $ 191 $ -- $ -- 2 290 841 207 143 121 -- 19 25,895 4,191 4,452 3,216 -- 39 64 29 36 2 ---- ------- ------- ------ ------ ------ 19 3,254 26,800 4,618 4,631 3,339 ---- ------- ------- ------ ------ ------ 8 1,158 1,643 397 232 209 3 37 555 -- -- -- -- 12 241 279 2 23 -- -- -- -- -- -- -- -- -- -- -- -- 2 2 53 -- 10 9 2 5 3 8 4 5 -- -- -- -- -- -- -- 8 -- -- -- -- -- 545 54 18 15 14 24 31 29 20 19 18 40 25 51 17 29 26 -- 12 241 279 3 23 -- -- -- -- -- -- -- -- -- -- -- -- 8 27 32 9 17 13 1 25 31 13 4 4 ---- ------- ------- ------ ------ ------ 88 1,887 2,933 1,040 335 344 ---- ------- ------- ------ ------ ------ (73) 6 35 -- (3) (2) ---- ------- ------- ------ ------ ------ 15 1,893 2,968 1,040 332 342 ---- ------- ------- ------ ------ ------ 4 1,361 23,832 3,578 4,299 2,997 ---- ------- ------- ------ ------ ------ 8 21,238 (3,640) 335 (987) (294) -- -- -- -- -- -- -- 570 -- -- -- -- -- 536 -- -- -- -- 150 15,976 6,614 3,410 1,283 952 -- (1,318) -- -- -- -- -- 285 -- -- -- -- ---- ------- ------- ------ ------ ------ 158 37,287 2,974 3,745 296 658 ---- ------- ------- ------ ------ ------ $162 $38,648 $26,806 $7,323 $4,595 $3,655 ==== ======= ======= ====== ====== ====== $ -- $ 313 $ -- $ -- $ -- $ -- $ -- $ 53 $ -- $ -- $ -- $ -- $ -- $ 122 $ -- $ -- $ -- $ -- </Table> See accompanying notes - -------------------------------------------------------------------------------- 79 AMERICAN BEACON FUNDS STATEMENTS OF CHANGES IN NET ASSETS (IN THOUSANDS) - -------------------------------------------------------------------------------- <Table> <Caption> BALANCED LARGE CAP GROWTH MID-CAP VALUE ------------------- ------------------ ------------------- YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31, ------------------- ------------------ ------------------- 2006 2005 2006 2005 2006 2005 -------- --------- -------- -------- -------- --------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income...................... $ 26,125 $ 20,300 $ 628 $ 588 $ 647 $ 431 Net realized gain (loss) on investments, futures contracts, and foreign currency transactions............................. 44,566 44,346 3,826 3,706 2,249 8,616 Change in net unrealized appreciation or depreciation of investments, futures contracts, and foreign currency translations............................. 42,383 9,553 3,999 (207) 6,534 (1,124) -------- --------- -------- -------- -------- --------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... 113,074 74,199 8,453 4,087 9,430 7,923 -------- --------- -------- -------- -------- --------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class...................... (359) (183) (1) -- (9) -- PlanAhead Class.......................... (2,286) (584) -- -- -- -- Service Class............................ -- -- -- -- -- -- AMR Class*............................... (20,180) (16,172) (376) (474) (481) (115) Net realized gain on investments: Institutional Class...................... (674) (277) -- -- (136) -- PlanAhead Class.......................... (4,591) (930) -- -- -- -- AMR Class*............................... (35,228) (21,970) -- -- (9,132) (3) -------- --------- -------- -------- -------- --------- NET DISTRIBUTIONS TO SHAREHOLDERS..... (63,318) (40,116) (377) (474) (9,758) (118) -------- --------- -------- -------- -------- --------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares.............. 118,740 247,623 24,244 39,712 59,595 164,231 Reinvestment of dividends and distributions............................ 62,858 40,085 376 474 9,756 118 Cost of shares redeemed.................... (91,106) (175,089) (13,832) (35,633) (16,516) (153,362) Redemption fees............................ -- -- -- -- 77 4 -------- --------- -------- -------- -------- --------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS..... 90,492 112,619 10,788 4,553 52,912 10,991 -------- --------- -------- -------- -------- --------- NET INCREASE (DECREASE) IN NET ASSETS........... 140,248 146,702 18,864 8,166 52,584 18,796 -------- --------- -------- -------- -------- --------- NET ASSETS: Beginning of period........................ 813,071 666,369 63,288 55,122 44,342 25,546 -------- --------- -------- -------- -------- --------- END OF PERIOD*............................. $953,319 $ 813,071 $ 82,152 $ 63,288 $ 96,926 $ 44,342 ======== ========= ======== ======== ======== ========= * Includes undistributed net investment income (loss) of......................... $ 19,982 $ 15,755 $ 479 $ 231 $ 479 $ 336 ======== ========= ======== ======== ======== ========= </Table> - -------- (1) Commencement of Operations * Formerly Institutional Class prior to 11/30/05 for Mid-Cap Value Fund - -------------------------------------------------------------------------------- 80 - -------------------------------------------------------------------------------- <Table> <Caption> SMALL CAP VALUE OPPORTUNITY(1) EMERGING MARKETS HIGH YIELD BOND ENHANCED INCOME - --------------- -------------------- ---------------------- -------------------- FROM MARCH 31 YEAR ENDED YEAR ENDED YEAR ENDED TO OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, - --------------- -------------------- ---------------------- -------------------- 2006 2006 2005 2006 2005 2006 2005 - --------------- -------- -------- --------- --------- -------- -------- $ 4 $ 1,361 $ 1,690 $ 23,832 $ 27,142 $ 3,578 $ 3,156 8 22,344 16,180 (3,640) 3,293 335 570 150 14,943 9,392 6,614 (19,461) 3,410 (2,306) ------ -------- -------- --------- --------- -------- -------- 162 38,648 27,262 26,806 10,974 7,323 1,420 ------ -------- -------- --------- --------- -------- -------- -- (163) (39) (16,799) (16,952) -- -- -- (36) (3) (7,065) (10,190) (3,905) (3,495) -- -- -- (1) -- -- -- -- (1,551) (577) -- -- -- -- -- (1,683) (673) (2,254) (4,274) -- -- -- (425) (86) (1,092) (2,693) (14) -- -- (14,022) (6,885) -- -- -- -- ------ -------- -------- --------- --------- -------- -------- -- (17,880) (8,263) (27,211) (34,109) (3,919) (3,495) ------ -------- -------- --------- --------- -------- -------- 4,644 34,209 41,933 161,075 164,045 30,206 31,229 -- 17,795 8,256 23,167 30,574 3,919 3,496 (43) (22,127) (45,081) (208,965) (224,426) (23,955) (24,206) -- 90 2 -- -- -- -- ------ -------- -------- --------- --------- -------- -------- 4,601 29,967 5,110 (24,723) (29,807) 10,170 10,519 ------ -------- -------- --------- --------- -------- -------- 4,763 50,735 24,109 (25,128) (52,942) 13,574 8,444 ------ -------- -------- --------- --------- -------- -------- -- 106,804 82,695 337,105 390,047 112,341 103,897 ------ -------- -------- --------- --------- -------- -------- $4,763 $157,539 $106,804 $ 311,977 $ 337,105 $125,915 $112,341 ====== ======== ======== ========= ========= ======== ======== $ 7 $ 1,129 $ 1,524 $ 499 $ -- $ (1,012) $ (470) ====== ======== ======== ========= ========= ======== ======== </Table> See accompanying notes - -------------------------------------------------------------------------------- 81 AMERICAN BEACON FUNDS STATEMENTS OF CHANGES IN NET ASSETS (IN THOUSANDS) -- CONTINUED - -------------------------------------------------------------------------------- <Table> <Caption> INTERMEDIATE BOND SHORT-TERM BOND -------------------- -------------------- YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, -------------------- -------------------- 2006 2005 2006 2005 -------- -------- -------- -------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income................................ $ 4,299 $ 3,950 $ 2,997 $ 2,629 Net realized gain (loss) on investments, futures contracts, and foreign currency transactions....... (987) 61 (294) (140) Change in net unrealized appreciation or depreciation of investments, futures contracts, and foreign currency translations.............................. 1,283 (2,958) 952 (1,625) -------- -------- -------- -------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................... 4,595 1,053 3,655 864 -------- -------- -------- -------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class (terminated 3/1/05) (Note 1)... -- (13) -- (48) PlanAhead Class.................................... (41) (39) (375) (304) Institutional Class (known as AMR Class prior to 3/1/05) (Note 1)................................ (4,367) (4,163) (3,409) (3,662) -------- -------- -------- -------- NET DISTRIBUTIONS TO SHAREHOLDERS............... (4,408) (4,215) (3,784) (4,014) -------- -------- -------- -------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares........................ 18,558 47,062 13,507 32,831 Reinvestment of dividends and distributions.......... 4,405 4,212 3,775 3,994 Cost of shares redeemed.............................. (19,229) (52,033) (24,812) (37,019) -------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS.................... 3,734 (759) (7,530) (194) -------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS..................... 3,921 (3,921) (7,659) (3,344) -------- -------- -------- -------- NET ASSETS: Beginning of period.................................. 94,324 98,245 88,265 91,609 -------- -------- -------- -------- END OF PERIOD*....................................... $ 98,245 $ 94,324 $ 80,606 $ 88,265 ======== ======== ======== ======== * Includes undistributed net investment income (loss) of................................................. $ 502 $ 1 $ (304) $ (1,843) ======== ======== ======== ======== </Table> - -------------------------------------------------------------------------------- 82 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2006 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES American Beacon Funds (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940 (the "Act"), as amended, as a no load, diversified, open-end management investment company. These financial statements and notes to the financial statements relate to the American Beacon Balanced Fund, the American Beacon Large Cap Growth Fund, the American Beacon Mid-Cap Value Fund, the American Beacon Small Cap Value Opportunity Fund, the American Beacon Emerging Markets Fund, the American Beacon High Yield Bond Fund, the American Beacon Enhanced Income Fund, the American Beacon Intermediate Bond Fund and the American Beacon Short-Term Bond Fund (each a "Fund" and collectively, the "Funds"), each a series of the Trust. American Beacon Advisors, Inc. (the "Manager"), is a wholly-owned subsidiary of AMR Corporation, the parent company of American Airlines, Inc. ("American"), and was organized in 1986 to provide business management, advisory, administrative and asset management consulting services to the Trust and other investors. Class Disclosure Each Fund, except the Enhanced Income Fund, has multiple classes of shares designed to meet the needs of different groups of investors; however, not all Funds offer all classes. The following table sets forth the differences amongst the classes: CLASS: OFFERED TO: SERVICE AND DISTRIBUTION FEES: - ------ ----------- ------------------------------ INSTITUTIONAL CLASS Investors making an initial investment of $2 million Administrative Service Fee -- 0.25% PLANAHEAD CLASS General public and investors investing through an Administrative Service Fee -- 0.25% intermediary Service Fee -- 0.25% SERVICE CLASS Investors investing through an intermediary Administrative Service Fee -- 0.25% Service Fee -- 0.25% Distribution Fee -- 0.25% AMR CLASS Investors in the tax-exempt retirement and benefit N/A plans of AMR Corporation and its affiliates Investment income, net capital gains (losses) and all expenses incurred by the Funds are allocated based on the relative net assets of each class, except for service fees and certain other fees and expenses related solely to one class of shares. Reorganization Effective March 1, 2005, the existing Institutional Class of the Intermediate Bond and Short-Term Bond Funds was terminated, and Institutional Class shares were exchanged for AMR Class shares of each Fund. Following the exchange, the former AMR Class of shares for these Funds was renamed Institutional Class. Effective November 30, 2005, the existing Institutional Class of the Mid- Cap Value Fund was renamed AMR Class, and the Fund began offering a new Institutional Class of shares. Effective February 28, 2006, the Service Class of the High Yield Bond Fund was closed. Security Valuation Investments are valued at the close of the New York Stock Exchange (the "Exchange"), normally 4 p.m. ET, each day that the Exchange is open for business. Equity securities for which market quotations are available are valued at the last sale price or official closing price (closing bid price or last evaluated quote if no sale has occurred) on the primary market or exchange on which they trade. - -------------------------------------------------------------------------------- 83 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- Debt securities (other than short-term securities) normally are valued on the basis of prices provided by an independent pricing service and may take into account appropriate factors such as institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. When a price is unavailable from a pricing service or when the price provided by the pricing service is deemed not to represent fair value, the prices of debt securities may be determined using quotes obtained from brokers. Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. Investment grade short-term obligations with 60 days or less to maturity are valued using the amortized cost method, which approximates market value. Securities for which the market prices are not readily available or are not reflective of the fair value of the security, as determined by the Manager, will be priced at fair value following procedures approved by the Board of Trustees (the "Board"). Most foreign markets close before the Exchange. Developments that could affect the values of securities that occur between the close of a foreign market and the close of the Exchange normally will not be reflected in security valuations. If such developments are so significant such that they will, in the judgment of the pricing committee of the Funds, clearly and materially affect the value of securities, the previous closing prices may be adjusted to reflect the fair value of the securities as of the close of the Exchange, as determined in good faith and pursuant to procedures approved by the Board. Adjustments to closing prices to reflect fair value on affected foreign securities may be provided by an independent pricing service. Security Transactions and Investment Income Security transactions are recorded on the trade date of the security purchase or sale. The Funds may purchase securities with delivery or payment to occur at a later date. At the time the Funds enter into a commitment to purchase a security, the transaction is recorded and the value of the security is reflected in the net asset value. The value of the security may vary with market fluctuations. Dividend income is recorded on the ex-dividend date except certain dividends from foreign securities which are recorded as soon as the information is available to the Funds. Interest income is earned from settlement date, recorded on the accrual basis, and adjusted, if necessary, for accretion of discounts and amortization of premiums. For financial and tax reporting purposes, realized gains and losses are determined on the basis of specific lot identification. Currency Translation All assets and liabilities initially expressed in foreign currency values are converted into U.S. dollar values at the mean of the bid and ask prices of such currencies against U.S. dollars as last quoted by a recognized dealer. Income, expenses and purchases and sales of investments are translated into U.S. dollars at the rate of exchange prevailing on the respective dates of such transactions. The effect of changes in foreign currency exchange rates on investments is separately identified from the fluctuations arising from changes in market values of securities held and is reported with all other foreign currency gains and losses in the Fund's Statement of Operations. Forward Foreign Currency Contracts The Emerging Markets Fund may enter into forward foreign currency contracts to hedge the exchange rate risk on investment transactions or to hedge the value of fund securities denominated in foreign currencies. Forward foreign currency contracts are valued at the forward exchange rate prevailing on the day of valuation. - -------------------------------------------------------------------------------- 84 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- Repurchase Agreements Under the terms of a repurchase agreement, securities are acquired by a Fund from a securities dealer or a bank which are subject to resale at a later date. Repurchase agreements are fully collateralized. The collateral is monitored daily by each Fund so that the collateral's market value equals or exceeds the carrying value of the repurchase agreement, including accrued interest. Futures Contracts Futures contracts are contracts to buy or sell a standard quantity of securities at a specified price on a future date. The Balanced, Large Cap Growth, Mid-Cap Value, Small Cap Value Opportunity, Emerging Markets, High Yield Bond and Enhanced Income Funds may enter into financial futures contracts as a method for keeping assets readily convertible to cash if needed to meet shareholder redemptions or for other needs while maintaining exposure to the stock or bond market, as applicable. The primary risks associated with the use of futures contracts are the possibility of illiquid markets or imperfect correlation between the values of the contracts and the underlying securities, or that the counterparty will fail to perform its obligations. Upon entering into a futures contract, the Fund is required to set aside or deposit with a broker an amount, termed the initial margin, which typically represents 5% of the face value of the futures contract. The Funds reflect this amount on the Schedules of Investments as a U.S. Treasury Bill held as collateral for futures contracts or as a Deposit with broker for futures contracts on the Statement of Assets and Liabilities. Payments to and from the broker, known as variation margin, are required to be made on a daily basis as the price of the futures contract fluctuates. Changes in initial settlement values are accounted for as unrealized appreciation (depreciation) until the contracts are terminated, at which time realized gains and losses are recognized. Futures contracts are valued at the most recent settlement price established each day by the exchange on which they are traded. Dividends to Shareholders Dividends from net investment income of the Balanced, Large Cap Growth, Mid-Cap Value, Small Cap Value Opportunity and Emerging Markets Funds normally will be declared and paid annually. The High Yield Bond, Enhanced Income, Intermediate Bond and Short-Term Bond Funds generally declare dividends from net investment income daily, payable monthly. Distributions, if any, of net realized capital gains are generally paid annually and recorded on the ex-dividend date. Commission Recapture The Funds have established brokerage commission recapture arrangements with certain brokers or dealers. If a Fund's investment advisor chooses to execute a transaction through a participating broker, the broker rebates a portion of the commission back to the Fund. Any collateral benefit received through participation in the commission recapture program is directed exclusively to the Fund. These amounts are reported with the net realized gains in the Fund's Statement of Operations. Allocation of Income, Expenses, Gains and Losses Income, expenses (other than those attributable to a specific class), gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets represented by such class. Operating expenses directly attributable to a specific class are charged against the operations of that class. - -------------------------------------------------------------------------------- 85 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimated. Redemption Fees The Institutional, PlanAhead and AMR Classes of the Emerging Markets Fund impose a 2% redemption fee on certain shares held for less than 90 days, and the AMR Class of the Mid-Cap Value Fund imposes a 2% redemption fee on certain shares held for less than 180 days. The fee is deducted from the redemption proceeds and is intended to offset the trading costs, market impact and other costs associated with short-term trading activity in the Funds. The "first-in, first-out" method is used to determine the holding period. Through April 30, 2006, the fee was retained by the class that imposed the fee. Effective May 1, 2006, the fee is allocated to all classes of each Fund pro-rata based on their respective net assets. Recently Issued Accounting Pronouncements On July 13, 2006, the Financial Accounting Standards Board ("FASB") released FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing each Fund's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At this time, management is evaluating the implications of FIN 48 and its impact on the financial statements has not yet been determined. In September 2006, the FASB issued Statement on Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157"). This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. As of October 31, 2006, the Funds do not believe the adoption of FAS 157 will impact the amounts reported in the financial statements, however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain of the measurements reported in the statement of operations for a fiscal period. Other Under the Trust's organizational documents, its officers and directors are indemnified against certain liability arising out of the performance of their duties to the Trust. In the normal course of business, the Trust enters into contracts that provide indemnification to the other party or parties against potential costs or liabilities. The Trust's maximum exposure under these arrangements is dependent on claims that may be made in the future and, therefore, cannot be estimated. The Trust has had no prior claims or losses pursuant to any such agreement. 2. TRANSACTIONS WITH AFFILIATES Management Agreement The Trust and the Manager are parties to a Management Agreement that obligates the Manager to provide or oversee the provision of all administrative, investment advisory, fund management and securities lending services. - -------------------------------------------------------------------------------- 86 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- Investment assets of the Balanced, Large Cap Growth, Mid-Cap Value, Small Cap Value Opportunity, Emerging Markets, High Yield Bond, Enhanced Income and Intermediate Bond Funds are managed by one or more investment advisors which have entered into separate investment advisory agreements with the Manager. As compensation for performing the duties required under the Management Agreement, the Manager receives from the Balanced Fund, Large Cap Growth Fund, Mid-Cap Value Fund, Small Cap Value Opportunity Fund, Emerging Markets Fund, High Yield Bond Fund and Enhanced Income Fund an annualized fee equal to 0.10% of the average daily net assets plus amounts paid by the Manager to the investment advisors hired by the Manager to direct investment activities of the Funds. The Manager receives an annualized fee of 0.25% of the average daily net assets of the Intermediate Bond Fund and pays a portion of their fee to an investment advisor hired by the Manager to direct investment activities of a portion of the Fund. The Manager serves as the sole investment advisor to the Short-Term Bond Fund. Pursuant to the Management Agreement, the Manager receives from the Fund an annualized fee equal to 0.25% of the average daily net assets of the Short- Term Bond Fund. Management fees paid during the year ended October 31, 2006 were as follows (dollars in thousands): <Table> <Caption> AMOUNTS PAID TO NET AMOUNTS MANAGEMENT MANAGEMENT INVESTMENT RETAINED BY FEE RATE FEE ADVISORS MANAGER ------------ ---------- --------------- ----------- Balanced Fund................................... 0.225%-0.70% $2,393 $1,526 $867 Large Cap Growth Fund........................... 0.35%-0.55% 357 285 72 Mid-Cap Value Fund.............................. 0.40%-1.10% 357 308 49 Small Cap Value Opportunity Fund................ 0.45%-0.55% 8 6 2 Emerging Markets Fund........................... 0.79%-1.20% 1,158 1,019 139 High Yield Bond Fund............................ 0.52% 1,643 1,323 320 Enhanced Income Fund............................ 0.25%-0.85% 397 285 112 Intermediate Bond Fund.......................... 0.25% 232 77 155 </Table> As compensation for services provided by the Manager in connection with securities lending activities, the lending Fund pays to the Manager, with respect to cash collateral posted by borrowers, a fee up to 25% of the net monthly interest income (the gross interest income earned by the investment of cash collateral, less the amount paid to borrowers and related expenses) from such activities and, with respect to loan fees paid by borrowers when a borrower posts collateral other than cash, a fee up to 25% of such loan fees. This fee is netted against securities lending income in the Statement of Operations. During the year ended October 31, 2006, securities lending fees paid to the Manager were as follows (in thousands): <Table> Balanced Fund................................................................... $30 Mid-Cap Value Fund.............................................................. 4 Emerging Markets Fund........................................................... 6 High Yield Bond Fund............................................................ 11 Enhanced Income Fund............................................................ 4 Intermediate Bond Fund.......................................................... 5 </Table> Administrative Services Agreement The Manager and the Trust entered into an Administrative Services Agreement which obligates the Manager to provide or oversee administrative and management services to the Funds. As compensation for performing the duties required under the Administrative Services Agreement, the Manager receives an annualized fee of 0.25% of the average daily net assets of the Institutional, PlanAhead and Service Classes of each of the Funds. Distribution Plans The Trust, except for the Service Class of the Funds, has adopted a "defensive" Distribution Plan (the "Plan") in accordance with Rule 12b-1 under the Act, pursuant to which no fees may be charged to the Funds for distribution purposes. However, the Plan authorizes the management fees received by the Manager and the investment advisors - -------------------------------------------------------------------------------- 87 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- hired by the Manager to be used for distribution purposes. Under this Plan, the Trust does not intend to compensate the Manager or any other party, either directly or indirectly, for the distribution of Trust shares. A separate Distribution Plan (the "Distribution Plan") has been adopted pursuant to Rule 12b-1 under the Act for the Service Class of the Funds. Under the Distribution Plan, as compensation for distribution assistance, the Manager receives an annual fee of 0.25% of the average daily net assets of the Service Class. The fee will be payable without regard to whether the amount of the fee is more or less than the actual expenses incurred in a particular month by the Manager for distribution assistance. Service Plans The Manager and the Trust entered into Service Plans that obligate the Manager to oversee additional shareholder servicing of the PlanAhead and Service Classes. As compensation for performing the duties required under the Service Plans, the Manager receives 0.25% of the average daily net assets of the PlanAhead and Service Classes of each Fund. Brokerage Commissions Affiliated entities of a subadvisor to the Large Cap Growth Fund and the Emerging Markets Fund received net commissions on purchases and sales of the Fund's portfolio securities totaling $262 and $50, respectively for the year ended October 31, 2006. Investment in Affiliated Funds The Funds are permitted, pursuant to an exemptive order by the Securities and Exchange Commission ("SEC") and procedures approved by the Board, to invest up to 25% of its total assets in the American Beacon Money Market Select Fund (the "Select Fund"). Cash collateral received by certain Funds in connection with securities lending may be invested in the Select Fund and the American Beacon Cash Plus Trust formerly the American Beacon Enhanced Cash Trust (the "Cash Trust"). The Funds, the Select Fund and the Cash Trust (collectively, the "Affiliated Funds") have the same investment advisor and therefore, are considered to be affiliated. The Manager serves as investment advisor to the Affiliated Funds and receives from each Affiliated Fund an annualized fee equal to 0.10% of its average daily net assets. During the period, fees earned by the Manager from the Affiliated Funds were as follows: <Table> <Caption> SECURITIES LENDING DIRECT INVESTMENT COLLATERAL INVESTED IN AFFILIATED FUNDS IN AFFILIATED FUNDS TOTAL ------------------- ------------------- -------- Balanced.............................................. $57,978 $149,007 $206,985 Large Cap Growth...................................... 522 2,380 2,902 Mid-Cap Value......................................... 3,484 9,568 13,052 Emerging Markets...................................... 6,121 10,648 16,769 High Yield Bond....................................... 17,249 -- 17,249 Enhanced Income....................................... 4,234 26,525 30,759 Intermediate Bond..................................... 2,947 20,524 23,471 Short-Term Bond....................................... 2,576 3,074 5,650 </Table> Other At October 31, 2006, AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof owned 100% of AMR Class shares of the Funds, 19% of the Institutional Class of the High Yield Bond Fund, 98% of the Institutional Class of the Intermediate Bond Fund and 87% of the Institutional Class of the Short- Term Bond Fund. - -------------------------------------------------------------------------------- 88 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- Interfund Lending Program Pursuant to an exemptive order by the SEC, the Funds, along with other registered investment companies having management contracts with the Manager, may participate in an interfund lending program as a borrower. This program provides an alternative credit facility allowing the Funds to borrow from other participating Funds. For the period ended October 31, 2006, the following Funds had borrowings: <Table> <Caption> WEIGHTED AVERAGE DAYS INTEREST AVERAGE DEBT INTEREST OUTSTANDING CHARGES UTILIZED RATE ----------- -------- ------------ -------- Emerging Markets..................................... 4 $318 $565,077 5.13% High Yield Bond...................................... 2 207 700,341 5.39% </Table> Reimbursement of Expenses The Manager contractually agreed to reimburse the following Funds for other expenses through February 28, 2007 to the extent that total annual fund operating expenses exceed the following amounts: <Table> <Caption> FUND CLASS EXPENSE CAP - ---- ----- ----------- Balanced.......................................................... Service 1.09% Large Cap Growth.................................................. Institutional 0.90% Mid-Cap Value..................................................... Institutional 1.01% Emerging Markets.................................................. PlanAhead 2.00% Intermediate Bond................................................. PlanAhead 0.95% Short-Term Bond................................................... PlanAhead 0.87% </Table> During the year ended October 31, 2006, the Manager contractually waived or reimbursed expenses as follows: <Table> <Caption> FUND CLASS AMOUNT - ---- ----- ------ Balanced............................................................. Service $ 13 Large Cap Growth..................................................... Institutional 87 Mid-Cap Value........................................................ Institutional 2,537 Emerging Markets Fund................................................ PlanAhead 2,926 Intermediate Bond.................................................... PlanAhead 3,303 Short-Term Bond...................................................... PlanAhead 1,925 </Table> During the year ended October 31, 2006, the Manager voluntarily waived or reimbursed expenses as follows in order to maintain expense ratios at or below the levels noted below: <Table> <Caption> EXPENSE FUND CLASS RATIO LIMIT AMOUNT - ---- ----- ----------- ------- Mid-Cap Value................................................ PlanAhead 1.23% $ 2,797 Small Cap Value Opportunity.................................. Institutional 1.06% 70,387 Small Cap Value Opportunity.................................. PlanAhead 1.31% 2,785 </Table> Expense Reimbursement Plan The Funds have adopted an Expense Reimbursement Plan whereby the Manager may seek repayment of fees waived or expenses reimbursed for a period of up to three years. However, reimbursement will occur only if the Class' average net assets have grown or expenses have declined sufficiently to allow reimbursement without - -------------------------------------------------------------------------------- 89 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- causing its expense ratio to exceed the previously agreed upon contractual expense limit. The following waived fees or reimbursed expenses are subject to potential recovery: <Table> <Caption> EXPIRATION YEAR --------------------------- FUND CLASS 2007 2008 2009 - ---- ----- ------- ------ ------ Balanced................................................... Service $ -- $1,650 $ 13 Large Cap Growth........................................... Institutional 78 184 87 Emerging Markets........................................... PlanAhead 399 5,148 2,926 Mid-Cap Value.............................................. Institutional 11,997 7,258 2,537 Mid-Cap Value.............................................. PlanAhead -- -- 2,797 High Yield Bond............................................ Institutional 34,513 62 -- Intermediate Bond.......................................... PlanAhead 172 2,421 3,303 Short-Term Bond............................................ PlanAhead -- -- 1,925 </Table> During the year ended October 31, 2006, the Funds recorded the following liabilities for expected repayment of prior fees waived and expenses reimbursed by the Manager: <Table> <Caption> FUND CLASS AMOUNT - ---- ----- ------- Balanced............................................................. Service $ 938 Emerging Markets..................................................... PlanAhead 8,473 High Yield Bond...................................................... Institutional 34,575 Mid-Cap Value........................................................ Institutional 21,792 </Table> The remaining Funds have not recorded a liability for this potential reimbursement due to the current assessment that a reimbursement is unlikely. 3. FEDERAL INCOME AND EXCISE TAXES It is the policy of each of the Funds to comply with the requirements of Subchapter M of the Internal Revenue Code and to distribute substantially all net investment income as well as any net realized capital gains on the sale of investments. Therefore, no federal income or excise tax provision is required. Dividends are categorized in accordance with income tax regulations which may treat certain transactions differently than U.S. generally accepted accounting principles. Accordingly, the character of distributions and composition of net assets for tax purposes may differ from those reflected in the accompanying financial statements. The tax character of distributions paid for the years ended October 31, 2006 and 2005 were as follows (in thousands): <Table> <Caption> SMALL CAP LARGE CAP MID-CAP VALUE BALANCED GROWTH VALUE OPPORTUNITY ---------------- ------------ ------------ ----------- YEAR ENDED YEAR ENDED YEAR ENDED PERIOD OCTOBER 31, OCTOBER 31, OCTOBER 31, ENDED ---------------- ------------ ------------ OCTOBER 31, 2006 2005 2006 2005 2006 2005 2006 ------- ------- ---- ---- ------ ---- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME Institutional Class.................... $ 405 $ 207 $ 1 $ -- $ 114 $118 $-- PlanAhead Class........................ 2,594 665 -- -- -- -- -- AMR Class.............................. 22,546 18,088 376 474 7,556 -- -- LONG-TERM CAPITAL GAIN Institutional Class.................... 629 253 -- -- 31 -- -- PlanAhead Class........................ 4,282 849 -- -- -- -- -- AMR Class.............................. 32,862 20,054 -- -- 2,057 -- -- ------- ------- ---- ---- ------ ---- --- TOTAL DISTRIBUTIONS PAID.......... $63,318 $40,116 $377 $474 $9,758 $118 $-- ------- ------- ---- ---- ------ ---- --- </Table> - -------------------------------------------------------------------------------- 90 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> EMERGING MARKETS HIGH YIELD BOND ENHANCED INCOME ----------------- ------------------ ---------------- YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31, ----------------- ------------------ ---------------- 2006 2005 2006 2005 2006 2005 ------- ------ ------- ------- ------ ------ DISTRIBUTIONS PAID FROM: ORDINARY INCOME Institutional Class....................... $ 416 $ 39 $16,799 $17,772 $ -- $ -- PlanAhead Class........................... 100 3 7,065 10,707 3,905 3,495 Service Class............................. -- -- 1 -- -- -- AMR Class................................. 3,660 577 -- -- -- -- LONG-TERM CAPITAL GAIN Institutional Class....................... 1,430 673 2,254 3,454 -- -- PlanAhead Class........................... 361 86 1,092 2,176 14 -- Service Class............................. -- -- -- -- -- -- AMR Class................................. 11,913 6,885 -- -- -- -- ------- ------ ------- ------- ------ ------ TOTAL DISTRIBUTIONS PAID............. $17,880 $8,263 $27,211 $34,109 $3,919 $3,495 ------- ------ ------- ------- ------ ------ </Table> <Table> <Caption> INTERMEDIATE BOND SHORT-TERM BOND --------------- --------------- YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, --------------- --------------- 2006 2005 2006 2005 ------ ------ ------ ------ DISTRIBUTIONS PAID FROM: ORDINARY INCOME Institutional Class (terminated 3/1/05).................. $ -- $ 13 $ -- $ 48 PlanAhead Class.......................................... 41 39 375 304 Institutional Class (formerly known as AMR Class prior to 3/1/05)....................................... 4,367 4,163 3,409 3,662 ------ ------ ------ ------ TOTAL DISTRIBUTIONS PAID............................ $4,408 $4,215 $3,784 $4,014 ------ ------ ------ ------ </Table> As of October 31, 2006, the components of distributable earnings on a tax basis were as follows (in thousands): <Table> <Caption> SMALL CAP BALANCED LARGE CAP MID-CAP VALUE EMERGING FUND GROWTH FUND VALUE FUND OPPORTUNITY MARKETS FUND ---------- ----------- ---------- ----------- ------------ Cost basis of investments for federal income tax purposes................................. $1,016,690 $80,169 $108,192 $5,874 $132,435 Unrealized appreciation........................ 141,857 7,739 6,294 261 38,173 Unrealized depreciation........................ (7,717) (568) (1,273) (110) (3,197) ---------- ------- -------- ------ -------- Net unrealized appreciation/(depreciation)..... 134,140 7,171 5,021 151 34,976 Undistributed ordinary income.................. 25,875 480 2,490 15 4,223 Undistributed long-term gain/(loss)............ 40,510 (3,602) 716 -- 19,610 ---------- ------- -------- ------ -------- Distributable earnings......................... $ 200,525 $ 4,049 $ 8,227 $ 166 $ 58,809 ========== ======= ======== ====== ======== </Table> <Table> <Caption> HIGH YIELD ENHANCED INTERMEDIATE SHORT-TERM BOND FUND INCOME FUND BOND FUND BOND FUND ---------- ----------- ------------ ---------- Cost basis of investments for federal income tax purposes........................................... $325,833 $149,750 $122,035 $82,348 Unrealized appreciation.............................. 4,235 3,801 627 163 Unrealized depreciation.............................. (3,568) (1,702) (981) (1,488) -------- -------- -------- ------- Net unrealized appreciation/(depreciation)........... 667 2,099 (354) (1,325) Undistributed ordinary income........................ 811 159 500 536 Undistributed long-term gain/(loss).................. (3,616) 74 (9,110) (8,726) -------- -------- -------- ------- Distributable earnings............................... $ (2,138) $ 2,332 $ (8,964) $(9,515) ======== ======== ======== ======= </Table> Financial reporting records are adjusted for permanent book/tax differences to reflect tax character. Financial records are not adjusted for temporary differences. The temporary differences between financial - -------------------------------------------------------------------------------- 91 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- reporting and tax-basis reporting of unrealized appreciation/(depreciation) are attributable primarily to the tax deferral of losses from wash sales, the realization for tax purposes of unrealized gains/(losses) on certain derivative instruments, book amortization for premiums, the realization for tax purposes of unrealized gains/(losses) on investments in passive foreign investment companies, reclassifications of income from real estate investment securities, and income adjustments associated with contingent payment debt instruments. Due to inherent differences in the recognition of income, expenses and realized gains/losses under U.S. generally accepted accounting principles and federal income tax regulations, permanent differences between book and tax reporting have been identified and appropriately reclassified on the Statement of Assets and Liabilities. Accordingly, the following amounts represent current year permanent differences derived from reclassifications of income from real estate investment securities, foreign currency, book amortization of premium, pay down reclasses, income adjustments associated with contingent payment debt instruments, and dividend reclasses that have been reclassified as of October 31, 2006 (in thousands): <Table> <Caption> LARGE CAP MID-CAP SMALL CAP EMERGING HIGH ENHANCED INTERMEDIATE BALANCED GROWTH VALUE VALUE MARKETS YIELD BOND INCOME BOND FUND FUND FUND OPPORTUNITY FUND FUND FUND FUND -------- --------- ------- ----------- -------- ---------- -------- ------------ Paid-in-capital.... $ 83 $ 1 $ -- $(3) $-- $(537) $ 475 $(501) Undistributed net investment income........... 927 (3) (14) 3 (6) 532 (215) 610 Accumulated net realized gain (loss)........... (1,010) 2 14 -- 6 5 (260) (109) Unrealized appreciation (depreciation) of investments, futures contracts and foreign currency......... -- -- -- -- -- -- -- -- <Caption> SHORT-TERM BOND FUND ---------- Paid-in-capital.... $ (865) Undistributed net investment income........... 2,328 Accumulated net realized gain (loss)........... (1,655) Unrealized appreciation (depreciation) of investments, futures contracts and foreign currency......... 192 </Table> At October 31, 2006 capital loss carryforward positions for federal income tax purposes were as follows (in thousands): <Table> <Caption> FUND 2007 2008 2009 2010 2011 2012 2013 2014 TOTAL - ---- ------ ------ ---- ------ ---- ---- ------ ------ ------ Large Cap Growth....................... $ -- $ -- $-- $2,928 $674 $ -- $ -- $ -- $3,602 High Yield Bond........................ -- -- -- -- -- -- -- 3,616 3,616 Intermediate Bond...................... -- 7,367 -- 328 -- -- 318 1,097 9,110 Short-Term Bond........................ 1,991 1,218 -- 913 161 800 1,256 2,387 8,726 </Table> The Large Cap Growth Fund utilized 2,940 of net capital loss carryovers and the Short-Term Bond Fund had $437 of expired capital loss carryovers for the year ended October 31, 2006. - -------------------------------------------------------------------------------- 92 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- 4. INVESTMENT TRANSACTIONS The cost of purchases and proceeds from sales and maturities of long-term investments during the year ended October 31, 2006 were as follows (in thousands): <Table> <Caption> SMALL CAP LARGE CAP MID-CAP VALUE EMERGING HIGH YIELD ENHANCED INTERMEDIATE BALANCED GROWTH VALUE OPPORTUNITY MKT BOND INCOME BOND -------- --------- ------- ----------- -------- ---------- -------- ------------ Purchases (excluding U.S. government securities)...... $360,932 $132,627 $49,108 $5,368 $96,479 $264,791 $53,065 $78,039 Sales and maturities (excluding U.S. government securities)................. 344,782 122,732 19,178 761 87,826 296,892 54,267 80,232 Purchases of U.S. government securities.................. 183,873 -- -- -- -- -- 18,436 38,133 Sales and maturities of U.S. government securities....... 126,531 -- -- -- -- -- 14,904 31,736 <Caption> SHORT-TERM BOND ---------- Purchases (excluding U.S. government securities)...... $36,277 Sales and maturities (excluding U.S. government securities)................. 41,921 Purchases of U.S. government securities.................. 2,933 Sales and maturities of U.S. government securities....... 4,904 </Table> A summary of the Funds' direct transactions in Affiliated Funds for the year ended October 31, 2006 is set forth below (in thousands): <Table> <Caption> OCTOBER 31, 2005 OCTOBER 31, 2006 FUND AFFILIATE SHARES/MARKET VALUE PURCHASES SALES SHARES/MARKET VALUE - ---- ----------- ------------------- --------- -------- ------------------- Balanced.............................. Select Fund $56,990 $340,952 $333,563 $64,379 Large Cap Growth...................... Select Fund 3,199 35,003 33,419 4,783 Mid-Cap Value......................... Select Fund 2,487 69,783 56,649 15,621 Small Cap Value Opportunity........... Select Fund -- 2,527 2,478 49 Emerging Markets...................... Select Fund 3,699 79,285 74,812 8,172 High Yield Bond....................... Select Fund 8,267 263,774 258,959 13,082 Enhanced Income....................... Select Fund 4,188 67,694 59,958 11,924 Intermediate Bond..................... Select Fund 3,312 48,946 49,368 2,890 Short-Term Bond....................... Select Fund 2,080 41,240 41,266 2,054 </Table> 5. SECURITIES LENDING Each Fund may lend its securities to qualified financial institutions, such as certain broker-dealers, to earn additional income. The borrowers are required to secure their loans continuously with collateral in an amount at least equal to the fair value of the securities loaned and initially in an amount at least equal to 102% of the fair value of domestic securities loaned or 105% of the fair value of international securities loaned. Collateral is marked to market and monitored daily. To the extent that a loan is collateralized by cash, such collateral shall be invested by the securities lending agent (the "Agent") in short-term instruments, money market mutual funds, and such other short-term investments, provided the investments meet certain quality and diversification requirements. The Funds, the Agent and the Manager retain 65%, 25% and 10%, respectively, of the income generated from the investment of cash collateral, less negotiated rebate fees paid to participating brokers and transaction costs. To the extent that a loan is secured by non-cash collateral, brokers pay the Fund negotiated lenders' fees, which are divided between the Fund, the Agent and the Manager 65%, 25% and 10%, respectively. The Fund also continues to receive income on the securities loaned, and any gain or loss in the market price of securities loaned that may occur during the term of the loan. Risks to the Fund in securities lending transactions are that the borrower may not provide additional collateral when required or return the securities when due, and that the value of the short-term investments will be less than the amount of cash collateral required to be returned to the borrower. - -------------------------------------------------------------------------------- 93 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- At October 31, 2006, the value of outstanding securities on loan and the value of collateral was as follows (in thousands): <Table> <Caption> MARKET VALUE OF FUND SECURITIES ON LOAN CASH COLLATERAL - ---- ------------------ --------------- Balanced..................................................... $187,301 $190,211 Large Cap Growth............................................. 5,409 5,490 Mid-Cap Value................................................ 16,276 16,716 Small Cap Value Opportunity.................................. 1,177 1,212 Emerging Markets............................................. 11,315 11,864 High Yield Bond.............................................. 19,770 20,296 Enhanced Income.............................................. 26,456 26,961 Intermediate Bond............................................ 24,179 24,533 Short-Term Bond.............................................. 1,161 1,183 </Table> Cash collateral for each Fund, other than High Yield Bond, was invested in a joint investment account, which is comprised of an investment in the Cash Trust and the Select Fund. The allocated amounts have been included as investments in each Fund's Schedule of Investments and Statement of Assets and Liabilities. Income earned on these investments is reported as Income derived from securities lending in the Statements of Operations. Non-Cash collateral received by the Funds may not be sold or repledged; therefore, non-cash collateral is not included on the Funds' Schedule of Investments or Statement of Assets and Liabilities. 6. CAPITAL SHARE TRANSACTIONS The tables below summarize the activity in capital shares for each Class of the Funds (shares and dollars in thousands): Period Ended October 31, 2006 <Table> <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS ----------------- ------------------ ------------------ ------------------ BALANCED FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - ------------- ------ ------- ------ -------- ------ -------- ------ -------- Shares sold.......................... 557 $ 8,501 3,407 $ 48,140 110 $ 1,538 4,199 $ 60,561 Reinvestment of dividends............ 68 982 474 6,468 -- -- 3,986 55,408 Shares redeemed...................... (139) (2,075) (2,500) (34,990) (5) (72) (3,776) (53,969) ---- ------- ------ -------- ------ -------- ------ -------- Net increase in shares outstanding... 486 $ 7,408 1,381 $ 19,618 105 $ 1,466 4,409 $ 62,000 ==== ======= ====== ======== ====== ======== ====== ======== <Caption> INSTITUTIONAL CLASS AMR CLASS ----------------- ------------------ LARGE CAP GROWTH FUND SHARES AMOUNT SHARES AMOUNT - --------------------- ------ ------- ------ -------- Shares sold.......................... 3 $ 17 3,677 $ 24,227 Reinvestment of dividends............ -- 1 57 375 Shares redeemed...................... (4) (25) (2,103) (13,807) ---- ------- ------ -------- Net increase (decrease) in shares outstanding........................ (1) $ (7) 1,631 $ 10,795 ==== ======= ====== ======== <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS AMR CLASS ----------------- ------------------ ------------------ MID-CAP VALUE FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - ------------------ ------ ------- ------ -------- ------ -------- Shares sold.......................... 379 $ 3,963 2,542 $ 26,510 2,787 $ 29,122 Reinvestment of dividends............ 15 142 -- -- 1,008 9,614 Shares redeemed*..................... (80) (910) (20) (213) (1,477) (15,316) ---- ------- ------ -------- ------ -------- Net increase in shares outstanding... 314 $ 3,195 2,522 $ 26,297 2,318 $ 23,420 ==== ======= ====== ======== ====== ======== * Net of Redemption Fees </Table> - -------------------------------------------------------------------------------- 94 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS -------------------- ------------------ SMALL CAP VALUE OPPORTUNITY FUND SHARES AMOUNT SHARES AMOUNT - -------------------------------- ------- --------- ------ -------- Shares sold.......................... 460 $ 4,562 8 $ 82 Reinvestment of dividends............ -- -- -- -- Shares redeemed...................... (3) (28) (2) (15) ------- --------- ------ -------- Net increase in shares outstanding... 457 $ 4,534 6 $ 67 ======= ========= ====== ======== <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS AMR CLASS -------------------- ------------------ ----------------------- EMERGING MARKETS FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - --------------------- ------- --------- ------ -------- ------ ------------- Shares sold.......................... 385 $ 6,392 304 $ 4,929 1,407 $ 22,888 Reinvestment of dividends............ 123 1,788 30 434 1,066 15,573 Shares redeemed*..................... (176) (2,856) (168) (2,645) (1,016) (16,536) ------- --------- ------ -------- ------ -------- Net increase in shares outstanding... 332 $ 5,324 166 $ 2,718 1,457 $ 21,925 ======= ========= ====== ======== ====== ======== * Net of Redemption Fees <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS -------------------- ------------------ ----------------------- HIGH YIELD BOND FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - -------------------- ------- --------- ------ -------- ------ ------------- Shares sold.......................... 12,050 $ 121,776 3,864 $ 39,258 4 $ 41 Reinvestment of dividends............ 1,484 15,060 798 8,106 -- 1 Shares redeemed...................... (12,034) (121,828) (8,570) (87,093) (4) (44) ------- --------- ------ -------- ------ -------- Net increase (decrease) in shares outstanding........................ 1,500 $ 15,008 (3,908) $(39,729) -- $ (2) ======= ========= ====== ======== ====== ======== <Caption> PLANAHEAD CLASS -------------------- ENHANCED INCOME FUND SHARES AMOUNT - -------------------- ------- --------- Shares sold.......................... 3,012 $ 30,206 Reinvestment of dividends............ 389 3,919 Shares redeemed...................... (2,376) (23,955) ------- --------- Net increase in shares outstanding... 1,025 $ 10,170 ======= ========= <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS -------------------- ------------------ INTERMEDIATE BOND FUND SHARES AMOUNT SHARES AMOUNT - ---------------------- ------- --------- ------ -------- Shares sold.......................... 1,863 $ 18,474 8 $ 84 Reinvestment of dividends............ 440 4,367 4 38 Shares redeemed...................... (1,912) (18,979) (25) (250) ------- --------- ------ -------- Net increase (decrease) in shares outstanding........................ 391 $ 3,862 (13) $ (128) ======= ========= ====== ======== <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS -------------------- ------------------ SHORT-TERM BOND FUND SHARES AMOUNT SHARES AMOUNT - -------------------- ------- --------- ------ -------- Shares sold.......................... 724 $ 6,305 825 $ 7,202 Reinvestment of dividends............ 391 3,407 42 368 Shares redeemed...................... (1,819) (15,869) (1,024) (8,943) ------- --------- ------ -------- Net decrease in shares outstanding... (704) $ (6,157) (157) $ (1,373) ======= ========= ====== ======== </Table> Period Ended October 31, 2005 <Table> <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS ----------------- ----------------- ---------------- -------------------- BALANCED FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - ------------- ------ ------- ------ ------- ------ ------ ------- --------- Shares sold......................... 404 $ 6,028 5,096 $71,560 -- $ 1 11,920 $ 170,034 Reinvestment of dividends........... 32 459 108 1,484 -- -- 2,736 38,142 Shares redeemed..................... (80) (1,192) (671) (9,463) -- -- (11,427) (164,434) --- ------- ----- ------- -- --- ------- --------- Net increase in shares outstanding.. 356 $ 5,295 4,533 $63,581 -- $ 1 3,229 $ 43,742 === ======= ===== ======= == === ======= ========= </Table> - -------------------------------------------------------------------------------- 95 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> INSTITUTIONAL CLASS AMR CLASS -------------------- ------------------ LARGE CAP GROWTH FUND SHARES AMOUNT SHARES AMOUNT - --------------------- ------- --------- ------ -------- Shares sold.......................... 17 $ 102 6,502 $ 39,610 Reinvestment of dividends............ -- -- 76 474 Shares redeemed...................... -- -- (5,843) (35,633) ------- --------- ------ -------- Net increase (decrease) in shares outstanding........................ 17 $ 102 735 $ 4,451 ======= ========= ====== ======== <Caption> INSTITUTIONAL CLASS -------------------- MID CAP VALUE FUND SHARES AMOUNT - ------------------ ------- --------- Shares sold.......................... 14,157 $ 164,231 Reinvestment of dividends............ 11 118 Shares redeemed*..................... (12,873) (153,358) ------- --------- Net increase (decrease) in shares outstanding........................ 1,295 $ 10,991 ======= ========= * Net of redemption fees <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS AMR CLASS -------------------- ------------------ ------------------- EMERGING MARKETS FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - --------------------- ------- --------- ------ -------- ------- -------- Shares sold.......................... 164 $ 2,342 187 $ 2,602 2,688 $ 36,989 Reinvestment of dividends............ 54 706 7 88 575 7,462 Shares redeemed*..................... (176) (2,291) (118) (1,644) (2,858) (41,144) ------- --------- ------ -------- ------ -------- Net increase (decrease) in shares outstanding........................ 42 $ 757 76 $ 1,046 405 $ 3,307 ======= ========= ====== ======== ====== ======== * Net of redemption fees <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS -------------------- ------------------ ------------------- HIGH YIELD BOND FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - -------------------- ------- --------- ------ -------- ------- -------- Shares sold.......................... 9,936 $ 104,727 5,626 $ 59,314 -- $ 4 Reinvestment of dividends............ 1,682 17,740 1,216 12,834 -- -- Shares redeemed...................... (12,669) (133,918) (8,714) (90,501) (1) (7) ------- --------- ------ -------- ------ -------- Net increase (decrease) in shares outstanding........................ (1,051) $ (11,451) (1,872) $(18,353) (1) $ (3) ======= ========= ====== ======== ====== ======== <Caption> PLANAHEAD CLASS -------------------- ENHANCED INCOME FUND SHARES AMOUNT - -------------------- ------- --------- Shares sold.......................... 3,082 $ 31,229 Reinvestment of dividends............ 346 3,496 Shares redeemed...................... (2,400) (24,206) ------- --------- Net increase in shares outstanding... 1,028 $ 10,519 ======= ========= </Table> <Table> <Caption> INSTITUTIONAL INSTITUTIONAL CLASS (FORMERLY CLASS (TERMINATED AMR CLASS THROUGH 3/1/05)* PLANAHEAD CLASS 3/1/05) ----------------- ----------------- ------------------ INTERMEDIATE BOND FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - ---------------------- ------ ------ ------ ------ ------ -------- Shares sold.................................... -- $ -- 18 $ 181 4,580 $ 46,881 Reinvestment of dividends...................... 1 11 4 38 408 4,163 Shares redeemed................................ (88) (912) (22) (222) (4,980) (50,899) --- ----- --- ----- ------ -------- Net increase (decrease) in shares outstanding.. (87) $(901) -- $ (3) 8 $ 145 === ===== === ===== ====== ======== </Table> * Activity is for the period from November 1, 2004 through February 28, 2005 <Table> <Caption> INSTITUTIONAL INSTITUTIONAL CLASS (FORMERLY CLASS (TERMINATED AMR CLASS THROUGH 3/1/05)* PLANAHEAD CLASS 3/1/05) ------------------ ------------------ ------------------ SHORT-TERM BOND FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - -------------------- ------ ------- ------ ------- ------ -------- Shares sold.................................... 110 $ 982 581 $ 5,167 3,008 $ 26,682 Reinvestment of dividends...................... 5 46 32 288 412 3,660 Shares redeemed................................ (481) (4,291) (491) (4,384) (3,193) (28,344) ---- ------- ---- ------- ------ -------- Net increase (decrease) in shares outstanding.. (366) $(3,263) 122 $ 1,071 227 $ 1,998 ==== ======= ==== ======= ====== ======== </Table> * Activity is for the period from November 1, 2004 through February 28, 2005 - -------------------------------------------------------------------------------- 96 (This page intentionally left blank) (LIGHTHOUSE LOGO) - -------------------------------------------------------------------------------- 97 AMERICAN BEACON BALANCED FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - -------------------------------------------------------------------------------- <Table> <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS ------------------------------------------- -------------------------------------------- YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31, ------------------------------------------- -------------------------------------------- 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002 ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- Net asset value, beginning of period.. $ 15.00 $ 14.31 $ 12.99 $ 10.97 $12.07 $ 14.20 $ 13.62 $ 12.40 $ 10.81 $ 11.88 ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- Income from investment operations: Net investment income(A B)....... 0.39 0.36 0.29 0.31(D) 0.11 0.35 0.34 0.27 0.28(D) 0.41 Net gains (losses) on securities (both realized and unrealized)(B)................. 1.54 1.11 1.36 1.84(D)(0.69) 1.44 1.01 1.25 1.74(D) (0.99) ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- Total income (loss) from investment operations.......................... 1.93 1.47 1.65 2.15 (0.58) 1.79 1.35 1.52 2.02 (0.58) ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- Less distributions: Dividends from net investment income......................... (0.38) (0.31) (0.33) (0.13) (0.44) (0.36) (0.30) (0.30) (0.43) (0.41) Distributions from net realized gains on securities............ (0.72) (0.47) -- -- (0.08) (0.72) (0.47) -- -- (0.08) ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- Total distributions................... (1.10) (0.78) (0.33) (0.13) (0.52) (1.08) (0.77) (0.30) (0.43) (0.49) ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- Net asset value, end of period........ $ 15.83 $ 15.00 $ 14.31 $ 12.99 $10.97 $ 14.91 $ 14.20 $ 13.62 $ 12.40 $ 10.81 ======= ======= ======= ======= ====== ======== ======= ======= ======= ======= Total return.......................... 13.60 % 10.53% 10.53% 19.77% (5.14)% 13.31% 10.12% 12.44% 19.36% (5.18)% ======= ======= ======= ======= ====== ======== ======= ======= ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands)..................... $22,587 $14,122 $ 8,378 $ 9,041 $8,994 $111,837 $86,875 $21,571 $13,321 $10,561 Ratios to average net assets (annualized): Expenses, after expense reimbursements (recoupments)(B)............ 0.59 % 0.56% 0.63% 0.63% 0.62% 0.85% 0.86% 0.93% 0.94% 0.90% Expenses before expense reimbursements (recoupments)(B)............ 0.59 % 0.56% 0.63% 0.63% 0.62% 0.85% 0.86% 0.93% 0.94% 0.90% Net investment income, after expense reimbursements (recoupments)(B)............ 2.81 % 2.45% 2.15% 2.74% 3.12% 2.55% 2.14% 1.84% 2.40% 2.83% Net investment income (loss), before expense reimbursements (recoupments)(B)............ 2.81 % 2.45% 2.15% 2.74% 3.12% 2.55% 2.14% 1.84% 2.40% 2.83% Portfolio turnover rate(C)....... 59 % 58% 62% 69% 84% 59% 58% 62% 69% 84% </Table> - -------- (A) Class expenses per share were subtracted from net investment income per share for the Fund before class expenses to determine net investment income per share through October 31, 2005. (B) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the AMR Investment Services Balanced Portfolio through February 28, 2002. (C) The Balanced Fund invested all of its investable assets in its corresponding Portfolio through February 28, 2002. Portfolio turnover rate through February 28, 2002 was that of the Portfolio. (D) For the year ended October 31, 2003, the net investment income and net gains (losses) on securities (both realized and unrealized) has been restated from 0.30 and 1.85, respectively for Institutional Class and 0.36 and 1.66, respectively for PlanAhead Class. (E) Not annualized. (F) Annualized. (G) Portfolio turnover rate is for the period from November 1, 2004 through October 31, 2005. - -------------------------------------------------------------------------------- 98 - -------------------------------------------------------------------------------- <Table> <Caption> SERVICE CLASS AMR CLASS - ------------- ------------------------------------------------- YEAR ENDED MAY 31 TO YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31, ------------------------------------------------- 2006 2005 2006 2005 2004 2003 2002 - ------------- ----------- -------- --------- -------- -------- -------- $ 14.16 $ 13.96 $ 14.49 $ 13.87 $ 12.60 $ 10.98 $ 12.06 ------- -------- -------- --------- -------- -------- -------- 0.38 0.09 0.45 0. 39 0.32 0.34 0.48 1.35 0.11 1.46 1.05 1.31 1.78 (1.01) ------- -------- -------- --------- -------- -------- -------- 1.73 0.20 1.91 1.44 1.63 2.12 (0.53) -------- -------- --------- -------- -------- -------- (0.34) -- (0.41) (0.35) (0.36) (0.50) (0.47) (0.72) -- (0.72) (0.47) -- -- (0.08) ------- -------- -------- --------- -------- -------- -------- (1.06) -- (1.13) (0.82) (0.36) (0.50) (0.55) ------- -------- -------- --------- -------- -------- -------- $ 14.83 $ 14.16 $ 15.27 $ 14.49 $ 13.87 $ 12.60 $ 10.98 ======= ======== ======== ========= ======== ======== ======== 13.01% 1.43%(E) 13.98% 10.63% 13.13% 20.06% (4.71)% ======= ======== ======== ========= ======== ======== ======== $ 1,562 $ 1 $817,333 $ 712,073 $636,420 $557,612 $487,526 1.22% 1.09%(F) 0.33% 0.33% 0.37% 0.38% 0.35% 1.22% 360.24%(F) 0.33% 0.33% 0.37% 0.38% 0.35% 2.18% 1.52%(F) 3.08% 2.70% 2.40% 2.98% 3.39% 2.17% (357.63)%(F) 3.08% 2.70% 2.40% 2.98% 3.39% 59% 58%(G) 59% 58% 62% 69% 84% </Table> - -------------------------------------------------------------------------------- 99 AMERICAN BEACON LARGE CAP GROWTH FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - -------------------------------------------------------------------------------- <Table> <Caption> INSTITUTIONAL CLASS ----------------------------------------------------- YEAR ENDED OCTOBER 31, ----------------------------------------------------- 2006(C) 2005 2004 2003 2002 ------- ------- -------- ------- -------- Net asset value, beginning of period................. $ 6.18 $ 5.82 $ 5.47 $ 4.53 $ 5.66 ------- ------ ------- ------- ------ Income from investment operations: Net investment income (loss)(A)................. 0.04 0.04 0.02 0.02 0.03 Net gains (losses) on securities (both realized and unrealized)(A)............................ 0.70 0.37 0.35 0.94 (1.16) ------- ------ ------- ------- ------ Total income (loss) from investment operations....... 0.74 0.41 0.37 0.96 (1.13) ------- ------ ------- ------- ------ Less distributions: Dividends from net investment income............ (0.03) (0.05) (0.02) (0.02) -- ------- ------ ------- ------- ------ Total distributions.................................. (0.03) (0.05) (0.02) (0.02) -- ------- ------ ------- ------- ------ Net asset value, end of period....................... $ 6.89 $ 6.18 $ 5.82 $ 5.47 $ 4.53 ======= ====== ======= ======= ====== Total return......................................... 12.04% 7.06% 6.71% 21.15% (19.96)% ======= ====== ======= ======= ====== Ratios and supplemental data: Net assets, end of period (in thousands)........ $ 110 $ 105 $ 1 $ 1 $ 1 Ratios to average net assets (annualized)(A): Expenses, net of waivers...................... 0.90% 0.89% 0.84% 0.87% 0.87% Expenses, before waivers...................... 0.99% 4.64% 13.22% 0.87% 0.87% Net investment income (loss), net of waivers.. 0.56% (0.18)% 0.18% 0.18% 0.06% Net investment income (loss), before waivers.. 0.48% (3.93)% (12.20)% 0.18% 0.06% Portfolio turnover rate(B)...................... 181% 164% 131% 138% 135% </Table> - -------- (A) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the AMR Investment Services Large Cap Growth Portfolio through February 28, 2001. (B) The Large Cap Growth Fund invested all of its investable assets in its corresponding Portfolio through February 28, 2001. Portfolio turnover rate through February 28, 2001 was that of the Portfolio. (C) On September 12, 2006, The Renaissance Group, LLC assumed management of the Large Cap Growth Fund's assets previously managed by J.P. Morgan Investment Management, Inc. - -------------------------------------------------------------------------------- 100 - -------------------------------------------------------------------------------- <Table> <Caption> AMR CLASS - --------------------------------------------------- YEAR ENDED OCTOBER 31, - --------------------------------------------------- 2006(C) 2005 2004 2003 2002 - ------- ------- ------- ------- ------- $ 6.21 $ 5.84 $ 5.48 $ 4.54 $ 5.67 - ------- ------- ------- ------- ------- 0.05 0.06 0.02 0.02 0.02 0.73 0.36 0.36 0.93 (1.14) - ------- ------- ------- ------- ------- 0.78 0.42 0.38 0.95 (1.12) - ------- ------- ------- ------- ------- (0.04) (0.05) (0.02) (0.01) (0.01) - ------- ------- ------- ------- ------- (0.04) (0.05) (0.02) (0.01) (0.01) - ------- ------- ------- ------- ------- $ 6.95 $ 6.21 $ 5.84 $ 5.48 $ 4.54 ======= ======= ======= ======= ======= 12.52% 7.22% 6.88% 21.09% (19.85)% ======= ======= ======= ======= ======= $82,042 $63,183 $55,121 $48,926 $28,017 0.59% 0.64% 0.71% 0.68% 0.67% 0.59% 0.64% 0.71% 0.68% 0.67% 0.88% 0.98% 0.34% 0.40% 0.30% 0.88% 0.98% 0.34% 0.40% 0.30% 181% 164% 131% 138% 135% </Table> - -------------------------------------------------------------------------------- 101 AMERICAN BEACON MID-CAP VALUE FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - -------------------------------------------------------------------------------- <Table> <Caption> PLANAHEAD CLASS AMR CLASS (FORMERLY INSTITUTIONAL --------------- CLASS PRIOR TO DECEMBER 1, INSTITUTIONAL CLASS 2005)(D) ------------------- --------------------------------- NOVEMBER 30, YEAR ENDED 2005 TO FEBRUARY 28 OCTOBER 31, JUNE 30 TO OCTOBER 31, TO OCTOBER 31, ------------------ OCTOBER 31, 2006 2006 2006 2005 2004 ------------------- --------------- ------- ------- ----------- Net asset value, beginning of period..... $ 12.09 $ 9.80 $ 11.72 $ 10.27 $ 10.00 ------- ------- ------- ------- ------- Income from investment operations: Net investment income............... 0.21 0.01 0.12 0.13 0.02(B) Net gains on securities (both realized and unrealized).......... 1.25 0.99 1.75 1.37 0.25 ------- ------- ------- ------- ------- Total income from investment operations.. 1.46 1.00 1.87 1.50 0.27 ------- ------- ------- ------- ------- Less distributions: Dividends from net investment income............................ (0.16) -- (0.14) (0.05) -- Distributions from net realized gains on securities............... (2.58) -- (2.58) -- -- ------- ------- ------- ------- ------- Total distributions...................... (2.74) -- (2.72) (0.05) -- ------- ------- ------- ------- ------- Net asset value, end of period........... $ 10.81 $ 10.80 $ 10.87 $ 11.72 $ 10.27 ======= ======= ======= ======= ======= Total return............................. 15.30%(A) 10.20%(A) 19.16%() 14.63% 2.70%(A) ======= ======= ======= ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands)........................ $ 3,396 $27,240 $66,290 $44,342 $25,546 Ratios to average net assets (annualized): Expenses, after expense reimbursements (recoupments)... 1.19% 1.49% 0.97% 1.01% 1.14%(C) Expenses, before expense reimbursements (recoupments)... 1.19% 1.61% 0.92% 1.02% 1.34%(C) Net investment income, after expense reimbursements (recoupments).................. 1.11% 0.57% 1.38% 0.92% 0.73%(C) Net investment income, before expense reimbursements (recoupments).................. 1.11% 0.44% 1.42% 0.91% 0.53%(C) Portfolio turnover rate............. 42%(E) 42%(E) 42%() 298% 6%(A) </Table> - -------- (A) Not annualized. (B) Based on average shares outstanding. (C) Annualized. (D) On November 30, 2005, the Mid-Cap Value Fund's Institutional Class of shares was renamed the AMR Class and the Fund began offering a new class of shares known as the Institutional Class. (E) Portfolio turnover rate is for the period November 1, 2005 through October 31, 2006. - -------------------------------------------------------------------------------- 102 AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - -------------------------------------------------------------------------------- <Table> <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS ------------------- --------------- MARCH 31 TO MARCH 31 TO OCTOBER 31, OCTOBER 31, 2006(A) 2006(A) ------------------- --------------- Net asset value, beginning of period........................... $ 10.00 $ 10.00 ------- -------- Income from investment operations: Net investment income (loss).............................. 0.01 0.01 Net gains (losses) on securities (both realized and unrealized)............................................. 0.25 0.25 ------- -------- Total income from investment operations........................ 0.26 0.26 ------- -------- Less distributions: Dividends from net investment income...................... -- -- Distributions from net realized gains on securities....... -- -- ------- -------- Total distributions............................................ -- -- ------- -------- Net asset value, end of period................................. $ 10.26 $ 10.26 ======= ======== Total return................................................... 2.60%(B) 2.60%(B) ======= ======== Ratios and supplemental data: Net assets, end of period (in thousands).................. $ 4,693 $ 70 Ratios to average net assets (annualized): Expenses net of waivers................................. 1.03% 1.28% Expenses before waivers................................. 6.12% 20.05% Net investment income, net of waivers................... 0.30% 0.21% Net investment income, before waivers................... (4.80%) (18.56%) Portfolio turnover rate................................... 32%(B) 32%(B) </Table> - -------- (A) March 31, 2006 is the inception date of the Small Cap Value Opportunity Fund. (B) Not annualized. - -------------------------------------------------------------------------------- 103 AMERICAN BEACON EMERGING MARKETS FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - -------------------------------------------------------------------------------- <Table> <Caption> INSTITUTIONAL CLASS -------------------------------------------------- YEAR ENDED OCTOBER 31, -------------------------------------------------- 2006 2005 2004 2003 2002 ------- ------- ------- ------- ------ Net asset value, beginning of period................ $ 15.10 $ 12.64 $ 10.62 $ 7.20 $ 6.64 ------- ------- ------- ------- ------ Income from investment operations: Net investment income(A)....................... 0.11 0.15 0.07 0.04 0.09 Net gains (losses) on securities (both realized and unrealized)(A).......................... 4.63 3.45 2.01 3.43 0.56 ------- ------- ------- ------- ------ Total income (loss) from investment operations...... 4.74 3.60 2.08 3.47 0.65 ------- ------- ------- ------- ------ Less distributions: Dividends from net investment income........... (0.21) (0.06) (0.06) (0.05) (0.09) Distributions from net realized gains on securities................................... (2.21) (1.08) -- -- -- ------- ------- ------- ------- ------ Total distributions................................. (2.42) (1.14) (0.06) (0.05) (0.09) ------- ------- ------- ------- ------ Redemption fees added to beneficial interests....... --(E) --(E) --(E) -- -- ------- ------- ------- ------- ------ Net asset value, end of period...................... $ 17.42 $ 15.10 $ 12.64 $ 10.62 $ 7.20 ======= ======= ======= ======= ====== Total return........................................ 34.49% 30.11% 19.65% 48.45% 9.80% ======= ======= ======= ======= ====== Ratios and supplemental data: Net assets, end of period (in thousands)....... $16,552 $ 9,348 $ 7,282 $ 3,557 $1,769 Ratios to average net assets (annualized): Expenses, after expense reimbursements (recoupments)(A).......................... 1.56% 1.52% 1.85% 1.76% 1.51% Expenses, before expense reimbursements (recoupments)(A).......................... 1.56% 1.52% 1.85% 1.76% 1.51% Net investment income (loss), after expense reimbursements (recoupments)(A)........... 0.80% 1.22% 0.74% 0.62% 1.11% Net investment income (loss), before expense reimbursements (recoupments)(A)........... 0.80% 1.22% 0.74% 0.62% 1.11% Portfolio turnover rate(B)..................... 67%() 63% 76% 80% 94% </Table> - -------- (A) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the AMR Investment Services Emerging Markets Portfolio through February 28, 2002. (B) The Emerging Markets Fund invested all of its investable assets in its corresponding Portfolio through February 28, 2002. Portfolio turnover rate through February 28, 2002 was that of the Portfolio. (C) Not annualized. (D) Portfolio turnover rate is for the period from November 1, 2001 through October 31, 2002. (E) Amounts represent less than $0.01 per share. (F) Annualized. - -------------------------------------------------------------------------------- 104 - -------------------------------------------------------------------------------- <Table> <Caption> AMR CLASS ---------------------------------------------------- PLANAHEAD CLASS - -------------------------------------------------------- YEAR ENDED OCTOBER 31, OCTOBER 1 TO YEAR ENDED OCTOBER 31, - ---------------------------------------- OCTOBER 31, ---------------------------------------------------- 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002 - ------- ------- ------- ------- ------------ -------- ------- ------- ------- ------- $ 14.98 $ 12.53 $ 10.55 $ 7.19 $ 6.86 $ 15.17 $ 12.68 $ 10.66 $ 7.22 $ 6.65 - ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- 0.09 0.15 0.04 0.09 -- 0.15 0.24 0.10 0.07 0.09 4.55 3.41 1.99 3.34 0.33 4.65 3.42 2.00 3.44 0.59 - ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- 4.64 3.56 2.03 3.43 0.33 4.80 3.66 2.10 3.51 0.68 - ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- (0.19) (0.03) (0.05) (0.07) -- (0.24) (0.09) (0.08) (0.07) (0.11) (2.21) (1.08) -- -- -- (2.21) (1.08) -- -- -- - ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- (2.40) (1.11) (0.05) (0.07) -- (2.45) (1.17) (0.08) (0.07) (0.11) - ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- --(E) --(E) --(E) --(E) -- -- -- -- -- -- - ------- ------- ------- ------- ------ -------- ------- ------- ------- ------- $ 17.22 $ 14.98 $ 12.53 $ 10.55 $ 7.19 $ 17.52 $ 15.17 $ 12.68 $ 10.66 $ 7.22 ======= ======= ======= ======= ====== ======== ======= ======= ======= ======= 34.16% 29.95% 19.33% 48.07% 4.81%(C) 34.87% 30.43% 20.00% 48.84% 10.10% ======= ======= ======= ======= ====== ======== ======= ======= ======= ======= $ 5,841 $ 2,592 $ 1,214 $ 492 $ 1 $135,146 $94,864 $74,199 $51,498 $32,731 2.04% 1.75% 2.14% 2.08% 1.87%(F) 1.30% 1.25% 1.59% 1.50% 1.26% 1.91% 2.01% 2.20% 2.08% 1.87%(F) 1.30% 1.25% 1.59% 1.50% 1.26% 0.49% 1.16% 0.37% 0.57% (0.25)%(F) 1.01% 1.60% 1.01% 0.92% 1.35% 0.62% 0.90% 0.31% 0.57% (0.25)%(F) 1.01% 1.60% 1.01% 0.92% 1.35% 67% 63% 76% 80% 94%(D) 67% 63% 76% 80%(C) 94% </Table> - -------------------------------------------------------------------------------- 105 AMERICAN BEACON HIGH YIELD BOND FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - -------------------------------------------------------------------------------- <Table> <Caption> INSTITUTIONAL CLASS -------------------------------------------------------- YEAR ENDED OCTOBER 31, -------------------------------------------------------- 2006(F) 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of period............... $ 10.22 $ 10.86 $ 10.73 $ 9.63 $ 9.82 -------- -------- -------- -------- -------- Income from investment operations: Net investment income......................... 0.88 0.76 0.78 0.78 0.80 Net gains (losses) on securities (both realized and unrealized).................... 0.09 (0.84) 0.27 1.10 (0.19) -------- -------- -------- -------- -------- Total income from investment operations............ 0.97 (0.08) 1.05 1.88 0.61 -------- -------- -------- -------- -------- Less distributions: Dividends from net investment income.......... (0.88) (0.76) (0.78) (0.78) (0.80) Distributions from net realized gains on securities.................................. (0.11) 0.20 (0.14) -- -- -------- -------- -------- -------- -------- Total distributions................................ (0.99) (0.56) (0.92) (0.78) (0.80) -------- -------- -------- -------- -------- Net asset value, end of period..................... $ 10.20 $ 10.22 $ 10.86 $ 10.73 $ 9.63 ======== ======== ======== ======== ======== Total return....................................... 8.78% 3.03% 10.19% 20.11% 6.28% ======== ======== ======== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands)...... $231,693 $216,744 $241,777 $161,380 $104,813 Ratios to average net assets (annualized): Expenses, after expense reimbursements (recoupments)............................ 0.85% 0.84% 0.88% 0.90% 0.90% Expenses, before expense reimbursements (recoupments)............................ 0.85% 0.84% 0.92% 1.00% 0.98% Net investment income, after expense reimbursements (recoupments)............. 7.55% 7.24% 7.27% 7.51% 8.02% Net investment income (loss), before expense reimbursements (recoupments)............. 7.55% 7.24% 7.23% 7.41% 7.94% Portfolio turnover rate....................... 88% 128% 138% 114% 163% </Table> - -------- (A) Not annualized. (B) Portfolio turnover rate is for the period from November 1, 2001 through October 31, 2002. (C) Portfolio turnover rate is for the period from November 1, 2002 through October 31, 2003. (D) Annualized. (E) Portfolio turnover rate is for the period from November 1, 2005 through October 31, 2006. (F) Franklin Advisers, Inc. was added as an investment advisor to the High Yield Bond Fund on September 12, 2006. - -------------------------------------------------------------------------------- 106 - -------------------------------------------------------------------------------- <Table> <Caption> PLANAHEAD CLASS SERVICE CLASS - ---------------------------------------------------------- ------------------------------------------------- FOUR MONTHS YEAR ENDED OCTOBER MAY 1 YEAR ENDED OCTOBER 31, MARCH 1 TO ENDED 31, TO - ------------------------------------------- OCTOBER 31, FEBRUARY 28, ------------------ OCTOBER 31, 2006(F) 2005 2004 2003 2002 2006 2005 2004 2003 - ------- -------- -------- -------- ----------- ------------ ------ -------- ----------- $ 10.22 $ 10.87 $ 10.73 $ 9.63 $10.10 $10.41 $10.87 $ 10.73 $ 10.47 - ------- -------- -------- -------- ------ ------ ------ -------- -------- 0.85 0.74 0.74 0.75 0.50 0.36 0.70 0.71 0.29 0.10 (0.85) 0.28 1.10 (0.47) 0.13 (0.45) 0.27 0.26 - ------- -------- -------- -------- ------ ------ ------ -------- -------- 0.95 (0.11) 1.02 1.85 0.03 0.49 0.25 0.98 0.55 - ------- -------- -------- -------- ------ ------ ------ -------- -------- (0.85) (0.74) (0.74) (0.75) (0.50) (0.35) (0.71) (0.70) (0.29) (0.11) 0.20 (0.14) -- -- (0.11) -- (0.14) -- - ------- -------- -------- -------- ------ ------ ------ -------- -------- (0.96) (0.54) (0.88) (0.75) (0.50) (0.46) (0.71) (0.84) (0.29) - ------- -------- -------- -------- ------ ------ ------ -------- -------- $ 10.21 $ 10.22 $ 10.87 $ 10.73 $ 9.63 $10.44 $10.41 $ 10.87 $ 10.73 ======= ======== ======== ======== ====== ====== ====== ======== ======== 8.63% 2.69% 9.94% 19.57% (0.26)%(A) 3.72%(A) 2.33% 9.41% 5.46%(A) ======= ======== ======== ======== ====== ====== ====== ======== ======== $80,284 $120,360 $148,266 $125,654 $4,029 NA $ 1 $ 4 $ 1 1.08% 1.08% 1.20% 1.24% 1.27%(D) 1.33%(D) 1.46% 1.57% 1.71%(D) 1.08% 1.08% 1.20% 1.24% 1.27%(D) 1.33%(D) 4.01% 440.81% 806.83%(D) 7.33% 7.00% 6.95% 7.11% 7.20%(D) 7.04%(D) 6.59% 6.57% 6.51%(D) 7.33% 7.00% 6.95% 7.11% 7.20%(D) 7.04%(D) 4.04% (432.67)% (798.61)%(D) 88% 128% 138% 114% 163%(B) 88%(E) 128% 138% 114%(C) </Table> - -------------------------------------------------------------------------------- 107 AMERICAN BEACON ENHANCED INCOME FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - -------------------------------------------------------------------------------- <Table> <Caption> PLANAHEAD CLASS ----------------------------------------------- YEAR ENDED OCTOBER 31, JUNE 30 TO -------------------------------- OCTOBER 31, 2006 2005 2004 2003 -------- -------- -------- ----------- Net asset value, beginning of period................... $ 9.98 $ 10.16 $ 9.96 $ 10.00 -------- -------- -------- -------- Income from investment operations: Net investment income............................. 0.33 0.29 0.26 0.07(B) Net gains (losses) on securities (both realized and unrealized)................................. 0.29 (0.16) 0.20 (0.04) -------- -------- -------- -------- Total income from investment operations................ 0.62 0.13 0.46 0.03 -------- -------- -------- -------- Less distributions: Dividends from net investment income.............. (0.35) (0.31) (0.26) (0.07) Distributions from net realized gains on securities...................................... -- -- -- -- -------- -------- -------- -------- Total distributions.................................... (0.35) (0.31) (0.26) (0.07) -------- -------- -------- -------- Net asset value, end of period......................... $ 10.25 $ 9.98 $ 10.16 $ 9.96 ======== ======== ======== ======== Total return........................................... 6.36% 1.32% 4.70% 0.32%(A) ======== ======== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands).......... $125,915 $112,341 $103,897 $101,072 Ratios to average net assets (annualized): Expenses........................................ 0.93% 0.92% 1.00% 0.93%(C) Net investment income........................... 3.21% 2.79% 2.54% 2.20%(C) Portfolio turnover rate........................... 65% 41% 72% 57%(A) </Table> - -------- (A) Not annualized. (B) Based on average shares outstanding. (C) Annualized. - -------------------------------------------------------------------------------- 108 (This page intentionally left blank) (LIGHTHOUSE LOGO) - -------------------------------------------------------------------------------- 109 AMERICAN BEACON INTERMEDIATE BOND FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - -------------------------------------------------------------------------------- <Table> <Caption> INSTITUTIONAL CLASS (FORMERLY AMR CLASS PRIOR TO 3/1/05) ----------------------------------------------------- YEAR ENDED OCTOBER 31, ----------------------------------------------------- 2006 2005(C) 2004 2003 2002 ------- ------- ------- -------- -------- Net asset value, beginning of period................. $ 10.01 $ 10.33 $ 10.24 $ 10.22 $ 10.30 ------- ------- ------- -------- -------- Income from investment operations: Net investment income(A)........................ 0.46 0.42 0.40 0.45 0.53 Net gains (losses) on securities (both realized and unrealized)(A)............................ 0.02 (0.29) 0.14 0.02 (0.08) ------- ------- ------- -------- -------- Total income from investment operations.............. 0.48 0.13 0.54 0.47 0.45 ------- ------- ------- -------- -------- Less distributions: Dividends from net investment income............ (0.47) (0.45) (0.45) (0.45) (0.53) Distributions from net realized gains on securities.................................... -- -- -- -- -- ------- ------- ------- -------- -------- Total distributions.................................. (0.47) (0.45) (0.45) (0.45) (0.53) ------- ------- ------- -------- -------- Net asset value, end of period....................... $ 10.02 $ 10.01 $ 10.33 $ 10.24 $ 10.22 ======= ======= ======= ======== ======== Total return......................................... 4.96% 1.26% 5.38% 4.62% 4.57% ======= ======= ======= ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands)........ $97,319 $93,270 $96,242 $131,927 $144,098 Ratios to average net assets (annualized): Expenses, net of waivers(A)................... 0.35% 0.31% 0.34% 0.32% 0.30% Expenses, before waivers(A)................... 0.35% 0.31% 0.34% 0.32% 0.30% Net investment income, net of waivers(A)...... 4.64% 4.12% 3.97% 4.32% 5.23% Net investment income, before waivers(A)...... 4.64% 4.12% 3.97% 4.32% 5.23% Portfolio turnover rate(B)...................... 122% 119% 106% 187% 185% </Table> - -------- (A) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the AMR Investment Services Intermediate Bond Portfolio through February 28, 2002. (B) The Intermediate Bond Fund invested all of its investable assets in its corresponding Portfolio through February 28, 2002. Portfolio turnover rate through February 28, 2002 was that of the Portfolio. (C) On March 1, 2005, the existing Institutional Class shares were terminated and exchanged for AMR Class shares at a conversion rate of 1.0202. Following this exchange, the former AMR Class Shares were re-named Institutional Class. - -------------------------------------------------------------------------------- 110 - -------------------------------------------------------------------------------- <Table> <Caption> PLAN AHEAD CLASS - -------------------------------------- YEAR ENDED OCTOBER 31, - -------------------------------------- 2006 2005 2004 2003 2002 - ------ ------ ------ ------ ------ $10.08 $10.41 $10.31 $10.27 $10.34 - ------ ------ ------ ------ ------ 0.39 0.36 0.35 0.39 0.48 0.04 (0.30) 0.14 0.04 (0.07) - ------ ------ ------ ------ ------ 0.43 0.06 0.49 0.43 0.41 - ------ ------ ------ ------ ------ (0.42) (0.39) (0.39) (0.39) (0.48) -- -- -- -- -- - ------ ------ ------ ------ ------ (0.42) (0.39) (0.39) (0.39) (0.48) - ------ ------ ------ ------ ------ $10.09 $10.08 $10.41 $10.31 $10.27 ====== ====== ====== ====== ====== 4.33% 0.54% 4.86% 4.25% 4.10% ====== ====== ====== ====== ====== $ 926 $1,054 $1,091 $1,395 $1,691 0.95% 0.95% 0.92% 0.86% 0.86% 1.29% 1.19% 0.93% 0.86% 0.86% 4.03% 3.48% 3.39% 3.70% 4.60% 3.70% 3.24% 3.38% 3.70% 4.60% 122% 119% 106% 187% 185% </Table> - -------------------------------------------------------------------------------- 111 AMERICAN BEACON SHORT-TERM BOND FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - -------------------------------------------------------------------------------- <Table> <Caption> INSTITUTIONAL (FORMERLY AMR CLASS PRIOR TO 3/1/05) --------------------------------------------------- YEAR ENDED OCTOBER 31, --------------------------------------------------- 2006 2005(C) 2004 2003 2002 ------- ------- ------- ------- ------- Net asset value, beginning of period.................. $ 8.75 $ 9.07 $ 9.31 $ 9.44 $ 9.60 ------- ------- ------- ------- ------- Income from investment operations: Net investment income(B)......................... 0.32(D) 0.29 0.27 0.42 0.44 Net gains (losses) on securities (both realized and unrealized)(B)............................. 0.07 (0.20) (0.05) (0.07) (0.11) ------- ------- ------- ------- ------- Total income from investment operations............... 0.39 0.09 0.22 0.35 0.33 ------- ------- ------- ------- ------- Less distributions: Dividends from net investment income............. (0.40) (0.41) (0.46) (0.48) (0.49) ------- ------- ------- ------- ------- Total distributions................................... (0.40) (0.41) (0.46) (0.48) (0.49) ------- ------- ------- ------- ------- Net asset value, end of period........................ $ 8.74 $ 8.75 $ 9.07 $ 9.31 $ 9.44 ======= ======= ======= ======= ======= Total return.......................................... 4.56% 1.00% 2.39% 3.82% 3.60% ======= ======= ======= ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands)......... $73,417 $79,683 $80,504 $91,911 $89,932 Ratios to average net assets (annualized): Expenses, net of waivers(B).................... 0.35% 0.33% 0.33% 0.33% 0.30% Expenses, before waivers(B).................... 0.35% 0.33% 0.33% 0.33% 0.30% Net investment income, net of waivers (B)...... 3.64% 3.15% 3.00% 4.54% 4.63% Net investment income, before waivers(B)....... 3.64% 3.15% 3.00% 4.54% 4.63% Portfolio turnover rate(A)....................... 48% 38% 41% 81% 63% </Table> - -------- (A) The Short-Term Bond Fund invested all of its investable assets in its corresponding Portfolio through February 28, 2002. Portfolio turnover rate through February 28, 2002 was that of the Portfolio. (B) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the AMR Investment Services Short-Term Bond Portfolio through February 28, 2002. (C) On March 1, 2005, the existing Institutional Class shares were terminated and exchanged for AMR Class shares at a conversion rate of 1.0014. Following this exchange, the former AMR Class Shares were re-named Institutional Class. (D) For purposes of this calculation, the change in undistributed net investment income per share was derived by dividing the change in undistributed net investment income by average shares outstanding for the period. - -------------------------------------------------------------------------------- 112 - -------------------------------------------------------------------------------- <Table> <Caption> PLANAHEAD CLASS - -------------------------------------- YEAR ENDED OCTOBER 31, - -------------------------------------- 2006 2005 2004 2003 2002 - ------ ------ ------ ------ ------ $ 8.77 $ 9.09 $ 9.33 $ 9.45 $ 9.62 - ------ ------ ------ ------ ------ 0.27(D) 0.28 0.25 0.39 0.43 0.07 (0.24) (0.07) (0.08) (0.14) - ------ ------ ------ ------ ------ 0.34 0.04 0.18 0.31 0.29 - ------ ------ ------ ------ ------ (0.35) (0.36) (0.42) (0.43) (0.46) - ------ ------ ------ ------ ------ (0.35) (0.36) (0.42) (0.43) (0.46) - ------ ------ ------ ------ ------ $ 8.76 $ 8.77 $ 9.09 $ 9.33 $ 9.45 ====== ====== ====== ====== ====== 4.01% 0.46% 1.84% 3.38% 3.16% ====== ====== ====== ====== ====== $7,189 $8,582 $7,781 $5,783 $3,520 0.88% 0.87% 0.87% 0.86% 0.73% 0.90% 0.94% 0.87% 0.86% 0.77% 3.10% 2.59% 2.44% 4.00% 4.16% 3.08% 2.52% 2.44% 4.00% 4.12% 48% 38% 41% 81% 63% </Table> - -------------------------------------------------------------------------------- 113 AMERICAN BEACON FUNDS PRIVACY POLICY (UNAUDITED) - -------------------------------------------------------------------------------- The American Beacon Funds recognizes and respects the privacy of our shareholders. We are providing this notice to you so you will understand how shareholder information may be collected and used. We may collect nonpublic personal information about you from one or more of the following sources: - information we receive from you on applications or other forms; - information about your transactions with us or our service providers; and - information we receive from third parties. We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. We restrict access to your nonpublic personal information to those employees or service providers who need to know that information to provide products or services to you. To ensure the confidentiality of your nonpublic personal information, we maintain safeguards that comply with federal standards. - -------------------------------------------------------------------------------- 114 AMERICAN BEACON FUNDS FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For corporate shareholders in the Funds, the percentage of ordinary dividend income distributed for the year ended October 31, 2006, which is designated as qualifying for the dividends-received deduction, is as follows (unaudited): <Table> Balanced Fund 37.0% Large Cap Growth Fund 86.3% Mid-Cap Value Fund 63.6% Emerging Markets Fund 0.3% Enhanced Income Fund 4.2% </Table> For shareholders in the Funds, the percentage of dividend income distributed for the year ended October 31, 2006, which is designated as qualified dividend income under the Jobs and Growth Tax Relief Act of 2003, is as follows (unaudited): <Table> Balanced Fund 35.6% Large Cap Growth Fund 100.0% Mid-Cap Value Fund 6.9% Emerging Markets Fund 44.0% Enhanced Income 3.9% </Table> Shareholders will receive notification in January 2007 of the percentage applicable to the preparation of their 2006 income tax returns. Pursuant to Section 852 of the Internal Revenue Code, the Funds designate the following amounts as long-term capital gain dividends for their taxable year ended October 31, 2006: <Table> Balanced Fund $37,772,772 Mid-Cap Value Fund 2,088,076 Emerging Markets Fund 13,704,660 High Yield Bond Fund 3,347,075 Enhanced Income Fund 13,577 </Table> - -------------------------------------------------------------------------------- 115 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- 1. APPROVAL OF APPOINTMENT OF FRANKLIN ADVISERS, INC. At the May 11, 2006 meeting of the Board of Trustees (the "Board"), American Beacon Advisors, Inc. (the "Manager") proposed that the Board approve Franklin Advisers, Inc. ("Franklin") as an additional investment advisor to the American Beacon High Yield Bond Fund (the "High Yield Bond Fund"). The Board also considered certain supplemental information at its August 2, 2006 meeting. Prior to the meetings, the Board requested and reviewed information provided by Franklin in connection with its consideration of Franklin as an investment advisor to the High Yield Bond Fund and the Investment Committee of the Board met with representatives from Franklin. The Board considered, among other materials, responses by Franklin to inquiries requesting: - a description of the advisory and related services proposed to be provided to the High Yield Bond Fund; - identification of the professional personnel to perform services for the High Yield Bond Fund and their education, experience and responsibilities; - a comparison of the performance of accounts similar to the High Yield Bond Fund managed by Franklin with the performance of applicable indices; - an analysis of the proposed advisory fee, a comparison to the fees charged to other comparable clients and an explanation of any differences between the fee schedules; - whether Franklin charges a lower advisory fee to other clients for which it provides services comparable to the services proposed for the High Yield Bond Fund and, if so, an explanation of the rationale for charging the other clients a lower fee; - a description of the portfolio managers' compensation, including any incentive arrangements, and if compensation is tied to performance, a description of the oversight mechanisms to prevent a manager with lagging performance from taking undue risks; - a description of Franklin's compliance program and matters, as well as its trading activities; and - any other information Franklin believed would be material to the Board's consideration of the Investment Advisory Agreement (the "Agreement"). The Board considered several factors when evaluating Franklin and in approving the Investment Advisory Agreement between Franklin and the Manager (the "Franklin Agreement"), including the process by which the Manager screened the universe of available high yield managers to identify those that would have added value to the High Yield Bond Fund's performance over the most recent three- and five-year periods. The Board also considered Franklin's experience in managing high yield fixed income securities, its reputation, the past performance of similar accounts managed by Franklin, its overall capabilities to perform the services under the Franklin Agreement and its willingness to perform those services for the High Yield Bond Fund. A discussion of the factors relating to the Board's selection of Franklin and approval of the Franklin Agreement follows. Nature, extent and quality of the services to be provided by Franklin. The Board considered Franklin's investment philosophy and investment process, as well as the background and experience of the members of the high yield fixed income portfolio management team. The Board also considered Franklin's investment resources, infrastructure and the adequacy of its compliance program. In reviewing information regarding various recent litigation matters involving Franklin or its affiliated companies, the Board concluded that Franklin appears to have implemented sufficient remedial actions and compliance upgrades. In addition, the Board took into consideration the Manager's conclusion that the investment process to be employed by Franklin would be highly consistent with the High Yield Bond Fund's investment objectives and policies, as well as the Manager's strong recommendation on behalf of Franklin. Further, the Board considered that Franklin was prepared to reserve a material amount of investment capacity for the benefit of the High Yield Bond Fund. Based on - -------------------------------------------------------------------------------- 116 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS -- CONTINUED (UNAUDITED) - -------------------------------------------------------------------------------- this information, the Board concluded that the nature, extent and quality of the advisory services to be provided by Franklin were appropriate for the High Yield Bond Fund in light of its investment objective, and, thus, supported a decision to approve the Franklin Agreement. Performance of Franklin. The Board evaluated Franklin's historical investment performance record in managing assets utilizing a high yield mandate. In particular, the Board evaluated the performance of the Franklin Templeton U.S. High Yield Composite for the one-, two-, three-, and four-year periods ended March 31, 2006 versus a relevant benchmark and a peer group of U.S. high yield fixed income managers in the Mercer investment universe. The Board noted that the performance of the Franklin Templeton U.S. High Yield Composite for all of the time periods presented was (1) better than the performance of the Credit Suisse First Boston High Yield (Developed Countries) Index and (2) above average compared to the Mercer U.S. high yield fixed income universe. The Board concluded that the historical investment performance record of Franklin supported approval of the Franklin Agreement. Comparisons of the amounts to be paid under the Franklin Agreement with those under contracts between Franklin and its other clients. In evaluating the Franklin Agreement, the Board reviewed Franklin's advisory fee schedule and breakpoints for the High Yield Bond Fund. The Board considered comparisons of the advisory fees to be charged by Franklin under the Franklin Agreement versus the fees charged by Franklin to other clients with a similar investment mandate. The Board noted that Franklin's fees for advising the High Yield Bond Fund, at current asset levels, under the Franklin Agreement will be lower than the fees charged by Franklin for new relationships. The Board also noted that the Manager has negotiated the lowest advisory fee Franklin charges for any comparable client account except for two existing accounts. The comparative data regarding the fees Franklin charges to other clients with a similar investment mandate assisted the Board in concluding that Franklin's advisory fees under the Franklin Agreement appeared to be within a reasonable range for the services to be provided to the High Yield Bond Fund. Costs of the services to be provided and profits to be realized by Franklin and its affiliates from the relationship with the High Yield Bond Fund. Since the advisory relationship with Franklin is new, the Board did not consider the costs of the services to be provided and profits to be realized by Franklin and its affiliates from the relationship with the High Yield Bond Fund. However, the Board noted that Franklin will not charge a lower advisory fee to other clients for comparable services. Extent to which economies of scale would be realized as the High Yield Bond Fund grows and whether fee levels reflect these economies of scale for the benefit of High Yield Bond Fund investors. The Board considered that Franklin's fee rate in combination with Post's fee rate likely would result in a modest reduction of expenses for High Yield Bond Fund shareholders in the longer term if High Yield Bond Fund assets increase. The Board also considered that the fees paid to Franklin are passed through the Manager by the High Yield Bond Fund and that the Manager would not benefit economically from the proposed fee agreement. The Board noted that the Manager negotiated "breakpoints" in Franklin's fees based on the levels of assets in the High Yield Bond Fund as well as assets managed by Franklin on behalf of AMR Corporation and its pension plans. Thus, the High Yield Bond Fund is able to receive the lowest possible fee due to economies of scale resulting from Franklin's management of a larger pool of assets. - -------------------------------------------------------------------------------- 117 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS -- CONTINUED (UNAUDITED) - -------------------------------------------------------------------------------- Benefits to be derived by Franklin from the relationship with the High Yield Bond Fund. The Board considered the "fall-out" or ancillary benefits that may accrue to Franklin as a result of the advisory relationship with the High Yield Bond Fund, including greater exposure in the marketplace with respect to Franklin's investment process and expanding the level of assets under management by Franklin. The Board noted that Franklin may not direct the High Yield Bond Fund's brokerage transactions to certain brokers to obtain research and other services and that the High Yield Bond Fund participates in a brokerage recapture program, which requests that Franklin select participating brokers. After consideration of this information, the Board concluded that the potential benefits accruing to Franklin by virtue of its relationship with the High Yield Bond Fund appear to be fair and reasonable. Board's Conclusion. The Board did not identify any single factor as being of paramount importance and different Trustees may have given different weight to different factors. However, based on the various considerations described above, the Board, including a majority of Trustees who are not "interested persons" of the High Yield Bond Fund, the Manager or Franklin, as that term is defined in the Investment Company Act of 1940 concluded that the proposed investment advisory fee is reasonable and that the approval of the Franklin Agreement is in the best interests of the High Yield Bond Fund and its shareholders and, as a result, approved the Franklin Agreement. 2. APPROVAL OF SUB-ADVISORY AGREEMENT BETWEEN MORGAN STANLEY INVESTMENT MANAGEMENT, INC. AND MORGAN STANLEY INVESTMENT MANAGEMENT COMPANY At the August 2, 2006 Board meeting, the Manager proposed that the Board approve a Sub-Advisory Agreement between Morgan Stanley Investment Management, Inc. ("Morgan Stanley"), one of the investment advisers to the American Beacon Emerging Markets Fund (the "Emerging Markets Fund"), and Morgan Stanley Investment Management Company ("MSIM Company"), an affiliate of Morgan Stanley. Under the Sub-Advisory Agreement, Morgan Stanley may delegate to MSIM Company investment advisory responsibility that it is required to perform by under its investment advisory agreement with the Manager. Morgan Stanley requested the Manager and the Board to approve the Sub-Advisory Agreement. The Board considered materials prepared by Morgan Stanley discussing the proposed delegation of investment advisory responsibilities under its agreement with the Manager to MSIM Company. In this regard, the Board considered representations from Morgan Stanley regarding the impact of the delegation to its affiliate on the Emerging Markets Fund, MSIM Company's experience and expertise in emerging markets, its reputation, its overall capabilities to perform the services under the Sub-Advisory Agreement and its willingness to perform those services for the Emerging Markets Fund. A discussion of the factors relating to the Board's approval of MSIM Company and the Sub-Advisory Agreement follows. Nature, extent and quality of the services to be provided by MSIM Company. Based on representations made by Morgan Stanley, the Board considered that the nature, extent and quality of services to be provided by MSIM Company would not decrease as a result of the delegation to MSIM Company. The Board noted that Morgan Stanley has proposed the Sub-Advisory Agreement in order to continue to utilize the services of certain members of the Emerging Markets Fund's portfolio management team. In this regard, the Board considered that members of the portfolio management team who are responsible for the day-to-day management of the Emerging Markets Fund are located outside the United States and are employed by MSIM Company. The Board also considered that MSIM Company's investment philosophy and investment process would not change how the Emerging Markets Fund is managed currently. - -------------------------------------------------------------------------------- 118 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS -- CONTINUED (UNAUDITED) - -------------------------------------------------------------------------------- The Board also noted that the investment advisory agreement with Morgan Stanley would remain in place, and that Morgan Stanley is responsible for overseeing the services to be provided by MSIM Company, Inc. In addition, the Board took into consideration the Manager's recommendation to approve the proposed arrangement. Based on this information, the Board concluded that the nature, extent and quality of the investment advisory services to be provided by MSIM Company were appropriate for the Emerging Markets Fund in light of its investment objective, and, thus, supported a decision to approve the Sub- Advisory Agreement. Performance of MSIM Company. The Board noted that it had evaluated the performance of Morgan Stanley at its annual contract renewal meeting in February 2006. The Board noted that the portion of Emerging Markets Fund assets allocated to Morgan Stanley outperformed or matched the Emerging Markets Fund's benchmark index for all relevant periods except the since inception period ended December 31, 2005. In this regard, the Board considered that MSIM Company likely would have had similar performance if it had managed the Emerging Markets Fund during these periods because the portfolio management team and processes would have been similar. Thus, the Board concluded that the performance record supported approval of the Sub-Advisory Agreement. Comparisons of the amounts to be paid under the Sub-Advisory Agreement with those under contracts between MSIM Company and its other clients. The Board did not consider comparisons of amounts to be paid under the Sub- Advisory Agreement because the fees to be paid to MSIM Company will be paid by Morgan Stanley. In addition, the Board considered that there is no change to the investment advisory fee to be paid by the Manager. Morgan Stanley previously represented that its fee rates are lower than the standard fee schedules for similarly managed mutual funds. Costs of the services to be provided and profits to be realized by MSIM Company and its affiliates from the relationship with the Emerging Markets Fund. Because Morgan Stanley pays MSIM Company, the Board did not consider the costs of the services to be provided and profits to be realized by MSIM Company and its affiliates from the relationship with the Emerging Markets Fund. Extent to which economies of scale would be realized as the Emerging Markets Fund grows and whether fee levels reflect these economies of scale for the benefit of Emerging Markets Fund investors. The Board considered that there are no changes to the fees paid for the investment advisory services provided to the Emerging Markets Fund. The only difference is that Morgan Stanley will pay a portion of the fee it receives from the Manager to MSIM Company, as determined by Morgan Stanley and MSIM Company from time to time, for its services in connection with the management of the Emerging Markets Fund. Benefits to be derived by MSIM Company from the relationship with the Emerging Markets Fund. The Board considered the "fall-out" or ancillary benefits that may accrue to MSIM Company as a result of its management of the Emerging Markets Fund. In this regard, the Board noted that MSIM Company may have greater exposure in the marketplace with respect to its investment process and expanding the level of assets under management by MSIM Company. The Board noted that MSIM Company may not direct the Emerging Markets Fund's brokerage transactions to certain brokers to obtain research and other services and that the Emerging Markets Fund participates in a brokerage recapture program, which requests that MSIM Company select participating brokers. After consideration of this information, the Board concluded that the potential benefits accruing to MSIM Company by virtue of its relationship with the Emerging Markets Fund appear to be fair and reasonable. - -------------------------------------------------------------------------------- 119 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS -- CONTINUED (UNAUDITED) - -------------------------------------------------------------------------------- Board's Conclusion. The Board did not identify any single factor as being of paramount importance and different Trustees may have given different weight to different factors. However, based on the various considerations described above, the Trustees, including a majority of the Independent Trustees, concluded that the fees to be paid under the Sub-Advisory Agreement are reasonable and that the approval of the Sub-Advisory Agreement is in the best interests of the Emerging Markets Fund and its shareholders and, as a result, approved the Sub-Advisory Agreement. 3. APPROVAL OF APPOINTMENT OF RENAISSANCE INVESTMENT MANAGEMENT At the August 3, 2006 Board meeting, the Manager proposed that the Board approve Renaissance Investment Management ("Renaissance") as an investment advisor to the American Beacon Large Cap Growth Fund (the "Large Cap Growth Fund"). Prior to the meeting, the Board requested and reviewed information provided by Renaissance in connection with its consideration of Renaissance as an investment advisor to the Large Cap Growth Fund and the Investment Committee of the Board met with representatives from Renaissance. The Board considered, among other materials, responses by Renaissance to inquiries requesting: - a description of the advisory and related services proposed to be provided to the Large Cap Growth Fund; - identification of the professional personnel to perform services for the Large Cap Growth Fund and their education, experience and responsibilities; - a comparison of the performance of accounts similar to the Large Cap Growth Fund managed by Renaissance with the performance of applicable indices; - an analysis of the proposed advisory fee, a comparison to the fees charged to other comparable clients and an explanation of any differences between the fee schedules; - whether Renaissance charges a lower advisory fee to other clients for which it provides services comparable to the services proposed for the Large Cap Growth Fund and, if so, an explanation of the rationale for charging the other clients a lower fee; - a description of the portfolio managers' compensation, including any incentive arrangements, and if compensation is tied to performance, a description of the oversight mechanisms to prevent a manager with lagging performance from taking undue risks; - a description of Renaissance's compliance program and matters, as well as its trading activities; and - any other information Renaissance believed would be material to the Board's consideration of the Agreement. The Board considered multiple factors when evaluating Renaissance and in approving the Investment Advisory Agreement between Renaissance and the Manager (the "Renaissance Agreement"), including that the Manager had screened a number of available large cap growth advisors to identify Renaissance. The Board considered Renaissance's experience in managing large cap growth assets, its reputation and financial condition, the past performance of similar accounts managed by Renaissance, its overall capabilities to perform the services under the Renaissance Agreement and its willingness to perform those services for the Large Cap Growth Fund. A discussion of the factors relating to the Board's selection of Renaissance and approval of the Renaissance Agreement follows. Nature, extent and quality of the services to be provided by Renaissance. The Board considered Renaissance's investment philosophy and investment process, as well as the background and experience of its portfolio manager. The Board also considered Renaissance's investment resources, infrastructure and the adequacy of its compliance program. In addition, the Board took into consideration the Manager's - -------------------------------------------------------------------------------- 120 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS -- CONTINUED (UNAUDITED) - -------------------------------------------------------------------------------- conclusion that the investment process to be employed by Renaissance would be consistent with the Large Cap Growth Fund's investment objective and policies, as well as the Manager's recommendation on behalf of Renaissance. The Board also noted that the transition to Renaissance likely would not result in a style shift from the previous investment advisor. Renaissance also represented that it planned on adding additional staff in the large cap growth research area. Based on this information, the Board concluded that the nature, extent and quality of the advisory services to be provided by Renaissance were appropriate for the Large Cap Growth Fund in light of its investment objective, and, thus, supported a decision to approve the Renaissance Agreement. Performance of Renaissance. The Board evaluated Renaissance's historical investment performance record in managing assets utilizing a large cap growth mandate. In particular, the Board evaluated the short-term performance of two comparable mutual funds managed by Renaissance relative to the Russell 1000 Growth Index (the "Index"). The Board noted that one fund outperformed the Index during the last calendar year but that both funds underperformed in 2006. The Board also compared the performance of a composite of large cap growth accounts relative to the Index. The composite outperformed the Index for all relevant periods except for the year to date return ended June 30, 2006. Thus, the Board concluded that the historical investment performance record of Renaissance supported approval of the Renaissance Agreement. Comparisons of the amounts to be paid under the Renaissance Agreement with those under contracts between Renaissance and its other clients. In evaluating the Renaissance Agreement, the Board reviewed Renaissance's proposed advisory fee schedule and breakpoints for the Large Cap Growth Fund. The Board considered comparisons of the advisory fees to be charged by Renaissance under the Renaissance Agreement versus the fees charged by Renaissance to other clients with a similar investment mandate. The Board noted that Renaissance's fee rate for advising the Large Cap Growth Fund under the Renaissance Agreement is lower than the standard fee rate charged by Renaissance. The Board also noted that the fee Renaissance charges will not exceed the blended fee charged to any other client of Renaissance with a large cap growth account of the same or smaller size (excluding existing relationships and wrap programs). In addition, the Board considered that the blended fee rate is slightly higher up to $100 million in managed assets when compared to the blended fee rate of the prior investment advisor. However, the proposed fee schedule also includes an additional breakpoint with a lower fee applicable after $100 million in assets in the Large Cap Growth Fund. This information assisted the Board in concluding that Renaissance's advisory fees under the Renaissance Agreement appeared to be within a reasonable range for the services to be provided to the Large Cap Growth Fund. Costs of the services to be provided and profits to be realized by Renaissance and its affiliates from the relationship with the Large Cap Growth Fund. Since the advisory relationship with Renaissance is new, the Board did not consider the costs of the services to be provided and profits to be realized by Renaissance and its affiliates from the relationship with the Large Cap Growth Fund. However, the Board noted that Renaissance's fee will not exceed the blended fee for similar accounts as noted above. Extent to which economies of scale would be realized as the Large Cap Growth Fund grows and whether fee levels reflect these economies of scale for the benefit of Large Cap Growth Fund investors. The Board considered that Renaissance's fee rate represents a significant discount from its standard fee rate for similar accounts. The Board considered that the fees to be paid to Renaissance are passed through the Manager by the Large Cap Growth Fund and that the Manager would not benefit economically from the proposed fee agreement. The Board also considered that the Manager negotiated "breakpoints" in Renaissance's fees based on - -------------------------------------------------------------------------------- 121 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS -- CONTINUED (UNAUDITED) - -------------------------------------------------------------------------------- the levels of assets in the Large Cap Growth Fund. Thus, the Board concluded that the Large Cap Growth Fund is receiving economies of scale due to the relatively low fees and breakpoints incorporated into the fee schedule. Benefits to be derived by Renaissance from the relationship with the Large Cap Growth Fund. The Board considered the "fall-out" or ancillary benefits that may accrue to Renaissance as a result of the advisory relationship with the Large Cap Growth Fund, including greater exposure in the marketplace with respect to Renaissance's investment process and expanding the level of assets under management by Renaissance. The Board noted that Renaissance may not direct the Large Cap Growth Fund's brokerage transactions to certain brokers to obtain research and other services and that the Large Cap Growth Fund participates in a brokerage recapture program. After consideration of this information, the Board concluded that the potential benefits accruing to Renaissance by virtue of its relationship with the Large Cap Growth Fund appear to be fair and reasonable. Board's Conclusion. The Board did not identify any single factor as being of paramount importance, and different Trustees may have given different weight to different factors. However, based on the various considerations described above, the Board, including a majority of Trustees who are not "interested persons" of the Large Cap Growth Funds, the Manager or Renaissance, as that term is defined in the 1940 Act, concluded that the proposed investment advisory fee is reasonable and that the approval of the Renaissance Agreement is in the best interests of the Large Cap Growth Fund and its shareholders and, as a result, approved the Renaissance Agreement. - -------------------------------------------------------------------------------- 122 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS (UNAUDITED) - -------------------------------------------------------------------------------- The Trustees and officers of the American Beacon Funds (the "Trust") are listed below, together with their principal occupations during the past five years. Unless otherwise indicated, the address of each person listed below is 4151 Amon Carter Boulevard, MD 2450, Fort Worth, Texas 76155. Each Trustee oversees twenty-seven funds in the fund complex that includes the Trust, the American Beacon Master Trust, the American Beacon Mileage Funds, and the American Beacon Select Funds. The Trust's Statement of Additional Information contains additional information about the Trustees and is available without charge by calling 1-800-658-5811. <Table> <Caption> POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS NAME, AGE AND ADDRESS WITH THE TRUST AND CURRENT DIRECTORSHIPS - --------------------- ----------------- ------------------------------------------- INTERESTED TRUSTEES TERM Lifetime of Trust until removal, resignation or retirement* William F. Quinn** (58) Trustee and President since Chairman and CEO (2006-Present) and President 1987 (1986-2006), American Beacon Advisors, Inc.; Chairman (1989-2003) and Director (1979-1989, 2003-Present), American Airlines Federal Credit Union; Director, Crescent Real Estate Equities, Inc. (1994-Present); Director, Pritchard, Hubble & Herr, LLC (investment advisor) (2001-2006); Director of Investment Committee, Southern Methodist University Endowment Fund (1996- Present); Member, Southern Methodist University Cox School of Business Advisory Board (1999-2002); Member, New York Stock Exchange Pension Manager Committee (1997-1998, 2000-2002, 2006-Present); Vice Chairman, Committee for the Investment of Employee Benefits (2004-Present); Chairman, Committee for the Investment of Employee Benefits Defined Benefit Sub-Committee (2002-2004); Director, United Way of Metropolitan Tarrant County (1988-2000, 2004-Present); Trustee, American Beacon Mileage Funds (1995-Present); Trustee, American Beacon Select Funds (1999- Present); Trustee, American Beacon Master Trust (1995-Present). Alan D. Feld** (69) Trustee since 1996 Partner, Akin, Gump, Strauss, Hauer & Feld, LLP (law firm) (1960-Present); Director, Clear Channel Communications (1984-Present); Trustee, CenterPoint Properties (1994-Present); Trustee, American Beacon Mileage Funds (1996-Present); Trustee, American Beacon Select Funds (1999- Present); Trustee, American Beacon Master Trust (1996-Present). NON-INTERESTED TRUSTEES TERM Lifetime of Trust until removal, resignation or retirement* W. Humphrey Bogart (62) Trustee since 2004 Consultant, New River Canada Ltd. (mutual fund servicing company) (1998-2003); Board Member, Baylor University Medical Center Foundation (1992- 2004); President and CEO, Allmerica Trust Company, NA (1996-1997); President and CEO, Fidelity Investments Southwest Company (1983-1995); Senior Vice President of Regional Centers, Fidelity Investments (1988-1995); Trustee, American Beacon Mileage Funds (2004-Present); Trustee, American Beacon Select Funds (2004-Present); Trustee, American Beacon Master Trust (2004-Present). </Table> - -------------------------------------------------------------------------------- 123 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS -- CONTINUED (UNAUDITED) - -------------------------------------------------------------------------------- <Table> <Caption> POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS NAME, AGE AND ADDRESS WITH THE TRUST AND CURRENT DIRECTORSHIPS - --------------------- ----------------- ------------------------------------------- NON-INTERESTED TRUSTEES (CONT.) Brenda A. Cline (45) Trustee since 2004 Executive Vice President, Chief Financial Officer, Treasurer and Secretary, Kimbell Art Foundation (1993-Present); Trustee, Texas Christian University (1998-Present); Trustee, W.I. Cook Foundation, Inc. (d/b/a Cook Children's Health Foundation) (2001-Present); Director, Christian Church Foundation (1999-Present); Trustee, American Beacon Mileage Funds (2004-Present); Trustee, American Beacon Select Funds (2004- Present); Trustee, American Beacon Master Trust (2004-Present). Richard A. Massman (63) Trustee since 2004 Senior Vice President and General Counsel, Hunt Consolidated, Inc. (holding company engaged in energy, real estate, farming, ranching and venture capital activities) (1994-Present); Trustee, American Beacon Mileage Funds (2004-Present); Trustee, American Beacon Select Funds (2004- Present); Trustee, American Beacon Master Trust (2004-Present). Stephen D. O'Sullivan (71) Trustee since 1987 Consultant (1994-Present); Trustee, American Beacon Mileage Funds (1995-Present); Trustee, American Beacon Select Funds (1999-Present); Trustee, American Beacon Master Trust (1995- Present). R. Gerald Turner (60) Trustee since 2001 President, Southern Methodist University (1995- 225 Perkins Admin. Bldg. Present); Director, ChemFirst (1986-2002); Southern Methodist Univ. Director, J.C. Penney Company, Inc. (1996- Dallas, Texas 75275 Present); Director, California Federal Preferred Capital Corp. (2001-2003); Director, Kronus Worldwide Inc. (chemical manufacturing) (2003- Present); Director, First Broadcasting Investment Partners, LLC (2003-Present); Member, United Way of Dallas Board of Directors; Member, Salvation Army of Dallas Board of Directors; Member, Methodist Hospital Advisory Board; Member, Knight Commission on Intercollegiate Athletics; Trustee, American Beacon Mileage Funds (2001-Present); Trustee, American Beacon Select Funds (2001- Present); Trustee, American Beacon Master Trust (2001-Present). Kneeland Youngblood (50) Trustee since 1996 Managing Partner, Pharos Capital Group, LLC (a 100 Crescent Court Suite 1740 Chairman since 2005 private equity firm) (1998-Present); Director, Dallas, Texas 75201 Burger King Corporation (2004-Present); Trustee, City of Dallas, Texas Employee Retirement Fund (2004-Present); Trustee, The Hockaday School (1997-2005); Director, Starwood Hotels and Resorts (2001-Present); Member, Council on Foreign Relations (1995-Present); Director, Just For the Kids (1995-2001); Director, L&B Realty Advisors (1998-2000); Trustee, Teachers Retirement System of Texas (1993-1999); Director, Starwood Financial Trust (1998-2001); Trustee, St. Mark's School of Texas (2002-Present); Trustee, American Beacon Mileage Funds (1996-Present); Trustee, American Beacon Select Funds (1999-Present); Trustee, American Beacon Master Trust (1996-Present). OFFICERS TERM One Year Rosemary K. Behan (47) VP, Secretary and Chief Legal Vice President, Legal and Compliance, American Officer since 2006 Beacon Advisors, Inc. (2006-Present); Assistant General Counsel, First Command Financial Planning, Inc. (2004-2006); Enforcement Attorney (2002-2004) and Branch Chief (2000-2002); Securities and Exchange Commission. Brian E. Brett (46) VP since 2004 Vice President, Director of Sales, American Beacon Advisors, Inc. (2004-Present); Regional Vice President, Neuberger Berman, LLC (investment advisor) (1996-2004). Michael W. Fields (52) VP since 1989 Vice President, Fixed Income Investments, American Beacon Advisors, Inc. (1988-Present). </Table> - -------------------------------------------------------------------------------- 124 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS -- CONTINUED (UNAUDITED) - -------------------------------------------------------------------------------- <Table> <Caption> POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS NAME, AGE AND ADDRESS WITH THE TRUST AND CURRENT DIRECTORSHIPS - --------------------- ----------------- ------------------------------------------- OFFICERS (CONT.) Rebecca L. Harris (39) Treasurer since 1995 Vice President, Finance, American Beacon Advisors, Inc. (1995-Present). Christina E. Sears (35) Chief Compliance Officer since Chief Compliance Officer, American Beacon 2004 and Asst. Secretary since Advisors, Inc. (2004-Present); Senior Compliance 1999 Analyst, American Beacon Advisors, Inc. (1998- 2004). </Table> - -------- * The Board has adopted a retirement plan that requires Trustees to retire no later than the last day of the calendar year in which they reach the age of 72, with the exception of Messrs. Quinn and O'Sullivan. ** Messrs. Quinn and Feld are deemed to be "interested persons" of the Trust, as defined by the 1940 Act. Mr. Quinn is Chairman of the Manager. Mr. Feld's law firm of Akin, Gump, Strauss, Hauer & Feld LLP has provided legal services within the past two years to one or more of the Trust's investment advisors. - -------------------------------------------------------------------------------- 125 (AMERICAN BEACON FUNDS LOGO) - -------------------------------------------------------------------------------- DELIVERY OF DOCUMENTS To reduce expenses, your financial institution may mail only one copy of the Prospectus, Annual Report and Semi-Annual Report to those addresses shared by two or more accounts. If you wish to receive individual copies of these documents, please contact your financial institution. Delivery of individual copies will commence thirty days after receiving your request. If you invest in the Funds through a financial institution, you may be able to receive the Fund's regulatory mailings, such as the Prospectus, Annual Report and Semi-Annual Report, by e-mail. If you are interested in this option, please go to www.icsdelivery.com and search for your financial institution's name or contact your financial institution directly. TO OBTAIN MORE INFORMATION ABOUT THE FUNDS: <Table> (KEYBOARD GRAPHIC) (MOUSE GRAPHIC) BY E-MAIL: ON THE INTERNET: american-beacon.funds@ambeacon.com Visit our website at www.americanbeaconfunds.com </Table> - -------------------------------------------------------------------------------- <Table> (TELEPHONE GRAPHIC) (MAILBOX GRAPHIC) BY TELEPHONE: BY MAIL: Institutional Class American Beacon Funds Call (800) 658-5811 4151 Amon Carter Blvd., MD 2450 AMR Class(SM) Fort Worth, TX 76155 Call (800) 345-2345 PlanAhead Class(R) and Service Class Call (800) 388-3344 </Table> - -------------------------------------------------------------------------------- <Table> AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULES AVAILABILITY OF PROXY VOTING POLICY AND RECORDS In addition to the Schedule of Investments A description of the policies and procedures provided in each semi-annual and annual that the Funds use to determine how to vote report, each Fund files a complete schedule proxies relating to portfolio securities is of its portfolio holdings with the Securities available in each Fund's Statement of Additional and Exchange Commission ("SEC") on Form N-Q Information, is available free of charge on the as of the first and third fiscal quarters. Funds' website (www.americanbeaconfunds.com) and The Funds' Forms N-Q are available on the by calling 1-800-967-9009 or by accessing the SEC's website at www.sec.gov. The Forms N-Q SEC's website at www.sec.gov. Each Fund's proxy may also be reviewed and copied at the SEC's voting record for the most recent year ended Public Reference Room, 450 Fifth Street, NW, June 30 is filed annually with the SEC on Form Washington, DC 20549. Information regarding N-PX. The Funds' Forms N-PX are available on the the operation of the SEC's Public Reference SEC's website at www.sec.gov. Each Fund's proxy Room may be obtained by calling 1-800-SEC- voting record may also be obtained by calling 1- 0330. A complete schedule of each Fund's 800-967-9009. portfolio holdings is also available on the Funds' website (www.americanbeaconfunds.com) approximately thirty days after the end of each month. </Table> FUND SERVICE PROVIDERS: <Table> <Caption> CUSTODIAN TRANSFER AGENT INDEPENDENT REGISTERED DISTRIBUTOR STATE STREET BANK AND BOSTON FINANCIAL DATA PUBLIC ACCOUNTING FIRM FORESIDE FUND SERVICES TRUST SERVICES ERNST & YOUNG LLP Portland, Maine Boston, Massachusetts Kansas City, Missouri Dallas, Texas </Table> This report is prepared for shareholders of the American Beacon Funds and may be distributed to others only if preceded or accompanied by a current prospectus. - ------------------------------------------------------------------------------- American Airlines, Inc. is not responsible for investments made in the American Beacon Funds. American Beacon Funds is a service mark of AMR Corporation. American Beacon Balanced Fund, American Beacon Large Cap Growth Fund, American Beacon Mid-Cap Value Fund, American Beacon Small Cap Value Opportunity Fund, American Beacon Emerging Markets Fund, American Beacon High Yield Bond Fund, American Beacon Enhanced Income Fund, American Beacon Intermediate Bond Fund and American Beacon Short-Term Bond Fund are service marks of American Beacon Advisors, Inc. AR10/06 538852 G U I D A N C E | V I S I O N | E X P E R I E N C E [AMERICAN BEACON FUNDS LOGO] ANNUAL REPORT [PHOTO] OCTOBER 31, 2006 INTERNATIONAL EQUITY FUND About American Beacon Advisors - -------------------------------------------------------------------------------- Since 1986, American Beacon Advisors has offered a variety of products and investment advisory services to numerous institutional and retail clients, including a variety of mutual funds, corporate cash management, and separate account management. Our clients include defined benefit plans, defined contribution plans, foundations, endowments, corporations, financial planners, and other institutional investors. With American Beacon Advisors, you can put the experience of a multi-billion dollar asset management firm to work for your company. Contents - -------------------------------------------------------------------------------- <Table> President's Message............................. 1 Market and Performance Overview................. 2 Schedule of Investments......................... 7 Additional Information.....................Back Cover </Table> Any opinions herein, including forecasts, reflect our judgement as of the end of the reporting period and are subject to change. Each advisor's strategies and each Fund's portfolio composition will change depending on economic and market conditions. This report is not a complete analysis of market conditions and, therefore, should not be relied upon as investment advice. Although economic and market information has been compiled from reliable sources, American Beacon Advisors, Inc. makes no representation as to the completeness or accuracy of the statements contained herein. Investing in foreign equities entails additional risk not associated with domestic equities, such as currency fluctuations, economic and political instability and differences in accounting standards. American Beacon Funds October 31, 2006 (BILL QUINN PICTURE) FELLOW SHAREHOLDERS, I am pleased to present to you the American Beacon International Equity Fund Annual Report for the twelve months ended October 31, 2006. It was a positive year for the developed foreign markets due in part to lower global oil prices. European markets outperformed Asian markets for the year by over 17%. The MSCI EAFE Index reported a one-year total return of 27.52%, beating the S&P 500(R) and Dow Jones Industrial Average indices' returns of 16.34% and 18.47%, respectively. The weak dollar had the effect of allowing the EAFE return in dollar terms to exceed the return in local currency terms by almost 5% for the one-year period. The American Beacon International Equity Fund-Institutional Class recorded annualized total returns of 27.49%, 21.57%, 16.17%, and 10.40% for the one-, three-, five-, and ten-year periods, beating the MSCI EAFE Index's returns for the three-, five- and ten-year periods and trailing the one-year number by just three basis points (0.03%). Given the strength of the overall markets, the Fund's performance in this environment exceeded the expectations we have for a value fund. All returns are as of October 31, 2006. Please review the enclosed market overviews, portfolio listings, and detailed financial data. As always, we welcome the opportunity to serve your financial needs. To obtain further details about the American Beacon Funds family or to access your account information, please visit our website at www.americanbeaconfunds.com. Thank you for your continued confidence in the American Beacon International Equity Fund. Sincerely, -s- William F. Quinn William F. Quinn President, American Beacon Funds Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 800-967-9009. 1 INTERNATIONAL EQUITY MARKET OVERVIEW OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- After rebounding in the fourth quarter of 2005, international stocks moved higher over the first quarter of 2006, as a continuation of strong profit growth, coupled with robust merger and acquisition activity, aided the overall rally in the international markets. However, a sharp selloff was witnessed in May and early June, due to concerns about accelerating inflation and fears that the Federal Reserve (the "Fed") would continue its course of tight monetary policy. Over the final four months of the period, global stocks rebounded as the Fed left the benchmark interest rate unchanged at 5.25% for a third time and downplayed concerns that the housing slump will jeopardize the country's five- year economic expansion. Further alleviating fears of tighter monetary policy was news of more benign inflation in Europe and Japan. Inflation in the Eurozone slowed to its lowest level in two and a half years. Japan's key inflation rate also slowed unexpectedly, and the Bank of Japan kept rates at 0.25%. Another important factor spurring equities higher was the sharp retreat in oil prices, as geopolitical tensions affecting the oil market eased. After reaching record levels in July, the price of oil fell below $57 a barrel in mid-October. A stronger-than-expected earnings season also contributed to the rebound. Economic growth remained robust in all principal regions of the world, with the Eurozone achieving the fastest rate of growth in six years. In Europe, stocks ended October at close to a five-year high, boosted by robust mergers and acquisitions activity. A record $1.2 trillion had been spent on European takeovers through September, compared with $750 billion for the same period last year. Japanese stocks lagged near the end of the period, as economic reports were weaker than expected, calling into question the sustainability of the long- awaited economic recovery. In addition, Japan's election of a new prime minister created uncertainty about the future pace of economic reform. All sectors of the MSCI EAFE Index posted positive returns with Utilities and Materials outperforming the broad market. However, the Energy and Telecom Services sectors significantly underperformed. From a regional perspective, Europe showed the largest gains, with particularly good stock performance in France, Germany and Spain. The United Kingdom performed roughly in line with the MSCI EAFE Index while Japan lagged. 2 PERFORMANCE OVERVIEW AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- The Institutional Class of the International Equity Fund returned 27.49% for the twelve months ended October 31, 2006. The Fund underperformed the MSCI EAFE Index (the "Index") return of 27.52% but outperformed the Lipper International Funds Index return of 27.27%. <Table> <Caption> COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 10/31/96 THROUGH 10/31/06 (PERFORMANCE GRAPH) LIPPER INT'L MSCI INSTITUTIONAL FUNDS EAFE CLASS INDEX INDEX ------------- ------------ ------- 10/96 $10,000 $10,000 $10,000 10/97 $11,908 $11,337 $10,463 10/98 $12,407 $11,863 $11,473 10/99 $14,886 $14,596 $14,115 10/00 $15,237 $15,100 $13,706 10/01 $12,717 $11,461 $10,289 10/02 $11,380 $10,284 $ 8,930 10/03 $14,978 $13,013 $11,344 10/04 $18,346 $15,168 $13,481 10/05 $21,105 $18,036 $15,920 10/06 $26,907 $22,955 $20,301 </Table> <Table> <Caption> ANNUALIZED TOTAL RETURNS ------------------------------------ PERIODS ENDED 10/31/06 ------------------------------------ VALUE OF $10,000 10/31/96- 1 YEAR 5 YEARS 10 YEARS 10/31/06 ------ ------- -------- --------- Institutional Class(1)............. 27.49% 16.17% 10.40% $26,907 PlanAhead Class(1)..... 27.20% 15.98% 10.16% $26,321 AMR Class(1)........... 27.88% 16.46% 10.68% $27,595 Service Class(1,2)..... 26.89% 15.75% 10.05% $26,065 Lipper Int'l. Funds Index(3)............. 27.27% 14.90% 8.67% $22,955 MSCI EAFE Index(3)..... 27.52% 14.56% 7.34% $20,301 </Table> 1. Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1- 800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. 2. Fund performance for the five-year and ten-year periods represents the total returns achieved by the PlanAhead Class from 10/31/96 up to 5/1/03, the inception date of the Service Class, and the returns of the Service Class since its inception. Expenses of the Service Class are higher than those of the PlanAhead Class. As a result, total returns shown may be higher than they would have been had the Service Class been in existence since 10/31/96. A portion of the fees charged to the Service Class of the Fund has been waived. Performance prior to waiving fees was lower than the actual returns shown. 3. The Lipper International Funds Index tracks the results of the 30 largest mutual funds in the Lipper International Funds category. Lipper is an independent mutual fund research and ranking service. One cannot directly invest in an index. The MSCI EAFE Index is a market capitalization weighted index of international stock performance composed of equities from developed markets excluding the U.S. and Canada. The Fund underperformed the Index by 0.03% over the past fiscal year primarily due to Fund expenses. Although stock selection was negative, it was more than offset by positive country allocation. Country allocation added value as the Fund had an underweight in Japan, which was the second worst performing EAFE market for the period with a gain of 16.6%. Additional value was added by overweighting the Netherlands, France and Ireland as each market gained over 30%. Although stock selection had a positive impact in the Netherlands, Finland and Canada, it was more than offset by negative stock selections in Japan and France. Japanese Finance companies, Takefuji (down 46.1%), Promise (down 41.3%), Acom (down 39.1%) and Aiful (35.0%), contributed to the Fund's underperformance in Japan. In France, despite positive performance, the Fund's positions in Sanofi-Synthelabo (up 8.5%), Total (up 13.5%) and France Telecom (up 5.5%) lagged the Index. In the Netherlands, significant positions in TNT (up 67.1%) and ING Groep (up 59.7%) added value. Kci Konecranes gained just over 100% in Finland, while Canadian-based Rogers Communication returned over 50%. Although economic and market conditions vary from period to period, the Fund's primary strategy remains consistent as it focuses on investing in undervalued companies with above-average earnings growth expectations. 3 PERFORMANCE OVERVIEW AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) -- CONTINUED OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- TOP TEN HOLDINGS <Table> <Caption> % OF NET ASSETS ---------- Sanofi-Synthelabo 2.3% France Telecom S.A. 2.1% GlaxoSmithKline plc 1.9% Vodafone Group plc 1.9% Total S.A. 1.8% Royal Dutch Shell plc 1.8% BAE Systems plc 1.7% Royal Bank of Scotland Group plc 1.6% Deutsche Post AG 1.5% BNP Paribas 1.5% </Table> SECTOR ALLOCATION <Table> <Caption> % OF EQUITIES -------- Financials 27.7% Consumer Discretionary 15.8% Industrials 10.8% Telecommunication Services 8.5% Energy 8.2% Consumer Staples 7.8% Health Care 7.3% Materials 4.8% Information Technology 4.7% Utilities 4.4% </Table> REGIONAL ALLOCATION* (PIE CHART) <Table> <Caption> % OF EQUITIES -------- Europe 76.6 % Pacific Rim 21.5 % North America 1.7 % Central America 0.2 % </Table> * shown as a percentage of equities. FUND EXPENSE EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, such as redemption fees, and (2) ongoing costs, including management fees, administrative service fees, distribution (12b-1) fees, and other Fund expenses. The examples below are intended to help you understand the ongoing cost (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the period in each Class and held for the entire period from May 1, 2006 through October 31, 2006. ACTUAL EXPENSES The "Actual" lines of the table provide information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Shareholders of the PlanAhead and Institutional Classes that invest in the Fund through an IRA may be subject to a custodial IRA fee of $12 that is typically deducted each December. If your account was subject to a custodial IRA fee during the period, your costs would have been $12 higher. Investing in foreign equities entails additional risk not associated with domestic equities, such as currency fluctuations, economic and political instability and differences in accounting standards. 4 PERFORMANCE OVERVIEW AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) -- CONTINUED OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The "Hypothetical" lines of the table provide information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed 5% per year rate of return before expenses (not the Fund's actual return). You may compare the ongoing costs of investing in the Fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. Shareholders of the PlanAhead and Institutional Classes that invest in the Fund through an IRA may be subject to a custodial IRA fee of $12 that is typically deducted each December. If your account was subject to a custodial IRA fee during the period, your costs would have been $12 higher. You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs charged by the Fund, such as redemption fees. Similarly, the expense examples for other funds do not reflect any transaction costs charged by those funds, such as sales charges (loads), redemption fees or exchange fees. Therefore, the "Hypothetical" lines of the table are useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. If you were subject to any transaction costs during the period, your costs would have been higher. <Table> <Caption> BEGINNING ENDING ACCOUNT ACCOUNT EXPENSES PAID VALUE VALUE DURING PERIOD* 5/1/06 10/31/06 5/1/06-10/31/06 --------- --------- --------------- INSTITUTIONAL CLASS Actual $1,000.00 $1,038.28 $ 3.48 Hypothetical $1,000.00 $1,021.79 $ 3.46 (5% return before expenses) PLANAHEAD CLASS Actual $1,000.00 $1,036.94 $ 4.79 Hypothetical $1,000.00 $1,020.51 $ 4.75 (5% return before expenses) SERVICE CLASS Actual $1,000.00 $1,035.85 $ 6.00 Hypothetical $1,000.00 $1,019.32 $5.95 (5% return before expenses) AMR CLASS Actual $1,000.00 $1,039.30 $ 2.18 Hypothetical $1,000.00 $1,023.07 $ 2.16 (5% return before expenses) </Table> * Expenses are equal to the Fund's annualized expense ratios for the six- month period of 0.68%, 0.93%, 1.17%, and 0.42% for the Institutional, PlanAhead, Service, and AMR Classes, respectively, multiplied by the average account value over the period, multiplied by the number derived by dividing the number of days in the most recent fiscal half-year (184) by days in the year (365) to reflect the half-year period. 5 AMERICAN BEACON INTERNATIONAL EQUITY FUND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - -------------------------------------------------------------------------------- To the Shareholders and Board of Trustees of American Beacon International Equity Fund: We have audited the accompanying statement of assets and liabilities of American Beacon International Equity Fund (a portfolio of American Beacon Funds) (the "Fund"), including the schedule of investments, as of October 31, 2006, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2006, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of American Beacon International Equity Fund as of October 31, 2006, 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 periods indicated therein, in conformity with U.S. generally accepted accounting principles. -s- Ernst & Young LLP Dallas, Texas December 28, 2006 See accompanying notes - -------------------------------------------------------------------------------- 6 AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SHARES VALUE ------------- ------------- (DOLLARS IN THOUSANDS) AUSTRALIA - 1.10% COMMON STOCKS - 1.10% Alumina Ltd. + ................................................. 732,248 $ 3,816 Commonwealth Bank of Australia ................................. 208,440 7,699 Macquarie Airports Management Ltd. ............................. 2,528,369 6,285 National Australia Bank Ltd. ................................... 342,730 10,133 News Corp. ..................................................... 182,280 3,800 ------------- TOTAL AUSTRALIA ................................................. 31,733 ------------- BERMUDA - 0.20% COMMON STOCKS - 0.20% Yue Yuen Industrial (Holdings) Ltd. ............................ 1,894,500 5,737 ------------- CANADA - 1.62% COMMON STOCKS - 1.62% Alcan, Inc. /\ ................................................. 78,471 3,681 BCE, Inc. ...................................................... 280,044 7,905 Celestica, Inc. /\ ............................................. 556,300 5,459 Husky Energy, Inc. + ........................................... 69,080 4,400 Jean Coutu Group, Inc. ......................................... 371,200 3,858 Manulife Financial Corp. ....................................... 436,196 14,178 Rogers Communications, Inc. .................................... 123,551 7,392 ------------- TOTAL CANADA .................................................... 46,873 ------------- DENMARK - 0.14% COMMON STOCKS - 0.14% Vestas Wind Systems /\ + ....................................... 141,526 3,986 ------------- FINLAND - 1.55% COMMON STOCKS - 1.55% KCI Konecranes Oyj ............................................. 432,600 9,320 Nokia Oyj /\ ................................................... 293,400 5,823 Stora Enso Oyj ................................................. 213,542 3,459 Stora Enso Oyj, A Shares ....................................... 68,102 1,106 Stora Enso Oyj, R Shares ....................................... 232,400 3,761 UPM-Kymmene Oyj ................................................ 835,200 21,202 ------------- TOTAL FINLAND ................................................... 44,671 ------------- FRANCE - 13.96% COMMON STOCKS - 13.96% Accor S.A. ..................................................... 199,750 13,869 AXA SA ......................................................... 1,013,618 38,616 BNP Paribas .................................................... 400,575 44,045 Carrefour S.A. ................................................. 122,683 7,475 Compagnie Generale des Etablissements Michelin ................. 116,670 9,515 Electricite de France .......................................... 143,361 8,693 France Telecom S.A. ............................................ 2,291,944 59,528 Lafarge S.A. ................................................... 55,862 7,508 </Table> <Table> <Caption> SHARES VALUE ------------- ------------- (DOLLARS IN THOUSANDS) Lagardere S.C.A. .............................................. 117,800 $ 8,472 Publicis Groupe SA /\ ......................................... 258,418 10,000 Sanofi-Synthelabo ............................................. 791,885 67,312 Schneider Electric S.A. ....................................... 71,531 7,431 Suez S.A. ..................................................... 311,998 13,961 Technip ....................................................... 200,193 12,057 Thomson S.A. /\ ............................................... 283,700 4,892 Total S.A. .................................................... 765,239 51,813 Vinci S.A. .................................................... 159,529 17,968 Vivendi SA /\ ................................................. 534,500 20,240 ------------- TOTAL FRANCE ................................................... 403,395 ------------- GERMANY - 8.26% COMMON STOCKS - 8.26% adidas AG /\ .................................................. 132,100 6,619 Allianz AG /\ ................................................. 57,102 10,598 BASF AG ....................................................... 58,310 5,139 Bayerische Motoren Werke Akitengesellshaft .................... 563,681 32,374 Celesio AG .................................................... 260,090 13,411 Deutsche Bank AG .............................................. 72,270 9,096 Deutsche Post AG + ............................................ 1,611,949 44,644 Deutsche Telekom /\ ........................................... 532,900 9,223 E.ON AG ....................................................... 205,630 24,670 Infineon Technologies AG /\ ................................... 527,250 6,420 Karstadt Quelle AG /\ + ....................................... 256,902 6,033 METRO AG /\ ................................................... 165,600 9,838 Muenchener Rueckversicherung-Gesellschaft AG ............................. 47,997 7,791 Siemens AG .................................................... 391,807 35,254 Volkswagen AG + ............................................... 176,100 17,374 ------------- TOTAL GERMANY .................................................. 238,484 ------------- GIBRALTAR - 0.11% COMMON STOCKS - 0.11% PartyGaming, Ltd. ............................................. 5,549,831 3,229 ------------- HONG KONG/CHINA - 1.96% COMMON STOCKS - 1.96% Cheung Kong Holdings Ltd. ..................................... 835,500 9,110 Hang Lung Group Ltd. .......................................... 2,451,000 6,234 Henderson Land Development Company Ltd. ....................... 2,078,200 11,490 Hutchison Whampoa Ltd. ........................................ 199,000 1,767 PetroChina Company Ltd. ....................................... 16,203,048 17,834 Swire Pacific Ltd. ............................................ 957,100 10,116 ------------- TOTAL HONG KONG/CHINA .......................................... 56,551 ------------- IRELAND - 2.36% COMMON STOCKS - 2.36% Allied Irish Banks ............................................ 445,132 12,158 </Table> See accompanying notes AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SHARES VALUE ------------- ------------- (DOLLARS IN THOUSANDS) Bank of Ireland .................................... 1,284,680 $ 25,872 CRH plc ........................................... 566,948 20,006 Depfa Bank plc .................................... 607,152 10,198 ------------- TOTAL IRELAND ...................................... 68,234 ------------- ITALY - 3.82% COMMON STOCKS - 3.82% Banco Popolare di Verona e Novara Scrl + .......... 314,308 8,460 Capitalia S.p.A. .................................. 668,599 5,909 Enel S.p.A. /\ .................................... 1,432,700 13,751 Eni S.p.A. + ...................................... 677,591 20,435 Mediaset SpA /\ ................................... 1,969,911 22,100 Telecom Italia S.p.A. ............................. 1,392,689 4,222 UniCredito Italiano S.p.A. ........................ 4,297,003 35,620 ------------- TOTAL ITALY ........................................ 110,497 ------------- JAPAN - 12.63% COMMON STOCKS - 12.63% Aiful Corporation Kyoto /\ ........................ 213,000 7,358 Daito Trust Construction Co., Ltd. /\ ............. 139,900 7,380 East Japan Railway Co. ............................ 934 6,533 Fuji Photo Film Company Ltd. ...................... 114,400 4,245 Hitachi Ltd. ...................................... 685,500 3,956 Honda Motor Company Ltd. .......................... 499,300 17,674 Hoya Corp. ........................................ 231,700 8,955 Japan Tobacco, Inc. ............................... 3,027 13,200 JS Group Corp. .................................... 315,500 6,474 Kao Corp. ......................................... 285,600 7,497 Keyence Corp. ..................................... 28,200 6,245 Konica Minolta Holdings, Inc. ..................... 499,500 6,654 LAWSON, Inc. ...................................... 141,000 4,786 Mabuchi Motor Co. Ltd. + .......................... 15,800 921 Minebea Company Ltd. .............................. 967,700 5,899 Mitsubishi Tokyo Financial Group, Inc. ............ 822 10,332 Mitsui Trust Holdings, Inc. /\ .................... 951,400 11,202 NEC Corp. ......................................... 417,300 2,148 Nidec Corp. ....................................... 148,800 11,387 Nintendo Company Ltd. ............................. 20,500 4,193 Nippon Express Co. Ltd. + ......................... 2,023,700 10,953 Nissan Motor Company Ltd. ......................... 2,620,500 31,391 Nomura Holdings, Inc. ............................. 848,000 14,973 Ricoh Co. Ltd. .................................... 386,500 7,634 ROHM Co. Ltd. ..................................... 119,400 10,985 Sankyo Co. Ltd. ................................... 184,300 9,408 Sekisui House Ltd. ................................ 672,600 10,633 SFCG Co Ltd. + .................................... 24,345 4,502 Sompo Japan Insurance, Inc. ....................... 376,900 5,014 Sony Corp. ........................................ 108,402 4,495 Sumitomo Mitsui Financial Group, Inc. ............. 2,502 27,383 Sumitomo Trust and Banking Company Ltd. ........... 1,075,700 11,570 </Table> <Table> <Caption> SHARES VALUE ------------- ------------- (DOLLARS IN THOUSANDS) Takeda Pharmaceutical Co. Ltd. ................................. 415,700 $ 26,693 TDK Corp. ...................................................... 90,300 7,065 THK Co Ltd. .................................................... 242,000 6,156 Tokyo Gas Co. Ltd. ............................................. 2,315,200 11,818 Toyoda Gosei Co. Ltd. .......................................... 249,188 5,785 Yamada Denki Co. Ltd. /\ ....................................... 94,300 9,385 Yamaha Motor Co. Ltd. /\ ....................................... 75,100 2,055 ------------- TOTAL JAPAN ..................................................... 364,937 ------------- LUXEMBOURG - 0.25% COMMON STOCKS - 0.25% Stolt-Nielsen SA /\ ............................................ 250,784 7,212 ------------- MEXICO - 0.20% COMMON STOCKS - 0.20% Telefonos de Mexico, S.A. de C.V., ADR ......................... 214,800 5,669 ------------- NETHERLANDS - 5.29% COMMON STOCKS - 5.29% ABN AMRO Holding N.V. .......................................... 848,753 24,753 ING Groep N.V. ................................................. 816,512 36,172 Koninklijke (Royal) Philips Electronics N.V. /\ ................ 1,136,946 39,716 SBM Offshore N.V. /\ ........................................... 273,650 8,099 TNT N.V. ....................................................... 718,625 27,662 Unilever N.V. /\ ............................................... 670,312 16,529 ------------- TOTAL NETHERLANDS ............................................... 152,931 ------------- NEW ZEALAND - 0.28% COMMON STOCKS - 0.28% Telecom Corporation of New Zealand Ltd.+ ....................... 2,577,400 8,063 ------------- NORWAY - 1.24% COMMON STOCKS - 1.24% Frontline Ltd. + ............................................... 100,877 3,816 Statoil ASA .................................................... 292,350 7,390 Telenor ASA .................................................... 1,556,889 24,591 ------------- TOTAL NORWAY .................................................... 35,797 ------------- PORTUGAL - 0.34% COMMON STOCKS - 0.34% Portugal Telecom, SGPS, S.A. ................................... 792,250 9,869 ------------- SINGAPORE - 1.52% COMMON STOCKS - 1.52% Development Bank of Singapore Group Holdings Ltd. .................................................. 1,889,455 24,759 Flextronics International Ltd. /\ .............................. 899,000 10,428 Singapore Telecommunications Ltd. .............................. 297,000 506 </Table> See accompanying notes AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SHARES VALUE ------------- ------------- (DOLLARS IN THOUSANDS) United Overseas Bank Ltd. ......................................... 712,000 $ 8,095 ------------- TOTAL SINGAPORE .................................................... 43,788 ------------- SOUTH KOREA - 3.24% COMMON STOCKS - 3.24% Hyundai Motor Co. Ltd., GDR /\ .................................... 112,700 2,620 Kookmin Bank, ADR ................................................. 213,510 16,944 Korea Electric Power Corp. ........................................ 86,860 3,356 LG Electronics, Inc. .............................................. 76,760 4,643 LG Telecom Ltd. /\ ................................................ 331,281 3,832 POSCO ............................................................. 45,345 12,584 Samsung Electronics Co. Ltd. ...................................... 38,723 25,110 Samsung Electronics Co. Ltd., GDR ++ .............................. 21,600 7,004 Shinhan Financial Group Company Ltd. .............................. 186,970 8,622 SK Telecom Company Ltd. ........................................... 40,632 8,819 ------------- TOTAL SOUTH KOREA .................................................. 93,534 ------------- SPAIN - 3.28% COMMON STOCKS - 3.28% Banco Bilbao Vizcaya Argentaria, S.A. /\ .......................... 691,815 16,706 Banco Popular Espanol SA .......................................... 506,100 8,772 Banco Santander Central Hispano SA ................................ 34,750 601 Banco Santander Central Hispano SA, GDR ........................... 560,544 9,709 Enagas S.A. ....................................................... 298,328 7,234 Iberdrola S.A. .................................................... 87,345 4,008 Repsol YPF S.A. ................................................... 281,480 9,341 Repsol YPF SA, ADR ................................................ 153,200 5,124 Telefonica S.A. ................................................... 1,721,528 33,177 ------------- TOTAL SPAIN ........................................................ 94,672 ------------- SWEDEN - 1.42% COMMON STOCKS - 1.42% Atlas Copco AB .................................................... 444,100 12,974 Nordea AB ......................................................... 617,020 8,497 Securitas AB ...................................................... 381,930 5,024 Securitas Direct AB /\ ............................................ 381,930 1,163 Securitas Systems AB /\ ........................................... 381,930 1,275 Swedbank AB ....................................................... 139,000 4,552 Telefonaktiebolaget LM Ericsson ................................... 2,006,000 7,610 ------------- TOTAL SWEDEN ....................................................... 41,095 ------------- SWITZERLAND - 6.73% COMMON STOCKS - 6.73% Adecco SA ......................................................... 138,320 8,545 Ciba Specialty Chemicals Holding, Inc. ............................ 202,450 12,392 Compagnie Financiere Richemont AG ................................. 183,900 9,098 Credit Suisse Group ............................................... 535,357 32,275 Lonza Group AG .................................................... 53,670 4,141 Nestle SA ......................................................... 68,404 23,369 </Table> <Table> <Caption> SHARES VALUE ------------- ------------- (DOLLARS IN THOUSANDS) Novartis AG ............................................................ 581,848 $ 35,312 Swiss Reinsurance ...................................................... 282,478 23,160 Syngenta AG ............................................................ 73,428 11,858 UBS AG ................................................................. 144,340 8,621 Zurich Financial Services AG ........................................... 103,962 25,697 ------------- TOTAL SWITZERLAND ....................................................... 194,468 ------------- UNITED KINGDOM - 24.67% COMMON STOCKS - 24.67% AMVESCAP plc ........................................................... 339,930 3,887 Anglo American plc ..................................................... 193,910 8,744 Aviva plc .............................................................. 916,850 13,554 BAE Systems plc ........................................................ 6,138,557 49,122 Barratt Development plc ................................................ 204,176 4,218 Boots Group PLC ........................................................ 906,780 14,011 BP plc ................................................................. 3,554,436 39,529 British American Tobacco Industries plc ................................ 901,964 24,587 British Sky Broadcasting Group plc ..................................... 914,390 9,463 Cadbury Schweppes plc .................................................. 1,845,247 18,567 Centrica plc ........................................................... 1,760,610 11,125 Compass Group plc ...................................................... 3,671,135 19,643 Debenhams plc /\ ....................................................... 2,334,586 8,372 Diageo plc ............................................................. 1,022,543 18,920 Gallaher Group plc ..................................................... 839,872 14,259 GKN plc ................................................................ 462,766 2,697 GlaxoSmithKline plc .................................................... 2,050,553 54,761 HBOS plc ............................................................... 653,354 13,547 HSBC Holdings plc ...................................................... 1,736,309 32,828 Imperial Tobacco Group plc ............................................. 403,040 14,277 Kingfisher plc ......................................................... 3,605,755 18,107 Lloyds TSB Group plc ................................................... 927,400 9,898 Marks and Spencer Group plc ............................................ 634,279 7,943 National Grid plc ...................................................... 1,917,378 24,505 Northern Rock plc /\ ................................................... 340,100 7,766 Old Mutual ............................................................. 2,372,399 7,671 Pearson plc ............................................................ 512,020 7,555 Reckitt Benckiser plc .................................................. 275,700 11,996 Rentokil Initial plc ................................................... 1,438,070 4,156 Reuters Group plc ...................................................... 1,030,072 8,788 Rio Tinto plc .......................................................... 264,493 14,591 Rolls-Royce Group PLC, B Shares /\ # ................................... 39,802,985 76 Rolls-Royce plc ........................................................ 1,084,550 9,718 Royal Bank of Scotland Group plc ....................................... 1,271,205 45,297 Royal Dutch Shell plc, ADR ............................................. 31,660 2,204 Royal Dutch Shell plc, A Shares ........................................ 726,464 25,173 Royal Dutch Shell plc, B Shares ........................................ 655,174 23,471 Shire plc .............................................................. 363,440 6,631 Smiths Group plc ....................................................... 438,030 7,904 Standard Chartered plc ................................................. 177,350 4,990 TI Automotive Ltd. /\ # ................................................ 655,200 -- </Table> See accompanying notes AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SHARES VALUE ------------- ------------- (DOLLARS IN THOUSANDS) Unilever plc ..................................................... 970,350 $ 24,081 Vodafone Group plc /\ ............................................ 21,136,939 54,432 Yell Group plc ................................................... 811,330 9,642 ------------- TOTAL UNITED KINGDOM .............................................. 712,706 ------------- SHORT TERM INVESTMENTS - 3.03% American Beacon Money Market Select Fund SS ........................................................ 87,487,208 87,487 ------------- SECURITIES LENDING COLLATERAL - 2.17% American Beacon Cash Plus Trust SS ............................... 40,880,768 40,881 American Beacon Money Market Select Fund ......................... 21,867,813 21,868 ------------- TOTAL SECURITIES LENDING COLLATERAL ............................... 62,749 ------------- TOTAL INVESTMENTS 101.37% - (COST $2,222,097) ..................... 2,928,367 LIABILITIES, NET OF OTHER ASSETS - (1.37%) ........................ (39,577) ------------- TOTAL NET ASSETS - 100.00% ........................................ $ 2,888,790 ============= </Table> Percentages are stated as a percent of net assets. /\ Non-income producing security. + All or a portion of this security is on loan at October 31, 2006. ++ Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $7,004 or 0.24% of net assets. The Fund has no right to demand registration of these securities. # Valued at fair value pursuant to procedures approved by the Board of Trustees. SS The Fund/Trust is affiliated by having the same investment advisor. See accompanying notes AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- FUTURES CONTRACTS (DOLLARS IN THOUSANDS) UNREALIZED NUMBER OF EXPIRATION MARKET APPRECIATION/ CONTRACTS DATE VALUE (DEPRECIATION) ----------- ----------- ------------ ------------ Australia SPI Index ..... 58 Dec 2006 $ 6,015 $ 265 Canada S&PCDA 60 Index .. 68 Dec 2006 8,557 437 France CAC 40 Index ..... 161 Dec 2006 11,013 294 Germany DAX Index ....... 40 Dec 2006 8,033 340 Hang Seng Index ......... 16 Nov 2006 1,886 17 Italy MIB 30 Index ...... 17 Dec 2006 4,296 119 Netherlands 200 AEX Index 31 Nov 2006 3,851 (24) Spain IBEX 35 Index ..... 27 Nov 2006 4,727 111 Sweden OMX Index ........ 182 Nov 2006 2,741 (49) Tokyo FE TOPIX Index .... 190 Dec 2006 26,167 (202) UK FTSE 100 Index ....... 231 Dec 2006 27,053 705 ----------- ----------- $ 104,339 $ 2,013 =========== =========== </Table> FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS (DOLLARS IN THOUSANDS) SETTLEMENT MARKET UNREALIZED DATE VALUE GAIN/(LOSS) ---------- ----------- ---------- CONTRACTS TO DELIVER 4,818 Australian Dollar 12/15/2006 $ 3,727 $ (57) 6,233 Canadian Dollar 12/15/2006 5,558 27 15,538 Euro Currency 12/15/2006 19,879 (37) 1,894,023 Japanese Yen 12/15/2006 16,299 (87) 8,610 Pound Sterling 12/15/2006 16,430 (116) 12,279 Swedish Krona 12/15/2006 1,705 (9) 5,506 Swiss Franc 12/15/2006 4,446 (11) TOTAL CONTRACTS TO DELIVER ----------- ---------- (RECEIVABLE AMOUNT $67,754) $ 68,044 $ (290) ----------- ---------- CONTRACTS TO RECEIVE 10,871 Australian Dollar 12/15/2006 $ 8,408 $ 226 14,369 Canadian Dollar 12/15/2006 12,813 (42) 34,180 Euro Currency 12/15/2006 43,729 220 4,709,176 Japanese Yen 12/15/2006 40,525 (201) 20,793 Pound Sterling 12/15/2006 39,678 808 27,468 Swedish Krona 12/15/2006 3,815 56 14,461 Swiss Franc 12/15/2006 11,677 (8) TOTAL CONTRACTS TO RECEIVE ----------- ---------- (PAYABLE AMOUNT $159,586) $ 160,645 $ 1,059 ----------- ---------- NET CURRENCY FLUCTUATION $ 769 ========== </Table> See accompanying notes AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SECTOR DIVERSIFICATION Percent of Net Assets ---------- Consumer Discretionary ........................... 15.17% Consumer Staples ................................. 7.53% Energy ........................................... 7.85% Financials ....................................... 26.55% Health Care ...................................... 7.06% Industrials ...................................... 10.35% Information Technology ........................... 4.55% Materials ........................................ 4.64% Telecommunication Services ....................... 8.21% Utilities ........................................ 4.26% Short Term Investments ........................... 5.20% Liabilities, Net of Other Assets ................. (1.37)% ---------- 100.00% ========== </Table> See accompanying notes AMERICAN BEACON INTERNATIONAL EQUITY FUND STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2006 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) - -------------------------------------------------------------------------------- <Table> ASSETS: Investments in unaffiliated securities, at value(A C)................. $ 2,778,131 Investments in affiliated securities, at value(B)..................... 150,236 Foreign currency, at value(D)......................................... 3,517 Deposit with brokers for futures contracts............................ 14,693 Receivable for investments sold....................................... 121 Dividends and interest receivable..................................... 4,641 Receivable for fund shares sold....................................... 4,557 Receivable for tax reclaims........................................... 726 Unrealized appreciation on foreign currency contracts................. 769 Prepaid expenses...................................................... 44 ----------- TOTAL ASSETS..................................................... 2,957,435 ----------- LIABILITIES: Payable for investments purchased..................................... 572 Payable upon return of securities loaned.............................. 62,749 Payable for fund shares redeemed...................................... 1,704 Payable for variation margin on open futures contracts................ 84 Payable under excess expense reimbursement plan....................... 5 Management and investment advisory fees payable (Note 2).............. 2,489 Administrative service and service fees payable....................... 635 Other liabilities..................................................... 407 ----------- TOTAL LIABILITIES................................................ 68,645 ----------- NET ASSETS................................................................. $ 2,888,790 =========== ANALYSIS OF NET ASSETS: Paid-in-capital....................................................... 1,933,803 Undistributed net investment income................................... 49,187 Accumulated net realized gain (loss).................................. 196,606 Unrealized appreciation (depreciation) of investments, futures contracts and foreign currency...................................... 709,194 ----------- NET ASSETS................................................................. $ 2,888,790 =========== SHARES OUTSTANDING (NO PAR VALUE): Institutional Class................................................... 62,783,054 =========== PlanAhead Class....................................................... 31,585,878 =========== Service Class......................................................... 195,529 =========== AMR Class............................................................. 22,654,809 =========== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE: Institutional Class................................................... $ 24.68 =========== PlanAhead Class....................................................... $ 24.42 =========== Service Class......................................................... $ 24.24 =========== AMR Class............................................................. $ 24.86 =========== - -------- (A) Cost of investments in unaffiliated securities......................... $ 2,071,861 (B) Cost of investments in affiliated securities........................... 150,236 (C) Market value of securities on loan..................................... 56,179 (D) Cost of foreign currency............................................... 3,462 </Table> See accompanying notes - -------------------------------------------------------------------------------- 13 AMERICAN BEACON INTERNATIONAL EQUITY FUND STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 2006 (IN THOUSANDS) - -------------------------------------------------------------------------------- <Table> INVESTMENT INCOME: Dividend income from unaffiliated securities (net of foreign taxes)*... $ 64,370 Dividend income from affiliated securities............................. 3,745 Interest income........................................................ 263 Income derived from securities lending, net............................ 2,192 Investment income allocated from the Portfolio (net of foreign taxes)**............................................................. 14,190 Expenses allocated from the Portfolio.................................. (3,209) Other income........................................................... 31 -------- TOTAL INVESTMENT INCOME........................................... 81,582 -------- EXPENSES: Management and investment advisory fees (Note 2)....................... 6,301 Administrative service fees (Note 2): Institutional Class.................................................. 3,663 PlanAhead Class...................................................... 1,684 Service Class........................................................ 10 Transfer agent fees: Institutional Class.................................................. 177 PlanAhead Class...................................................... 109 Service Class........................................................ -- AMR Class............................................................ 20 Custody and fund accounting fees....................................... 937 Professional fees...................................................... 64 Registration fees and expenses......................................... 100 Service fees: PlanAhead Class (Note 2)............................................. 1,681 Service Class (Note 2)............................................... 10 Distribution fees -- Service Class (Note 2)............................ 10 Prospectus and shareholder reports..................................... 231 Other expenses......................................................... 223 -------- TOTAL EXPENSES.................................................... 15,220 -------- Net (fees waived and expenses reimbursed)/recouped by Manager (Note 2)................................................................... 4 -------- NET EXPENSES...................................................... 15,224 -------- NET INVESTMENT INCOME....................................................... 66,358 -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain from: Investments.......................................................... 125,805 Commission recapture (Note 1)........................................ 217 Foreign currency translations........................................ 7,592 Futures contracts.................................................... 10,559 Net realized gain (loss) allocated from Portfolio.................... 62,206 Change in net unrealized appreciation or depreciation of: Investments.......................................................... 27,496 Futures contracts.................................................... (2,021) Foreign currency translations........................................ 99,635 Net change in unrealized gain/loss allocated from Portfolio.......... 233,765 -------- NET GAIN (LOSS) ON INVESTMENTS.................................... 565,254 -------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................ $631,612 ======== * Foreign taxes....................................................... $ 5,626 ** Foreign taxes....................................................... $ 841 </Table> See accompanying notes - -------------------------------------------------------------------------------- 14 AMERICAN BEACON INTERNATIONAL EQUITY FUND STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS) - -------------------------------------------------------------------------------- <Table> <Caption> YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, 2006 2005 ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income......................................... $ 66,358 $ 47,523 Net realized gain (loss) on investments, futures contracts, and foreign currency transactions........................... 206,379 186,828** Change in net unrealized appreciation or depreciation of investments, futures contracts, and foreign currency translations................................................ 358,875 44,556 ---------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..... 631,612 278,907 ---------- ---------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class......................................... (25,841) (13,529) PlanAhead Class............................................. (10,419) (4,004) Service Class............................................... (39) (22) AMR Class................................................... (10,085) (7,644) Net realized gain on investments: Institutional Class......................................... (80,744) -- PlanAhead Class............................................. (36,241) -- Service Class............................................... (195) -- AMR Class................................................... (28,011) -- ---------- ---------- NET DISTRIBUTIONS TO SHAREHOLDERS........................ (191,575) (25,199) ---------- ---------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares................................. 548,466 766,799 Reinvestment of dividends and distributions................... 176,178 22,373 Cost of shares redeemed....................................... (574,493) (545,309) Redemption fees............................................... 308 58 ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS........................................... 150,459 243,921 ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS.............................. 590,496 497,629 ---------- ---------- NET ASSETS: Beginning of period........................................... 2,298,294 1,800,665 ---------- ---------- END OF PERIOD*................................................ $2,888,790 $2,298,294 ========== ========== * Includes undistributed net investment income (loss) of..... $ 49,187 $ 38,005 ========== ========== ** Includes $902 payment by affiliate (Note 2). </Table> See accompanying notes - -------------------------------------------------------------------------------- 15 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2006 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES American Beacon Funds (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940 (the "Act"), as amended, as a no load, diversified, open-end management investment company. These financial statements and notes to the financial statements relate to the American Beacon International Equity Fund, a series of the Trust. American Beacon Advisors, Inc. (the "Manager") is a wholly-owned subsidiary of AMR Corporation, the parent company of American Airlines, Inc. ("American"), and was organized in 1986 to provide business management, advisory, administrative and asset management consulting services to the Trust and other investors. Reorganization Prior to March 1, 2006, the American Beacon International Equity Fund (the "Fund") invested all of its investable assets in the International Equity Portfolio (the "Portfolio") of the American Beacon Master Trust. At the close of business on February 28, 2006, the Portfolio redeemed for cash and securities the investment of the American Independence International Multi-Manager Stock Fund as follows (in thousands): <Table> Cash......................................................................... $ 9,583 Securities at market value................................................... $94,585 </Table> Upon completion of this transaction, the Fund was the sole shareholder in the Portfolio. Accordingly, on February 28, 2006 the Fund withdrew its interest in the Portfolio. The Fund received a distribution of cash and securities from the Portfolio with a market value equal to the Fund's investment in the Portfolio in the amount of $2,598,672,000 at the close of business. The Portfolio then ceased operations. The following is a summary of the significant accounting policies followed by the Fund. Class Disclosure The Fund has multiple classes of shares designed to meet the needs of different groups of investors. The following table sets forth the differences amongst the classes: CLASS: OFFERED TO: SERVICE AND DISTRIBUTION FEES: - ------ ----------- ------------------------------ INSTITUTIONAL CLASS Investors making an initial investment of $2 million Administrative Service Fee -- 0.25% PLANAHEAD CLASS General public and investors investing through an Administrative Service Fee -- 0.25% intermediary Service Fee -- 0.25% SERVICE CLASS Investors investing through an intermediary Administrative Service Fee -- 0.25% Service Fee -- 0.25% Distribution Fee -- 0.25% AMR CLASS Investors in the tax-exempt retirement and benefit N/A plans of AMR Corporation and its affiliates Investment income, net capital gains (losses) and all expenses incurred by the Fund are allocated based on the relative net assets of each class, except for service fees and certain other fees and expenses related solely to one class of shares. Security Valuation Investments are valued at the close of the New York Stock Exchange (the "Exchange"), normally 4 p.m. ET, each day that the Exchange is open for business. Equity securities for which market quotations are available are valued at the last sale price or official closing price (closing bid price or last evaluated quote if no sale has occurred) on the primary market or exchange on which they trade. - -------------------------------------------------------------------------------- 16 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- Debt securities (other than short-term securities) normally are valued on the basis of prices provided by an independent pricing service and may take into account appropriate factors such as institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. When a price is unavailable from a pricing service or when the price provided by the pricing service is deemed not to represent fair value, the prices of debt securities may be determined using quotes obtained from brokers. Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. Investment grade short-term obligations with 60 days or less to maturity are valued using the amortized cost method, which approximates market value. Securities for which the market prices are not readily available or are not reflective of the fair value of the security, as determined by the Manager, will be priced at fair value following procedures approved by the Board of Trustees (the "Board"). Most foreign markets close before the Exchange. Developments that could affect the values of securities that occur between the close of a foreign market and the close of the Exchange normally will not be reflected in security valuations. If such developments are so significant that they will, in the judgment of the pricing committee of the Fund, clearly and materially affect the value of securities, the foreign market closing prices may be adjusted to reflect the fair value of the securities as of the close of the Exchange, as determined in good faith and pursuant to procedures approved by the Board. Adjustments to closing prices to reflect fair value on affected foreign securities may be provided by an independent pricing service. Security Transactions and Investment Income Security transactions are recorded on the trade date of the security purchase or sale. The Fund may purchase securities with delivery or payment to occur at a later date. At the time the Fund enters into a commitment to purchase a security, the transaction is recorded and the value of the security is reflected in the net asset value. The value of the security may vary with market fluctuations. Dividend income, net of foreign taxes, is recorded on the ex-dividend date except certain dividends from foreign securities which are recorded as soon as the information is available to the Fund. Interest income is earned from settlement date, recorded on the accrual basis, and adjusted, if necessary, for accretion of discounts and amortization of premiums. For financial and tax reporting purposes, realized gains and losses are determined on the basis of specific lot identification. Currency Translation All assets and liabilities initially expressed in foreign currency values are converted into U.S. dollar values at the mean of the bid and ask prices of such currencies against U.S. dollars as last quoted by a recognized dealer. Income, expenses and purchases and sales of investments are translated into U.S. dollars at the rate of exchange prevailing on the respective dates of such transactions. The effect of changes in foreign currency exchange rates on investments is separately identified from the fluctuations arising from changes in market values of securities held and is reported with all other foreign currency gains and losses in the Fund's Statement of Operations. Forward Foreign Currency Contracts The Fund may enter into forward foreign currency contracts to hedge the exchange rate risk on investment transactions or to hedge the value of Fund securities denominated in foreign currencies. Forward foreign currency contracts are valued at the forward exchange rate prevailing on the day of valuation. The Fund bears the market risk that arises from changes in foreign exchange rates, and accordingly, the unrealized gain (loss) on these contracts is - -------------------------------------------------------------------------------- 17 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- reflected in the accompanying financial statements. The Fund also bears the credit risk if the counterparty fails to perform under the contract. Futures Contracts The Fund may enter into financial futures contracts which are contracts to buy a standard quantity of securities at a specified price on a future date. The Fund may purchase or sell futures contracts and options on futures contracts as a method for keeping assets readily convertible to cash if needed to meet shareholder redemptions or for other needs while maintaining exposure to the stock market. The primary risks associated with the use of futures contracts are the possibility of illiquid markets or imperfect correlation between the value of the contracts and the underlying securities, or that the counterparty will fail to perform its obligations. Upon entering into a futures contract, the Fund is required to set aside or deposit with a broker an amount, termed the initial margin, which typically represents 5% of the face value of the futures contract. The initial margin amount is reflected as Deposit with broker for futures contracts on the Statement of Assets and Liabilities. Payments to and from the broker, known as variation margin, are required to be made on a daily basis as the price of the futures contract fluctuates. Changes in the initial settlement values are accounted for as unrealized appreciation (depreciation) until the contracts are terminated, at which time realized gains and losses are recognized. Futures contracts are valued at the most recent settlement price established each day by the exchange on which they are traded. Commission Recapture The Fund has established brokerage commission recapture arrangements with certain brokers or dealers. If a Fund investment advisor chooses to execute a transaction through a participating broker, the broker rebates a portion of the commission back to the Fund. Any collateral benefit received through participation in the commission recapture program is directed exclusively to the Fund. This amount is reported with the net realized gain in the Fund's Statement of Operations. Redemption Fees The Fund imposes a 2% redemption fee on shares held for less than 90 days. The fee is deducted from the redemption proceeds and is intended to offset the trading costs, market impact and other costs associated with short-term trading activity in the Fund. The "first-in, first-out" method is used to determine the holding period. Through April 30, 2006, the fee was retained by the class that imposed the fee. Effective May 1, 2006, the fee is allocated to all classes of the Fund pro-rata based on their respective net assets. Dividends to Shareholders Dividends from net investment income of the Fund normally will be declared and paid annually. Distributions, if any, of net realized capital gains are generally paid annually and recorded on the ex-dividend date. Allocation of Income, Expenses, Gains and Losses Income, expenses (other than those attributable to a specific class), gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets represented by such class. Operating expenses directly attributable to a specific class are charged against the operations of that class. - -------------------------------------------------------------------------------- 18 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimated. Recently Issued Accounting Pronouncements On July 13, 2006, the Financial Accounting Standards Board ("FASB") released FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At this time, management is evaluating the implications of FIN 48 and its impact on the financial statements has not yet been determined. In September 2006, the FASB issued Statement on Financial Accounting Standards No. 157, "Fair Value Measurements' ("FAS 157"). This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. As of October 31, 2006, the Fund does not believe the adoption of FAS 157 will impact the amounts reported in the financial statements, however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain of the measurements reported in the statement of operations for a fiscal period. Other Under the Trust's organizational documents, its officers and directors are indemnified against certain liability arising out of the performance of their duties to the Trust. In the normal course of business, the Trust enters into contracts that provide indemnification to the other party or parties against potential costs or liabilities. The Trust's maximum exposure under these arrangements is dependent on claims that may be made in the future and, therefore, cannot be estimated. The Trust has had no prior claims or losses pursuant to any such agreement. 2. TRANSACTIONS WITH AFFILIATES Management Agreement The Trust and the Manager are parties to a Management Agreement that obligates the Manager to provide or oversee the provision of all administrative, investment advisory, Fund management and securities lending services. Investment assets of the Fund are managed by multiple investment advisors which have entered into separate investment advisory agreements with the Manager. As compensation for performing the duties required under the Management Agreement, the Manager receives from the Fund an annualized fee equal to 0.10% of the average daily net assets plus amounts paid by the Manager to the investment advisors hired by the Manager to direct investment activities of the Fund. Management fees paid during the period were as follows: <Table> <Caption> AMOUNT PAID TO NET AMOUNT MANAGEMENT MANAGEMENT INVESTMENT RETAINED BY PERIOD PAYOR FEE RATE FEE ADVISORS MANAGER ------ --------- ----------- ---------- --------------- ----------- 11/1/05-2/28/06 Portfolio 0.25%-0.60% $2,849,000 $1,996,000 $ 853,000 3/1/06-10/31/06 Fund 0.25%-0.60% $6,301,000 $4,453,000 $1,848,000 </Table> - -------------------------------------------------------------------------------- 19 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- As compensation for services provided by the Manager in connection with securities lending activities, the Fund pays to the Manager, with respect to cash collateral posted by borrowers, a fee up to 25% of the net monthly interest income (the gross interest income earned by the investment of cash collateral, less the amount paid to borrowers and related expenses) from such activities and, with respect to loan fees paid by borrowers when a borrower posts collateral other than cash, a fee up to 25% of such loan fees. During the period from March 1 through October 31, 2006, the Fund paid securities lending fees of $293,273 to the Manager. This fee is netted against securities lending income in the Statement of Operations. Through February 28, 2006, the Portfolio paid securities lending fees of $44,443 to the Manager. Administrative Services Agreement The Manager and the Trust entered into an Administrative Services Agreement that obligates the Manager to provide or oversee administrative and management services to the Fund. As compensation for performing the duties required under the Administrative Services Agreement, the Manager receives an annualized fee of 0.25% of the average daily net assets of the Institutional, PlanAhead and Service Classes of the Fund. Distribution Plans The Trust, except for the Service Class of the Fund, has adopted a "defensive" Distribution Plan (the "Plan") in accordance with Rule 12b-1 under the Act, pursuant to which no fees may be charged to the Funds for distribution purposes. However, the Plan authorizes the management fees received by the Manager and the investment advisors hired by the Manager to be used for distribution purposes. Under this Plan, the Trust does not intend to compensate the Manager or any other party, either directly or indirectly, for the distribution of Trust shares. A separate Distribution Plan (the "Distribution Plan") has been adopted pursuant to Rule 12b-1 under the Act for the Service Class of the Fund. Under the Distribution Plan, as compensation for distribution assistance, the Manager receives an annual fee of 0.25% of the average daily net assets of the Service Class. The fee will be payable without regard to whether the amount of the fee is more or less than the actual expenses incurred in a particular month by the Manager for distribution assistance. Service Plans The Manager and the Trust entered into Service Plans that obligate the Manager to oversee additional shareholder servicing of the PlanAhead and Service Classes. As compensation for performing the duties required under the Service Plans, the Manager receives 0.25% of the average daily net assets of the PlanAhead and Service Classes of the Fund. Reimbursement of Expenses The Manager voluntarily waived or reimbursed expenses of the Service Class of the Fund totaling $1,956 in order to maintain an expense ratio at or below 1.16%. Expense Reimbursement Plan The Fund has adopted an Expense Reimbursement Plan whereby the Manager may seek repayment of fees waived or expenses reimbursed for a period of up to three years. However, reimbursement will occur only if the Class' average net assets have grown or expenses have declined sufficiently to allow reimbursement without - -------------------------------------------------------------------------------- 20 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- causing its expense ratio to exceed the previously agreed upon contractual expense limit. The following waived fees or reimbursed expenses are subject to potential recovery: <Table> <Caption> YEAR AMOUNT - ---- ------ 2007.......................................................................... $2,934 2008.......................................................................... 9 2009.......................................................................... 1,956 </Table> During the year ended October 31, 2006, the Fund recorded a liability totaling $4,899 for expected repayment of prior fees waived and expenses reimbursed by the Manager. Investment in Affiliated Funds The Fund is permitted, pursuant to an exemptive order by the Securities and Exchange Commission ("SEC") and procedures approved by the Board, to invest up to 25% of its total assets in the American Beacon Money Market Select Fund (the "Select Fund"). Cash collateral received by the Fund in connection with securities lending may be invested in the Select Fund and the American Beacon Cash Plus Trust. The Fund, the Select Fund and the Cash Trust (collectively, the "Affiliated Funds") have the same investment advisor and therefore, are considered to be affiliated. The Manager serves as investment advisor to the Affiliated Funds and receives an annualized fee equal to 0.10% of the average daily net assets of each Affiliated Fund. During the period from March 1 through October 31, 2006, the Manager earned fees from the Affiliated Funds totaling $74,360 on the Fund's direct investment in the Affiliated Funds, and $89,527 from securities lending collateral invested in the Affiliated Funds. During the period from November 1, 2005 through February 28, 2006, the Manager earned fees from the Affiliated Funds totaling $43,188 on the Portfolio's direct investment in the Affiliated Funds, and $36,245 from securities lending collateral invested in the Affiliated Funds. Interfund Lending Program Pursuant to an exemptive order by the SEC, the Fund, along with other registered investment companies having management contracts with the Manager, may participate in an interfund lending program as a borrower. This program provides an alternative credit facility allowing the Fund to borrow from other participating series managed by the Manager. At October 31, 2006, the Fund had not utilized the credit facility. Other At October 31, 2006, AMR Corporation and subsidiary companies and employee benefit trusts thereof owned 100% of AMR Class shares of the Fund. During the period ended October 31, 2005, subadvisors voluntarily reimbursed the Portfolio for certain losses totaling $941,000. A $383,000 reimbursement was made to compensate the Portfolio for a loss associated with a rights offering that expired. The shares that would have been acquired through a full exercise of the rights were subsequently purchased on the open market. The subadvisor reimbursed the Portfolio for the appreciation of the shares over the exercise price, transaction costs and foreign exchange costs incurred in making this purchase in the open market. A $558,000 reimbursement was made to compensate the Portfolio for a loss associated with the Manager's direction to sell a security that the subadvisor purchased in a country not approved for investment by the Manager. The reimbursement amount allocated to the Fund totaled $902,000 for the period and is reflected in the gain/loss section of the Statement of Changes in Net Assets. - -------------------------------------------------------------------------------- 21 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- 3. FEDERAL INCOME AND EXCISE TAXES It is the policy of the Fund to comply with the requirements of Subchapter M of the Internal Revenue Code and to distribute substantially all net investment income as well as any net realized capital gains on the sale of investments. Therefore, no federal income or excise tax provision is required. Dividends are categorized in accordance with income tax regulations which may treat certain transactions differently than U.S. generally accepted accounting principles. Accordingly, the character of distributions and composition of net assets for tax purposes may differ from those reflected in the accompanying financial statements. The tax character of distributions paid during the years ended October 31, 2006 and October 31, 2005 (in thousands): <Table> <Caption> YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, 2006 2005 ----------- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME Institutional Class............................................. $ 42,005 $13,529 PlanAhead Class................................................. 17,674 4,004 Service Class................................................... 78 22 AMR Class....................................................... 15,693 7,644 LONG-TERM CAPITAL GAIN Institutional Class............................................. 64,579 -- PlanAhead Class................................................. 28,986 -- Service Class................................................... 156 -- AMR Class....................................................... 22,404 -- -------- ------- TOTAL DISTRIBUTIONS PAID................................... $191,575 $25,199 -------- ------- </Table> As of October 31, 2006, the components of distributable earnings on a tax basis were as follows (in thousands): <Table> Cost basis of investments for federal income tax purposes................... $2,244,128 Unrealized appreciation..................................................... 710,124 Unrealized depreciation..................................................... (25,885) ---------- Net unrealized appreciation/(depreciation).................................. 684,239 Undistributed ordinary income............................................... 104,355 Undistributed long-term gain/(loss)......................................... 156,310 ---------- Distributable earnings...................................................... $ 944,904 ========== </Table> Financial reporting records are adjusted for permanent book/tax differences to reflect tax character. Financial records are not adjusted for temporary differences. The temporary differences between financial reporting and tax-basis reporting of unrealized appreciation/(depreciation) are attributable primarily to the tax deferral of losses from wash sales, the realization for tax purposes of unrealized gains/(losses) on certain derivative instruments, the realization for tax purposes of unrealized gains/(losses) on investments in passive foreign investment companies, and Section 732 basis adjustments. Due to inherent differences in the recognition of income, expenses and realized gains/losses under U.S. generally accepted accounting principles and federal income tax regulations, permanent differences between book and tax reporting have been identified and appropriately reclassified on the Statement of Assets and Liabilities. - -------------------------------------------------------------------------------- 22 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- Accordingly, the following amounts represent current year permanent differences derived from foreign currency gains/losses from sales of investments in passive foreign investment companies, and Section 732 basis adjustments that have been reclassified as of October 31, 2006 (in thousands): <Table> Paid-in-capital.............................................................. $ 7,575 Undistributed net investment income.......................................... (8,792) Accumulated net realized gain (loss)......................................... 2,862 Unrealized appreciation (depreciation) of investments, futures contracts and foreign currency........................................................... (1,645) </Table> 4. INVESTMENT TRANSACTIONS The aggregate cost of purchases and proceeds from sales of investments, other than short-term obligations, for the year ended October 31, 2006 were $1,029,125,000 and $1,051,960,000, respectively. These amounts include investment transactions of the Portfolio during the period from November 1, 2005 through February 28, 2006. A summary of the Fund's direct ownership and transactions in Affiliated Funds for the year ended October 31, 2006 is set forth below. These amounts include investment transactions of the Portfolio during the period from November 1, 2005 through February 28, 2006. (amounts shown in thousands): <Table> <Caption> OCTOBER 31, OCTOBER 31, 2005 2006 SHARES/MARKET SHARES/MARKET AFFILIATED FUND VALUE PURCHASES SALES VALUE - ---------------------------- ------------- ------------- ------------- ------------- Select Fund................. $119,493 $871,497 $903,503 $87,487 </Table> 5. SECURITIES LENDING The Fund may lend its securities to qualified financial institutions, such as certain broker-dealers, to earn additional income. The borrowers are required to secure their loans continuously with collateral in an amount at least equal to the fair value of the securities loaned, initially in an amount at least equal to 102% of the fair value of domestic securities loaned and 105% of the fair value of international securities loaned. Collateral is marked to market and monitored daily. To the extent that a loan is collateralized by cash, such collateral shall be invested by the securities lending agent (the "Agent") in short-term instruments, money market mutual funds, and such other short-term investments, provided the investments meet certain quality and diversification requirements. The Fund, the Agent and the Manager retain 75%, 15% and 10%, respectively, of the income generated from the investment of cash collateral, less negotiated rebate fees paid to participating brokers and transaction costs. To the extent that a loan is secured by non-cash collateral, brokers pay the Fund negotiated lenders' fees, which are divided between the Fund, the Agent, and the Manager 75%, 15% and 10%, respectively. The Fund also continues to receive income on the securities loaned, and any gain or loss in the market prices of securities loaned that may occur during the term of the loan. Risks to the Fund in securities lending transactions are that the borrower may not provide additional collateral when required or return the securities when due, and that the value of the short-term investments will be less than the amount of cash collateral required to be returned to the borrower. At October 31, 2006, securities with a market value of approximately $56,179,000 were loaned by the Fund. Cash collateral held by the custodian for the Fund in an investment in the Affiliated Funds totaled $62,749,000. - -------------------------------------------------------------------------------- 23 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- 6. CAPITAL SHARE TRANSACTIONS The tables below summarize the activity in capital shares for each Class of the Fund (shares and dollars in thousands): Year Ended October 31, 2006 <Table> <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS --------------------- -------------------- ----------------- ------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------- --------- ------ --------- ------ ------ ------ -------- Shares sold...................... 12,683 $ 284,628 9,650 $ 216,325 69 $1,512 1,997 $ 46,001 Reinvestment of dividends........ 4,440 92,342 2,207 45,506 11 234 1,823 38,096 Shares redeemed*................. (15,645) (356,972) (7,248) (162,210) (29) (657) (2,379) (54,346) ------- --------- ------ --------- --- ------ ------ -------- Net increase in shares outstanding.................... 1,478 $ 19,998 4,609 $ 99,621 51 $1,089 1,441 $ 29,751 ======= ========= ====== ========= === ====== ====== ======== * Net of Redemption Fees </Table> Year Ended October 31, 2005 <Table> <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS --------------------- -------------------- ------------------ -------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------- --------- ------ --------- ------ ------- ------- --------- Shares sold..................... 16,308 $ 330,188 14,933 $ 299,953 162 $ 3,261 6,624 $ 133,397 Reinvestment of dividends....... 543 10,788 199 3,920 1 22 383 7,643 Shares redeemed*................ (11,284) (228,220) (5,111) (103,087) (59) (1,188) (10,557) (212,756) ------- --------- ------ --------- --- ------- ------- --------- Net increase in shares outstanding................... 5,567 $ 112,756 10,021 $ 200,786 104 $ 2,095 (3,550) $ (71,716) ======= ========= ====== ========= === ======= ======= ========= * Net of Redemption Fees </Table> - -------------------------------------------------------------------------------- 24 (This page intentionally left blank) (LIGHTHOUSE LOGO) - -------------------------------------------------------------------------------- 25 AMERICAN BEACON INTERNATIONAL EQUITY FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - -------------------------------------------------------------------------------- <Table> <Caption> INSTITUTIONAL CLASS -------------------------------------------------------------- YEAR ENDED OCTOBER 31, -------------------------------------------------------------- 2006 2005 2004(B) 2003(F) 2002 ---------- ---------- ---------- -------- -------- Net asset value, beginning of period........................... $ 20.98 $ 18.47 $ 15.46 $ 12.10 $ 13.77 ---------- ---------- ---------- -------- -------- Income from investment operations: Net investment income(A) (D).. 0.60 0.44 0.30 0.25 0.21 Net gains (losses) on securities (both realized and unrealized)(D).......... 4.86 2.31 3.12 3.47 (1.62) ---------- ---------- ---------- -------- -------- Total income (loss) from investment operations....................... 5.46 2.75 3.42 3.72 (1.41) ---------- ---------- ---------- -------- -------- Less distributions: Dividends from net investment income...................... (0.43) (0.24) (0.41) (0.36) (0.26) Distributions from net realized gains on securities.................. (1.33) -- -- -- -- ---------- ---------- ---------- -------- -------- Total distributions................ (1.76) (0.24) (0.41) (0.36) (0.26) ---------- ---------- ---------- -------- -------- Redemption fees added to beneficial interest......................... --(I) --(I) --(I) --(I) -- ---------- ---------- ---------- -------- -------- Net asset value, end of period..... $ 24.68 $ 20.98 $ 18.47 $ 15.46 $ 12.10 ========== ========== ========== ======== ======== Total return....................... 27.49% 15.04% 22.49% 31.61% (10.51%) ========== ========== ========== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands).................. $1,549,521 $1,286,441 $1,029,272 $722,333 $537,476 Ratios to average net assets (annualized): Expenses, net of waivers(D)............... 0.71% 0.70% 0.76% 0.79% 0.75% Expenses, before waivers(D)............... 0.71% 0.70% 0.76% 0.79% 0.75% Net investment income, net of waivers(D)............ 2.52% 2.17% 1.69% 1.97% 1.56% Net investment income (losses), before waivers(D)............... 2.52% 2.17% 1.69% 1.97% 1.56% Portfolio turnover rate(C).... 40% 37% 36% 44% 43% <Caption> PLANAHEAD CLASS ---------------------------------------------------------------- YEAR ENDED OCTOBER 31, ---------------------------------------------------------------- 2006 2005 2004(B) 2003(F) 2002 -------- ---------- ---------- ---------- ---------- Net asset value, beginning of period........................... $ 20.79 $ 18.31 $ 15.34 $ 11.95 $ 13.58 -------- -------- -------- -------- -------- Income from investment operations: Net investment income(A) (D).. 0.50 0.41 0.26 0.22 0.15 Net gains (losses) on securities (both realized and unrealized)(D).......... 4.84 2.29 3.08 3.46 (1.56) -------- -------- -------- -------- -------- Total income (loss) from investment operations....................... 5.34 2.70 3.34 3.68 (1.41) -------- -------- -------- -------- -------- Less distributions: Dividends from net investment income...................... (0.38) (0.22) (0.37) (0.29) (0.22) Distributions from net realized gains on securities.................. (1.33) -- -- -- -- -------- -------- -------- -------- -------- Total distributions................ (1.71) (0.22) (0.37) (0.29) (0.22) -------- -------- -------- -------- -------- Redemption fees added to beneficial interest......................... --(I) --(I) --(I) --(I) -- -------- -------- -------- -------- -------- Net asset value, end of period..... $ 24.42 $ 20.79 $ 18.31 $ 15.34 $ 11.95 ======== ======== ======== ======== ======== Total return....................... 27.20% 14.73% 22.16% 31.62% (10.57%) ======== ======== ======== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands).................. $771,298 $560,770 $310,540 $177,425 $ 99,636 Ratios to average net assets (annualized): Expenses, net of waivers(D)............... 0.96% 0.95% 1.02% 1.10% 1.04% Expenses, before waivers(D)............... 0.96% 0.95% 1.02% 1.10% 1.04% Net investment income, net of waivers(D)............ 2.25% 1.96% 1.46% 1.68% 1.35% Net investment income (losses), before waivers(D)............... 2.25% 1.96% 1.46% 1.68% 1.35% Portfolio turnover rate(C).... 40% 37% 36% 44% 43% </Table> - -------- (A) Class expenses per share were subtracted from net investment income per share for the Fund before class expenses to determine net investment income per share. (B) The Boston Company Asset Management, LLC was added as an investment advisor to the International Equity Fund on September 27, 2004. (C) The International Equity Fund invested all of its investable assets in the Portfolio through February 28, 2006. Portfolio turnover rate through February 28, 2006 is that of the Portfolio. (D) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the Portfolio through February 28, 2006. (E) Annualized. (F) Independence Investment LLC was removed as an investment advisor to the International Equity Fund on October 24, 2003. (G) Not annualized. (H) Portfolio turnover rate is for the period November 1, 2002 through October 31, 2003. (I) Amounts represent less than $0.01 per share. - -------------------------------------------------------------------------------- 26 - -------------------------------------------------------------------------------- <Table> <Caption> SERVICE CLASS AMR CLASS - --------------------------------------------- -------------------------------------------------------- YEAR ENDED OCTOBER 31, MAY 1 TO YEAR ENDED OCTOBER 31, - ------------------------------ OCTOBER 31, -------------------------------------------------------- 2006 2005 2004(B) 2003(F) 2006 2005 2004(B) 2003(F) 2002 - ------- ------- ------- ----------- -------- -------- -------- -------- -------- $ 20.61 $ 18.24 $ 15.31 $ 12.18 $ 21.12 $ 18.58 $ 15.54 $ 12.18 $ 13.86 - ------- ------- ------- ----------- -------- -------- -------- -------- -------- 0.46 0.37 0.30 0.09 0.63 0.50 0.34 0.29 0.24 4.76 2.26 2.99 3.04 4.92 2.33 3.14 3.46 (1.62) - ------- ------- ------- ----------- -------- -------- -------- -------- -------- 5.22 2.63 3.29 3.13 5.55 2.83 3.48 3.75 (1.38) - ------- ------- ------- ----------- -------- -------- -------- -------- -------- (0.26) (0.26) (0.36) -- (0.48) (0.29) (0.44) (0.39) (0.30) (1.33) -- -- -- (1.33) -- -- -- -- - ------- ------- ------- ----------- -------- -------- -------- -------- -------- (1.59) (0.26) (0.36) -- (1.81) (0.29) (0.44) (0.39) (0.30) - ------- ------- ------- ----------- -------- -------- -------- -------- -------- --(I) --(I) --(I) --(I) --(I) --(I) --(I) --(I) -- - ------- ------- ------- ----------- -------- -------- -------- -------- -------- $ 24.24 $ 20.61 $ 18.24 $ 15.31 $ 24.86 $ 21.12 $ 18.58 $ 15.54 $ 12.18 ======= ======= ======= =========== ======== ======== ======== ======== ======== 26.89% 14.45% 21.88% 25.70%(G) 27.88% 15.32% 22.84% 31.77% (10.26%) ======= ======= ======= =========== ======== ======== ======== ======== ======== $ 4,740 $ 2,987 $ 739 $ 1 $563,231 $448,096 $460,114 $322,801 $264,579 1.16% 1.21% 1.27% 1.50%(E) 0.45% 0.44% 0.49% 0.52% 0.49% 1.19% 1.21% 6.26% 1,139.08%(E) 0.45% 0.44% 0.49% 0.52% 0.49% 2.09% 1.70% 0.81% 1.33%(E) 2.76% 2.49% 1.97% 2.22% 1.81% 2.05% 1.70% (4.18%) (1,136.25%)(E) 2.76% 2.49% 1.97% 2.22% 1.81% 40% 37% 36% 44%(H) 40% 37% 36% 44% 43% </Table> - -------------------------------------------------------------------------------- 27 AMERICAN BEACON FUNDS PRIVACY POLICY (UNAUDITED) - -------------------------------------------------------------------------------- The American Beacon Funds recognizes and respects the privacy of our shareholders. We are providing this notice to you so you will understand how shareholder information may be collected and used. We may collect nonpublic personal information about you from one or more of the following sources: - information we receive from you on applications or other forms; - information about your transactions with us or our service providers; and - information we receive from third parties. We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. We restrict access to your nonpublic personal information to those employees or service providers who need to know that information to provide products or services to you. To ensure the confidentiality of your nonpublic personal information, we maintain safeguards that comply with federal standards. - -------------------------------------------------------------------------------- 28 AMERICAN BEACON INTERNATIONAL EQUITY FUND FEDERAL TAX INFORMATION OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- For corporate shareholders in the Fund, the percentage of ordinary dividend income distributed for the year ended October 31, 2006, which is designated as qualifying for the dividends-received deduction was 1.1%. For shareholders in the Fund, the percentage of dividend income distributed for the year ended October 31, 2006, which is designated as qualified dividend income under the Jobs and Growth Tax Relief Act of 2003 was 71.8%. Shareholders will receive notification in January 2007 of the percentage applicable to the preparation of their 2006 income tax returns. The Fund designated a foreign tax credit of $6,806,816 and recognized foreign source income of $64,910,162. Pursuant to Section 852 of the Internal Revenue Code, the Fund designates $116,196,133 as long-term capital gain dividends for the tax year ended October 31, 2006. - -------------------------------------------------------------------------------- 29 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS (UNAUDITED) - -------------------------------------------------------------------------------- The Trustees and officers of the American Beacon Funds (the "Trust") are listed below, together with their principal occupations during the past five years. Unless otherwise indicated, the address of each person listed below is 4151 Amon Carter Boulevard, MD 2450, Fort Worth, Texas 76155. Each Trustee oversees twenty-seven funds in the fund complex that includes the Trust, the American Beacon Master Trust, the American Beacon Mileage Funds, and the American Beacon Select Funds. The Trust's Statement of Additional Information contains additional information about the Trustees and is available without charge by calling 1-800-658-5811. <Table> <Caption> POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(s) DURING PAST 5 YEARS NAME, AGE AND ADDRESS WITH THE TRUST AND CURRENT DIRECTORSHIPS - --------------------- ----------------- ------------------------------------------- INTERESTED TRUSTEES Term Lifetime of Trust until removal, resignation or retirement* William F. Quinn** (58) Trustee and Chairman and CEO (2006-Present) and President (1986- President since 2006), American Beacon Advisors, Inc.; Chairman 1987 (1989-2003) and Director (1979-1989, 2003-Present), American Airlines Federal Credit Union; Director, Crescent Real Estate Equities, Inc. (1994-Present); Director, Pritchard, Hubble & Herr, LLC (investment advisor) (2001-2006); Director of Investment Committee, Southern Methodist University Endowment Fund (1996-Present); Member, Southern Methodist University Cox School of Business Advisory Board (1999-2002); Member, New York Stock Exchange Pension Manager Committee (1997-1998, 2000-2002, 2006- Present); Vice Chairman, Committee for the Investment of Employee Benefits (2004-Present); Chairman, Committee for the Investment of Employee Benefits Defined Benefit Sub-Committee (2002-2004); Director, United Way of Metropolitan Tarrant County (1988-2000, 2004-Present); Trustee, American Beacon Mileage Funds (1995-Present); Trustee, American Beacon Select Funds (1999-Present); Trustee, American Beacon Master Trust (1995-Present). Alan D. Feld** (69) Trustee since 1996 Partner, Akin, Gump, Strauss, Hauer & Feld, LLP (law firm) (1960-Present); Director, Clear Channel Communications (1984-Present); Trustee, CenterPoint Properties (1994-Present); Trustee, American Beacon Mileage Funds (1996-Present); Trustee, American Beacon Select Funds (1999-Present); Trustee, American Beacon Master Trust (1996-Present). NON-INTERESTED TRUSTEES Term Lifetime of Trust until removal, resignation or retirement* W. Humphrey Bogart (62) Trustee since 2004 Consultant, New River Canada Ltd. (mutual fund servicing company) (1998-2003); Board Member, Baylor University Medical Center Foundation (1992-2004); President and CEO, Allmerica Trust Company, NA (1996-1997); President and CEO, Fidelity Investments Southwest Company (1983-1995); Senior Vice President of Regional Centers, Fidelity Investments (1988- 1995); Trustee, American Beacon Mileage Funds (2004- Present); Trustee, American Beacon Select Funds (2004-Present); Trustee, American Beacon Master Trust (2004-Present). </Table> - -------------------------------------------------------------------------------- 30 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS -- CONTINUED (UNAUDITED) - -------------------------------------------------------------------------------- <Table> <Caption> POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(s) DURING PAST 5 YEARS NAME, AGE AND ADDRESS WITH THE TRUST AND CURRENT DIRECTORSHIPS - --------------------- ----------------- ------------------------------------------- NON-INTERESTED TRUSTEES (CONT.) Brenda A. Cline (45) Trustee since 2004 Executive Vice President, Chief Financial Officer, Treasurer and Secretary, Kimbell Art Foundation (1993-Present); Trustee, Texas Christian University (1998-Present); Trustee, W.I. Cook Foundation, Inc. (d/b/a Cook Children's Health Foundation) (2001- Present); Director, Christian Church Foundation (1999-Present); Trustee, American Beacon Mileage Funds (2004-Present); Trustee, American Beacon Select Funds (2004-Present); Trustee, American Beacon Master Trust (2004-Present). Richard A. Massman (63) Trustee since 2004 Senior Vice President and General Counsel, Hunt Consolidated, Inc. (holding company engaged in energy, real estate, farming, ranching and venture capital activities) (1994-Present); Trustee, American Beacon Mileage Funds (2004-Present); Trustee, American Beacon Select Funds (2004- Present); Trustee, American Beacon Master Trust (2004-Present). Stephen D. O'Sullivan (71) Trustee since 1987 Consultant (1994-Present); Trustee, American Beacon Mileage Funds (1995-Present); Trustee, American Beacon Select Funds (1999-Present); Trustee, American Beacon Master Trust (1995-Present). R. Gerald Turner (60) Trustee since 2001 President, Southern Methodist University (1995- 225 Perkins Admin. Bldg. Present); Director, ChemFirst (1986-2002); Director, Southern Methodist Univ. J.C. Penney Company, Inc. (1996-Present); Director, Dallas, Texas 75275 California Federal Preferred Capital Corp. (2001- 2003); Director, Kronus Worldwide Inc. (chemical manufacturing) (2003-Present); Director, First Broadcasting Investment Partners, LLC (2003- Present); Member, United Way of Dallas Board of Directors; Member, Salvation Army of Dallas Board of Directors; Member, Methodist Hospital Advisory Board; Member, Knight Commission on Intercollegiate Athletics; Trustee, American Beacon Mileage Funds (2001-Present); Trustee, American Beacon Select Funds (2001-Present); Trustee, American Beacon Master Trust (2001-Present). Kneeland Youngblood (50) Trustee since 1996 Managing Partner, Pharos Capital Group, LLC (a 100 Crescent Court Chairman since private equity firm) (1998-Present); Director, Suite 1740 2005 Burger King Corporation (2004-Present); Trustee, Dallas, Texas 75201 City of Dallas, Texas Employee Retirement Fund (2004-Present); Trustee, The Hockaday School (1997- 2005); Director, Starwood Hotels and Resorts (2001- Present); Member, Council on Foreign Relations (1995-Present); Director, Just For the Kids (1995- 2001); Director, L&B Realty Advisors (1998-2000); Trustee, Teachers Retirement System of Texas (1993- 1999); Director, Starwood Financial Trust (1998- 2001); Trustee, St. Mark's School of Texas (2002- Present); Trustee, American Beacon Mileage Funds (1996-Present); Trustee, American Beacon Select Funds (1999-Present); Trustee, American Beacon Master Trust (1996-Present). </Table> - -------------------------------------------------------------------------------- 31 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS -- CONTINUED (UNAUDITED) - -------------------------------------------------------------------------------- <Table> <Caption> POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(s) DURING PAST 5 YEARS NAME, AGE AND ADDRESS WITH THE TRUST AND CURRENT DIRECTORSHIPS - --------------------- ----------------- ------------------------------------------- OFFICERS Term One Year Rosemary K. Behan (47) VP, Secretary and Vice President, Legal and Compliance, American Chief Legal Beacon Advisors, Inc. (2006-Present); Assistant Officer since 2006 General Counsel, First Command Financial Planning, Inc. (2004-2006); Enforcement Attorney (2002-2004) and Branch Chief (2000-2002); Securities and Exchange Commission. Brian E. Brett (46) VP since 2004 Vice President, Director of Sales, American Beacon Advisors, Inc. (2004-Present); Regional Vice President, Neuberger Berman, LLC (investment advisor) (1996-2004). Michael W. Fields (52) VP since 1989 Vice President, Fixed Income Investments, American Beacon Advisors, Inc. (1988-Present). Rebecca L. Harris (39) Treasurer since Vice President, Finance, American Beacon Advisors, 1995 Inc. (1995-Present). Christina E. Sears (35) Chief Compliance Chief Compliance Officer, American Beacon Advisors, Officer since 2004 Inc. (2004-Present); Senior Compliance Analyst, and Asst. American Beacon Advisors, Inc. (1998-2004). Secretary since 1999 </Table> - -------- * The Board has adopted a retirement plan that requires Trustees to retire no later than the last day of the calendar year in which they reach the age of 72, with the exception of Messrs. Quinn and O'Sullivan. ** Messrs. Quinn and Feld are deemed to be "interested persons" of the Trust, as defined by the 1940 Act. Mr. Quinn is Chairman of the Manager. Mr. Feld's law firm of Akin, Gump, Strauss, Hauer & Feld LLP has provided legal services within the past two years to one or more of the Trust's investment advisors. - -------------------------------------------------------------------------------- 32 (This page intentionally left blank) (LIGHTHOUSE LOGO) - -------------------------------------------------------------------------------- 33 (AMERICAN BEACON FUNDS LOGO) - -------------------------------------------------------------------------------- DELIVERY OF DOCUMENTS To reduce expenses, your financial institution may mail only one copy of the Prospectus, Annual Report and Semi-Annual Report to those addresses shared by two or more accounts. If you wish to receive individual copies of these documents, please contact your financial institution. Delivery of individual copies will commence thirty days after receiving your request. If you invest in the Fund through a financial institution, you may be able to receive the Fund's regulatory mailings, such as the Prospectus, Annual Report and Semi-Annual Report, by e-mail. If you are interested in this option, please go to www.icsdelivery.com and search for your financial institution's name or contact your financial institution directly. TO OBTAIN MORE INFORMATION ABOUT THE FUND: <Table> (KEYBOARD GRAPHIC) (MOUSE GRAPHIC) BY E-MAIL: ON THE INTERNET: American-Beacon.Funds@ambeacon.com Visit our website at www.americanbeaconfunds.com </Table> - -------------------------------------------------------------------------------- <Table> (TELEPHONE GRAPHIC) (MAILBOX GRAPHIC) BY TELEPHONE: BY MAIL: Institutional Class American Beacon Funds Call (800) 658-5811 4151 Amon Carter Blvd., MD 2450 AMR Class(SM) Fort Worth, TX 76155 Call (800) 345-2345 PlanAhead Class(R) and Service Class Call (800) 388-3344 </Table> - -------------------------------------------------------------------------------- <Table> AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULES AVAILABILITY OF PROXY VOTING POLICY AND RECORDS In addition to the Schedule of Investments A description of the policies and procedures provided in each semi-annual and annual that the Funds use to determine how to vote report, each Fund files a complete schedule proxies relating to portfolio securities is of its portfolio holdings with the Securities available in each Fund's Statement of Additional and Exchange Commission ("SEC") on Form N-Q Information, is available free of charge on the as of the first and third fiscal quarters. Fund's website (www.americanbeaconfunds.com) and The Funds' Forms N-Q are available on the by calling 1-800-967-9009 or by accessing the SEC's website at www.sec.gov. The Forms N-Q SEC's website at www.sec.gov. Each Fund's proxy may also be reviewed and copied at the SEC's voting record for the most recent year ended Public Reference Room, 450 Fifth Street, NW, June 30 is filed annually with the SEC on Form Washington, DC 20549. Information regarding N-PX. The Funds' Forms N-PX are available on the the operation of the SEC's Public Reference SEC's website at www.sec.gov. Each Fund's proxy Room may be obtained by calling 1-800-SEC- voting record may also be obtained by calling 1- 0330. A complete schedule of each Fund's 800-967-9009. portfolio holdings is also available on the Funds' website (www.americanbeaconfunds.com) approximately thirty days after the end of each month. </Table> FUND SERVICE PROVIDERS: <Table> <Caption> CUSTODIAN TRANSFER AGENT INDEPENDENT REGISTERED PUBLIC DISTRIBUTOR STATE STREET BANK AND TRUST BOSTON FINANCIAL DATA SERVICES ACCOUNTING FIRM FORESIDE FUND SERVICES Boston, Massachusetts Kansas City, Missouri ERNST & YOUNG LLP Portland, Maine Dallas, Texas </Table> This report is prepared for shareholders of the American Beacon Funds and may be distributed to others only if preceded or accompanied by a current prospectus. - ------------------------------------------------------------------------------- American Airlines, Inc. is not responsible for investments made in the American Beacon Funds. American Beacon Funds is a service mark of AMR Corporation. American Beacon International Equity Fund is a service mark of American Beacon Advisors, Inc. AR 10/06 538853 G U I D A N C E | V I S I O N | E X P E R I E N C E [AMERICAN BEACON FUNDS LOGO] ANNUAL REPORT [PHOTO] OCTOBER 31, 2006 LARGE CAP VALUE FUND About American Beacon - -------------------------------------------------------------------------------- Since 1986, American Beacon Advisors has offered a variety of products and investment advisory services to numerous institutional and retail clients, including a variety of mutual funds, corporate cash management, and separate account management. Our clients include defined benefit plans, defined contribution plans, foundations, endowments, corporations, financial planners, and other institutional investors. With American Beacon Advisors, you can put the experience of a multi-billion dollar asset management firm to work for your company. Contents - -------------------------------------------------------------------------------- <Table> President's Message............................. 1 Market and Performance Overview................. 2 Schedule of Investments......................... 7 Additional Information.....................Back Cover </Table> Any opinions herein, including forecasts, reflect our judgement as of the end of the reporting period and are subject to change. Each advisor's strategies and the Fund's portfolio composition will change depending on economic and market conditions. This report is not a complete analysis of market conditions and therefore, should not be relied upon as investment advice. Although economic and market information has been compiled from reliable sources, American Beacon Advisors, Inc. makes no representation as to the completeness or accuracy of the statements contained herein. American Beacon Funds October 31, 2006 (BILL QUINN PICTURE) FELLOW SHAREHOLDERS, Iam pleased to present to you the American Beacon Large Cap Value Fund Annual Report for the twelve months ended October 31, 2006. The U.S. equity markets finished the period on a positive note due to the continued strong performance of the economy, lower oil prices, and the Federal Reserve taking a neutral policy on interest rates. The S&P 500(R) and Dow Jones Industrial Average indices reported one-year returns of 16.34% and 18.47%, respectively, as of October 31, 2006. During very strong markets, value investors often have a hard time competing against the broad market benchmarks. However, the American Beacon Large Cap Value Fund-Institutional Class recorded a total return of 18.69% for its fiscal year, beating its peer group, the Lipper Large-Cap Value Funds Index, and the S&P 500 Index. More importantly, the Fund's performance exceeded that of its peer group for the three, five, and ten years ended October 31, 2006. Please review the enclosed market overviews, portfolio listings, and detailed financial data. As always, we welcome the opportunity to serve your financial needs. To obtain further details about the American Beacon Funds family or to access your account information, please visit our website at www.americanbeaconfunds.com. Thank you for your continued confidence in the American Beacon Large Cap Value Fund. Sincerely, -s- William F. Quinn William F. Quinn President, American Beacon Funds 1 DOMESTIC EQUITY MARKET OVERVIEW OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- The U.S. stock market proved resilient in the final two months of 2005, posting mid-single digit total returns despite events in early 2005 of geopolitical tensions, rising interest rates, soaring oil prices, and a devastating hurricane. Continued expansion in the manufacturing sector, heightened productivity, and employment gains contributed to solid results and helped the year end on a positive note. The stock market continued its fourth quarter 2005 rally into the first quarter of 2006, even in the face of more rate increases by the Federal Reserve. The gains were due in large part to continued growth in the industrial economy, modest unemployment, and minimal inflation. Furthermore, value stocks in the Russell indices outpaced their growth counterparts in the first quarter, as they have over the past few years. With regard to size, small cap stocks performed the best, followed by mid-caps, with large cap issues bringing up the rear for the first quarter as well as the trailing one-, three- and five-year periods. While nine of the ten economic sectors in the S&P 500 Index advanced, sector performance varied widely in the first quarter, with more than 15 percentage points separating the leader from the laggard. Telecommunication Services and Energy posted the largest gains, with total returns of 14.5% and 9.1%, respectively. At the opposite end of the spectrum was the Utilities sector at - 1.2%. During the second quarter of 2006, several key U.S. stock market indices, including the S&P 500 Index and the Nasdaq Composite, declined. While economic and earnings growth remained strong, concerns about inflation and the direction of monetary policy under the leadership of new Federal Reserve Chairman Ben Bernanke pressured equity prices. The Federal Reserve raised short-term interest rates in May and again in June, but stocks rallied late in the quarter on expectations that the end of the tightening cycle was near. As measured by various Russell indices, value stocks again outperformed growth stocks in the second quarter, while large cap equities outpaced their midcap and small cap counterparts, as is often the case in a down market. Investors also preferred defensive stocks in the weak market environment, and Utilities, Energy, and Consumer Staples were the only sectors in the S&P 500 Index to advance during the second quarter. Negative market sentiment took its toll on the more volatile Information Technology sector, which was the S&P 500 Index's worst performer. In the third quarter of 2006, the U.S. stock market indices rebounded. Equity investors set aside concerns about the effects of a slowing housing market, auto industry turmoil, and a heightened homeland security alert. After 17 increases in interest rates over the past two-plus years, the Federal Reserve held interest rates steady at both of its rate-setting meetings during the quarter. This pause, combined with moderate economic growth and strong corporate earnings, contributed to a stock market rally. As had been the case in recent quarters, value stocks outperformed their growth counterparts within the Russell universe during the third quarter. Large cap issues outperformed smaller and mid-cap companies, but continue to lag over the three-, five- and ten-year periods. In a reversal of the second quarter, seven of the ten sectors in the S&P 500 Index provided a positive total return during the third quarter. After performing well over the previous quarter, the Energy sector declined, reflecting the sharp decline in commodity energy prices in September. Telecommunication Services and Health Care rebounded sharply during the third quarter, as both sectors advanced more than 10%. The U.S. stock market posted low- to mid-single-digit gains in October 2006. Overall, growth stocks narrowly outperformed their value counterparts during the month. In general, stock performance was inversely related to size, as small cap stocks were the strongest performers, followed by mid-caps, with large cap issues trailing the pack. All ten economic sectors in the S&P 500 Index advanced in October. Both the Consumer Discretionary and Materials sectors posted total returns in excess of 6%, while Health Care was the laggard, gaining just 0.5% for the month. 2 PERFORMANCE OVERVIEW AMERICAN BEACON LARGE CAP VALUE FUNDSM OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- The Institutional Class of the Large Cap Value Fund returned 18.69% for the twelve months ended October 31, 2006. The Fund trailed the Linked S&P 500/Citigroup Value Index ("Index") return of 20.93%, but outperformed the Lipper Large-Cap Value Funds Index return of 18.41%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 10/31/96 THROUGH 10/31/06 (PERFORMANCE GRAPH) <Table> <Caption> LIPPER LARGE-CAP S&P 500 500/CITIGROUP VALUE INSTITUTIONAL CLASS VALUE FUNDS INDEX INDEX ------------------- ---------------- ------- ------------------- 10/96 10000 10000 10000 10000 10/97 12805 12956 13211 12970 10/98 13609 14660 16116 14493 10/99 13843 17139 20253 17248 10/00 14509 18153 21487 18917 10/01 14188 15300 16136 15433 10/02 12652 13115 13698 12997 10/03 16106 15815 16547 16223 10/04 19100 17675 18106 18569 10/05 22278 19434 19685 20458 10/06 26442 23011 22902 24740 </Table> <Table> <Caption> ANNUALIZED TOTAL RETURNS ------------------------------------ VALUE OF PERIODS ENDED 10/31/06 $10,000 ------------------------------------ 10/31/96- 1 YEAR 5 YEARS 10 YEARS 10/31/06 ---------- ---------- ---------- ----------- Institutional Class(1)................................. 18.69% 13.26% 10.21% $26,442 PlanAhead Class(1)..................................... 18.44% 12.96% 9.91% $25,715 Service Class(1,2)..................................... 18.18% 12.87% 9.86% $25,621 AMR Class(1)........................................... 19.08% 13.56% 10.50% $27,144 Lipper Large-Cap Value Funds Index(3).................. 18.41% 8.51% 8.69% $23,011 S&P 500 Index(3)....................................... 16.34% 7.26% 8.64% $22,902 Linked S&P 500/Citigroup Value Index(3)................ 20.93% 9.90% 9.48% $24,740 </Table> 1. Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be higher or lower than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1- 800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. 2. Fund performance for the five-year and ten-year periods represents the total returns achieved by the PlanAhead Class from 10/31/96 up to 6/1/05, the inception date of the Service Class, and the returns of the Service Class since its inception. Expenses of the Service Class are higher than those of the PlanAhead Class. Therefore, total returns shown may be higher than they would have been had the Service Class been in existence since 10/31/96. 3. The S&P 500 Index is an unmanaged index of common stocks publicly traded in the United States. The Linked S&P 500/Citigroup Value Index represents returns of the S&P 500/Barra Value Index ("Barra Index") up to 10/31/05 and the S&P 500/Citigroup Value Style Index ("Citigroup Index") thereafter. The Barra Index is a market value weighted index of stocks with book-to-price ratios in the top 50% of the S&P 500 Index. The Citigroup Index is a market value weighted index of stocks in the S&P 500 that score highest based on an average of book-to-price ratio, cash flow- to-price ratio, sales-to-price ratio, and dividend yield, representing 50% of the total market value of the S&P 500. The Lipper Large-Cap Value Funds Index tracks the results of the 30 largest mutual funds in the Lipper Large-Cap Value Funds category. Lipper is an independent mutual fund research and ranking service. One cannot directly invest in an index. The Fund underperformed the Index primarily through stock selection and to a lesser extent through sector allocation. From a stock selection standpoint, the Fund had poor stock selection in the Financials, Consumer Discretionary and Energy sectors. The companies with the greatest impact in the Financials sector were SLM (down 10.8%) and Mitsubishi UFJ Financial (up 0.9%). In the Consumer Discretionary sector, Centex (down 18.5%), Pulte Homes (down 17.6%) and Home Depot (down 11.0%) were the largest detractors. In the Energy sector, ConocoPhillips (down 5.7%), BP (up 2.0%) and Devon Energy (up 11.5%) were responsible for all of the underperformance. Positive stock selection in Consumer Staples, mostly in Archer Daniels Midland (up 59.8%) and UST (up 36.3%), and in Information Technology, primarily through Oracle Systems (up 46.9%) and Apple Computer (up 40.8%), added relative value versus the Index but not enough to offset the negative impact from the Financials, Consumer Discretionary, and Energy sectors. Sector weightings detracted modest value during the period. The Fund's underweight in the Telecommunication Services sector, the best performing sector of the Index, was responsible for most of the Fund's underperformance through sector allocation. The sub-advisors continue to invest in a broadly diversified portfolio of companies that they believe have attractive valuations and above-average earnings growth potential. This approach should allow the Fund to benefit over the long-term. 3 PERFORMANCE OVERVIEW AMERICAN BEACON LARGE CAP VALUE FUND(SM) -- CONTINUED OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- TOP TEN HOLDINGS <Table> <Caption> % OF NET ASSETS ---------- ConocoPhillips 2.8% Bank of America Corp. 2.1% JP Morgan Chase & Co. 2.1% Citigroup, Inc. 1.9% International Business Machines Corp. 1.6% Verizon Communications, Inc. 1.5% Pfizer, Inc. 1.4% Altria Group, Inc. 1.4% Exelon Corp. 1.4% Diageo plc 1.3% </Table> SECTOR ALLOCATION <Table> <Caption> % OF EQUITIES -------- Financials 25.8% Industrials 12.1% Consumer Discretionary 11.1% Consumer Staples 10.3% Information Technology 10.0% Health Care 10.0% Energy 7.6% Telecommunication Services 4.5% Utilities 4.5% Materials 4.1% </Table> FUND EXPENSE EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees, administrative service fees, distribution (12b-1) fees, and other Fund expenses. The examples below are intended to help you understand the ongoing cost (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the period in each Class and held for the entire period from May 1, 2006 through October 31, 2006. ACTUAL EXPENSES The "Actual" lines of the table provide information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Shareholders of the PlanAhead and Institutional Classes that invest in the Fund through an IRA may be subject to a custodial IRA fee of $12 that is typically deducted each December. If your account was subject to a custodial IRA fee during the period, your costs would have been $12 higher. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The "Hypothetical" lines of the table provide information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed 5% per year rate of return before expenses (not the Fund's actual return). You may compare the ongoing costs of investing in the Fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. Shareholders of the PlanAhead and Institutional Classes that invest in the Fund through an IRA may be subject to a custodial IRA fee of $12 that is typically deducted each December. If your account was subject to a custodial IRA fee during the period, your costs would have been $12 higher. You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs charged by the Fund. Similarly, the expense examples for other funds do not reflect any transaction costs charged by those funds, such as sales charges (loads), redemption fees or exchange fees. Therefore, the "Hypothetical" lines of the table are useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. If you were subject to any transaction costs during the period, your costs would have been higher. 4 PERFORMANCE OVERVIEW AMERICAN BEACON LARGE CAP VALUE FUND(SM) -- CONTINUED OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- <Table> <Caption> BEGINNING ENDING ACCOUNT ACCOUNT EXPENSES PAID VALUE VALUE DURING PERIOD* 5/1/06 10/31/06 5/1/06-10/31/06 --------- --------- --------------- INSTITUTIONAL CLASS Actual $1,000.00 $1,058.80 $3.13 Hypothetical $1,000.00 $1,022.17 $3.07 (5% return before expenses) PLANAHEAD CLASS Actual $1,000.00 $1,057.67 $4.39 Hypothetical $1,000.00 $1,020.94 $4.31 (5% return before expenses) SERVICE CLASS Actual $1,000.00 $1,056.46 $5.65 Hypothetical $1,000.00 $1,019.71 $5.55 (5% return before expenses) AMR CLASS Actual $1,000.00 $1,060.81 $1.76 Hypothetical $1,000.00 $1,023.50 $1.73 (5% return before expenses) </Table> * Expenses are equal to the Fund's annualized expense ratios for the six- month period of 0.60%, 0.85%, 1.09% and 0.34% for the Institutional, PlanAhead, Service, and AMR Classes, respectively, multiplied by the average account value over the period, multiplied by the number derived by dividing the number of days in the most recent fiscal half-year (184) by days in the year (365) to reflect the half-year period. 5 AMERICAN BEACON LARGE CAP VALUE FUND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - -------------------------------------------------------------------------------- To the Shareholders and Board of Trustees of American Beacon Large Cap Value Fund: We have audited the accompanying statement of assets and liabilities of American Beacon Large Cap Value Fund (a portfolio of American Beacon Funds) (the "Fund"), including the schedule of investments, as of October 31, 2006, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2006, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of American Beacon Large Cap Value Fund as of October 31, 2006, 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 periods indicated therein, in conformity with U.S. generally accepted accounting principles. -s- Ernst & Young LLP Dallas, TX December 28, 2006 See accompanying notes - -------------------------------------------------------------------------------- 6 AMERICAN BEACON LARGE CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) COMMON STOCKS - 93.72% CONSUMER DISCRETIONARY - 10.37% AUTO COMPONENTS - 0.13% Magna International, Inc. .......................... 79,900 $ 5,976 ------------ HOTELS, RESTAURANTS & LEISURE - 1.24% Carnival Corp. ..................................... 630,700 30,791 Harrah's Entertainment, Inc. ....................... 147,100 10,934 McDonald's Corp. ................................... 84,400 3,538 Wyndham Worldwide Corp. /\ ......................... 191,660 5,654 Yum! Brands, Inc. .................................. 105,700 6,285 ------------ 57,202 ------------ HOUSEHOLD DURABLES - 2.17% Centex Corp. + ..................................... 496,700 25,978 Fortune Brands, Inc. ............................... 272,700 20,984 Koninklijke (Royal) Philips Electronics NV ......... 232,966 8,114 Matsushita Electric Industrial Co. Ltd., ADR ....... 1,200,000 24,960 Newell Rubbermaid, Inc. + .......................... 231,700 6,668 Pulte Homes, Inc. .................................. 426,200 13,208 ------------ 99,912 ------------ LEISURE EQUIPMENT & PRODUCTS - 0.28% Mattel, Inc. ....................................... 573,700 12,983 ------------ MEDIA - 3.54% CBS Corp. .......................................... 426,800 12,352 Clear Channel Communications, Inc. ................. 735,000 25,615 The Interpublic Group of Companies, Inc. /\ + ...... 1,220,200 13,312 Time Warner, Inc. .................................. 1,607,000 32,156 The Walt Disney Company Ltd. ....................... 1,647,500 51,830 Warner Music Group Corp. ........................... 1,080,000 28,004 ------------ 163,269 ------------ MULTILINE RETAIL - 1.96% Federated Department Stores, Inc. .................. 590,112 25,912 J.C. Penney Company, Inc. + ........................ 510,000 38,367 Target Corp. ....................................... 330,400 19,553 Wal-Mart Stores, Inc. .............................. 134,400 6,623 ------------ 90,455 ------------ SPECIALTY RETAIL - 0.73% The Home Depot, Inc. ............................... 903,900 33,743 ------------ TEXTILES & APPAREL - 0.32% Liz Claiborne, Inc. ................................ 345,000 14,549 ------------ TOTAL CONSUMER DISCRETIONARY 478,089 ------------ CONSUMER STAPLES - 9.62% BEVERAGES - 1.44% Constellation Brands, Inc. /\ ...................... 155,800 4,283 </Table> <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) Diageo plc, ADR .................................... 833,300 $ 62,056 ------------ 66,339 ------------ FOOD & DRUG RETAILING - 1.00% Safeway, Inc. ...................................... 305,500 8,969 Sysco Corp. ........................................ 1,060,000 37,079 ------------ 46,048 ------------ FOOD PRODUCTS - 2.82% Archer-Daniels-Midland Co. ......................... 1,082,700 41,684 ConAgra Foods, Inc. ................................ 1,201,300 31,414 General Mills, Inc. ................................ 219,100 12,449 Kellogg Co. ........................................ 590,000 29,683 Sara Lee Corp. ..................................... 153,200 2,620 Unilever plc, ADR + ................................ 508,500 12,346 ------------ 130,196 ------------ PERSONAL PRODUCTS - 0.43% L'Oreal SA, ADR .................................... 1,026,000 19,853 ------------ TOBACCO - 3.93% Altria Group, Inc. ................................. 774,800 63,014 Gallaher Group plc, ADR + .......................... 107,500 7,322 Imperial Tobacco Group plc, ADR + .................. 741,500 52,899 UST, Inc. + ........................................ 1,080,100 57,850 ------------ 181,085 ------------ TOTAL CONSUMER STAPLES 443,521 ------------ ENERGY - 7.13% ENERGY EQUIPMENT & SERVICES - 0.71% Weatherford International Ltd. /\ .................. 792,000 32,536 ------------ OIL & GAS - 6.42% Chevron Corp. ...................................... 532,462 35,782 ConocoPhillips ..................................... 2,143,696 129,136 Devon Energy Corp. ................................. 614,100 41,046 Duke Energy Corp. .................................. 1,421,800 44,986 Occidental Petroleum Corp. ......................... 816,700 38,336 Petro-Canada + ..................................... 124,700 5,311 Sunoco, Inc. ....................................... 21,600 1,428 ------------ 296,025 ------------ TOTAL ENERGY 328,561 ------------ FINANCIALS - 24.23% BANKS - 6.04% Bank of America Corp. .............................. 1,832,278 98,705 Comerica, Inc. ..................................... 109,500 6,372 First Horizon National Corp. + ..................... 312,900 12,303 KeyCorp ............................................. 271,600 10,087 SunTrust Banks, Inc. ................................ 112,200 8,863 U.S. Bancorp ........................................ 704,660 23,846 </Table> See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON LARGE CAP VALUE FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) UnionBanCal Corp. .................................. 51,800 $ 2,983 Wachovia Corp. ..................................... 440,100 24,425 Washington Mutual, Inc. + .......................... 824,900 34,893 Wells Fargo & Co. .................................. 1,537,100 55,781 ------------ 278,258 ------------ DIVERSIFIED FINANCIALS - 10.03% The Bear Stearns Cos, Inc. ......................... 117,600 17,799 Capital One Financial Corp. ........................ 264,400 20,975 The Charles Schwab Corp. ........................... 2,163,000 39,410 Citigroup, Inc. .................................... 1,737,538 87,155 Federal Home Loan Mortgage Corp. ................... 293,600 20,255 Federal National Mortgage Association .............. 218,200 12,931 The Goldman Sachs Group, Inc. ...................... 77,500 14,709 JP Morgan Chase & Co. .............................. 2,072,798 98,334 Merrill Lynch & Co., Inc. .......................... 263,200 23,009 Mitsubishi UFJ Financial Group, Inc., ADR .......... 2,520,000 32,130 Morgan Stanley Dean Witter & Co. ................... 748,900 57,238 SLM Corp. .......................................... 783,700 38,150 ------------ 462,095 ------------ INSURANCE - 7.83% ACE Ltd. ........................................... 475,900 27,245 Aflac, Inc. ........................................ 670,000 30,096 The Allstate Corp. ................................. 568,728 34,897 American International Group, Inc. ................. 891,200 59,862 AON Corp. .......................................... 155,600 5,413 Assurant, Inc. ..................................... 111,000 5,845 The Chubb Corp. .................................... 610,000 32,422 Conseco, Inc. /\ ................................... 315,000 6,407 Genworth Financial, Inc. ........................... 501,500 16,770 The Hartford Financial Services Group, Inc. ........ 35,700 3,112 MetLife, Inc. ...................................... 597,500 34,135 MGIC Investment Corp. .............................. 284,300 16,706 Prudential Financial, Inc. ......................... 61,400 4,724 The St. Paul Travelers Companies, Inc. ............. 720,400 36,834 UnumProvident Corp. ................................ 443,900 8,780 XL Capital Ltd. .................................... 537,100 37,893 ------------ 361,141 ------------ REAL ESTATE - 0.33% Realogy Corp. /\ + ................................. 271,625 7,002 The St. Joe Co. + .................................. 152,000 8,175 ------------ 15,177 ------------ TOTAL FINANCIALS 1,116,671 ------------ HEALTH CARE - 9.39% HEALTH CARE EQUIPMENT & SUPPLIES - 2.09% Baxter International, Inc. ......................... 1,324,700 60,896 C.R. Bard, Inc. .................................... 430,000 35,243 ------------ 96,139 ------------ </Table> <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) HEALTH CARE PROVIDERS & SERVICES - 2.46% Cigna Corp. ........................................ 191,900 $ 22,449 Community Health Systems, Inc. /\ .................. 830,000 26,934 HCA, Inc. + ........................................ 202,600 10,235 Tenet Healthcare Corp. /\ + ........................ 815,200 5,755 UnitedHealth Group, Inc. ........................... 174,300 8,502 WellPoint, Inc. /\ ................................. 520,300 39,709 ------------ 113,584 ------------ PHARMACEUTICALS - 4.84% AstraZeneca PLC, ADR ............................... 576,900 33,864 Bristol-Myers Squibb Co. ........................... 1,682,500 41,642 Eli Lilly & Co. .................................... 62,100 3,478 Johnson & Johnson .................................. 134,200 9,045 Merck & Co., Inc. .................................. 194,500 8,834 Pfizer, Inc. ....................................... 2,457,700 65,498 Schering-Plough Corp. .............................. 590,800 13,081 Wyeth .............................................. 935,000 47,713 ------------ 223,155 ------------ TOTAL HEALTH CARE 432,878 ------------ INDUSTRIALS - 11.33% AEROSPACE & DEFENSE - 3.19% The Boeing Co. ..................................... 751,300 59,999 Lockheed Martin Corp. .............................. 101,900 8,858 Northrop Grumman Corp. ............................. 531,200 35,266 Raytheon Co. ....................................... 473,800 23,666 United Technologies Corp. .......................... 292,200 19,204 ------------ 146,993 ------------ AIR FREIGHT & COURIERS - 0.18% FedEx Corp. ........................................ 71,200 8,155 ------------ COMMERCIAL SERVICES & SUPPLIES - 0.46% Mastercard, Inc. + ................................. 154,000 11,412 Waste Management, Inc. ............................. 260,465 9,762 ------------ 21,174 ------------ ELECTRICAL EQUIPMENT - 0.67% American Power Conversion Corp. + .................. 1,018,300 30,783 ------------ INDUSTRIAL CONGLOMERATES - 3.41% 3M Co. ............................................. 186,200 14,680 General Electric Co. ............................... 1,378,900 48,413 Honeywell International, Inc. ...................... 1,174,100 49,453 Textron, Inc. ...................................... 178,400 16,222 Tyco International Ltd. ............................ 962,600 28,330 ------------ 157,098 ------------ MACHINERY - 2.71% Caterpillar, Inc. .................................. 326,500 19,822 Deere & Co. ........................................ 370,000 31,498 </Table> See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON LARGE CAP VALUE FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) Flowserve Corp. /\ ................................. 222,300 $ 11,782 Illinois Tool Works, Inc. .......................... 791,800 37,951 ITT Industries, Inc. ............................... 440,500 23,959 ------------ 125,012 ------------ RENTAL AUTO/EQUIPMENT - 0.04% Avis Budget Group, Inc. ............................ 95,830 1,896 ------------ TRANSPORTATION INFRASTRUCTURE - 0.67% Burlington Northern Santa Fe Corp. ................. 401,200 31,105 ------------ TOTAL INDUSTRIALS 522,216 ------------ INFORMATION TECHNOLOGY - 9.42% COMMUNICATIONS EQUIPMENT - 1.19% Lucent Technologies, Inc. /\ ....................... 1,955,000 4,751 Nokia Corp., ADR ................................... 2,520,400 50,105 ------------ 54,856 ------------ COMPUTERS & PERIPHERALS - 3.66% Apple Computer, Inc. /\ ............................ 574,000 46,540 Hewlett-Packard Co. ................................ 1,228,500 47,592 International Business Machines Corp. .............. 806,500 74,464 ------------ 168,596 ------------ ELECTRICAL EQUIPMENT - 0.58% Molex, Inc. ........................................ 139,000 4,851 Molex, Inc., Class A Shares ........................ 745,100 22,018 ------------ 26,869 ------------ IT CONSULTING & SERVICES - 0.85% Computer Sciences Corp. /\ + ....................... 122,900 6,495 Electronic Data Systems Corp. ...................... 1,279,500 32,410 ------------ 38,905 ------------ SEMICONDUCTOR EQUIPMENT & PRODUCTS - 0.88% Intel Corp. ........................................ 551,000 11,758 Texas Instruments, Inc. ............................ 947,000 28,581 ------------ 40,339 ------------ SOFTWARE - 2.26% Autodesk, Inc. ..................................... 174,000 6,394 BMC Software, Inc. /\ .............................. 215,400 6,529 CA, Inc. ........................................... 1,314,503 32,547 Microsoft Corp. .................................... 819,700 23,534 Oracle Corp. /\ .................................... 1,911,000 35,296 ------------ 104,300 ------------ TOTAL INFORMATION TECHNOLOGY 433,865 ------------ MATERIALS - 3.83% CHEMICALS - 2.53% Air Products & Chemicals, Inc. ..................... 630,600 43,934 Dow Chemical Co. ................................... 234,900 9,582 E. I. du Pont de Nemours & Co. ..................... 258,200 11,825 </Table> <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) Lyondell Chemical Co. .............................. 1,019,300 $ 26,165 The Mosaic Co. /\ + ................................ 723,800 13,549 PPG Industries, Inc. ............................... 166,500 11,389 Tronox, Inc. + ..................................... 16,572 217 ------------ 116,661 ------------ METALS & MINING - 0.47% Alcoa, Inc. ........................................ 754,568 21,815 ------------ PAPER & FOREST PRODUCTS - 0.83% Sappi Ltd., ADR + .................................. 355,400 5,032 Weyerhaeuser Co. ................................... 519,100 33,010 ------------ 38,042 ------------ TOTAL MATERIALS 176,518 ------------ TELECOMMUNICATION SERVICES - 4.20% DIVERSIFIED TELECOMMUNICATION - 4.20% AT&T, Inc. ......................................... 1,656,500 56,735 BellSouth Corp. .................................... 1,044,200 47,093 Verizon Communications, Inc. ....................... 1,833,146 67,826 Vodafone Group plc, ADR + .......................... 852,749 22,044 ------------ TOTAL TELECOMMUNICATION SERVICES 193,698 ------------ UTILITIES - 4.20% ELECTRIC UTILITIES - 4.20% CenterPoint Energy, Inc. + ......................... 938,900 14,534 Dominion Resources, Inc. ........................... 170,700 13,825 DTE Energy Co. ..................................... 314,000 14,265 Entergy Corp. ...................................... 473,800 40,666 Exelon Corp. ....................................... 1,009,400 62,563 FPL Group, Inc. + .................................. 826,500 42,152 Public Service Enterprise Group, Inc. .............. 91,400 5,580 ------------ TOTAL UTILITIES 193,585 ------------ TOTAL COMMON STOCKS 4,319,602 ------------ SHORT TERM INVESTMENTS - 6.79% American Beacon Money Market Select Fund ++ .......................................... 293,665,902 293,666 PAR AMOUNT ------------ U.S. Treasury Bill, 4.90%, Due 12/7/2006 # ........................... $ 19,420 19,326 ------------ TOTAL SHORT TERM INVESTMENTS 312,992 ------------ SHARES ------------ SECURITIES LENDING COLLATERAL - 4.62% American Beacon Cash Plus Trust ++ ................. 146,601,118 146,601 </Table> See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON LARGE CAP VALUE FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) American Beacon Money Market Select Fund ++ .......................................... $ 66,442,606 $ 66,443 ------------ TOTAL SECURITIES LENDING COLLATERAL 213,044 ------------ TOTAL INVESTMENTS 105.13% - (COST $4,301,049) 4,845,638 LIABILITIES, NET OF OTHER ASSETS - (5.13%) (236,422) ------------ TOTAL NET ASSETS - 100.00% $ 4,609,216 ============ </Table> Percentages are stated as a percent of net assets. /\ Non-income producing security. + All or a portion of this security is on loan at October 31, 2006. ++ The Fund/Trust is affiliated by having the same investment advisor. # At October 31, 2006, security pledged as collateral for open futures contracts. FUTURES CONTRACTS (DOLLARS IN THOUSANDS) <Table> <Caption> UNREALIZED NUMBER OF EXPIRATION MARKET APPRECIATION/ CONTRACTS DATE VALUE (DEPRECIATION) --------- ---------- ----------- -------------- Emini S&P 500 Index ........................ 4,536 Dec 2006 $ 313,710 $ 5,618 =========== ============== </Table> See accompanying notes - -------------------------------------------------------------------------------- AMERICAN BEACON LARGE CAP VALUE FUND STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2006 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) - -------------------------------------------------------------------------------- <Table> ASSETS: Investments in unaffiliated securities, at value(A C)................ $ 4,338,928 Investments in affiliated securities, at value(B).................... 506,710 Receivable for investments sold...................................... 896 Dividends and interest receivable.................................... 6,010 Receivable for fund shares sold...................................... 50,993 Prepaid expenses..................................................... 83 ------------ TOTAL ASSETS.................................................... 4,903,620 ------------ LIABILITIES: Payable for investments purchased.................................... 75,175 Payable upon return of securities loaned............................. 213,044 Payable for fund shares redeemed..................................... 1,611 Payable for variation margin on open futures contracts............... 8 Management and investment advisory fees payable (Note 2)............. 2,745 Administrative service and service fees payable...................... 1,223 Other liabilities.................................................... 598 ------------ TOTAL LIABILITIES............................................... 294,404 ------------ NET ASSETS................................................................ $ 4,609,216 ============ ANALYSIS OF NET ASSETS: Paid-in-capital...................................................... 3,904,928 Undistributed net investment income.................................. 42,693 Accumulated net realized gain (loss)................................. 111,388 Unrealized appreciation (depreciation) of investments, futures contracts and foreign currency..................................... 550,207 ------------ NET ASSETS................................................................ $ 4,609,216 ============ SHARES OUTSTANDING (NO PAR VALUE): Institutional Class.................................................. 40,331,788 ============ PlanAhead Class...................................................... 113,725,498 ============ Service Class........................................................ 1,726,022 ============ AMR Class............................................................ 43,526,964 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE: Institutional Class.................................................. $ 23.77 ============ PlanAhead Class...................................................... $ 22.74 ============ Service Class........................................................ $ 22.64 ============ AMR Class............................................................ $ 23.55 ============ - -------- (A) Cost of investments in unaffiliated securities........................ $ 3,794,339 (B) Cost of investments in affiliated securities.......................... 506,710 (C) Market value of securities on loan.................................... 207,695 </Table> See accompanying notes - -------------------------------------------------------------------------------- 11 AMERICAN BEACON LARGE CAP VALUE FUND STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 2006 (IN THOUSANDS) - -------------------------------------------------------------------------------- <Table> INVESTMENT INCOME: Dividend income from unaffiliated securities (net of foreign taxes)*... $ 60,042 Dividend income from affiliated securities............................. 10,860 Interest income........................................................ 748 Income derived from securities lending, net............................ 210 -------- TOTAL INVESTMENT INCOME........................................... 71,860 -------- EXPENSES: Management and investment advisory fees (Note 2)....................... 8,281 Administrative service fees (Note 2): Institutional Class.................................................. 1,352 PlanAhead Class...................................................... 3,675 Service Class........................................................ 59 Transfer agent fees: Institutional Class.................................................. 77 PlanAhead Class...................................................... 132 Service Class........................................................ 1 AMR Class............................................................ 29 Custody and fund accounting fees....................................... 437 Professional fees...................................................... 83 Registration fees and expenses......................................... 338 Service fees: PlanAhead Class (Note 2)............................................. 3,675 Service Class (Note 2)............................................... 59 Distribution fees -- Service Class (Note 2)............................ 59 Prospectus and shareholder reports..................................... 286 Other expenses......................................................... 378 -------- TOTAL EXPENSES.................................................... 18,921 -------- NET INVESTMENT INCOME....................................................... 52,939 -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain from: Investments.......................................................... 107,323 Commission recapture (Note 1)........................................ 368 Futures contracts.................................................... 13,973 Change in net unrealized appreciation or depreciation of: Investments.......................................................... 332,339 Futures contracts.................................................... 6,789 -------- NET GAIN (LOSS) ON INVESTMENTS.................................... 460,792 -------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................ $513,731 ======== * Foreign taxes........................................................ $ 182 </Table> See accompanying notes - -------------------------------------------------------------------------------- 12 AMERICAN BEACON LARGE CAP VALUE FUND STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS) - -------------------------------------------------------------------------------- <Table> <Caption> YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, 2006 2005 ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income........................ $ 52,939 $ 20,301 Net realized gain (loss) on investments, futures contracts, and foreign currency transactions............................... 121,664 73,494 Change in net unrealized appreciation or depreciation of investments, futures contracts, and foreign currency translations............................... 339,128 61,431 ---------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................... 513,731 155,226 ---------- ---------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class........................ (2,811) (909) PlanAhead Class............................ (9,026) (1,111) Service Class.............................. (183) -- AMR Class.................................. (12,219) (11,555) Net realized gain on investments: Institutional Class........................ (8,282) -- PlanAhead Class............................ (28,149) -- Service Class.............................. (544) -- AMR Class.................................. (32,018) -- ---------- ---------- NET DISTRIBUTIONS TO SHAREHOLDERS....... (93,232) (13,575) ---------- ---------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares................ 3,041,055 936,214 Reinvestment of dividends and distributions.. 88,860 13,156 Cost of shares redeemed...................... (528,489) (299,876) ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS....... 2,601,426 649,494 ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS............. 3,021,925 791,145 ---------- ---------- NET ASSETS: Beginning of period.......................... 1,587,291 796,146 ---------- ---------- END OF PERIOD*............................... $4,609,216 $1,587,291 ========== ========== * Includes undistributed net investment income (loss) of........................... $ 42,693 $ 14,208 ========== ========== </Table> See accompanying notes - -------------------------------------------------------------------------------- 13 AMERICAN BEACON LARGE CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2006 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES American Beacon Funds (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940 (the "Act"), as amended, as a no load, open-end management investment company. These financial statements and notes to the financial statements relate to the American Beacon Large Cap Value Fund (the "Fund"), a series of the Trust. American Beacon Advisors, Inc. (the "Manager") is a wholly-owned subsidiary of AMR Corporation, the parent company of American Airlines, Inc. ("American"), and was organized in 1986 to provide business management, advisory, administrative and asset management consulting services to the Trust and other investors. Class Disclosure The Fund has multiple classes of shares designed to meet the needs of different groups of investors. The following table sets forth the differences amongst the classes: CLASS: OFFERED TO: SERVICE AND DISTRIBUTION FEES: - ------ ----------- ------------------------------ INSTITUTIONAL CLASS Investors making an initial investment of $2 million Administrative Service Fee -- 0.25% PLANAHEAD CLASS General public and investors investing through an Administrative Service Fee -- 0.25% intermediary Service Fee -- 0.25% SERVICE CLASS Investors investing through an intermediary Administrative Service Fee -- 0.25% Service Fee -- 0.25% Distribution Fee -- 0.25% AMR CLASS Investors in the tax-exempt retirement and benefit N/A plans of AMR Corporation and its affiliates Security Valuation Investments are valued at the close of the New York Stock Exchange (the "Exchange"), normally 4 p.m. ET, each day that the Exchange is open for business. Equity securities for which market quotations are available are valued at the last sale price or official price (closing bid price or last evaluated quote if no sale has occurred) on the primary market or exchange on which they trade. Debt securities (other than short-term securities) normally are valued on the basis of prices provided by an independent pricing service and may take into account appropriate factors such as institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. When a price is unavailable from a pricing service or when the price provided by the pricing service is deemed not to represent fair value, the prices of debt securities may be determined using quotes obtained from brokers. Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. Investment grade short-term obligations with 60 days or less to maturity are valued using the amortized cost method, which approximates market value. Securities for which the market prices are not readily available or are not reflective of the fair value of the security, as determined by the Manager, will be priced at fair value following procedures approved by the Board of Trustees (the "Board"). Security Transactions and Investment Income Security transactions are recorded on the trade date of the security purchase or sale. - -------------------------------------------------------------------------------- 14 AMERICAN BEACON LARGE CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- The Fund may purchase securities with delivery or payment to occur at a later date. At the time the Fund enters into a commitment to purchase a security, the transaction is recorded and the value of the security is reflected in the net asset value. The value of the security may vary with market fluctuations. Dividend income, net of foreign taxes, is recorded on the ex-dividend date except certain dividends from foreign securities which are recorded as soon as the information is available to the Fund. Interest income is earned from settlement date, recorded on the accrual basis, and adjusted, if necessary, for accretion of discounts and amortization of premiums. For financial and tax reporting purposes, realized gains and losses are determined on the basis of specific lot identification. Futures Contracts Futures contracts are contracts to buy or sell a standard quantity of securities at a specified price on a future date. The Fund may enter into financial futures contracts as a method for keeping assets readily convertible to cash if needed to meet shareholder redemptions or for other needs while maintaining exposure to the stock or bond market, as applicable. The primary risks associated with the use of futures contracts are the possibility of illiquid markets or imperfect correlation between the values of the contracts and the underlying securities, or that the counterparty will fail to perform its obligations. Upon entering into a futures contract, the Fund is required to set aside or deposit with a broker an amount, termed the initial margin, which typically represents 5% of the face value of the futures contract. The Fund reflects this amount on the Schedule of Investments as a U.S. Treasury Bill held as collateral for futures contracts. Payments to and from the broker, known as variation margin, are required to be made on a daily basis as the price of the futures contract fluctuates. Changes in initial settlement values are accounted for as unrealized appreciation (depreciation) until the contracts are terminated, at which time realized gains and losses are recognized. Futures contracts are valued at the most recent settlement price established each day by the exchange on which they are traded. Dividends to Shareholders Dividends from net investment income of the Fund normally will be declared and paid annually. Distributions, if any, of net realized capital gains are generally paid annually and recorded on the ex-dividend date. Commission Recapture The Fund has established brokerage commission recapture arrangements with certain brokers or dealers. If the Fund's investment advisor chooses to execute a transaction through a participating broker, the broker rebates a portion of the commission back to the Fund. Any collateral benefit received through participation in the commission recapture program is directed exclusively to the Fund. This amount is reported with the net realized gain in the Fund's Statement of Operations. Allocation of Income, Expenses, Gains and Losses Income, expenses (other than those attributable to a specific class), gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets represented by such class. Operating expenses directly attributable to a specific class are charged against the operations of that class. - -------------------------------------------------------------------------------- 15 AMERICAN BEACON LARGE CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimated. Recently Issued Accounting Pronouncements On July 13, 2006, the Financial Accounting Standards Board ("FASB") released FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At this time, management is evaluating the implications of FIN 48 and its impact on the financial statements has not yet been determined. In September 2006, the FASB issued Statement on Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157"). This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. As of October 31, 2006, the Fund does not believe the adoption of FAS 157 will impact the amounts reported in the financial statements, however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain of the measurements reported in the statement of operations for a fiscal period. Other Under the Trust's organizational documents, its officers and directors are indemnified against certain liability arising out of the performance of their duties to the Trust. In the normal course of business, the Trust enters into contracts that provide indemnification to the other party or parties against potential costs or liabilities. The Trust's maximum exposure under these arrangements is dependent on claims that may be made in the future and, therefore, cannot be estimated. The Trust has had no prior claims or losses pursuant to any such agreement. 2. TRANSACTIONS WITH AFFILIATES Management Agreement The Trust and the Manager are parties to a Management Agreement that obligates the Manager to provide or oversee the provision of all administrative, investment advisory, fund management and securities lending services. Investment assets of the Fund are managed by multiple investment advisors which have entered into separate investment advisory agreements with the Manager. As compensation for performing the duties required under the Management Agreement, the Manager receives from the Fund an annualized fee equal to 0.10% of the average daily net assets plus amounts paid by the Manager to the investment advisors hired by the Manager to direct investment activities of the Funds. Management fees paid during the year ended October 31, 2006 were as follows (dollars in thousands): <Table> <Caption> AMOUNTS PAID NET AMOUNTS MANAGEMENT MANAGEMENT TO INVESTMENT RETAINED BY FEE RATE FEE ADVISORS MANAGER - ------------ ---------- ------------- ----------- 0.225%-0.70% $8,281 $5,377 $2,904 </Table> - -------------------------------------------------------------------------------- 16 AMERICAN BEACON LARGE CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- As compensation for services provided by the Manager in connection with securities lending activities, the Fund pays to the Manager, with respect to cash collateral posted by borrowers, a fee up to 25% of the net monthly interest income (the gross interest income earned by the investment of cash collateral, less the amount paid to borrowers and related expenses) from such activities and, with respect to loan fees paid by borrowers when a borrower posts collateral other than cash, a fee up to 25% of such loan fees. During the year ended October 31, 2006, securities lending fees totaling $31,495 were paid to the Manager by the Fund. This fee is netted against securities lending income in the Statement of Operations. Administrative Services Agreement The Manager and the Trust entered into an Administrative Services Agreement which obligates the Manager to provide or oversee administrative and management services to the Fund. As compensation for performing the duties required under the Administrative Services Agreement, the Manager receives an annualized fee of 0.25% of the average daily net assets of the Institutional, PlanAhead and Service Classes of the Fund. Distribution Plans The Trust, except for the Service Class of the Fund, has adopted a "defensive" Distribution Plan (the "Plan") in accordance with Rule 12b-1 under the Act, pursuant to which no fees may be charged to the Fund for distribution purposes. However, the Plan authorizes the management fees received by the Manager and the investment advisors hired by the Manager to be used for distribution purposes. Under this Plan, the Trust does not intend to compensate the Manager or any other party, either directly or indirectly, for the distribution of Trust shares. A separate Distribution Plan (the "Distribution Plan") has been adopted pursuant to Rule 12b-1 under the Act for the Service Class of the Fund. Under the Distribution Plan, as compensation for distribution assistance, the Manager receives an annual fee of 0.25% of the average daily net assets of the Service Class. The fee will be payable without regard to whether the amount of the fee is more or less than the actual expenses incurred in a particular month by the Manager for distribution assistance. Service Plans The Manager and the Trust entered into Service Plans that obligate the Manager to oversee additional shareholder servicing of the PlanAhead and Service Classes. As compensation for performing the duties required under the Service Plans, the Manager receives 0.25% of the average daily net assets of the PlanAhead and Service Classes of the Fund. Investment in Affiliated Funds The Fund is permitted, pursuant to an exemptive order by the Securities and Exchange Commission ("SEC") and procedures approved by the Board, to invest up to 25% of its total assets in the American Beacon Money Market Select Fund (the "Select Fund"). Cash collateral received by the Fund in connection with securities lending may be invested in the Select Fund and the American Beacon Cash Plus Trust (the "Cash Trust"). The Fund, the Select Fund and the Cash Trust (collectively, the "Affiliated Funds") have the same investment advisor and therefore, are considered to be affiliated. The Manager serves as investment advisor to the Affiliated Funds and receives from each Affiliated Fund an annualized fee equal to 0.10% of its average daily net assets. During the year ended October 31, 2006, fees earned by the Manager from the Affiliated Funds were as follows: <Table> <Caption> SECURITIES LENDING DIRECT INVESTMENT COLLATERAL INVESTED IN AFFILIATED FUNDS IN AFFILIATED FUNDS TOTAL - ------------------- ------------------- -------- $225,852 $171,450 $397,302 </Table> - -------------------------------------------------------------------------------- 17 AMERICAN BEACON LARGE CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- Other At October 31, 2006, AMR Corporation and subsidiary companies and employee benefit trusts thereof owned 100% of AMR Class shares of the Fund. Interfund Lending Program Pursuant to an exemptive order by the SEC, the Fund, along with other registered investment companies having management contracts with the Manager, may participate in an interfund lending program as a borrower. This program provides an alternative credit facility allowing the Fund to borrow from other participating Funds. At October 31, 2006, the Fund had not utilized the credit facility. Reimbursement of Expenses The Manager reimbursed expenses totaling $17 to the Service Class of the Fund during the year ended October 31, 2006. 3. FEDERAL INCOME AND EXCISE TAXES It is the policy of the Fund to comply with the requirements of Subchapter M of the Internal Revenue Code and to distribute substantially all net investment income as well as any net realized capital gains on the sale of investments. Therefore, no federal income or excise tax provision is required. Dividends are categorized in accordance with income tax regulations which may treat certain transactions differently than U.S. generally accepted accounting principles. Accordingly, the character of distributions and composition of net assets for tax purposes may differ from those reflected in the accompanying financial statements. The tax character of distributions paid during the years ended October 31, 2006 and October 31, 2005 were as follows (in thousands): <Table> <Caption> YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, 2006 2005 ----------- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME Institutional Class......................................... $ 3,517 $ 909 PlanAhead Class............................................. 11,427 1,111 Service Class............................................... 229 -- AMR Class................................................... 14,949 11,555 LONG-TERM CAPITAL GAIN Institutional Class......................................... 7,576 -- PlanAhead Class............................................. 25,749 -- Service Class............................................... 497 -- AMR Class................................................... 29,288 -- ------- ------- TOTAL DISTRIBUTIONS PAID............................... $93,232 $13,575 ------- ------- </Table> - -------------------------------------------------------------------------------- 18 AMERICAN BEACON LARGE CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- As of October 31, 2006, the components of distributable earnings on a tax basis were as follows (in thousands): <Table> Cost basis of investments for federal income tax purposes................... $4,315,647 Unrealized appreciation..................................................... 549,391 Unrealized depreciation..................................................... (19,400) ---------- Net unrealized appreciation/(depreciation).................................. 529,991 Undistributed ordinary income............................................... 70,648 Undistributed long-term gain/(loss)......................................... 103,554 ---------- Distributable earnings...................................................... $ 704,193 ========== </Table> Financial reporting records are adjusted for permanent book/tax differences to reflect tax character. Financial records are not adjusted for temporary differences. The temporary differences between financial reporting and tax-basis reporting of unrealized appreciation/(depreciation) are attributable primarily to the tax deferral of losses from wash sales, the realization for tax purposes of unrealized gains/(losses) on certain derivative instruments, and reclassifications of income from real estate investment securities. Due to inherent differences in the recognition of income, expenses and realized gains/losses under U.S. generally accepted accounting principles and federal income tax regulations, permanent differences between book and tax reporting have been identified and appropriately reclassified on the Statement of Assets and Liabilities. Accordingly, the following amounts represent current year permanent differences derived from reclassifications of income from real estate investment securities, foreign currency, and dividend reclasses that have been reclassified as of October 31, 2006 (in thousands): <Table> Paid-in-capital................................................................ $ 62 Undistributed net investment income............................................ (215) Accumulated net realized gain (loss)........................................... 153 Unrealized appreciation (depreciation) of investments, futures contracts and foreign currency............................................................. -- </Table> 4. INVESTMENT TRANSACTIONS Investment transactions for the year ended October 31, 2006 (excluding short-term investments) are as follows (in thousands): <Table> Purchases................................................................... $3,196,760 Proceeds from sales......................................................... $ 707,842 </Table> A summary of the Fund's direct ownership and transactions in Affiliated Funds for the year ended October 31, 2006 is set forth below (in thousands): <Table> <Caption> OCTOBER 31, 2005 OCTOBER 31, 2006 AFFILIATE SHARES/MARKET VALUE PURCHASES SALES SHARES/MARKET VALUE - --------- ------------------- ---------- ---------- ------------------- Select Fund............................... $163,848 $4,527,744 $4,397,926 $293,666 </Table> 5. SECURITIES LENDING The Fund may lend its securities to qualified financial institutions, such as certain broker-dealers, to earn additional income. The borrowers are required to secure their loans continuously with collateral in an amount at least equal to the fair value of the securities loaned, initially in an amount at least equal to 102% of the fair value of domestic securities loaned and 105% of the fair value of international securities loaned. Collateral is marked to market and monitored daily. To the extent that a loan is collateralized by cash, such collateral shall be invested by - -------------------------------------------------------------------------------- 19 AMERICAN BEACON LARGE CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS -- CONTINUED OCTOBER 31, 2006 - -------------------------------------------------------------------------------- the securities lending agent (the "Agent") in short-term instruments, money market mutual funds, and such other short-term investments, provided the investments meet certain quality and diversification requirements. The Fund, the Agent and the Manager retain 65%, 25% and 10%, respectively of the income generated from the investment of cash collateral, less negotiated rebate fees paid to participating brokers and transaction costs. To the extent that a loan is secured by non-cash collateral, brokers pay the Fund negotiated lenders' fees, which are divided between the Fund, the Agent and the Manager 65%, 25% and 10%, respectively. The Fund also continues to receive income on the securities loaned, and any gain or loss in the market price of securities loaned that may occur during the term of the loan. Risks to the Fund in securities lending transactions are that the borrower may not provide additional collateral when required or return the securities when due, and that the value of the short-term investments will be less than the amount of cash collateral required to be returned to the borrower. At October 31, 2006, the value of outstanding securities on loan and the value of collateral was as follows (in thousands): <Table> <Caption> MARKET VALUE OF SECURITIES ON LOAN NON-CASH COLLATERAL CASH COLLATERAL - ------------------ ------------------- --------------- $207,695 $-- $213,044 </Table> Cash collateral is invested in a joint investment account, which is comprised of an investment in the Cash Trust and the Select Fund. The allocated amounts have been included as investments in the Schedule of Investments and Statement of Assets and Liabilities. Income earned on these investments is reported as Income derived from securities lending in the Statement of Operations. Non-cash collateral received by the Fund may not be sold or repledged; therefore, non-cash collateral is not included on the Fund's Schedule of Investments or Statement of Assets and Liabilities. 6. CAPITAL SHARE TRANSACTIONS The tables below summarize the activity in capital shares for each Class of the Fund (dollars and shares in thousands): Year Ended October 31, 2006 <Table> <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS ------------------- ---------------------- ------------------ -------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------ -------- ------- ---------- ------ ------- ------ --------- Shares sold.................... 34,068 $746,193 98,689 $2,075,973 1,451 $30,595 8,618 $ 188,294 Reinvestment of dividends...... 439 9,253 1,715 34,642 36 727 2,125 44,238 Shares redeemed................ (3,753) (81,987) (12,788) (269,180) (338) (7,086) (8,030) (170,236) ------ -------- ------- ---------- ----- ------- ------ --------- Net increase in shares outstanding.................. 30,754 $673,459 87,616 $1,841,435 1,149 $24,236 2,713 $ 62,296 ====== ======== ======= ========== ===== ======= ====== ========= </Table> Year Ended October 31, 2005 <Table> <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS ------------------- ------------------- ------------------ --------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------ -------- ------ -------- ------ ------- ------- --------- Shares sold...................... 8,194 $167,141 25,447 $500,989 589 $11,617 12,849 $ 256,467 Reinvestment of dividends........ 25 496 58 1,105 -- -- 592 11,555 Shares redeemed.................. (1,299) (26,180) (2,332) (45,952) (13) (261) (11,251) (227,483) ------ -------- ------ -------- --- ------- ------- --------- Net increase in shares outstanding.................... 6,920 $141,457 23,173 $456,142 576 $11,356 2,190 $ 40,539 ====== ======== ====== ======== === ======= ======= ========= </Table> - -------------------------------------------------------------------------------- 20 (This page intentionally left blank) (LIGHTHOUSE LOGO) - -------------------------------------------------------------------------------- 21 AMERICAN BEACON LARGE CAP VALUE FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - -------------------------------------------------------------------------------- <Table> <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS ------------------------------------------------- --------------------------------- YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31, ------------------------------------------------- --------------------------------- 2006 2005 2004 2003 2002 2006 2005 2004 -------- -------- ------- ------- ------- ---------- -------- ------- Net asset value, beginning of period...... $ 21.00 $ 18.23 $ 15.62 $ 12.55 $ 14.51 $ 20.16 $ 17.54 $ 15.05 -------- -------- ------- ------- ------- ---------- -------- ------- Income from investment operations: Net investment income (loss)(A C).... 0.31 0.28 0.26 0.25(F) 0.27 0.28 0.27 0.23 Net gains (losses) on securities (both realized and unrealized)(C).. 3.48 2.74 2.62 3.11(F) (1.76) 3.31 2.58 2.49 -------- -------- ------- ------- ------- ---------- -------- ------- Total income (loss) from investment operations.............................. 3.79 3.02 2.88 3.36 (1.49) 3.59 2.85 2.72 -------- -------- ------- ------- ------- ---------- -------- ------- Less distributions: Dividends from net investment income............................. (0.26) (0.25) (0.27) (0.29) (0.30) (0.25) (0.23) (0.23) Distributions from net realized gains on securities...................... (0.76) -- -- -- (0.17) (0.76) -- -- -------- -------- ------- ------- ------- ---------- -------- ------- Total distributions....................... (1.02) (0.25) (0.27) (0.29) (0.47) (1.01) (0.23) (0.23) -------- -------- ------- ------- ------- ---------- -------- ------- Net asset value, end of period............ $ 23.77 $ 21.00 $ 18.23 $ 15.62 $ 12.55 $ 22.74 $ 20.16 $ 17.54 ======== ======== ======= ======= ======= ========== ======== ======= Total return.............................. 18.69% 16.64% 18.59% 27.30% (10.83)% 18.44% 16.33% 18.26% ======== ======== ======= ======= ======= ========== ======== ======= Ratios and supplemental data: Net assets, end of period (in thousands)......................... $958,830 $201,111 $48,451 $23,512 $21,589 $2,586,410 $526,357 $51,489 Ratios to average net assets (annualized): Expenses, net of waivers(C)........ 0.60% 0.60% 0.66% 0.66% 0.61% 0.85% 0.86% 0.94% Expenses, before waivers(C)........ 0.60% 0.60% 0.66% 0.66% 0.61% 0.85% 0.86% 0.94% Net investment income, net of waivers(C)...................... 1.86% 1.58% 1.49% 1.88% 1.82% 1.61% 1.30% 1.21% Net investment income, before waivers(C)...................... 1.86% 1.58% 1.49% 1.88% 1.82% 1.61% 1.30% 1.21% Portfolio turnover rate(E) .......... 26% 25% 29% 27% 34% 26% 25% 29% </Table> - -------- (A) Class expenses per share were subtracted from net investment income per share for the Fund before class expenses to determine net investment income per share for the Institutional, PlanAhead and AMR Classes. (B) Not annualized. (C) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the AMR Investment Services Large Cap Value Portfolio through February 28, 2002. (D) Portfolio turnover rate is for the period from November 1, 2004 through October 31, 2005. (E) The Large Cap Value Fund invested all of its investable assets in its corresponding Portfolio through February 28, 2002. Portfolio turnover rate through February 28, 2002 was that of the Portfolio. (F) For the year ended October 31, 2003, the net investment income and net gains (losses) on securities (both realized and unrealized) has been restated from 0.20 and 3.16, respectively for Institutional Class and 0.10 and 3.11, respectively for PlanAhead Class. (H) Annualized. - -------------------------------------------------------------------------------- 22 - -------------------------------------------------------------------------------- <Table> <Caption> PLANAHEAD CLASS SERVICE CLASS AMR CLASS - ------------------------- -------------------------- ---------------------------------------------------------- YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31, - ------------------------- YEAR ENDED MAY 31 TO ---------------------------------------------------------- OCTOBER 31, OCTOBER 31, 2003 2002 2006 2005 2006 2005 2004 2003 2002 - ---------- ---------- ----------- ----------- ---------- -------- -------- -------- -------- $ 12.09 $ 14.00 $ 20.13 $ 19.33 $ 20.78 $ 18.02 $ 15.44 $ 12.40 $ 14.34 ------- ------- ------- -------- ---------- -------- -------- -------- -------- 0.22(F) 0.25 0.26 0.01 0.35 0.31 0.30 0.29 0.31 2.99(F) (1.74) 3.27 0.79 3.47 2.73 2.58 3.06 (1.75) ------- ------- ------- -------- ---------- -------- -------- -------- -------- 3.21 (1.49) 3.53 0.80 3.82 3.04 2.88 3.35 (1.44) ------- ------- ------- -------- ---------- -------- -------- -------- -------- (0.25) (0.25) (0.26) -- (0.29) (0.28) (0.30) (0.31) (0.33) -- (0.17) (0.76) -- (0.76) -- -- -- (0.17) ------- ------- ------- -------- ---------- -------- -------- -------- -------- (0.25) (0.42) (1.02) -- (1.05) (0.28) (0.30) (0.31) (0.50) ------- ------- ------- -------- ---------- -------- -------- -------- -------- $ 15.05 $ 12.09 $ 22.64 $ 20.13 $ 23.55 $ 20.78 $ 18.02 $ 15.44 $ 12.40 ======= ======= ======= ======== ========== ======== ======== ======== ======== 26.99% (11.13)% 18.18% 4.14%(B) 19.08% 16.95% 18.89% 27.64% (10.62)% ======= ======= ======= ======== ========== ======== ======== ======== ======== $21,331 $15,941 $39,077 $ 11,604 $1,024,899 $848,219 $696,206 $598,869 $511,287 0.95% 0.93% 1.09% 1.14%(H) 0.34% 0.35% 0.39% 0.36% 0.36% 0.95% 0.93% 1.09% 1.77%(H) 0.34% 0.35% 0.39% 0.36% 0.36% 1.57% 1.53% 1.39% 1.72%(H) 2.18% 1.87% 1.79% 2.13% 2.06% 1.57% 1.53% 1.39% 1.09%(H) 2.18% 1.87% 1.79% 2.13% 2.06% 27% 34% 26% 25%(D) 26% 25% 29% 27% 34% </Table> - -------------------------------------------------------------------------------- 23 AMERICAN BEACON FUNDS PRIVACY POLICY (UNAUDITED) - -------------------------------------------------------------------------------- The American Beacon Funds recognizes and respects the privacy of our shareholders. We are providing this notice to you so you will understand how shareholder information may be collected and used. We may collect nonpublic personal information about you from one or more of the following sources: - information we receive from you on applications or other forms; - information about your transactions with us or our service providers; and - information we receive from third parties. We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. We restrict access to your nonpublic personal information to those employees or service providers who need to know that information to provide products or services to you. To ensure the confidentiality of your nonpublic personal information, we maintain safeguards that comply with federal standards. AMERICAN BEACON LARGE CAP VALUE FUND FEDERAL TAX INFORMATION OCTOBER 31, 2006 (UNAUDITED) - -------------------------------------------------------------------------------- For corporate shareholders in the Fund, the percentage of ordinary dividend income distributed for the year ended October 31, 2006, which is designated as qualifying for the dividend-received deduction, was 73.7%. For shareholders in the Fund, the percentage of dividend income distributed for the year ended October 31, 2005, which is designated as qualified dividend income under the Jobs and Growth Tax Relief Act of 2003, was 69.8%. Shareholders will receive notification in January 2007 of the percentage applicable to their preparation of their 2006 income tax returns. Pursuant to Section 852 of the Internal Revenue Code, the Fund designates $63,110,499 as long-term capital gain dividends for the tax year ended October 31, 2006. - -------------------------------------------------------------------------------- 24 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE RE-APPOINTMENT OF METROPOLITAN WEST CAPITAL MANAGEMENT, LLC (UNAUDITED) - -------------------------------------------------------------------------------- At the May 11, 2006 meeting of the Board of Trustees (the "Board"), American Beacon Advisors, Inc. (the "Manager") proposed that the Board approve the re-appointment of Metropolitan West Capital Management, LLC ("MetWest Capital") and the approval of a new Investment Advisory Agreement between MetWest Capital and the Manager ("Agreement") following Evergreen Investment Company, Inc.'s ("Evergreen") acquisition of a controlling interest of MetWest Capital. Prior to the meeting, the Board requested and reviewed information provided by MetWest Capital in connection with its consideration to re-appoint MetWest Capital. The Board considered, among other materials, responses by MetWest Capital discussing: - whether there would be changes in fee rate schedule to be paid by the American Beacon Large Cap Value Fund and American Beacon Small Cap Value Fund (collectively, the "Funds") under the Agreement; - whether the level of services provided to the Funds by MetWest will be affected by the change of control; - the effects of the change of control on portfolio management personnel and the adequacy of staffing levels to provide quality services to the Funds; - whether MetWest Capital's trading activities would change as a result of the change of control; - information regarding MetWest Capital's new affiliates, including Evergreen; - material changes to MetWest Capital's compliance program and code of ethics; and - potential benefits to the Funds resulting from the change of control. The Board considered several factors when evaluating MetWest Capital and in approving the Agreement. In addition, the Board took into consideration its evaluation of MetWest Capital at its February 2006 Board meeting in connection with the annual renewal of the prior Agreement with MetWest Capital. A discussion of the factors relating to the Board's approval of the Agreement follows. Nature, extent and quality of the services provided by MetWest Capital. The Board considered the services provided by MetWest Capital under the prior Agreement and those to be provided following MetWest Capital's change of control. In this connection, the Board noted that the Manager and MetWest Capital would enter into a new Agreement that is substantially identical to the existing agreement except for a different effective date. In addition, the Board considered that MetWest Capital represented that the level of services to be provided to the Funds following the change of control would not change, but may be enhanced as noted below. In considering that the Funds' portfolio manager and other senior executives at MetWest Capital have signed long-term contracts with Evergreen, the Board concluded that these actions would provide continuity of portfolio management for the Funds. Additionally, the Board considered that: (1) MetWest Capital's trading activities would not be affected by the change of control, but MetWest Capital may execute Fund trades through a new affiliated broker-dealer; (2) the regulatory actions and litigation reported by MetWest Capital related to newly affiliated entities that would not provide investment advisory services to the Funds; and (3) MetWest Capital would adopt Evergreen's compliance program and code of ethics. Based on this information, the Board concluded that the nature, extent and quality of the advisory services to be provided by MetWest Capital were appropriate for the Funds, and, thus, supported a decision to approve the Agreement. Performance of MetWest Capital. The Board relied upon its February 2006 evaluation of MetWest Capital's performance and determined that the historical investment performance of MetWest Capital supported the Board's decision to re- appoint MetWest as an investment adviser to the Funds. Investment advisory fees, costs of services, profitability and economies of scale. The Board considered the investment advisory fees paid to MetWest for its services to the Funds. In this connection, the Board noted that the investment advisory fee rates would not change under the Agreement. The Board relied upon its February 2006 evaluation of comparative data on investment advisory fees because MetWest Capital had represented previously that it does not charge other comparable clients a fee rate lower than that charged to the Funds. The Board - -------------------------------------------------------------------------------- 25 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE RE-APPOINTMENT OF METROPOLITAN WEST CAPITAL MANAGEMENT, LLC -- CONTINUED (UNAUDITED) - -------------------------------------------------------------------------------- concluded that MetWest Capital's fees under the Agreement are reasonable based on the services provided to the Funds. The Board also relied upon its February 2006 evaluation of the costs of the services provided by MetWest Capital, MetWest Capital's profitability and whether the fee schedule reflected economies of scale for the benefit of the Funds' investors. The Board noted that such reliance was reasonable because MetWest Capital proposed to maintain the same fee rate schedule. Other Benefits. The Board considered certain other benefits to the Funds as a result of the change of control. In this regard, the Board considered that: (1) Evergreen maintains a large compliance staff who will augment its compliance oversight and resources; (2) MetWest Capital will have access to the substantial technology team at Evergreen; and (3) MetWest Capital will have potential for better employee retention due to Evergreen's enhanced benefit programs. After consideration of this information, the Board concluded that the Funds could receive additional benefits due to the enhanced services provided by MetWest Capital. Board's Conclusions. The Board did not identify any single factor as being of paramount importance and different Trustees may have given different weight to different factors. However, based on the various considerations described above, the Trustees, including a majority of the Independent Trustees, concluded that the proposed investment advisory fee is reasonable and the approval of the Agreement is in the best interests of the Funds and their shareholders and, as a result, approved the Agreement. - -------------------------------------------------------------------------------- 26 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS (UNAUDITED) - -------------------------------------------------------------------------------- The Trustees and officers of the American Beacon Funds (the "Trust") are listed below, together with their principal occupations during the past five years. Unless otherwise indicated, the address of each person listed below is 4151 Amon Carter Boulevard, MD 2450, Fort Worth, Texas 76155. Each Trustee oversees twenty-seven funds in the fund complex that includes the Trust, the American Beacon Master Trust, the American Beacon Mileage Funds, and the American Beacon Select Funds. The Trust's Statement of Additional Information contains additional information about the Trustees and is available without charge by calling 1-800-658-5811. <Table> <Caption> POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(s) DURING PAST 5 YEARS NAME, AGE AND ADDRESS WITH THE TRUST AND CURRENT DIRECTORSHIPS - --------------------- ----------------- ------------------------------------------- INTERESTED TRUSTEES Term Lifetime of Trust until removal, resignation or retirement* William F. Quinn** (58) Trustee and Chairman and CEO (2006-Present) and President (1986- President since 2006), American Beacon Advisors, Inc.; Chairman 1987 (1989-2003) and Director (1979-1989, 2003-Present), American Airlines Federal Credit Union; Director, Crescent Real Estate Equities, Inc. (1994-Present); Director, Pritchard, Hubble & Herr, LLC (investment advisor) (2001-2006); Director of Investment Committee, Southern Methodist University Endowment Fund (1996-Present); Member, Southern Methodist University Cox School of Business Advisory Board (1999-2002); Member, New York Stock Exchange Pension Manager Committee (1997-1998, 2000-2002, 2006- Present); Vice Chairman, Committee for the Investment of Employee Benefits (2004-Present); Chairman, Committee for the Investment of Employee Benefits Defined Benefit Sub-Committee (2002-2004); Director, United Way of Metropolitan Tarrant County (1988-2000, 2004-Present); Trustee, American Beacon Mileage Funds (1995-Present); Trustee, American Beacon Select Funds (1999-Present); Trustee, American Beacon Master Trust (1995-Present). Alan D. Feld** (69) Trustee since 1996 Partner, Akin, Gump, Strauss, Hauer & Feld, LLP (law firm) (1960-Present); Director, Clear Channel Communications (1984-Present); Trustee, CenterPoint Properties (1994-Present); Trustee, American Beacon Mileage Funds (1996-Present); Trustee, American Beacon Select Funds (1999-Present); Trustee, American Beacon Master Trust (1996-Present). NON-INTERESTED TRUSTEES Term Lifetime of Trust until removal, resignation or retirement* W. Humphrey Bogart (62) Trustee since 2004 Consultant, New River Canada Ltd. (mutual fund servicing company) (1998-2003); Board Member, Baylor University Medical Center Foundation (1992-2004); President and CEO, Allmerica Trust Company, NA (1996-1997); President and CEO, Fidelity Investments Southwest Company (1983-1995); Senior Vice President of Regional Centers, Fidelity Investments (1988- 1995); Trustee, American Beacon Mileage Funds (2004- Present); Trustee, American Beacon Select Funds (2004-Present); Trustee, American Beacon Master Trust (2004-Present). </Table> - -------------------------------------------------------------------------------- 27 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS -- CONTINUED (UNAUDITED) - -------------------------------------------------------------------------------- <Table> <Caption> POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(s) DURING PAST 5 YEARS NAME, AGE AND ADDRESS WITH THE TRUST AND CURRENT DIRECTORSHIPS - --------------------- ----------------- ------------------------------------------- NON-INTERESTED TRUSTEES (CONT.) Brenda A. Cline (45) Trustee since 2004 Executive Vice President, Chief Financial Officer, Treasurer and Secretary, Kimbell Art Foundation (1993-Present); Trustee, Texas Christian University (1998-Present); Trustee, W.I. Cook Foundation, Inc. (d/b/a Cook Children's Health Foundation) (2001- Present); Director, Christian Church Foundation (1999-Present); Trustee, American Beacon Mileage Funds (2004-Present); Trustee, American Beacon Select Funds (2004-Present); Trustee, American Beacon Master Trust (2004-Present). Richard A. Massman (63) Trustee since 2004 Senior Vice President and General Counsel, Hunt Consolidated, Inc. (holding company engaged in energy, real estate, farming, ranching and venture capital activities) (1994-Present); Trustee, American Beacon Mileage Funds (2004-Present); Trustee, American Beacon Select Funds (2004- Present); Trustee, American Beacon Master Trust (2004-Present). Stephen D. O'Sullivan (71) Trustee since 1987 Consultant (1994-Present); Trustee, American Beacon Mileage Funds (1995-Present); Trustee, American Beacon Select Funds (1999-Present); Trustee, American Beacon Master Trust (1995-Present). R. Gerald Turner (60) Trustee since 2001 President, Southern Methodist University (1995- 225 Perkins Admin. Bldg. Present); Director, ChemFirst (1986-2002); Director, Southern Methodist Univ. J.C. Penney Company, Inc. (1996-Present); Director, Dallas, Texas 75275 California Federal Preferred Capital Corp. (2001- 2003); Director, Kronus Worldwide Inc. (chemical manufacturing) (2003-Present); Director, First Broadcasting Investment Partners, LLC (2003- Present); Member, United Way of Dallas Board of Directors; Member, Salvation Army of Dallas Board of Directors; Member, Methodist Hospital Advisory Board; Member, Knight Commission on Intercollegiate Athletics; Trustee, American Beacon Mileage Funds (2001-Present); Trustee, American Beacon Select Funds (2001-Present); Trustee, American Beacon Master Trust (2001-Present). Kneeland Youngblood (50) Trustee since 1996 Managing Partner, Pharos Capital Group, LLC (a 100 Crescent Court Chairman since private equity firm) (1998-Present); Director, Suite 1740 2005 Burger King Corporation (2004-Present); Trustee, Dallas, Texas 75201 City of Dallas, Texas Employee Retirement Fund (2004-Present); Trustee, The Hockaday School (1997- 2005); Director, Starwood Hotels and Resorts (2001- Present); Member, Council on Foreign Relations (1995-Present); Director, Just For the Kids (1995- 2001); Director, L&B Realty Advisors (1998-2000); Trustee, Teachers Retirement System of Texas (1993- 1999); Director, Starwood Financial Trust (1998- 2001); Trustee, St. Mark's School of Texas (2002- Present); Trustee, American Beacon Mileage Funds (1996-Present); Trustee, American Beacon Select Funds (1999-Present); Trustee, American Beacon Master Trust (1996-Present). </Table> - -------------------------------------------------------------------------------- 28 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS -- CONTINUED (UNAUDITED) - -------------------------------------------------------------------------------- <Table> <Caption> POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(s) DURING PAST 5 YEARS NAME, AGE AND ADDRESS WITH THE TRUST AND CURRENT DIRECTORSHIPS - --------------------- ----------------- ------------------------------------------- OFFICERS Term One Year Rosemary K. Behan (47) VP, Secretary and Vice President, Legal and Compliance, American Chief Legal Beacon Advisors, Inc. (2006-Present); Assistant Officer since 2006 General Counsel, First Command Financial Planning, Inc. (2004-2006); Enforcement Attorney (2002-2004) and Branch Chief (2000-2002); Securities and Exchange Commission. Brian E. Brett (46) VP since 2004 Vice President, Director of Sales, American Beacon Advisors, Inc. (2004-Present); Regional Vice President, Neuberger Berman, LLC (investment advisor) (1996-2004). Michael W. Fields (52) VP since 1989 Vice President, Fixed Income Investments, American Beacon Advisors, Inc. (1988-Present). Rebecca L. Harris (39) Treasurer since Vice President, Finance, American Beacon Advisors, 1995 Inc. (1995-Present). Christina E. Sears (35) Chief Compliance Chief Compliance Officer, American Beacon Advisors, Officer since 2004 Inc. (2004-Present); Senior Compliance Analyst, and Asst. American Beacon Advisors, Inc. (1998-2004). Secretary since 1999 </Table> - -------- * The Board has adopted a retirement plan that requires Trustees to retire no later than the last day of the calendar year in which they reach the age of 72, with the exception of Messrs. Quinn and O'Sullivan. ** Messrs. Quinn and Feld are deemed to be "interested persons" of the Trust, as defined by the 1940 Act. Mr. Quinn is Chairman of the Manager. Mr. Feld's law firm of Akin, Gump, Strauss, Hauer & Feld LLP has provided legal services within the past two years to one or more of the Trust's investment advisors. - -------------------------------------------------------------------------------- 29 (AMERICAN BEACON FUNDS LOGO) - -------------------------------------------------------------------------------- DELIVERY OF DOCUMENTS To reduce expenses, your financial institution may mail only one copy of the Prospectus, Annual Report and Semi-Annual Report to those addresses shared by two or more accounts. If you wish to receive individual copies of these documents, please contact your financial institution. Delivery of individual copies will commence thirty days after receiving your request. If you invest in the Fund through a financial institution, you may be able to receive the Fund's regulatory mailings, such as the Prospectus, Annual Report and Semi-Annual Report, by e-mail. If you are interested in this option, please go to www.icsdelivery.com and search for your financial institution's name or contact your financial institution directly. TO OBTAIN MORE INFORMATION ABOUT THE FUND: <Table> (KEYBOARD GRAPHIC) (MOUSE GRAPHIC) BY E-MAIL: ON THE INTERNET: american-beacon.funds@ambeacon.com Visit our website at www.americanbeaconfunds.com </Table> - -------------------------------------------------------------------------------- <Table> (TELEPHONE GRAPHIC) (MAILBOX GRAPHIC) BY TELEPHONE: BY MAIL: Institutional Class American Beacon Funds Call (800) 658-5811 4151 Amon Carter Blvd., MD 2450 AMR Class(SM) Fort Worth, TX 76155 Call (800) 345-2345 PlanAhead Class(R) and Service Class Call (800) 388-3344 </Table> - -------------------------------------------------------------------------------- <Table> AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULES AVAILABILITY OF PROXY VOTING POLICY AND RECORDS In addition to the Schedule of Investments A description of the policies and procedures the provided in each semi-annual and annual Fund uses to determine how to vote proxies report, the Fund files a complete schedule of relating to portfolio securities is available in its portfolio holdings with the Securities the Fund's Statement of Additional Information, and Exchange Commission ("SEC") on Form N-Q is available free of charge on the Fund's as of the first and third fiscal quarters. website (www.americanbeaconfunds.com) and by The Fund's Forms N-Q are available on the calling 1-800-967-9009 or by accessing the SEC's SEC's website at www.sec.gov. The Forms N-Q website at www.sec.gov. The Fund's proxy voting may also be reviewed and copied at the SEC's record for the most recent year ended June 30 is Public Reference Room, 450 Fifth Street, NW, filed annually with the SEC on Form N-PX. The Washington, DC 20549. Information regarding Fund's Forms N-PX are available on the SEC's the operation of the SEC's Public Reference website at www.sec.gov. The Fund's proxy voting Room may be obtained by calling 1-800-SEC- record may also be obtained by calling 1-800- 0330. A complete schedule of the Fund's 967-9009. portfolio holdings is also available on the Funds' website (www.americanbeaconfunds.com) approximately thirty days after the end of each month. </Table> FUND SERVICE PROVIDERS: <Table> <Caption> CUSTODIAN TRANSFER AGENT INDEPENDENT AUDITORS DISTRIBUTOR STATE STREET BANK AND TRUST BOSTON FINANCIAL DATA SERVICES ERNST & YOUNG LLP FORESIDE FUND SERVICES Boston, Massachusetts Kansas City, Missouri Dallas, Texas Portland, Maine </Table> This report is prepared for shareholders of the American Beacon Funds and may be distributed to others only if preceded or accompanied by a current prospectus. - ------------------------------------------------------------------------------- American Airlines, Inc. is not responsible for investments made in the American Beacon Funds. American Beacon Funds is a service mark of AMR Corporation. American Beacon Large Cap Value Fund is a service mark of American Beacon Advisors, Inc. AR 10/06 538854 G U I D A N C E | V I S I O N | E X P E R I E N C E [AMERICAN BEACON FUNDS LOGO] ANNUAL REPORT [PHOTO] OCTOBER 31, 2006 SMALL CAP VALUE FUND About American Beacon - -------------------------------------------------------------------------------- Since 1986, American Beacon Advisors has offered a variety of products and investment advisory services to numerous institutional and retail clients, including a variety of mutual funds, corporate cash management, and separate account management. Our clients include defined benefit plans, defined contribution plans, foundations, endowments, corporations, financial planners, and other institutional investors. With American Beacon Advisors, you can put the experience of a multi-billion dollar asset management firm to work for your company. Contents - -------------------------------------------------------------------------------- <Table> President's Message............................. 1 Market and Performance Overview................. 2 Schedule of Investments......................... 7 Additional Information.....................Back Cover </Table> Any opinions herein, including forecasts, reflect our judgement as of the end of the reporting period and are subject to change. Each advisor's strategies and the Fund's portfolio composition will change depending on economic and market conditions. This report is not a complete analysis of market conditions and therefore, should not be relied upon as investment advice. Although economic and market information has been compiled from reliable sources, American Beacon Advisors, Inc. makes no representation as to the completeness or accuracy of the statements contained herein. Investing in the securities of small capitalization companies involves greater risk and the possibility of greater price volatility than investing in larger capitalization and more established companies. American Beacon Funds October 31, 2006 (BILL QUINN PICTURE) FELLOW SHAREHOLDERS, I am pleased to present to you the American Beacon Small Cap Value Fund Annual Report for the twelve months ended October 31, 2006. The U.S. equity markets finished the fiscal year on a positive note due to the continued strong performance of the economy, lower oil prices, and the Federal Reserve taking a neutral policy on interest rates. The S&P 500(R) and Dow Jones Industrial Average indices reported one-year returns of 16.34% and 18.47%, respectively. The American Beacon Small Cap Value Fund-Institutional Class recorded annualized total returns of 15.80%, 16.15%, 19.00%, and 14.86% for the one-year, three-year, five-year, and since-inception (December 31, 1998) periods ended October 31, 2006, respectively, beating the Lipper Small-Cap Value Funds Index's return for the five-year period by 2.19%. While companies with little or no earnings performed well in the short term, the American Beacon Small Cap Value Fund has not wavered from its long-term disciplined process. The Fund's long- term focus is on companies with above-average earnings growth potential, below- average price to earnings ratios, and below-average price to book-value ratios. We believe these characteristics will benefit our shareholders over the long term. Please review the enclosed market overviews, portfolio listings, and detailed financial data. As always, we welcome the opportunity to serve your financial needs. To obtain further details about the American Beacon Funds family or to access your account information, please visit our website at www.americanbeaconfunds.com. Thank you for your continued confidence in the American Beacon Funds. Sincerely, -s- William F. Quinn William F. Quinn President, American Beacon Funds Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 800-967-9009. 1 DOMESTIC EQUITY MARKET OVERVIEW OCTOBER 31, 2006 (Unaudited) - -------------------------------------------------------------------------------- The U.S. stock market proved resilient in the final two months of 2005, posting mid-single digit total returns despite events in early 2005 of geopolitical tensions, rising interest rates, soaring oil prices, and a devastating hurricane. Continued expansion in the manufacturing sector, heightened productivity, and employment gains contributed to solid results and helped the year end on a positive note. The stock market continued its fourth quarter 2005 rally into the first quarter of 2006, even in the face of more rate increases by the Federal Reserve. The gains were due in large part to continued growth in the industrial economy, modest unemployment, and minimal inflation. Furthermore, value stocks in the Russell indices outpaced their growth counterparts in the first quarter, as they have over the past few years. With regard to size, small cap stocks performed the best, followed by mid-caps, with large cap issues bringing up the rear for the first quarter as well as the trailing one-, three- and five-year periods. While nine of the ten economic sectors in the S&P 500(R) Index advanced, sector performance varied widely in the first quarter, with more than 15 percentage points separating the leader from the laggard. Telecommunication Services and Energy posted the largest gains, with total returns of 14.5% and 9.1%, respectively. At the opposite end of the spectrum was the Utilities sector at - 1.2%. During the second quarter of 2006, several key U.S. stock market indices, including the S&P 500 Index and the Nasdaq Composite, declined. While economic and earnings growth remained strong, concerns about inflation and the direction of monetary policy under the leadership of new Federal Reserve Chairman Ben Bernanke pressured equity prices. The Federal Reserve raised short-term interest rates in May and again in June, but stocks rallied late in the quarter on expectations that the end of the tightening cycle was near. As measured by various Russell indices, value stocks again outperformed growth stocks in the second quarter, while large cap equities outpaced their midcap and small cap counterparts, as is often the case in a down market. Investors also preferred defensive stocks in the weak market environment, and Utilities, Energy, and Consumer Staples were the only sectors in the S&P 500 Index to advance during the second quarter. Negative market sentiment took its toll on the more volatile Information Technology sector, which was the S&P 500 Index's worst performer. In the third quarter of 2006, the U.S. stock market indices rebounded. Equity investors set aside concerns about the effects of a slowing housing market, auto industry turmoil, and a heightened homeland security alert. After 17 increases in interest rates over the past two-plus years, the Federal Reserve held interest rates steady at both of its rate-setting meetings during the quarter. This pause, combined with moderate economic growth and strong corporate earnings, contributed to a stock market rally. As had been the case in recent quarters, value stocks outperformed their growth counterparts within the Russell universe during the third quarter. Large cap issues outperformed smaller and mid-cap companies, but continued to lag over the three-, five- and ten-year periods. In a reversal of the second quarter, seven of the ten sectors in the S&P 500 Index provided a positive total return during the third quarter. After performing well over the previous quarter, the Energy sector declined, reflecting the sharp decline in commodity energy prices in September. Telecommunications Services and Health Care rebounded sharply during the third quarter, as both sectors advanced more than 10%. The U.S. stock market posted low- to mid-single-digit gains in October 2006. Overall, growth stocks narrowly outperformed their value counterparts during the month. In general, stock performance was inversely related to size, as small cap stocks were the strongest performers, followed by mid-caps, with large cap issues trailing the pack. All ten economic sectors in the S&P 500 Index advanced in October. Both the Consumer Discretionary and Materials sectors posted total returns in excess of 6%, while Health Care was the laggard, gaining just 0.5% for the month. 2 PERFORMANCE OVERVIEW AMERICAN BEACON SMALL CAP VALUE FUND(SM) OCTOBER 31, 2006 (Unaudited) - -------------------------------------------------------------------------------- The Institutional Class of the Small Cap Value Fund returned 15.80% for the twelve months ended October 31, 2006, lagging the Russell 2000(R) Value Index ("Index") return of 22.90% and the Lipper Small-Cap Value Funds Index return of 17.83% for the same period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 12/31/98* THROUGH 10/31/06 (PERFORMANCE GRAPH) <Table> <Caption> LIPPER SMALL- INSTITUTIONAL CAP VALUE RUSSELL 2000 CLASS FUNDS INDEX VALUE INDEX ------------- ------------- ------------ 12/98.................. $10,000 $10,000 $10,000 10/99.................. $ 9,070 $ 9,513 $ 9,508 10/00.................. $10,320 $11,261 $11,153 10/01.................. $12,400 $12,151 $12,129 10/02.................. $12,808 $11,799 $11,822 10/03.................. $18,886 $16,493 $16,584 10/04.................. $22,637 $19,551 $19,567 10/05.................. $25,557 $22,433 $22,119 10/06.................. $29,595 $26,432 $27,184 </Table> * Inception of Institutional Class <Table> <Caption> ANNUALIZED TOTAL RETURNS -------------------------- PERIODS ENDED 10/31/06 VALUE OF -------------------------- $10,000 SINCE 12/31/98- 1 YEAR 5 YEARS INCEPTION 10/31/06 ------ ------- --------- --------- Institutional Class(1).. 15.80% 19.00% 14.86% $29,595 PlanAhead Class(1,2).... 15.56% 18.71% 14.57% $29,028 Service Class(1,3)...... 15.23% 18.48% 14.43% $28,733 AMR Class(1,2).......... 16.12% 19.32% 15.17% $30,229 Lipper Small-Cap Value Funds Index(4)........ 17.83% 16.81% 13.21% $26,432 Russell 2000 Value Index(4).............. 22.90% 17.52% 13.62% $27,184 </Table> 1. Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1- 800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. 2. Fund performance for the since inception period represents the total returns achieved by the Institutional Class from 12/31/98 up to 3/1/99, the inception date of the PlanAhead and AMR Classes, and the returns of the PlanAhead and AMR Classes since inception of these Classes. Expenses of the PlanAhead Class are higher than those of the Institutional Class. As a result, total returns shown may be higher than they would have been had the PlanAhead Class been in existence since 12/31/98. Expenses of the AMR Class are lower than those of the Institutional Class. As a result, total returns shown may be lower than they would have been had the AMR Class been in existence since 12/31/98. 3. Fund performance for the five-year period represents the total returns achieved by the PlanAhead Class from 11/1/01 up to 5/1/03 (the inception date of the Service Class), and the returns of the Service Class since 5/1/03. Fund performance for the since inception period represents the total returns achieved by the Institutional Class from 12/31/98 up to 3/1/99, the returns of the PlanAhead Class from 3/1/99 up to 5/1/03 and the returns of the Service Class since its inception. Expenses of the Service Class are higher than those of the Institutional and PlanAhead Classes. As a result, total returns shown may be higher than they would have been had the Service Class been in existence since 12/31/98. A portion of the fees charged to the Service Class of the Fund has been waived. Performance prior to waiving fees was lower than the actual returns shown. 4. Russell 2000(R) Value Index is a service mark of the Frank Russell Company. The Russell 2000 Value Index is an unmanaged index of those stocks in the Russell 2000 Index with below-average price-to-book ratios and below-average forecasted growth values. The Lipper Small-Cap Value Funds Index tracks the results of the 30 largest mutual funds in the Lipper Small-Cap Value Funds category. Lipper is an independent mutual fund research and ranking service. One cannot directly invest in an index. The Fund underperformed the Index almost entirely due to stock selection, as sector allocation detracted only modestly. More than half of the Fund's underperformance resulted from its holdings in the Consumer Discretionary and Materials sectors. In the Consumer Discretionary sector, Valassis Communications (down 52.0%), WCI Communities (down 35.6%) and Standard Pacific (down 36.9%) were the largest individual detractors. In the Materials sector, the largest negative impact was made by Worthington Industries (down 10.9%) and Lubrizol (up 10.9%). Poor stock selection also resulted from the Fund's positions in the Industrials and Financials sectors. The individual holdings that had the largest negative impact on performance in the Industrials sector were Deluxe (down 27.8% during the time the Fund owned the security) and Briggs & Stratton (down 18.1%). In the Financials sector, Scottish Re Group (down 62.8%) and Asset Acceptance Capital (down 32.8% during the time the Fund owned the security) were responsible for most of the poor relative performance. The Fund's large underweighting in the Financials sector, which was one of the poorer performing sectors of the Index, was a positive contributor to the Fund's performance relative to the Index. However, its impact was offset by the Fund's large overweighting in the Consumer Discretionary sector, which was also a poor performing sector of the Index. 3 PERFORMANCE OVERVIEW AMERICAN BEACON SMALL CAP VALUE FUND(SM) -- CONTINUED OCTOBER 31, 2006 (Unaudited) - -------------------------------------------------------------------------------- The sub-advisors continue to focus on stock selection to uncover investment opportunities that have the potential to benefit the Fund's performance over the long term. TOP TEN HOLDINGS <Table> <Caption> % OF NET ASSETS ---------- American Financial Group, Inc. ...... 1.2 % AGCO Corp. .......................... 0.8 % Avnet, Inc. ......................... 0.8 % Great Plains Energy, Inc. ........... 0.8 % Ingram Micro, Inc. .................. 0.8 % Delphi Financial Group, Inc. ........ 0.7 % Flowserve Corp. ..................... 0.7 % The Hanover Insurance Group, Inc. ... 0.7 % The Men's Wearhouse, Inc. ........... 0.7 % Atmos Energy Corp. .................. 0.6 % </Table> SECTOR ALLOCATION <Table> <Caption> % OF EQUITIES -------- Financials............................ 24.7 % Consumer Discretionary................ 19.8 % Industrials........................... 18.7 % Information Technology................ 10.9 % Utilities............................. 7.0% Materials............................. 6.7% Energy................................ 4.6% Health Care........................... 3.7% Consumer Staples...................... 3.3% Telecommunication Services............ 0.6% </Table> FUND EXPENSE EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees, administrative service fees, distribution (12b-1) fees, and other Fund expenses. The examples below are intended to help you understand the ongoing cost (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the period in each Class and held for the entire period from May 1, 2006 through October 31, 2006. ACTUAL EXPENSES The "Actual" lines of the table provide information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Shareholders of the PlanAhead and Institutional Classes that invest in the Fund through an IRA may be subject to a custodial IRA fee of $12 that is typically deducted each December. If your account was subject to a custodial IRA fee during the period, your costs would have been $12 higher. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The "Hypothetical" lines of the table provide information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed 5% per year rate of return before expenses (not the Fund's actual return). You may compare the ongoing costs of investing in the Fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. Shareholders of the PlanAhead and Institutional Classes that invest in the Fund through an IRA may be subject to a custodial IRA fee of $12 that is typically deducted each December. If your account was subject to a custodial IRA fee during the period, your costs would have been $12 higher. You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs charged by the Fund. Similarly, the expense examples for other funds do not reflect any transaction costs charged by those funds, such as sales charges (loads), redemption fees or exchange fees. Therefore, the "Hypothetical" lines of the table are useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. If you were subject to any transaction costs during the period, your costs would have been higher. 4 PERFORMANCE OVERVIEW AMERICAN BEACON SMALL CAP VALUE FUND(SM) -- CONTINUED OCTOBER 31, 2006 (Unaudited) - -------------------------------------------------------------------------------- <Table> <Caption> BEGINNING ENDING ACCOUNT ACCOUNT EXPENSES PAID VALUE VALUE DURING PERIOD* 5/1/06 10/31/06 5/1/06-10/31/06 --------- --------- --------------- INSTITUTIONAL CLASS Actual $1,000.00 $ 999.56 $4.09 Hypothetical $1,000.00 $1,021.12 $4.13 (5% return before expenses) PLANAHEAD CLASS Actual $1,000.00 $ 998.64 $5.31 Hypothetical $1,000.00 $1,019.89 $5.36 (5% return before expenses) SERVICE CLASS Actual $1,000.00 $ 997.27 $6.68 Hypothetical $1,000.00 $1,018.51 $6.76 (5% return before expenses) AMR CLASS Actual $1,000.00 $1,000.89 $2.78 Hypothetical $1,000.00 $1,022.43 $2.81 (5% return before expenses) </Table> * Expenses are equal to the Fund's annualized expense ratios for the six- month period of 0.81%, 1.05%, 1.35%, and 0.55% for the Institutional, PlanAhead, Service, and AMR Classes, respectively, multiplied by the average account value over the period, multiplied by the number derived by dividing the number of days in the most recent fiscal half-year (184) by days in the year (365) to reflect the half-year period. 5 AMERICAN BEACON SMALL CAP VALUE FUND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - -------------------------------------------------------------------------------- To the Shareholders and Board of Trustees of American Beacon Small Cap Value Fund: We have audited the accompanying statement of assets and liabilities of American Beacon Small Cap Value Fund (a portfolio of American Beacon Funds) (the "Fund"), including the schedule of investments, as of October 31, 2006, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2006, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of American Beacon Small Cap Value Fund as of October 31, 2006, 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 periods indicated therein, in conformity with U.S. generally accepted accounting principles. -s- Ernst & Young LLP Dallas, Texas December 28, 2006 See accompanying notes - -------------------------------------------------------------------------------- 6 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) COMMON STOCKS - 95.51% CONSUMER DISCRETIONARY - 18.90% AUTO COMPONENTS - 2.62% Aftermarket Technology Corp. /\ .................... 148,800 $ 2,796 American Axle & Manufacturing Holdings, Inc + ...... 759,900 14,248 ArvinMeritor, Inc. + ............................... 523,600 7,865 Bandag, Inc. + ..................................... 43,900 1,927 Bandag, Inc., A Shares ............................. 3,500 132 BorgWarner, Inc. + ................................. 119,500 6,871 Gentex Corp. + ..................................... 330,300 5,255 The Goodyear Tire & Rubber Co. /\ + ................ 399,900 6,130 Keystone Automotive Industries, Inc. /\ + .......... 99,400 3,823 Lear Corp. + ....................................... 615,400 18,591 Modine Manufacturing Co. ........................... 222,400 5,295 Tenneco, Inc. /\ + ................................. 125,500 2,849 TRW Automotive Holdings Corp. /\ ................... 254,500 6,528 ------------ 82,310 ------------ DISTRIBUTORS - 0.09% Spectrum Brands, Inc. /\ + ......................... 277,900 2,701 ------------ HOTELS, RESTAURANTS & LEISURE - 1.88% Brinker International, Inc. + ...................... 88,900 4,128 CBRL Group, Inc. + ................................. 193,497 8,496 CEC Entertainment, Inc. /\ ......................... 175,200 6,039 Jack in the Box, Inc. /\ ........................... 43,400 2,435 JAKKS Pacific, Inc. /\ + ........................... 197,400 4,282 Landry's Restaurants, Inc. + ....................... 313,700 9,191 Live Nation, Inc. /\ ............................... 164,800 3,504 Lodgian, Inc. /\ + ................................. 495,000 7,054 Magna Entertainment Corp. /\ + ..................... 736,100 3,864 Morton's Restaurant Group, Inc. /\ ................. 13,600 220 Red Lion Hotels Corp. /\ ........................... 79,800 954 Ruby Tuesday, Inc. ................................. 28,400 788 Speedway Motorsports, Inc. ......................... 121,500 4,577 Sunterra Corp. /\ + ................................ 299,100 3,305 ------------ 58,837 ------------ HOUSEHOLD DURABLES - 3.78% American Greetings Corp. + ......................... 413,100 9,877 Beazer Homes USA, Inc. + ........................... 172,100 7,459 Blyth, Inc. ........................................ 335,700 8,030 Champion Enterprises, Inc. /\ + .................... 1,117,000 10,343 Ethan Allen Interiors, Inc. + ...................... 235,100 8,374 Furniture Brands International, Inc. + ............. 550,100 10,232 Helen of Troy Ltd. /\ + ............................ 382,500 9,413 HNI Corp. + ........................................ 17,200 773 M.D.C. Holdings, Inc. + ............................ 110,173 5,493 Matthews International Corp. ....................... 68,000 2,613 The Ryland Group, Inc. + ........................... 47,500 2,182 </Table> <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) Standard Pacific Corp. + ............................ 19,100 $ 463 Tempur-Pedic International, Inc. /\ + ............... 577,000 11,390 The Toro Co. ........................................ 156,900 6,772 Tupperware Corp. + .................................. 450,200 9,558 WCI Communities, Inc. /\ + .......................... 752,300 12,127 The Yankee Candle Company, Inc. ..................... 106,700 3,612 ------------ 118,711 ------------ INTERNET & CATALOG RETAIL - 0.37% Insight Enterprises, Inc. /\ ........................ 301,200 6,473 School Specialty, Inc. /\ + ......................... 133,000 5,208 ------------ 11,681 ------------ LEISURE EQUIPMENT & PRODUCTS - 1.04% Brunswick Corp. + ................................... 574,600 18,100 MarineMax, Inc. /\ + ................................ 311,600 8,884 Polaris Industries, Inc. + .......................... 129,600 5,549 ------------ 32,533 ------------ MEDIA - 1.42% Belo Corp. .......................................... 102,800 1,801 Courier Corp. + ..................................... 70,999 2,785 Cox Radio, Inc. /\ + ................................ 270,900 4,562 Dow Jones & Co., Inc. + ............................. 59,100 2,074 Entercom Communications Corp. + ..................... 225,300 6,234 Getty Images, Inc. /\ + ............................. 17,000 736 Gray Television, Inc. ............................... 67,400 435 Hearst-Argyle Television, Inc. + .................... 67,400 1,698 Journal Communications, Inc. ........................ 341,900 4,000 Lin TV Corp. /\ + ................................... 322,775 2,653 Meredith Corp. ...................................... 37,000 1,942 R.H. Donnelley Corp. + .............................. 45,000 2,710 Scholastic Corp. /\ ................................. 103,900 3,265 Westwood One, Inc. .................................. 1,210,600 9,576 ------------ 44,471 ------------ MULTILINE RETAIL - 0.95% BJ's Wholesale Club, Inc. /\ ........................ 591,600 16,949 Dollar Tree Stores, Inc. /\ + ....................... 10,900 339 Fred's, Inc. + ...................................... 578,100 7,562 Tuesday Morning Corp. + ............................. 307,100 5,067 ------------ 29,917 ------------ SPECIALTY RETAIL - 5.54% Aeropostale, Inc. /\ ................................ 53,900 1,580 Asbury Automotive Group, Inc. ....................... 243,100 5,834 Big 5 Sporting Goods Corp. + ........................ 387,800 9,323 Borders Group, Inc. + ............................... 459,900 9,469 The Buckle, Inc. + .................................. 74,400 2,945 The Cato Corp. ...................................... 30,600 700 Charming Shoppes, Inc. /\ + ......................... 523,500 7,748 Claire's Stores, Inc. ............................... 360,200 10,212 Conn's, Inc. /\ + ................................... 44,700 1,074 </Table> See accompanying notes - -------------------------------------------------------------------------------- 					7 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) The Finish Line, Inc., Class A Shares .............. 169,700 $ 2,199 Foot Locker, Inc. .................................. 98,400 2,282 Genesco, Inc. /\ + ................................. 96,300 3,618 Group 1 Automotive, Inc. + ......................... 178,000 10,201 HOT Topic, Inc. /\ + ............................... 211,300 2,136 Jos. A. Bank Clothiers, Inc. /\ + .................. 172,500 5,121 Lithia Motors, Inc. + .............................. 46,500 1,186 The Men's Wearhouse, Inc. + ........................ 653,800 26,054 OfficeMax, Inc. .................................... 67,800 3,226 Pacific Sunwear of California /\ + ................. 321,100 5,658 Regis Corp. + ...................................... 236,600 8,884 Rent-A-Center, Inc. /\ ............................. 458,850 13,197 Sonic Automotive, Inc., A Shares + ................. 584,500 15,372 Stage Stores, Inc. ................................. 198,080 6,420 Talbots, Inc. + .................................... 78,600 2,204 United Auto Group, Inc. + .......................... 22,500 517 Williams-Sonoma, Inc. + ............................ 28,900 983 Zale Corp. /\ + .................................... 537,000 15,487 ------------ 173,630 ------------ TEXTILES & APPAREL - 1.21% Brown Shoe Company, Inc. ........................... 2,350 92 Columbia Sportswear Co. /\ + ....................... 87,168 4,867 Jones Apparel Group, Inc. .......................... 72,500 2,422 Kenneth Cole Productions, Inc. ..................... 116,900 2,973 K-Swiss, Inc. + .................................... 139,539 4,929 New York & Co, Inc. /\ + ........................... 157,600 2,049 The Timberland Co. /\ .............................. 271,200 7,824 The Warnaco Group, Inc. /\ + ....................... 601,200 12,769 ------------ 37,925 ------------ TOTAL CONSUMER DISCRETIONARY 592,716 ------------ CONSUMER STAPLES - 3.15% FOOD & DRUG RETAILING - 1.01% Agrium, Inc. ....................................... 294,600 8,254 Casey's General Stores, Inc. ....................... 244,900 5,944 Longs Drug Stores Corp. + .......................... 189,800 8,169 Pathmark Stores, Inc. /\ + ......................... 298,400 3,023 Ruddick Corp. ...................................... 225,900 6,370 ------------ 31,760 ------------ FOOD PRODUCTS - 1.93% Chiquita Brands International, Inc. + .............. 222,000 3,041 Del Monte Foods Co. ................................ 1,416,900 15,288 J&J Snack Foods Corp. + ............................ 53,800 1,798 The JM Smucker Co. ................................. 54,700 2,680 Lance, Inc. + ...................................... 100,110 1,954 Pilgrim's Pride Corp. + ............................ 57,500 1,436 Ralcorp Holdings, Inc. /\ + ........................ 268,300 13,268 Sanderson Farms, Inc. + ............................ 147,200 3,905 Sensient Technologies Corp. + ...................... 344,150 7,933 </Table> <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) Smithfield Foods, Inc. /\ .......................... 345,700 $ 9,293 ------------ 60,596 ------------ TOBACCO - 0.21% Schweitzer-Mauduit International, Inc. ............. 102,800 2,371 Universal Corp. + .................................. 115,000 4,234 ------------ 6,605 ------------ TOTAL CONSUMER STAPLES 98,961 ------------ ENERGY - 4.37% ENERGY EQUIPMENT & SERVICES - 1.81% CARBO Ceramics, Inc. + ............................. 76,500 2,578 Dril-Quip, Inc. /\ + ............................... 59,040 2,325 FMC Technologies, Inc. /\ + ........................ 19,100 1,155 Gulfmark Offshore, Inc. /\ + ....................... 20,900 722 Helmerich & Payne, Inc. /\ ......................... 296,100 7,092 NS Group, Inc. /\ .................................. 65,500 4,281 Oil States International, Inc. /\ + ................ 461,100 13,390 Tetra Technologies, Inc. /\ ........................ 124,700 3,230 Tidewater, Inc. + .................................. 155,800 7,748 Unit Corp. /\ ...................................... 92,700 4,300 Universal Compression Holdings, Inc. /\ ............ 166,600 10,039 ------------ 56,860 ------------ OIL & GAS - 2.56% Alon USA Energy, Inc. + ............................ 29,500 828 Berry Petroleum Co. + .............................. 248,700 7,424 Bronco Drilling Co., Inc. /\ + ..................... 329,400 5,613 Cabot Oil & Gas Corp. /\ ........................... 16,500 873 Cimarex Energy Co. + ............................... 114,500 4,124 Encore Acquisition Co. /\ + ........................ 404,949 10,140 Energy Partners Ltd. /\ + .......................... 18,400 449 EXCO Resources, Inc. /\ + .......................... 948,800 13,739 Forest Oil Corp. /\ ................................ 106,000 3,460 The Houston Exploration Co. /\ ..................... 5,200 282 Hydril Company LP /\ ............................... 65,300 3,921 Pioneer Drilling Co. /\ + .......................... 437,900 5,750 Pogo Producing Co. + ............................... 185,700 8,310 Stone Energy Corp. /\ + ............................ 206,200 8,035 Tsakos Energy Navigation Ltd. + .................... 166,900 7,400 ------------ 80,348 ------------ TOTAL ENERGY 137,208 ------------ FINANCIALS - 23.60% BANKS - 7.30% Accredited Home Lenders Holding Co. /\ + ........... 25,907 793 Alabama National Bancorp + ......................... 43,500 2,952 Anchor BanCorp Wisconsin, Inc. ..................... 49,838 1,447 Astoria Financial Corp. ............................ 243,100 7,052 BancorpSouth, Inc. + ............................... 154,800 3,955 </Table> See accompanying notes - -------------------------------------------------------------------------------- 					8 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) Bank of Hawaii Corp. ................................. 193,600 $ 10,100 BankAtlantic Bancorp, Inc. + ......................... 673,900 8,828 Chemical Financial Corp. + ........................... 161,431 4,828 Chittenden Corp. ..................................... 208,925 6,161 Citizens Banking Corp. + ............................. 326,735 8,485 City National Corp. + ................................ 48,200 3,208 Columbia Banking System, Inc. ........................ 91,600 2,902 Community Bank System, Inc. + ........................ 220,300 5,475 Corus Bankshares, Inc. + ............................. 13,274 273 Cullen/Frost Bankers, Inc. + ......................... 153,354 8,306 Downey Financial Corp. + ............................. 136,100 9,375 F.N.B. Corp. + ....................................... 392,600 6,647 First Republic Bank .................................. 111,800 4,354 FirstFed Financial Corp. /\ + ........................ 12,700 785 FirstMerit Corp. + ................................... 228,500 5,306 Flagstar Bancorp, Inc. + ............................. 355,700 5,346 Flushing Financial Corp. ............................. 114,900 2,021 Fulton Financial Corp. + ............................. 117,178 1,876 Greater Bay Bancorp .................................. 77,100 1,985 Harleysville National Corp. + ........................ 98,509 2,104 IBERIABANK Corp. ..................................... 44,300 2,607 Independent Bank Corp. ............................... 21,900 523 International Bancshares Corp. ....................... 241,128 7,398 Investors Financial Services Corp. + ................. 32,300 1,270 Irwin Financial Corp. + .............................. 51,600 1,144 MAF Bancorp, Inc. .................................... 128,670 5,544 National Penn Bancshares, Inc. + ..................... 53,084 1,088 NBT Bancorp, Inc. + .................................. 150,606 3,743 Pacific Capital Bancorp .............................. 129,300 3,977 Park National Corp. + ................................ 25,900 2,626 PFF Bancorp, Inc. + .................................. 8,200 254 Placer Sierra Bancshares /\ .......................... 23,900 567 Provident Bankshares Corp. + ......................... 112,820 4,077 Provident Financial Services, Inc. ................... 98,300 1,803 Republic Bancorp, Inc. + ............................. 551,498 7,379 S&T Bancorp, Inc. + .................................. 9,164 310 Sky Financial Group, Inc. ............................ 340,594 8,532 The South Financial Group, Inc. + .................... 186,000 4,935 Sterling Bancshares, Inc. ............................ 166,700 3,052 Sterling Financial Corp. ............................. 84,799 2,820 Susquehanna Bancshares, Inc. + ....................... 263,600 6,587 TrustCo Bank Corp NY + ............................... 128,000 1,414 Trustmark Corp. + .................................... 332,560 10,529 United Bankshares, Inc. + ............................ 75,671 2,890 Washington Federal, Inc. ............................. 504,094 11,715 Webster Financial Corp. .............................. 281,900 13,621 WesBanco, Inc. + ..................................... 64,845 2,124 Wilmington Trust Corp. ............................... 44,800 1,863 ------------ 228,956 ------------ </Table> <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) DIVERSIFIED FINANCIALS - 2.75% Affiliated Managers Group, Inc. /\ + ................ 88,000 $ 8,812 Ares Capital Corp. .................................. 263,900 4,890 Asset Acceptance Capital Corp. /\ + ................. 476,122 8,480 Assured Guaranty Ltd. ............................... 166,900 4,201 Asta Funding, Inc. + ................................ 197,500 6,723 CBRE Realty Finance, Inc. + ......................... 106,460 1,633 CompuCredit Corp. /\ + .............................. 248,200 8,627 Cowen Group, Inc. /\ ................................ 81,000 1,170 Financial Federal Corp. + ........................... 177,150 4,875 IndyMac Bancorp, Inc. + ............................. 159,100 7,231 MCG Capital Corp. + ................................. 561,100 10,055 MortgageIT Holdings, Inc. + ......................... 280,500 3,978 Nelnet, Inc. /\ + ................................... 42,800 1,260 Piper Jaffray Co. /\ ................................ 133,113 9,205 Raymond James Financial, Inc. ....................... 58,200 1,854 Texas Capital Bancshares, Inc. /\ ................... 54,700 1,096 World Acceptance Corp. /\ ........................... 42,281 2,114 ------------ 86,204 ------------ INSURANCE - 9.30% 21st Century Insurance Group + ...................... 551,900 8,709 Alfa Corp. + ........................................ 76,503 1,413 American Equity Investment Life Holding Co. + ....... 379,700 4,845 American Financial Group, Inc. + .................... 540,500 25,868 American National Insurance Co. ..................... 11,600 1,346 AmerUs Group Co. .................................... 203,000 13,901 Arch Capital Group Ltd. /\ .......................... 139,000 8,936 Argonaut Group, Inc. /\ ............................. 14,607 497 Aspen Insurance Holdings Ltd. ....................... 235,800 5,853 The Commerce Group, Inc. ............................ 197,500 5,846 Conseco, Inc. /\ + .................................. 544,600 11,077 Delphi Financial Group, Inc. ........................ 521,150 20,455 FBL Financial Group, Inc. ........................... 218,448 7,722 Fremont General Corp. + ............................. 30,900 449 Great American Financial Resources, Inc. ............ 78,800 1,821 The Hanover Insurance Group, Inc. ................... 453,800 20,580 Harleysville Group, Inc. ............................ 63,628 2,296 HCC Insurance Holdings, Inc. ........................ 248,800 8,375 Horace Mann Educators Corp. ......................... 449,000 9,043 Infinity Property and Casualty Corp. ................ 150,598 6,479 KMG America Corp. /\ ................................ 276,700 2,103 LandAmerica Financial Group, Inc. + ................. 51,100 3,224 Mercury General Corp. ............................... 152,300 7,885 The Midland Co. ..................................... 57,800 2,702 National Western Life Insurance Co. ................. 2,400 576 The Navigators Group, Inc. /\ ....................... 179,700 8,458 Odyssey Re Holdings Corp. + ......................... 384,500 13,630 Ohio Casualty Corp. + ............................... 352,040 9,656 The Phoenix Companies, Inc. ......................... 206,900 3,277 </Table> See accompanying notes - -------------------------------------------------------------------------------- 					9 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) PMA Capital Corp. /\ ................................ 169,400 $ 1,606 Presidential Life Corp. ............................. 90,400 2,133 Protective Life Corp. ............................... 310,500 13,740 Quanta Capital Holdings Ltd. /\ ..................... 265,200 520 Reinsurance Group of America, Inc. + ................ 253,300 14,286 Safety Insurance Group, Inc. + ...................... 113,400 5,671 Security Capital Assurance Ltd. /\ .................. 112,560 2,836 StanCorp Financial Group, Inc. ...................... 239,000 10,920 Stewart Information Services Corp. + ................ 43,500 1,612 Triad Guaranty, Inc. /\ + ........................... 212,600 10,951 United America Indemnity Ltd. /\ .................... 245,297 5,632 United Fire & Casualty, Co. ......................... 35,700 1,263 Unitrin, Inc. ....................................... 82,300 3,533 ------------ 291,725 ------------ REAL ESTATE - 4.25% Alexandria Real Estate Equities, Inc. ............... 17,400 1,735 American Financial Realty Trust ..................... 477,700 5,575 Annaly Capital Management, Inc. ..................... 531,000 6,967 Bluegreen Corp. /\ + ................................ 321,300 4,029 Brookfield Homes Corp. + ............................ 134,870 4,377 Capital Lease Funding, Inc. + ....................... 453,100 5,338 Capital Trust, Inc. + ............................... 70,600 3,142 Comstock Homebuilding Companies, Inc. /\ + .......... 147,700 799 Corrections Corp of America /\ ...................... 106,759 4,878 Crystal River Capital, Inc. + ....................... 67,600 1,489 DiamondRock Hospitality Co. ......................... 145,800 2,460 Eagle Hospitality Properties Trust, Inc. ............ 196,000 1,838 Education Realty Trust, Inc. + ...................... 267,300 4,135 Equity Inns, Inc. ................................... 521,300 8,747 Fieldstone Investment Corp. + ....................... 408,900 3,324 First Potomac Realty Trust + ........................ 100,500 3,109 Government Properties Trust, Inc. ................... 22,900 242 Health Care Real Estate Investment Trust, Inc. + ...................................... 46,700 1,928 Highland Hospitality Corp. .......................... 487,500 6,737 Innkeepers USA Trust ................................ 230,000 3,945 Jones Lang LaSalle, Inc. ............................ 78,400 7,213 LaSalle Hotel Properties + .......................... 278,500 11,767 Lexington Corporate Properties Trust + .............. 415,000 8,840 MI Developments, Inc. ............................... 401,800 14,545 Mission West Properties, Inc. + ..................... 183,300 2,284 Redwood Trust, Inc. ................................. 117,800 6,475 Strategic Hotel Capital, Inc. ....................... 195,400 4,156 Thomas Properties Group, Inc. ....................... 108,500 1,468 Ventas, Inc. ........................................ 44,300 1,727 ------------ 133,269 ------------ TOTAL FINANCIALS 740,154 ------------ </Table> <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) HEALTH CARE - 3.50% BIOTECHNOLOGY - 0.08% Charles River Laboratories International, Inc. /\ ........................................... 29,800 $ 1,279 Invitrogen Corp. /\ ................................ 18,900 1,097 ------------ 2,376 ------------ HEALTH CARE EQUIPMENT & SUPPLIES - 0.06% Medical Action Industries, Inc. /\ ................. 75,200 1,998 ------------ HEALTH CARE PROVIDERS & SERVICES - 2.81% Amedisys, Inc. /\ + ................................ 149,100 6,049 Apria Healthcare Group, Inc. /\ .................... 314,500 7,325 Kindred Healthcare, Inc. /\ + ...................... 295,900 7,989 LifePoint Hospitals, Inc. /\ + ..................... 335,600 11,914 Magellan Health Services, Inc. /\ .................. 416,353 18,170 MAXIMUS, Inc. ...................................... 376,900 10,519 Option Care, Inc. + ................................ 460,763 5,838 Pediatrix Medical Group, Inc. /\ ................... 150,400 6,757 RehabCare Group, Inc. /\ + ......................... 140,500 1,807 Res-Care, Inc. /\ + ................................ 207,400 4,011 Triad Hospitals, Inc. /\ + ......................... 164,300 6,084 Universal Health Services, Inc. .................... 31,900 1,689 ------------ 88,152 ------------ PHARMACEUTICALS - 0.55% Aspreva Pharmaceuticals Corp. /\ ................... 332,100 6,041 Endo Pharmaceuticals Holdings, Inc. /\ ............. 30,800 879 KV Pharmaceutical Co. /\ + ......................... 101,300 2,261 Sciele Pharma, Inc. /\ + ........................... 369,200 8,052 ------------ 17,233 ------------ TOTAL HEALTH CARE 109,759 ------------ INDUSTRIALS - 17.81% AEROSPACE & DEFENSE - 1.02% Alliant Techsystems, Inc. /\ + ..................... 28,200 2,177 Armor Holdings, Inc. /\ ............................ 171,500 8,825 BE Aerospace, Inc. /\ .............................. 250,400 6,330 EDO Corp. + ........................................ 115,800 2,769 Esterline Technologies Corp. /\ + .................. 278,700 10,507 United Industrial Corp. + .......................... 32,500 1,463 ------------ 32,071 ------------ AIR FREIGHT & COURIERS - 0.44% Ryder System, Inc. ................................. 259,900 13,684 ------------ BUILDING PRODUCTS - 0.86% ElkCorp + .......................................... 152,000 3,818 Griffon Corp. /\ + ................................. 48,600 1,195 Insituform Technologies, Inc. /\ + ................. 492,800 11,517 Lennox International, Inc. ......................... 283,300 7,638 </Table> See accompanying notes - -------------------------------------------------------------------------------- 					10 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) Simpson Manufacturing Co., Inc. + ................... 75,200 $ 2,135 Universal Forest Products, Inc. + ................... 13,200 599 ------------ 26,902 ------------ CHEMICALS - 0.14% Pioneer Companies, Inc. /\ .......................... 172,100 4,414 ------------ COMMERCIAL SERVICES & SUPPLIES - 6.15% Adesa, Inc. + ....................................... 239,500 6,021 Allied Waste Industries, Inc. /\ .................... 156,700 1,904 Bowne & Co., Inc. + ................................. 417,800 6,530 The Brink's Co. + ................................... 101,230 5,314 Career Education Corp. /\ ........................... 259,300 5,777 Casella Waste Systems, Inc. /\ + .................... 185,200 2,100 Central Parking Corp. + ............................. 213,800 3,667 Ceridian Corp. /\ ................................... 102,000 2,404 CheckFree Corp. /\ .................................. 5,800 229 Clean Harbors, Inc. /\ + ............................ 133,200 5,700 Convergys Corp. /\ .................................. 256,500 5,440 Con-way, Inc. ....................................... 294,900 13,910 CSG Systems International, Inc. /\ + ................ 234,000 6,313 Deluxe Corp. + ...................................... 381,200 8,642 Electro Rent Corp. /\ + ............................. 83,006 1,372 Ennis, Inc. ......................................... 68,000 1,562 Headwaters, Inc. /\ + ............................... 196,000 4,851 John H. Harland Co. ................................. 160,000 6,542 Kelly Services, Inc. + .............................. 397,300 11,434 Kforce, Inc. /\ ..................................... 404,600 6,057 Labor Ready, Inc. /\ ................................ 274,000 4,798 LECG Corp. /\ + ..................................... 580,600 11,432 McGrath Rentcorp .................................... 133,338 3,600 Navigant Consulting, Inc. /\ + ...................... 350,900 6,250 PHH Corp. /\ + ...................................... 279,800 7,723 Pre-Paid Legal Services, Inc. + ..................... 107,500 4,563 The Providence Service Corp /\ + .................... 109,600 3,013 Sabre Holdings Corp. ................................ 638,498 16,231 Spherion Corp. /\ + ................................. 451,100 3,270 Steelcase, Inc., A Shares ........................... 95,300 1,579 United Stationers, Inc. /\ .......................... 82,500 3,939 Valassis Communications, Inc. /\ .................... 1,027,300 15,420 Waste Connections, Inc. /\ + ........................ 129,700 5,278 ------------ 192,865 ------------ CONSTRUCTION & ENGINEERING - 0.45% Comfort Systems USA, Inc. ........................... 99,822 1,159 Infrasource Services, Inc. /\ + ..................... 180,000 3,523 The Shaw Group, Inc. /\ + ........................... 362,400 9,625 ------------ 14,307 ------------ ELECTRICAL EQUIPMENT - 0.94% Brady Corp. + ....................................... 314,900 11,651 EnerSys /\ + ........................................ 80,300 1,416 </Table> <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) II-VI, Inc. /\ ..................................... 120,300 $ 2,945 Regal-Beloit Corp. + ............................... 247,400 12,234 Thomas & Betts Corp. /\ ............................ 23,200 1,195 ------------ 29,441 ------------ MACHINERY - 5.05% AGCO Corp. /\ ...................................... 1,042,780 27,894 Albany International Corp. ......................... 14,600 491 Barnes Group, Inc. + ............................... 568,400 11,396 Briggs & Stratton Corp. + .......................... 379,800 9,681 Flowserve Corp. /\ ................................. 434,600 23,034 The Greenbrier Companies, Inc. + ................... 115,300 4,324 Harsco Corp. ....................................... 149,900 12,236 IDEX Corp. ......................................... 243,800 11,434 Kaydon Corp. + ..................................... 326,400 13,644 Kennametal, Inc. ................................... 57,000 3,518 Navistar International Corp. /\ .................... 323,600 8,973 Reliance Steel & Aluminum Co. ...................... 40,000 1,374 Terex Corp. /\ ..................................... 268,200 13,882 The Timken Co. ..................................... 442,000 13,282 Wabash National Corp. + ............................ 222,000 3,115 ------------ 158,278 ------------ MARINE - 0.67% Alexander & Baldwin, Inc. .......................... 175,000 8,055 Kirby Corp. /\ + ................................... 293,400 10,278 Overseas Shipholding Group, Inc. ................... 41,400 2,590 ------------ 20,923 ------------ RENTAL AUTO/EQUIPMENT - 0.32% Avis Budget Group, Inc. ............................ 136,650 2,704 United Rentals, Inc. /\ + .......................... 311,300 7,375 ------------ 10,079 ------------ ROAD & RAIL - 1.54% Arkansas Best Corp. + .............................. 162,900 6,676 Covenant Transport, Inc. /\ + ...................... 182,300 2,277 Laidlaw International, Inc. ........................ 243,300 7,058 Swift Transportation Co., Inc. /\ + ................ 643,753 16,191 Werner Enterprises, Inc. + ......................... 162,800 2,987 YRC Worldwide, Inc. /\ + ........................... 337,900 13,090 ------------ 48,279 ------------ TRADING COMPANIES & DISTRIBUTORS - 0.05% MSC Industrial Direct Co., Inc. .................... 36,100 1,477 ------------ TRANSPORT-SERVICES - 0.18% Bristow Group, Inc. /\ + ........................... 173,600 5,764 ------------ TOTAL INDUSTRIALS 558,484 ------------ INFORMATION TECHNOLOGY - 10.44% COMMUNICATIONS EQUIPMENT - 1.51% Andrew Corp. /\ + .................................. 174,900 1,620 </Table> See accompanying notes - -------------------------------------------------------------------------------- 					11 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) Avocent Corp. /\ + .................................. 233,800 $ 8,583 Brocade Communications Systems, Inc. /\ + ........... 541,000 4,387 Comtech Telecommunications Corp. /\ + ............... 183,900 6,556 DSP Group, Inc. /\ .................................. 43,900 953 Emulex Corp. /\ ..................................... 329,300 6,191 Foundry Networks, Inc. /\ ........................... 495,600 6,274 Plantronics, Inc. + ................................. 219,600 4,636 Powerwave Technologies, Inc. /\ + ................... 258,300 1,682 Symmetricom, Inc. /\ + .............................. 294,500 2,494 Tekelec, Inc. /\ + .................................. 260,800 3,847 ------------ 47,223 ------------ COMPUTERS & PERIPHERALS - 0.67% Avid Technology, Inc. /\ + .......................... 135,100 4,880 Electronics for Imaging, Inc. /\ .................... 223,500 5,283 Hutchinson Technology, Inc. /\ + .................... 108,500 2,512 Mercury Computer Systems, Inc. /\ + ................. 464,600 5,724 Palm, Inc. /\ + ..................................... 177,500 2,725 ------------ 21,124 ------------ ELECTRONIC EQUIPMENT & INSTRUMENTS - 4.36% Arrow Electronics, Inc. /\ .......................... 264,600 7,898 Avnet, Inc. /\ ...................................... 994,500 23,550 Benchmark Electronics, Inc. /\ + .................... 413,399 10,976 Celestica, Inc. /\ + ................................ 501,900 4,934 Diebold, Inc. + ..................................... 310,000 13,541 Global Imaging Systems, Inc. /\ ..................... 17,000 370 IKON Office Solutions, Inc. + ....................... 659,600 9,835 Ingram Micro, Inc. /\ ............................... 1,478,300 30,468 Littelfuse, Inc. /\ + ............................... 337,200 11,418 Mettler-Toledo International, Inc. /\ ............... 35,200 2,416 MTS Systems Corp. ................................... 34,200 1,138 PerkinElmer, Inc. ................................... 102,300 2,185 Plexus Corp. /\ + ................................... 312,600 6,852 Vishay Intertechnology, Inc. /\ + ................... 820,100 11,063 ------------ 136,644 ------------ INTERNET SOFTWARE & SERVICES - 0.87% EarthLink, Inc. /\ + ................................ 970,100 6,810 Netgear, Inc. /\ + .................................. 212,195 5,687 NIC, Inc. /\ + ...................................... 435,700 2,104 United Online, Inc. + ............................... 482,080 6,518 WebEx Communications, Inc. /\ + ..................... 163,100 6,271 ------------ 27,390 ------------ IT CONSULTING & SERVICES - 0.61% BearingPoint, Inc. /\ + ............................. 332,000 2,765 Perot Systems Corp. /\ .............................. 360,700 5,320 Phase Forward, Inc. /\ .............................. 295,300 4,099 SI International, Inc. /\ + ......................... 138,900 4,606 SYNNEX Corp. /\ + ................................... 51,500 1,156 Unisys Corp. /\ + ................................... 183,600 1,201 ------------ 19,147 ------------ </Table> <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) SEMICONDUCTOR EQUIPMENT & PRODUCTS - 1.25% Actel Corp. /\ + ................................... 170,200 $ 2,790 Cirrus Logic, Inc. /\ .............................. 296,500 2,093 Fairchild Semiconductor International, Inc. /\ ..... 48,700 785 FEI Co. /\ + ....................................... 201,700 4,611 Integrated Device Technology, Inc. /\ .............. 104,800 1,661 Kulicke and Soffa Industries, Inc. /\ + ............ 162,500 1,459 Micrel, Inc. /\ .................................... 227,100 2,535 MKS Instruments, Inc. /\ ........................... 438,200 9,487 Omnivision Technologies, Inc. /\ + ................. 183,985 3,021 Photronics, Inc. /\ ................................ 121,200 1,696 Rudolph Technologies, Inc. /\ ...................... 87,100 1,538 Teradyne, Inc. /\ + ................................ 110,500 1,549 Zoran Corp. /\ ..................................... 422,300 5,878 ------------ 39,103 ------------ SOFTWARE - 1.17% Agile Software Corp. /\ + .......................... 245,700 1,656 Computer Programs and Systems, Inc. /\ + ........... 26,000 889 Epicor Software Corp. /\ + ......................... 218,200 3,061 EPIQ Systems, Inc. /\ + ............................ 147,100 2,248 Mentor Graphics Corp. /\ + ......................... 1,185,500 19,999 Novell, Inc. /\ .................................... 458,000 2,748 Sybase, Inc. /\ + .................................. 207,000 5,041 TIBCO Software, Inc. /\ ............................ 116,700 1,080 ------------ 36,722 ------------ TOTAL INFORMATION TECHNOLOGY 327,353 ------------ MATERIALS - 6.41% BASIC MATERIALS - 0.08% AMCOL International Corp. + ........................ 97,700 2,571 ------------ CHEMICALS - 2.99% Celanese Corp. ..................................... 172,500 3,555 CF Industries Holdings, Inc. + ..................... 469,000 9,296 Cytec Industries, Inc. ............................. 100,400 5,561 FMC Corp. .......................................... 226,300 15,513 Georgia Gulf Corp. ................................. 216,100 4,622 H.B. Fuller Co. .................................... 213,000 5,280 International Flavors & Fragrances, Inc. + ......... 72,400 3,076 Lubrizol Corp. ..................................... 435,700 19,606 Olin Corp. ......................................... 504,600 8,730 PolyOne Corp. /\ + ................................. 1,837,700 15,069 Tronox, Inc. + ..................................... 154,300 2,021 UAP Holding Corp. /\ + ............................. 37,800 946 Westlake Chemical Corp. ............................ 14,600 461 ------------ 93,736 ------------ CONSTRUCTION MATERIALS - 0.20% Ameron International Corp. ......................... 66,000 4,834 </Table> See accompanying notes - -------------------------------------------------------------------------------- 					12 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) Florida Rock Industries, Inc. + .................... 33,300 $ 1,429 ------------ 6,263 ------------ CONTAINERS & PACKAGING - 0.30% AptarGroup, Inc. + ................................. 140,100 7,693 Silgan Holdings, Inc. .............................. 37,958 1,570 ------------ 9,263 ------------ METALS & MINING - 2.42% Century Aluminum Co. /\ + .......................... 420,200 16,354 Compass Minerals International, Inc. + ............. 103,200 3,194 Foundation Coal Holdings, Inc. ..................... 344,400 12,643 Gibraltar Industries, Inc. + ....................... 510,900 10,785 GrafTech Int'l, Ltd. /\ ............................ 749,100 4,532 Metal Management, Inc. ............................. 153,700 4,224 Quanex Corp. + ..................................... 90,150 3,021 RTI International Metals, Inc. /\ + ................ 117,800 7,223 USEC, Inc. + ....................................... 123,800 1,382 Worthington Industries, Inc. + ..................... 719,100 12,426 ------------ 75,784 ------------ PAPER & FOREST PRODUCTS - 0.42% Glatfelter ......................................... 198,700 2,909 Louisiana-Pacific Corp. ............................ 209,600 4,146 Neenah Paper, Inc. + ............................... 99,500 3,664 Wausau Paper Corp. + ............................... 189,800 2,574 ------------ 13,293 ------------ TOTAL MATERIALS 200,910 ------------ TELECOMMUNICATION SERVICES - 0.60% DIVERSIFIED TELECOMMUNICATION - 0.60% Cincinnati Bell, Inc. /\ + ......................... 1,139,900 5,346 Commonwealth Telephone Enterprises, Inc. ........... 145,700 6,099 Iowa Telecommunications Services, Inc. ............. 233,600 4,658 Premiere Global Services, Inc. /\ .................. 335,000 2,787 ------------ TOTAL TELECOMMUNICATION SERVICES 18,890 ------------ UTILITIES - 6.73% ELECTRIC UTILITIES - 3.76% Black Hills Corp. + ................................ 37,700 1,301 Cleco Corp. + ...................................... 171,500 4,408 Duquesne Light Holdings, Inc. + .................... 438,800 8,701 El Paso Electric Co. /\ ............................ 164,400 3,840 Great Plains Energy, Inc. + ........................ 740,900 24,109 Hawaiian Electric Industries, Inc. + ............... 63,200 1,771 NSTAR .............................................. 557,600 19,399 OGE Energy Corp. ................................... 389,200 15,015 Otter Tail Corp. + ................................. 38,100 1,141 Pike Electric Corp. /\ ............................. 192,100 3,544 PNM Resources, Inc. ................................ 227,800 6,415 Puget Energy, Inc. ................................. 402,800 9,619 </Table> <Table> <Caption> SHARES VALUE ------------ ------------ (DOLLARS IN THOUSANDS) TECO Energy, Inc. .................................. 97,600 $ 1,610 WPS Resources Corp. + .............................. 319,700 17,011 ------------ 117,884 ------------ GAS UTILITIES - 2.65% AGL Resources, Inc. + .............................. 479,900 17,996 Atmos Energy Corp. + ............................... 651,900 20,033 Energen Corp. ...................................... 70,900 3,036 The Laclede Group, Inc. ............................ 145,400 5,181 National Fuel Gas Co. + ............................ 244,800 9,155 New Jersey Resources Corp. + ....................... 157,100 8,147 Peoples Energy Corp. + ............................. 45,200 1,975 Southern Union Co. ................................. 160,348 4,438 UGI Corp. .......................................... 233,600 6,190 WGL Holdings, Inc. + ............................... 212,500 6,896 ------------ 83,047 ------------ MULTI-UTILITIES - 0.32% Vectren Corp. ...................................... 111,500 3,240 Westar Energy, Inc. ................................ 275,500 6,976 ------------ 10,216 ------------ TOTAL UTILITIES 211,147 ------------ TOTAL COMMON STOCKS 2,995,582 ------------ SHORT TERM INVESTMENTS - 4.10% American Beacon Money Market Select Fund ++ ........................................... 114,617,466 114,617 PAR AMOUNT ------------ U.S. Treasury Bill, 4.90%, Due 12/7/2006 # ............................ $ 14,055 13,987 ------------ TOTAL SHORT TERM INVESTMENTS 128,604 ------------ SHARES ------------ SECURITIES LENDING COLLATERAL 25.15% American Beacon Cash Plus Trust ++ ................. 542,647,134 542,647 American Beacon Money Market Select Fund ++ ........................................... 245,938,709 245,939 ------------ TOTAL SECURITIES LENDING COLLATERAL 788,586 ------------ TOTAL INVESTMENTS 124.76% - (COST $3,523,780) 3,912,772 LIABILITIES, NET OF OTHER ASSETS - (24.76%) (776,475) ------------ TOTAL NET ASSETS - 100.00% $ 3,136,297 ============ </Table> See accompanying notes - -------------------------------------------------------------------------------- 					13 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS - CONTINUED October 31, 2006 - -------------------------------------------------------------------------------- Percentages are stated as a percent of net assets. /\ Non-income producing security. + All or a portion of this security is on loan at October 31, 2006. ++ The Fund/Trust is affiliated by having the same investment advisor. # At October 31, 2006, security pledged as collateral for open futures contracts. FUTURES CONTRACTS (DOLLARS IN THOUSANDS) <Table> <Caption> UNREALIZED NUMBER OF EXPIRATION MARKET APPRECIATION/ CONTRACTS DATE VALUE (DEPRECIATION) --------- ---------- --------- -------------- Emini Mini Russell 1,663 Dec 2006 $ 128,217 $ 4,268 ========= ============== </Table> See accompanying notes - -------------------------------------------------------------------------------- 					14 AMERICAN BEACON SMALL CAP VALUE FUND STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2006 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) - -------------------------------------------------------------------------------- <Table> ASSETS: Investments in unaffiliated securities, at value(A C)................. $ 3,009,569 Investments in affiliated securities, at value(B)..................... 903,203 Receivable for investments sold....................................... 24,765 Dividends and interest receivable..................................... 2,314 Receivable for fund shares sold....................................... 1,574 Prepaid expenses...................................................... 37 ----------- TOTAL ASSETS..................................................... 3,941,462 ----------- LIABILITIES: Payable for investments purchased..................................... 6,827 Payable upon return of securities loaned.............................. 788,586 Payable for fund shares redeemed...................................... 3,444 Payable for variation margin on open futures contracts................ 439 Management and investment advisory fees payable (Note 2).............. 4,410 Administrative service and service fees payable....................... 857 Other liabilities..................................................... 602 ----------- TOTAL LIABILITIES................................................ 805,165 ----------- NET ASSETS................................................................. $ 3,136,297 =========== ANALYSIS OF NET ASSETS: Paid-in-capital....................................................... 2,520,282 Undistributed net investment income................................... 17,578 Accumulated net realized gain (loss).................................. 205,177 Unrealized appreciation (depreciation) of investments, futures contracts and foreign currency...................................... 393,260 ----------- NET ASSETS................................................................. $ 3,136,297 =========== SHARES OUTSTANDING (NO PAR VALUE): Institutional Class................................................... 58,533,659 =========== PlanAhead Class....................................................... 60,416,409 =========== Service Class......................................................... 3,218,303 =========== AMR Class............................................................. 18,364,004 =========== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE: Institutional Class................................................... $ 22.53 =========== PlanAhead Class....................................................... $ 22.08 =========== Service Class......................................................... $ 21.94 =========== AMR Class............................................................. $ 22.48 =========== - -------- (A) Cost of investments in unaffiliated securities......................... $ 2,620,577 (B) Cost of investments in affiliated securities........................... 903,203 (C) Market value of securities on loan..................................... 765,935 </Table> See accompanying notes - -------------------------------------------------------------------------------- 15 AMERICAN BEACON SMALL CAP VALUE FUND STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 2006 (IN THOUSANDS) - -------------------------------------------------------------------------------- <Table> INVESTMENT INCOME: Dividend income from unaffiliated securities (net of foreign taxes)*... $ 42,521 Dividend income from affiliated securities............................. 5,868 Interest income........................................................ 614 Income derived from securities lending, net............................ 1,684 -------- TOTAL INVESTMENT INCOME........................................... 50,687 -------- EXPENSES: Management and investment advisory fees (Note 2)....................... 15,499 Administrative service fees (Note 2): Institutional Class.................................................. 3,128 PlanAhead Class...................................................... 3,331 Service Class........................................................ 150 Transfer agent fees: Institutional Class.................................................. 226 PlanAhead Class...................................................... 164 Service Class........................................................ 23 AMR Class............................................................ 12 Custody and fund accounting fees....................................... 479 Professional fees...................................................... 86 Registration fees and expenses......................................... 46 Service fees: PlanAhead Class (Note 2)............................................. 3,331 Service Class (Note 2)............................................... 150 Distribution fees -- Service Class (Note 2)............................ 150 Prospectus and shareholder reports..................................... 486 Other expenses......................................................... 321 -------- TOTAL EXPENSES.................................................... 27,582 -------- NET INVESTMENT INCOME....................................................... 23,105 -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from: Investments.......................................................... 202,647 Commission recapture (Note 1)........................................ 448 Futures contracts.................................................... (424) Change in net unrealized appreciation or depreciation of: Investments.......................................................... 203,548 Futures contracts.................................................... 8,585 -------- NET GAIN (LOSS) ON INVESTMENTS.................................... 414,804 -------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................ $437,909 ======== * Foreign taxes........................................................ $ 42 </Table> See accompanying notes - -------------------------------------------------------------------------------- 16 AMERICAN BEACON SMALL CAP VALUE FUND STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS) - -------------------------------------------------------------------------------- <Table> <Caption> YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, 2006 2005 ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income......................................... $ 23,105 $ 14,541 Net realized gain (loss) on investments, futures contracts, and foreign currency transactions........................... 202,671 128,038 Change in net unrealized appreciation or depreciation of investments, futures contracts, and foreign currency translations................................................ 212,133 68,643 ---------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..... 437,909 211,222 ---------- ---------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class......................................... (7,101) (1,734) PlanAhead Class............................................. (6,167) (1,962) Service Class............................................... (139) (37) AMR Class................................................... (3,772) (2,456) Net realized gain on investments: Institutional Class......................................... (46,081) (20,489) PlanAhead Class............................................. (59,088) (27,260) Service Class............................................... (2,120) (632) AMR Class................................................... (17,954) (20,024) ---------- ---------- NET DISTRIBUTIONS TO SHAREHOLDERS........................ (142,422) (74,594) ---------- ---------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares................................. 721,048 2,144,506 Reinvestment of dividends and distributions................... 138,617 70,239 Cost of shares redeemed....................................... (886,291) (830,022) ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS........................................... (26,626) 1,384,723 ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS.............................. 268,861 1,521,351 ---------- ---------- NET ASSETS: Beginning of period........................................... 2,867,436 1,346,085 ---------- ---------- END OF PERIOD*................................................ $3,136,297 $2,867,436 ========== ========== * Includes undistributed net investment income (loss) of...... $ 17,578 $ 12,280 ========== ========== </Table> See accompanying notes - -------------------------------------------------------------------------------- 17 AMERICAN BEACON SMALL CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2006 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES American Beacon Funds (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940 (the "Act"), as amended, as a no load, open-end management investment company. These financial statements and notes to the financial statements relate to the American Beacon Small Cap Value Fund (the "Fund"), a series of the Trust. American Beacon Advisors, Inc. (the "Manager") is a wholly-owned subsidiary of AMR Corporation, the parent company of American Airlines, Inc. ("American"), and was organized in 1986 to provide business management, advisory, administrative and asset management consulting services to the Trust and other investors. Class Disclosure The Fund has multiple classes of shares designed to meet the needs of different groups of investors. The following table sets forth the differences amongst the classes: CLASS: OFFERED TO: SERVICE AND DISTRIBUTION FEES: - ------ ----------- ------------------------------ INSTITUTIONAL CLASS Investors making an initial investment of $2 million Administrative Service Fee -- 0.25% PLANAHEAD CLASS General public and investors investing through an Administrative Service Fee -- 0.25% intermediary Service Fee -- 0.25% SERVICE CLASS Investors investing through an intermediary Administrative Service Fee -- 0.25% Service Fee -- 0.25% Distribution Fee -- 0.25% AMR CLASS Investors in the tax-exempt retirement and benefit N/A plans of AMR Corporation and its affiliates Security Valuation Investments are valued at the close of the New York Stock Exchange (the "Exchange"), normally 4 p.m. ET, each day that the Exchange is open for business. Equity securities for which market quotations are available are valued at the last sale price or official price (closing bid price or last evaluated quote if no sale has occurred) on the primary market or exchange on which they trade. Debt securities (other than short-term securities) normally are valued on the basis of prices provided by an independent pricing service and may take into account appropriate factors such as institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. When a price is unavailable from a pricing service or when the price provided by the pricing service is deemed not to represent fair value, the prices of debt securities may be determined using quotes obtained from brokers. Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. Investment grade short-term obligations with 60 days or less to maturity are valued using the amortized cost method, which approximates market value. Securities for which the market prices are not readily available or are not reflective of the fair value of the security, as determined by the Manager, will be priced at a fair value following procedures approved by the Board of Trustees (the "Board"). Security Transactions and Investment Income Security transactions are recorded on the trade date of the security purchase or sale. - -------------------------------------------------------------------------------- 18 AMERICAN BEACON SMALL CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2006 - -------------------------------------------------------------------------------- The Fund may purchase securities with delivery or payment to occur at a later date. At the time the Fund enters into a commitment to purchase a security, the transaction is recorded and the value of the security is reflected in the net asset value. The value of the security may vary with market fluctuations. Dividend income, net of foreign taxes, is recorded on the ex-dividend date except certain dividends from foreign securities which are recorded as soon as the information is available to the Fund. Interest income is earned from settlement date, recorded on the accrual basis, and adjusted, if necessary, for accretion of discounts and amortization of premiums. For financial and tax reporting purposes, realized gains and losses are determined on the basis of specific lot identification. Futures Contracts Futures contracts are contracts to buy or sell a standard quantity of securities at a specified price on a future date. The Fund may enter into financial futures contracts as a method for keeping assets readily convertible to cash if needed to meet shareholder redemptions or for other needs while maintaining exposure to the stock or bond market, as applicable. The primary risks associated with the use of futures contracts are the possibility of illiquid markets or imperfect correlation between the values of the contracts and the underlying securities, or that the counterparty will fail to perform its obligations. Upon entering into a futures contract, the Fund is required to set aside or deposit with a broker an amount, termed the initial margin, which typically represents 5% of the face value of the futures contract. The Fund reflects this amount on the Schedule of Investments as a U.S. Treasury Bill held as collateral for futures contracts. Payments to and from the broker, known as variation margin, are required to be made on a daily basis as the price of the futures contract fluctuates. Changes in initial settlement values are accounted for as unrealized appreciation (depreciation) until the contracts are terminated, at which time realized gains and losses are recognized. Futures contracts are valued at the most recent settlement price established each day by the exchange on which they are traded. Dividends to Shareholders Dividends from net investment income of the Fund normally will be declared and paid annually. Distributions, if any, of net realized capital gains are generally paid annually and recorded on the ex-dividend date. Commission Recapture The Fund has established brokerage commission recapture arrangements with certain brokers or dealers. If the Fund's investment advisor chooses to execute a transaction through a participating broker, the broker rebates a portion of the commission back to the Fund. Any collateral benefit received through participation in the commission recapture program is directed exclusively to the Fund. This amount is reported with the net realized gains of the Fund's Statement of Operations. Allocation of Income, Expenses, Gains and Losses Income, expenses (other than those attributable to a specific class), gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets represented by such class. Operating expenses directly attributable to a specific class are charged against the operations of that class. - -------------------------------------------------------------------------------- 19 AMERICAN BEACON SMALL CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2006 - -------------------------------------------------------------------------------- Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimated. Recently Issued Accounting Pronouncements On July 13, 2006, the Financial Accounting Standards Board ("FASB") released FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At this time, management is evaluating the implications of FIN 48 and its impact on the financial statements has not yet been determined. In September 2006, the FASB issued Statement on Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157"). This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. As of October 31, 2006, the Fund does not believe the adoption of FAS 157 will impact the amounts reported in the financial statements, however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain of the measurements reported in the statement of operations for a fiscal period. Other Under the Trust's organizational documents, its officers and directors are indemnified against certain liability arising out of the performance of their duties to the Trust. In the normal course of business, the Trust enters into contracts that provide indemnification to the other party or parties against potential costs or liabilities. The Trust's maximum exposure under these arrangements is dependent on claims that may be made in the future and, therefore, cannot be estimated. The Trust has had no prior claims or losses pursuant to any such agreement. 2. TRANSACTIONS WITH AFFILIATES Management Agreement The Trust and the Manager are parties to a Management Agreement that obligates the Manager to provide or oversee the provision of all administrative, investment advisory, fund management and securities lending services. Investment assets of the Fund are managed by multiple investment advisors which have entered into separate investment advisory agreements with the Manager. As compensation for performing the duties required under the Management Agreement, the Manager receives from the Fund an annualized fee equal to 0.10% of the average daily net assets plus amounts paid by the Manager to the investment advisors hired by the Manager to direct investment activities of the Funds. Management fees paid during the year ended October 31, 2006 were as follows (dollars in thousands): <Table> <Caption> AMOUNTS PAID TO NET AMOUNTS MANAGEMENT MANAGEMENT INVESTMENT RETAINED BY FEE RATE FEE ADVISORS MANAGER - ----------- ---------- --------------- ----------- 0.35%-0.60% $15,499 $12,430 $3,069 </Table> - -------------------------------------------------------------------------------- 20 AMERICAN BEACON SMALL CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2006 - -------------------------------------------------------------------------------- As compensation for services provided by the Manager in connection with securities lending activities, the Fund pays to the Manager, with respect to cash collateral posted by borrowers, a fee up to 25% of the net monthly interest income (the gross interest income earned by the investment of cash collateral, less the amount paid to borrowers and related expenses) from such activities and, with respect to loan fees paid by borrowers when a borrower posts collateral other than cash, a fee up to 25% of such loan fees. During the year ended October 31, 2006, securities lending fees totaling $243,871 were paid to the Manager by the Fund. This fee is netted against securities lending income in the Statement of Operations. Administrative Services Agreement The Manager and the Trust entered into an Administrative Services Agreement which obligates the Manager to provide or oversee administrative and management services to the Fund. As compensation for performing the duties required under the Administrative Services Agreement, the Manager receives an annualized fee of 0.25% of the average daily net assets of the Institutional, PlanAhead and Service Classes of the Fund. Distribution Plans The Trust, except for the Service Class of the Fund, has adopted a "defensive" Distribution Plan (the "Plan") in accordance with Rule 12b-1 under the Act, pursuant to which no fees may be charged to the Fund for distribution purposes. However, the Plan authorizes the management fees received by the Manager and the investment advisors hired by the Manager to be used for distribution purposes. Under this Plan, the Trust does not intend to compensate the Manager or any other party, either directly or indirectly, for the distribution of Trust shares. A separate Distribution Plan (the "Distribution Plan") has been adopted pursuant to Rule 12b-1 under the Act for the Service Class of the Fund. Under the Distribution Plan, as compensation for distribution assistance, the Manager receives an annual fee of 0.25% of the average daily net assets of the Service Class. The fee will be payable without regard to whether the amount of the fee is more or less than the actual expenses incurred in a particular month by the Manager for distribution assistance. Service Plans The Manager and the Trust entered into Service Plans that obligate the Manager to oversee additional shareholder servicing of the PlanAhead and Service Classes. As compensation for performing the duties required under the Service Plans, the Manager receives 0.25% of the average daily net assets of the PlanAhead and Service Classes of the Fund. Investment in Affiliated Funds The Fund is permitted, pursuant to an exemptive order by the Securities and Exchange Commission ("SEC") and procedures approved by the Board, to invest up to 25% of its total assets in the American Beacon Money Market Select Fund (the "Select Fund"). Cash collateral received by the Fund in connection with securities lending may be invested in the Select Fund and the American Beacon Cash Plus Trust (the "Cash Trust"). The Fund, the Select Fund and the Cash Trust (collectively, the "Affiliated Funds") have the same investment advisor and therefore, are considered to be affiliated. The Manager serves as investment advisor to the Affiliated Funds and receives from each Affiliated Fund an annualized fee equal to 0.10% of its average daily net assets. During the year ended October 31, 2006, fees earned by the Manager from the Affiliated Funds were as follows: <Table> <Caption> SECURITIES LENDING DIRECT INVESTMENT COLLATERAL INVESTED IN AFFILIATED FUNDS IN AFFILIATED FUNDS TOTAL - ------------------- ------------------- -------- $123,023 $731,641 $854,664 </Table> - -------------------------------------------------------------------------------- 21 AMERICAN BEACON SMALL CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2006 - -------------------------------------------------------------------------------- Interfund Lending Program Pursuant to an exemptive order by the SEC, the Fund, along with other registered investment companies having management contracts with the Manager, may participate in an interfund lending program as a borrower. This program provides an alternative credit facility allowing the Fund to borrow from other participating series managed by the Manager. At October 31, 2006, the Fund had not utilized the credit facility. Other At October 31, 2006, AMR Corporation and subsidiary companies and employee benefit trusts thereof owned 100% of AMR Class shares of the Fund. 3. FEDERAL INCOME AND EXCISE TAXES It is the policy of the Fund to comply with the requirements of Subchapter M of the Internal Revenue Code and to distribute substantially all net investment income as well as any net realized capital gains on the sale of investments. Therefore, no federal income or excise tax provision is required. Dividends are categorized in accordance with income tax regulations which may treat certain transactions differently than U.S. generally accepted accounting principles. Accordingly, the character of distributions and composition of net assets for tax purposes may differ from those reflected in the accompanying financial statements. The tax character of distributions paid during the years ended October 31, 2006 and October 31, 2005 were as follows (in thousands): <Table> <Caption> YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, 2006 2005 ----------- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME Institutional Class............................................. $ 20,806 $12,463 PlanAhead Class................................................. 23,742 16,237 Service Class................................................... 770 368 AMR Class....................................................... 9,112 12,942 LONG-TERM CAPITAL GAIN Institutional Class............................................. 32,376 9,760 PlanAhead Class................................................. 41,513 12,985 Service Class................................................... 1,489 301 AMR Class....................................................... 12,614 9,538 -------- ------- TOTAL DISTRIBUTIONS PAID................................... $142,422 $74,594 -------- ------- </Table> As of October 31, 2006, the components of distributable earnings on a tax basis were as follows (in thousands): <Table> Cost basis of investments for federal income tax purposes................... $3,532,964 Unrealized appreciation..................................................... 478,896 Unrealized depreciation..................................................... (99,088) ---------- Net unrealized appreciation (depreciation).................................. 379,808 Undistributed ordinary income............................................... 80,274 Undistributed long-term gain (loss)......................................... 155,934 ---------- Distributable earnings...................................................... $ 616,016 ========== </Table> - -------------------------------------------------------------------------------- 22 AMERICAN BEACON SMALL CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2006 - -------------------------------------------------------------------------------- Financial reporting records are adjusted for permanent book/tax differences to reflect tax character. Financial records are not adjusted for temporary differences. The temporary differences between financial reporting and tax-basis reporting of unrealized appreciation/(depreciation) are attributable primarily to the tax deferral of losses from wash sales, the realization for tax purposes of unrealized gains/(losses) on certain derivative instruments, and reclassifications of income from real estate investment securities. Due to inherent differences in the recognition of income, expenses, and realized gains/losses under U.S. generally accepted accounting principles and federal income tax regulations, permanent differences between book and tax reporting have been identified and appropriately reclassified on the Statement of Assets and Liabilities. Accordingly, the following amounts represent current year permanent differences derived from reclassifications of income from real estate investment securities, foreign currency, and dividend reclasses that have been reclassified as of October 31, 2006 (in thousands): <Table> Paid-in-capital................................................................ $ -- Undistributed net investment income............................................ (628) Accumulated net realized gain (loss)........................................... 628 Unrealized appreciation (depreciation) of investments, futures contracts and foreign currency............................................................. -- </Table> 4. INVESTMENT TRANSACTIONS Investment transactions for the year ended October 31, 2006 (excluding short-term investments) are as follows (in thousands): <Table> Purchases........... $1,409,528 Proceeds from sales............. $1,563,952 </Table> A summary of the Fund's direct ownership and transactions in Affiliated Funds for the year ended October 31, 2006 is set forth below (in thousands): <Table> <Caption> OCTOBER 31, 2005 OCTOBER 31, 2006 AFFILIATED FUND SHARES/MARKET VALUE PURCHASES SALES SHARES/MARKET VALUE - --------------- ------------------- ---------- ---------- ------------------- Select Fund............................... $124,632 $1,109,433 $1,119,448 $114,617 </Table> 5. SECURITIES LENDING The Fund may lend its securities to qualified financial institutions, such as certain broker-dealers, to earn additional income. The borrowers are required to secure their loans continuously with collateral in an amount at least equal to the fair value of the securities loaned, initially in an amount at least equal to 102% of the fair value of domestic securities loaned and 105% of the fair value of international securities loaned. Collateral is marked to market and monitored daily. To the extent that a loan is collateralized by cash, such collateral shall be invested by the securities lending agent (the "Agent") in short-term instruments, money market mutual funds, and such other short-term investments, provided the investments meet certain quality and diversification requirements. The Fund, the Agent and the Manager retain 65%, 25% and 10%, respectively, of the income generated from the investment of cash collateral, less negotiated rebate fees paid to participating brokers and transaction costs. To the extent that a loan is secured by non-cash collateral, brokers pay the Fund negotiated lenders' fees, which are divided between the Fund, the Agent and the Manager 65%, 25% and 10%, respectively. The Fund also continues to receive income on the securities loaned, and any gain or loss in the market price of securities loaned that may occur during the term of the loan. - -------------------------------------------------------------------------------- 23 AMERICAN BEACON SMALL CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2006 - -------------------------------------------------------------------------------- Risks to the Fund in securities lending transactions are that the borrower may not provide additional collateral when required or return the securities when due, and that the value of the short-term investments will be less than the amount of cash collateral required to be returned to the borrower. At October 31, 2006, the value of outstanding securities on loan and the value of collateral was as follows (in thousands): <Table> <Caption> MARKET VALUE OF SECURITIES ON LOAN NON-CASH COLLATERAL CASH COLLATERAL - ------------------ ------------------- --------------- $765,935 $5 $788,586 </Table> Cash collateral is invested in a joint investment account, which is comprised of an investment in the Cash Trust and the Select Fund. The allocated amounts have been included as investments in the Schedule of Investments and Statement of Assets and Liabilities. Income earned on these investments is reported as Income derived from securities lending in the Statement of Operations. Non-Cash collateral received by the Fund may not be sold or repledged; therefore, non-cash collateral is not included on the Fund's Schedule of Investments or Statement of Assets and Liabilities. 6. CAPITAL SHARE TRANSACTIONS The tables below summarize the activity in capital shares for each Class of the Fund (dollars and shares in thousands): Year Ended October 31, 2006 <Table> <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS --------------------- --------------------- ------------------- ------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------- --------- ------- --------- ------ -------- ------ -------- Shares sold..................... 18,285 $ 389,424 12,755 $ 269,509 1,941 $ 40,521 1,002 $ 21,594 Reinvestment of dividends....... 2,467 50,759 3,162 63,873 112 2,259 1,061 21,726 Shares redeemed................. (14,930) (320,285) (21,412) (446,771) (1,078) (22,608) (4,550) (96,627) ------- --------- ------- --------- ------ -------- ------ -------- Net increase (decrease) in shares outstanding............ 5,822 $ 119,898 (5,495) $(113,389) 975 $ 20,172 (2,487) $(53,307) ======= ========= ======= ========= ====== ======== ====== ======== </Table> Year Ended October 31, 2005 <Table> <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS -------------------- ---------------------- ------------------ -------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ ------ ------ ------ ------ Shares sold.................... 38,008 $ 759,658 52,534 $1,035,304 2,036 $40,048 15,182 $ 309,496 Reinvestment of dividends...... 923 18,570 1,443 28,520 34 669 1,123 22,480 Shares redeemed................ (9,004) (182,580) (13,220) (262,130) (467) (9,230) (18,790) (376,082) ------ --------- ------- ---------- ----- ------- ------- --------- Net increase (decrease) in shares outstanding........... 29,927 $ 595,648 40,757 $ 801,694 1,603 $31,487 (2,485) $ (44,106) ====== ========= ======= ========== ===== ======= ======= ========= </Table> - -------------------------------------------------------------------------------- 24 (This page intentionally left blank) (LIGHTHOUSE LOGO) - -------------------------------------------------------------------------------- 25 AMERICAN BEACON SMALL CAP VALUE FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)) - -------------------------------------------------------------------------------- <Table> <Caption> INSTITUTIONAL CLASS PLANAHEAD CLASS -------------------------------------------------- ----------------------------------------- YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31, -------------------------------------------------- ----------------------------------------- 2006 2005(C) 2004(G) 2003(D) 2002 2006 2005(C) 2004(G) 2003(D) ---------- ---------- -------- ------- ------- ---------- ---------- -------- ------- Net asset value, beginning of period........................... $ 20.43 $ 18.85 $ 16.21 $ 11.28 $ 11.69 $ 20.04 $ 18.54 $ 15.95 $ 11.22 ---------- ---------- -------- ------- ------- ---------- ---------- -------- ------- Income from investment operations: Net investment income (loss)(A)................... 0.19 0.11 0.07 (0.01) (0.01) 0.13 0.09 0.08 0.05 Net gains on securities (both realized and unrealized)(A).............. 2.94 2.31 3.09 5.24 0.47 2.89 2.24 2.98 5.08 ---------- ---------- -------- ------- ------- ---------- ---------- -------- ------- Total income from investment operations....................... 3.13 2.42 3.16 5.23 0.46 3.02 2.33 3.06 5.13 ---------- ---------- -------- ------- ------- ---------- ---------- -------- ------- Less distributions: Dividends from net investment income...................... (0.14) (0.07) (0.08) (0.02) (0.11) (0.09) (0.06) (0.03) (0.12) Distributions from net realized gains on securities.................. (0.89) (0.77) (0.44) (0.28) (0.76) (0.89) (0.77) (0.44) (0.28) ---------- ---------- -------- ------- ------- ---------- ---------- -------- ------- Total distributions................ (1.03) (0.84) (0.52) (0.30) (0.87) (0.98) (0.83) (0.47) (0.40) ---------- ---------- -------- ------- ------- ---------- ---------- -------- ------- Net asset value, end of period..... $ 22.53 $ 20.43 $ 18.85 $ 16.21 $ 11.28 $ 22.08 $ 20.04 $ 18.54 $ 15.95 ========== ========== ======== ======= ======= ========== ========== ======== ======= Total return....................... 15.80% 12.90% 19.86% 47.45% 3.29% 15.56% 12.63% 19.56% 47.12% ========== ========== ======== ======= ======= ========== ========== ======== ======= Ratios and supplemental data: Net assets, end of period (in thousands).................. $1,319,024 $1,076,909 $429,540 $89,579 $21,936 $1,333,814 $1,320,853 $466,364 $66,906 Ratios to average net assets (annualized): Expenses net of waivers(A).. 0.82% 0.87% 0.89% 0.89% 0.82% 1.06% 1.10% 1.15% 1.16% Expenses before waivers(A).. 0.82% 0.87% 0.89% 0.89% 0.82% 1.06% 1.10% 1.15% 1.16% Net investment income (loss) net of waivers(A)........ 0.83% 0.66% 0.57% 0.60% 0.81% 0.59% 0.42% 0.33% 0.39% Net investment income (loss) before waivers(A)........ 0.83% 0.66% 0.57% 0.60% 0.81% 0.59% 0.42% 0.33% 0.39% Portfolio turnover rate(B).... 48% 47% 35% 75% 81% 48% 47% 35% 75% </Table> - -------- (A) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the AMR Investment Services Small Cap Value Portfolio through February 28, 2002. (B) The Small Cap Value Fund invested all of its investable assets in its corresponding Portfolio through February 28, 2002. Portfolio turnover rate through February 28, 2002 was that of the Portfolio. (C) Opus Capital Group, LLC was added as an investment advisor on February 1, 2005 and Metropolitan West Capital Management, LLC, SSgA Funds Management, Inc. and Dreman Value Management, LLC were added as investment advisors on August 12, 2005. (D) Barrow, Hanley, Mewhinney & Strauss, Inc. was added as an investment advisor to the Small Cap Value Fund on September 18, 2003. (E) Not annualized. (F) Portfolio turnover rate is for the period November 1, 2002 through October 31, 2003. (G) The Boston Company Asset Management, LLC was added as an investment advisor to the Small Cap Value Fund on September 27, 2004. (H) Annualized. - -------------------------------------------------------------------------------- 26 - -------------------------------------------------------------------------------- <Table> <Caption> PLANAHEAD CLASS SERVICE CLASS AMR CLASS - --------------- -------------------------------------- ------------------------------------------------ YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, MAY 1 TO YEAR ENDED OCTOBER 31, - --------------- ------------------------- OCTOBER 31, ------------------------------------------------ 2002 2006 2005(C) 2004(G) 2003(D) 2006 2005(C) 2004(G) 2003(D) 2002 - --------------- ------- ------- ------- ----------- -------- -------- -------- -------- -------- $ 11.64 $ 19.94 $ 18.49 $ 15.92 $ 11.88 $ 20.38 $ 18.78 $ 16.13 $ 11.30 $ 11.71 ------- ------- ------- ------- ----------- -------- -------- -------- -------- -------- 0.06 0.07 0.04 0.01 -- 0.27 0.21 0.14 0.10 0.15 0.36 2.88 2.23 3.00 4.04 2.91 2.26 3.04 5.15 0.34 ------- ------- ------- ------- ----------- -------- -------- -------- -------- -------- 0.42 2.95 2.27 3.01 4.04 3.18 2.47 3.18 5.25 0.49 ------- ------- ------- ------- ----------- -------- -------- -------- -------- -------- (0.08) (0.06) (0.05) -- -- (0.19) (0.10) (0.09) (0.14) (0.14) (0.76) (0.89) (0.77) (0.44) -- (0.89) (0.77) (0.44) (0.28) (0.76) ------- ------- ------- ------- ----------- -------- -------- -------- -------- -------- (0.84) (0.95) (0.82) (0.44) -- (1.08) (0.87) (0.53) (0.42) (0.90) ------- ------- ------- ------- ----------- -------- -------- -------- -------- -------- $ 11.22 $ 21.94 $ 19.94 $ 18.49 $ 15.92 $ 22.48 $ 20.38 $ 18.78 $ 16.13 $ 11.30 ======= ======= ======= ======= =========== ======== ======== ======== ======== ======== 2.99% 15.23% 12.32% 19.24% 34.01%(E) 16.12% 13.23% 20.12% 47.93% 3.54% ======= ======= ======= ======= =========== ======== ======== ======== ======== ======== $16,190 $70,602 $44,709 $11,828 $ 1 $412,857 $424,965 $438,353 $327,542 $181,180 1.11% 1.34% 1.40% 1.38% 1.49%(H) 0.55% 0.58% 0.60% 0.61% 0.56% 1.11% 1.34% 1.40% 1.69% 1,089.04%(H) 0.55% 0.58% 0.60% 0.61% 0.56% 0.52% 0.31% 0.12% 0.17% (0.05%)(H) 1.10% 0.94% 0.84% 0.95% 1.09% 0.52% 0.31% 0.12% (0.14%) (1,087.60%)(H) 1.10% 0.94% 0.84% 0.95% 1.09% 81% 48% 47% 35% 75%(F) 48% 47% 35% 75% 81% </Table> - -------------------------------------------------------------------------------- 27 AMERICAN BEACON FUNDS PRIVACY POLICY (Unaudited) - -------------------------------------------------------------------------------- The American Beacon Funds recognizes and respects the privacy of our shareholders. We are providing this notice to you so you will understand how shareholder information may be collected and used. We may collect nonpublic personal information about you from one or more of the following sources: - information we receive from you on applications or other forms; - information about your transactions with us or our service providers; and - information we receive from third parties. We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. We restrict access to your nonpublic personal information to those employees or service providers who need to know that information to provide products or services to you. To ensure the confidentiality of your nonpublic personal information, we maintain safeguards that comply with federal standards. AMERICAN BEACON SMALL CAP VALUE FUND FEDERAL TAX INFORMATION October 31, 2006 (Unaudited) - -------------------------------------------------------------------------------- For corporate shareholders in the Fund, the percentage of ordinary dividend income distributed for the year ended October 31, 2006, which is designated as qualifying for the dividend-received deduction, was 74.4%. For shareholders in the Fund, the percentage of dividend income distributed for the year ended October 31, 2006, which is designated as qualified dividend income under the Jobs and Growth Tax Relief Act of 2003, was 31.8%. Shareholders will receive notification in January 2007 of the percentage applicable to the preparation of their 2006 income tax returns. Pursuant to Section 852 of the Internal Revenue Code, the Fund designates $87,992,068 as long-term capital gain dividends for the tax year ended October 31, 2006. - -------------------------------------------------------------------------------- 28 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE RE-APPOINTMENT OF METROPOLITAN WEST CAPITAL MANAGEMENT, LLC (Unaudited) - -------------------------------------------------------------------------------- At the May 11, 2006 meeting of the Board of Trustees (the "Board"), American Beacon Advisors, Inc. (the "Manager") proposed that the Board approve the re-appointment of Metropolitan West Capital Management, LLC ("MetWest Capital") and the approval of a new Investment Advisory Agreement between MetWest Capital and the Manager ("Agreement") following Evergreen Investment Company, Inc.'s ("Evergreen") acquisition of a controlling interest of MetWest Capital. Prior to the meeting, the Board requested and reviewed information provided by MetWest Capital in connection with its consideration to re-appoint MetWest Capital. The Board considered, among other materials, responses by MetWest Capital discussing: - whether there would be changes in fee rate schedule to be paid by the American Beacon Large Cap Value Fund and American Beacon Small Cap Value Fund (collectively, the "Funds") under the Agreement; - whether the level of services provided to the Funds by MetWest will be affected by the change of control; - the effects of the change of control on portfolio management personnel and the adequacy of staffing levels to provide quality services to the Funds; - whether MetWest Capital's trading activities would change as a result of the change of control; - information regarding MetWest Capital's new affiliates, including Evergreen; - material changes to MetWest Capital's compliance program and code of ethics; and - potential benefits to the Funds resulting from the change of control. The Board considered several factors when evaluating MetWest Capital and in approving the Agreement. In addition, the Board took into consideration its evaluation of MetWest Capital at its February 2006 Board meeting in connection with the annual renewal of the prior Agreement with MetWest Capital. A discussion of the factors relating to the Board's approval of the Agreement follows. Nature, extent and quality of the services provided by MetWest Capital. The Board considered the services provided by MetWest Capital under the prior Agreement and those to be provided following MetWest Capital's change of control. In this connection, the Board noted that the Manager and MetWest Capital would enter into a new Agreement that is substantially identical to the existing agreement except for a different effective date. In addition, the Board considered that MetWest Capital represented that the level of services to be provided to the Funds following the change of control would not change, but may be enhanced as noted below. In considering that the Funds' portfolio manager and other senior executives at MetWest Capital have signed long-term contracts with Evergreen, the Board concluded that these actions would provide continuity of portfolio management for the Funds. Additionally, the Board considered that: (1) MetWest Capital's trading activities would not be affected by the change of control, but MetWest Capital may execute Fund trades through a new affiliated broker-dealer; (2) the regulatory actions and litigation reported by MetWest Capital related to newly affiliated entities that would not provide investment advisory services to the Funds; and (3) MetWest Capital would adopt Evergreen's compliance program and code of ethics. Based on this information, the Board concluded that the nature, extent and quality of the advisory services to be provided by MetWest Capital were appropriate for the Funds, and, thus, supported a decision to approve the Agreement. Performance of MetWest Capital. The Board relied upon its February 2006 evaluation of MetWest Capital's performance and determined that the historical investment performance of MetWest Capital supported the Board's decision to re- appoint MetWest as an investment adviser to the Funds. Investment advisory fees, costs of services, profitability and economies of scale. The Board considered the investment advisory fees paid to MetWest for its services to the Funds. In this connection, the Board noted that the investment advisory fee rates would not change under the Agreement. The Board relied upon its February 2006 evaluation of comparative data on investment advisory fees because MetWest Capital had represented previously that it does not charge other comparable clients a fee rate lower than that charged to the Funds. The Board - -------------------------------------------------------------------------------- 29 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE RE-APPOINTMENT OF METROPOLITAN WEST CAPITAL MANAGEMENT, LLC -- CONTINUED (Unaudited) - -------------------------------------------------------------------------------- concluded that MetWest Capital's fees under the Agreement are reasonable based on the services provided to the Funds. The Board also relied upon its February 2006 evaluation of the costs of the services provided by MetWest Capital, MetWest Capital's profitability and whether the fee schedule reflected economies of scale for the benefit of the Funds' investors. The Board noted that such reliance was reasonable because MetWest Capital proposed to maintain the same fee rate schedule. Other Benefits. The Board considered certain other benefits to the Funds as a result of the change of control. In this regard, the Board considered that: (1) Evergreen maintains a large compliance staff who will augment its compliance oversight and resources; (2) MetWest Capital will have access to the substantial technology team at Evergreen; and (3) MetWest Capital will have potential for better employee retention due to Evergreen's enhanced benefit programs. After consideration of this information, the Board concluded that the Funds could receive additional benefits due to the enhanced services provided by MetWest Capital. Board's Conclusions. The Board did not identify any single factor as being of paramount importance and different Trustees may have given different weight to different factors. However, based on the various considerations described above, the Trustees, including a majority of the Independent Trustees, concluded that the proposed investment advisory fee is reasonable and the approval of the Agreement is in the best interests of the Funds and their shareholders and, as a result, approved the Agreement. - -------------------------------------------------------------------------------- 30 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS (Unaudited) - -------------------------------------------------------------------------------- The Trustees and officers of the American Beacon Funds (the "Trust") are listed below, together with their principal occupations during the past five years. Unless otherwise indicated, the address of each person listed below is 4151 Amon Carter Boulevard, MD 2450, Fort Worth, Texas 76155. Each Trustee oversees twenty-seven funds in the fund complex that includes the Trust, the American Beacon Master Trust, the American Beacon Mileage Funds, and the American Beacon Select Funds. The Trust's Statement of Additional Information contains additional information about the Trustees and is available without charge by calling 1-800-658-5811. <Table> <Caption> POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(s) DURING PAST 5 YEARS NAME, AGE AND ADDRESS WITH THE TRUST AND CURRENT DIRECTORSHIPS - --------------------- ----------------- ------------------------------------------- INTERESTED TRUSTEES Term Lifetime of Trust until removal, resignation or retirement* William F. Quinn** (58) Trustee and Chairman and CEO (2006-Present) and President (1986- President since 1987 2006), American Beacon Advisors, Inc.; Chairman (1989-2003) and Director (1979-1989, 2003-Present), American Airlines Federal Credit Union; Director, Crescent Real Estate Equities, Inc. (1994-Present); Director, Pritchard, Hubble & Herr, LLC (investment advisor) (2001-2006); Director of Investment Committee, Southern Methodist University Endowment Fund (1996-Present); Member, Southern Methodist University Cox School of Business Advisory Board (1999-2002); Member, New York Stock Exchange Pension Manager Committee (1997-1998, 2000-2002, 2006- Present); Vice Chairman, Committee for the Investment of Employee Benefits (2004-Present); Chairman, Committee for the Investment of Employee Benefits Defined Benefit Sub-Committee (2002-2004); Director, United Way of Metropolitan Tarrant County (1988-2000, 2004-Present); Trustee, American Beacon Mileage Funds (1995-Present); Trustee, American Beacon Select Funds (1999-Present); Trustee, American Beacon Master Trust (1995-Present). Alan D. Feld** (69) Trustee since 1996 Partner, Akin, Gump, Strauss, Hauer & Feld, LLP (law firm) (1960-Present); Director, Clear Channel Communications (1984-Present); Trustee, CenterPoint Properties (1994-Present); Trustee, American Beacon Mileage Funds (1996-Present); Trustee, American Beacon Select Funds (1999-Present); Trustee, American Beacon Master Trust (1996-Present). </Table> - -------------------------------------------------------------------------------- 31 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS -- CONTINUED (Unaudited) - -------------------------------------------------------------------------------- <Table> <Caption> POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(s) DURING PAST 5 YEARS NAME, AGE AND ADDRESS WITH THE TRUST AND CURRENT DIRECTORSHIPS - --------------------- ----------------- ------------------------------------------- NON-INTERESTED TRUSTEES Term Lifetime of Trust until removal, resignation or retirement* W. Humphrey Bogart (62) Trustee since 2004 Consultant, New River Canada Ltd. (mutual fund servicing company) (1998-2003); Board Member, Baylor University Medical Center Foundation (1992-2004); President and CEO, Allmerica Trust Company, NA (1996-1997); President and CEO, Fidelity Investments Southwest Company (1983-1995); Senior Vice President of Regional Centers, Fidelity Investments (1988- 1995); Trustee, American Beacon Mileage Funds (2004- Present); Trustee, American Beacon Select Funds (2004-Present); Trustee, American Beacon Master Trust (2004-Present). Brenda A. Cline (45) Trustee since 2004 Executive Vice President, Chief Financial Officer, Treasurer and Secretary, Kimbell Art Foundation (1993-Present); Trustee, Texas Christian University (1998-Present); Trustee, W.I. Cook Foundation, Inc. (d/b/a Cook Children's Health Foundation) (2001- Present); Director, Christian Church Foundation (1999-Present); Trustee, American Beacon Mileage Funds (2004-Present); Trustee, American Beacon Select Funds (2004-Present); Trustee, American Beacon Master Trust (2004-Present). Richard A. Massman (63) Trustee since 2004 Senior Vice President and General Counsel, Hunt Consolidated, Inc. (holding company engaged in energy, real estate, farming, ranching and venture capital activities) (1994-Present); Trustee, American Beacon Mileage Funds (2004-Present); Trustee, American Beacon Select Funds (2004- Present); Trustee, American Beacon Master Trust (2004-Present). Stephen D. O'Sullivan Trustee since 1987 Consultant (1994-Present); Trustee, American Beacon (71) Mileage Funds (1995-Present); Trustee, American Beacon Select Funds (1999-Present); Trustee, American Beacon Master Trust (1995-Present). R. Gerald Turner (60) Trustee since 2001 President, Southern Methodist University (1995- 225 Perkins Admin. Bldg. Present); Director, ChemFirst (1986-2002); Director, Southern Methodist Univ. J.C. Penney Company, Inc. (1996-Present); Director, Dallas, Texas 75275 California Federal Preferred Capital Corp. (2001- 2003); Director, Kronus Worldwide Inc. (chemical manufacturing) (2003-Present); Director, First Broadcasting Investment Partners, LLC (2003- Present); Member, United Way of Dallas Board of Directors; Member, Salvation Army of Dallas Board of Directors; Member, Methodist Hospital Advisory Board; Member, Knight Commission on Intercollegiate Athletics; Trustee, American Beacon Mileage Funds (2001-Present); Trustee, American Beacon Select Funds (2001-Present); Trustee, American Beacon Master Trust (2001-Present). Kneeland Youngblood (50) Trustee since 1996 Managing Partner, Pharos Capital Group, LLC (a 100 Crescent Court Suite Chairman since 2005 private equity firm) (1998-Present); Director, 1740 Burger King Corporation (2004-Present); Trustee, Dallas, Texas 75201 City of Dallas, Texas Employee Retirement Fund (2004-Present); Trustee, The Hockaday School (1997- 2005); Director, Starwood Hotels and Resorts (2001- Present); Member, Council on Foreign Relations (1995-Present); Director, Just For the Kids (1995- 2001); Director, L&B Realty Advisors (1998-2000); Trustee, Teachers Retirement System of Texas (1993- 1999); Director, Starwood Financial Trust (1998- 2001); Trustee, St. Mark's School of Texas (2002- Present); Trustee, American Beacon Mileage Funds (1996-Present); Trustee, American Beacon Select Funds (1999-Present); Trustee, American Beacon Master Trust (1996-Present). </Table> - -------------------------------------------------------------------------------- 32 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS -- CONTINUED (Unaudited) - -------------------------------------------------------------------------------- <Table> <Caption> POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(s) DURING PAST 5 YEARS NAME, AGE AND ADDRESS WITH THE TRUST AND CURRENT DIRECTORSHIPS - --------------------- ----------------- ------------------------------------------- OFFICERS Term One Year Rosemary K. Behan (47) VP, Secretary and Vice President, Legal and Compliance, American Chief Legal Officer Beacon Advisors, Inc. (2006-Present); Assistant since 2006 General Counsel, First Command Financial Planning, Inc. (2004-2006); Enforcement Attorney (2002-2004) and Branch Chief (2000-2002); Securities and Exchange Commission. Brian E. Brett (46) VP since 2004 Vice President, Director of Sales, American Beacon Advisors, Inc. (2004-Present); Regional Vice President, Neuberger Berman, LLC (investment advisor) (1996-2004). Michael W. Fields (52) VP since 1989 Vice President, Fixed Income Investments, American Beacon Advisors, Inc. (1988-Present). Rebecca L. Harris (39) Treasurer since 1995 Vice President, Finance, American Beacon Advisors, Inc. (1995-Present). Christina E. Sears (35) Chief Compliance Chief Compliance Officer, American Beacon Advisors, Officer since 2004 Inc. (2004-Present); Senior Compliance Analyst, and Asst. Secretary American Beacon Advisors, Inc. (1998-2004). since 1999 </Table> - -------- * The Board has adopted a retirement plan that requires Trustees to retire no later than the last day of the calendar year in which they reach the age of 72, with the exception of Messrs. Quinn and O'Sullivan. ** Messrs. Quinn and Feld are deemed to be "interested persons" of the Trust, as defined by the 1940 Act. Mr. Quinn is Chairman of the Manager. Mr. Feld's law firm of Akin, Gump, Strauss, Hauer & Feld LLP has provided legal services within the past two years to one or more of the Trust's investment advisors. - -------------------------------------------------------------------------------- 33 (AMERICAN BEACON FUNDS LOGO) - -------------------------------------------------------------------------------- DELIVERY OF DOCUMENTS To reduce expenses, your financial institution may mail only one copy of the Prospectus, Annual Report and Semi-Annual Report to those addresses shared by two or more accounts. If you wish to receive individual copies of these documents, please contact your financial institution. Delivery of individual copies will commence thirty days after receiving your request. If you invest in the Fund through a financial institution, you may be able to receive the Fund's regulatory mailings, such as the Prospectus, Annual Report and Semi-Annual Report, by e-mail. If you are interested in this option, please go to www.icsdelivery.com and search for your financial institution's name or contact your financial institution directly. TO OBTAIN MORE INFORMATION ABOUT THE FUND: <Table> (KEYBOARD GRAPHIC) (MOUSE GRAPHIC) BY E-MAIL: ON THE INTERNET: american-beacon.funds@ambeacon.com Visit our website at www.americanbeaconfunds.com </Table> - -------------------------------------------------------------------------------- <Table> (TELEPHONE GRAPHIC) (MAILBOX GRAPHIC) BY TELEPHONE: BY MAIL: Institutional Class American Beacon Funds Call (800) 658-5811 4151 Amon Carter Blvd., MD 2450 AMR Class(SM) Fort Worth, TX 76155 Call (800) 345-2345 PlanAhead Class(R) and Service Class Call (800) 388-3344 </Table> - -------------------------------------------------------------------------------- <Table> AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULES AVAILABILITY OF PROXY VOTING POLICY AND RECORDS In addition to the Schedule of Investments A description of the policies and procedures the provided in each semi-annual and annual Fund uses to determine how to vote proxies report, the Fund files a complete schedule of relating to portfolio securities is available in its portfolio holdings with the Securities the Fund's Statement of Additional Information, and Exchange Commission ("SEC") on Form N-Q is available free of charge on the Fund's as of the first and third fiscal quarters. website (www.americanbeaconfunds.com) and by The Fund's Forms N-Q are available on the calling 1-800-967-9009 or by accessing the SEC's SEC's website at www.sec.gov. The Forms N-Q website at www.sec.gov. The Fund's proxy voting may also be reviewed and copied at the SEC's record for the most recent year ended June 30 is Public Reference Room, 450 Fifth Street, NW, filed annually with the SEC on Form N-PX. The Washington, DC 20549. Information regarding Fund's Forms N-PX are available on the SEC's the operation of the SEC's Public Reference website at www.sec.gov. The Fund's proxy voting Room may be obtained by calling 1-800-SEC- record may also be obtained by calling 1-800- 0330. A complete schedule of the Fund's 967-9009. portfolio holdings is also available on the Funds' website (www.americanbeaconfunds.com) approximately thirty days after the end of each month. </Table> FUND SERVICE PROVIDERS: <Table> <Caption> CUSTODIAN TRANSFER AGENT INDEPENDENT AUDITORS DISTRIBUTOR STATE STREET BANK AND TRUST BOSTON FINANCIAL DATA ERNST & YOUNG LLP FORESIDE FUND SERVICES Boston, Massachusetts SERVICES Dallas, Texas Portland, Maine Kansas City, Missouri </Table> This report is prepared for shareholders of the American Beacon Funds and may be distributed to others only if preceded or accompanied by a current prospectus. - ------------------------------------------------------------------------------- American Airlines, Inc. is not responsible for investments made in the American Beacon Funds. American Beacon Funds is a service mark of AMR Corporation. American Beacon Small Cap Value Fund is a service mark of American Beacon Advisors, Inc. AR 10/06 538855 ITEM 2. CODE OF ETHICS. The Trust has adopted a code of ethics that applies to its principal executive and financial officers (the "Code"). The Trust did not amend the Code nor did it grant any waivers to the provisions of the Code during the period covered by the shareholder report presented in Item 1. The Code is filed herewith as Exhibit 99.CODE ETH. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. The Trust's Board of Trustees has determined that Stephen O'Sullivan, a member of the Trust's Audit and Compliance Committee, is an "audit committee financial expert" as defined in Form N-CSR. Mr. O'Sullivan is "independent" as defined in Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) <Table> <Caption> Audit Fees Fiscal Year Ended - ---------- ----------------- $41,994* 12/31/2004 $212,628 10/31/2005 $48,010 12/31/2005 $249,625 10/31/2006 </Table> <FN> * Revised to include additional audit fees assessed in 2005 relating to 2004 audit </FN> (b) <Table> <Caption> Audit-Related Fees Fiscal Year Ended - ------------------ ----------------- $0 12/31/2004 $26,460* 10/31/2005 $0 12/31/2005 $23,164** 10/31/2006 </Table> <FN> * Attestation services related to Interfund Lending Program ** Attestation services related to Interfund Lending Program and review of N-1A </FN> (c) <Table> <Caption> Tax Fees Fiscal Year Ended - -------- ----------------- $0 12/31/2004 $28,847* 10/31/2005 $10,695* 12/31/2005 $0 10/31/2006 </Table> <FN> * For review of 2003 and 2004 tax returns </FN> (d) <Table> <Caption> All Other Fees Fiscal Year Ended - -------------- ----------------- $0 12/31/2004 $0 10/31/2005 $0 12/31/2005 $0 10/31/2006 </Table> (e)(1) Pursuant to its charter, the Trust's Audit and Compliance Committee shall have the following duties and powers pertaining to pre-approval of audit and non-audit services provided by the Trust's principal accountant: - to approve, prior to appointment, the engagement of auditors to annually audit and provide their opinion on the Trusts' financial statements, and, in connection therewith, reviewing and evaluating matters potentially affecting the independence and capabilities of the auditors; - to approve, prior to appointment, the engagement of the auditors to provide non-audit services to the Trusts, an investment adviser to any series of the Trusts or any entity controlling, controlled by, or under common control with an investment adviser ("adviser affiliate") that provides ongoing services to the Trusts, if the engagement relates directly to the operations and financial reporting of the Trusts; - to consider whether the non-audit services provided by a Trust's auditor to an investment adviser or any adviser affiliate that provides ongoing services to a series of the Trusts, which services were not pre-approved by the Committee, are compatible with maintaining the auditor's independence; - to review the arrangements for and scope of the annual audit and any special audits; and - to review and approving the fees proposed to be charged to the Trusts by the auditors for each audit and non-audit service. The Audit and Compliance Committee may delegate any portion of its authority, including the authority to grant pre-approvals of audit and permitted non-audit services, to a subcommittee of one or more members. Any decisions of the subcommittee to grant pre-approvals shall be presented to the full audit committee at its next regularly scheduled meeting. (e)(2) None of the fees disclosed in paragraphs (b) through (d) above 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) <Table> <Caption> Aggregate Non-Audit Fees for Services Rendered to the: - ------------------------------------------------------ Adviser's Affiliates Providing Registrant Adviser Ongoing Services to Registrant Fiscal Year Ended - ---------- ------- ------------------------------ ----------------- $0 $0 N/A 12/31/2004 $55,307 $0 N/A 10/31/2005 $10,695 $0 N/A 12/31/2005 $23,164 $0 N/A 10/31/2006 </Table> (h) Not applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. The schedules of investments for each series of the Trust are included in the shareholder report presented in Item 1. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Trust has made no material changes to the procedures by which shareholders may recommend nominees to the Trust's Board of Trustees since the Trust last disclosed such procedures in Schedule 14A. ITEM 11. CONTROLS AND PROCEDURES. (a) Based upon an evaluation within 90 days of the filing date of this report, the principal executive and financial officers concluded that the disclosure controls and procedures of the Trust are effective. (b) There were no changes in the Trust's internal control over financial reporting during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Trust's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Filed herewith as EX-99.CODE ETH. (a)(2) A separate certification for each principal executive officer and principal financial officer of the Trust as required by Rule 30a-2(a) under the Investment Company Act of 1940 is attached hereto as EX-99.CERT. (a)(3) Not applicable. (b) The certifications required by Rule 30a-2(b) under the Investment Company Act of 1940 are attached hereto as 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. (Registrant): American Beacon Funds By /s/ William F. Quinn -------------------- William F. Quinn President Date: January 8, 2007 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/ William F. Quinn -------------------- William F. Quinn President Date: January 8, 2007 By /s/ Rebecca L. Harris --------------------- Rebecca L. Harris Treasurer Date: January 8, 2007