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, 2007 Date of reporting period: October 31, 2007 ITEM 1. REPORT TO STOCKHOLDERS. GUIDANCE | VISION | EXPERIENCE (AMERICAN BEACON FUNDS(SM) LOGO) ANNUAL REPORT (GPAPHIC) OCTOBER 31, 2007 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 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........................................... 36 Mid-Cap Value Fund.............................................. 41 Small Cap Value Opportunity Fund................................ 44 Emerging Markets Fund........................................... 48 High Yield Bond Fund............................................ 54 Enhanced Income Fund............................................ 62 Intermediate Bond Fund.......................................... 68 Short-Term Bond Fund............................................ 77 Additional Information.......................................... Back Cover Any opinions herein, including forecasts, reflect our judgment 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. (PHOTO OF DOUGLAS G. HERRING) FELLOW SHAREHOLDERS, I am pleased to present to you the American Beacon Funds Annual Report for the twelve months ended October 31, 2007. Please review the enclosed material carefully, as it includes important information about the Funds. For the year ended October 31, 2007, the world's equity markets continued to post impressive -- albeit more volatile -- numbers. Here at home, the S&P 500 Index reported a return of 14.56%. Most sectors continued to see strong corporate profits, dampened by a meltdown in homebuilding and financial stocks. Abroad, the MSCI Emerging Markets Index reported an extraordinary return of 67.85%, reflecting continued strong global growth and a weak U.S. Dollar. Against this backdrop, the Institutional Class of the five American Beacon equity funds included herein all posted positive returns for the fiscal year ended October 31, 2007. The American Beacon Small Cap Value Opportunity, Mid-Cap Value and Balanced Funds reported one-year returns of 1.08%, 4.87% and 9.31%, respectively. Our Large Cap Growth Fund and our Emerging Markets Fund recorded double-digit returns of 11.84% and 60.83%, respectively. In the credit markets, bonds saw a widening in credit spreads as investors fled to quality due to the crisis in the U.S. housing and financial sectors. The bond market, as defined by the Lehman Brothers Aggregate Index, returned 5.38% for the year ended October 31, 2007. In comparison, the American Beacon Enhanced Income Fund - PlanAhead Class, and Intermediate Bond and Short-Term Bond Funds - Institutional Class, all reported one-year returns above 5.5% for the period. The American Beacon High Yield Bond Fund - Institutional Class gained 6.85%. Despite the return of volatility this year, coupled with the re-pricing of credit risk, we believe the Funds' focus on long-term performance and below-average expenses will - in the long run - serve our investors well. As always, we appreciate 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/ Douglas G. Herring ---------------------------------------- Douglas G. Herring President American Beacon Funds 1 DOMESTIC EQUITY MARKET OVERVIEW OCTOBER 31, 2007 (UNAUDITED) After increasing short-term rates 17 times from 1.00% in June 2004 to 5.25% in June 2006, the Federal Reserve (the "Fed"), led by new chairman Ben Bernanke, left rates unchanged over the remainder of 2006. This "inaction," combined with a sharp decline in oil prices, and further declines in long-term interest rates, led to a strong stock market rally that carried through the end of 2006. This was followed by a brief mid-quarter correction in the first quarter of 2007, ignited by subprime mortgage concerns and a sharp fall in the global markets. However, equity prices rallied near the end of the quarter as the Fed voiced some concerns over economic growth while continuing to emphasize inflation risk, leading to a positive-shaped yield curve for the first time in seven months. As measured by the various Russell indices, value and growth stocks performed in line with each other in the first quarter, with larger companies underperforming both mid-cap and smaller companies. Seven of the ten sectors in the broad-market S&P 500 Index advanced in the quarter with Utilities and Materials leading the way. The worst performing sector, Financials, declined as the market reacted to the subprime mortgage news. During the second quarter of 2007, U.S. equity markets absorbed the news of a slowing housing market, higher energy prices, rising long-term interest rates, and diminished expectations for a cut in short-term rates. Equity prices were fueled by private investors' attraction to strong corporate cash flows, liquid balance sheets, and the low cost of buyout financing. All of the major stock indices gained during the quarter, with the S&P 500 Index finally reaching a new high, breaking the one set in March 2000. Reversing the trend of the prior 18 months, growth stocks outperformed their value counterparts while large cap stocks outperformed mid-cap and small cap equities. With the exception of the Utilities sector, each of the remaining nine sectors in the broad-market S&P 500 Index advanced during the quarter. The performance disparity between the sectors was pronounced, reinforcing the importance of portfolio diversification. Investors favored the Energy and Information Technology sectors, both of which gained more than 10% during the quarter. Consumer Staples and Financials, along with the aforementioned Utilities sector, were the laggards. The economic events of the third quarter made for jittery financial markets. However, even in the face of a slowing housing industry, the subprime mortgage spillover, a falling dollar, and a world-wide credit squeeze, most equity markets in the U.S. maintained their solid performance through the third quarter of 2007. After continuing to drive down stock prices in July, investors returned to the stock market in force in late August. The rally continued in September, spurred by the Fed's decision to cut interest rates for the first time in more than four years. The lower cost of borrowed funds, a strong worldwide economy and solid corporate performance were significant drivers of the market upturn. The quarter was characterized by high variability, market capitalization, and investment style, as the Russell 1000(R) Value Index declined while the NASDAQ Composite Index advanced. During the third quarter, growth stocks continued to outperform their value counterparts in the Russell indices and remained ahead. Large companies clearly were in favor during the quarter, with the Russell 1000 Index showing positive returns while mid-cap and small cap issues declined. As was the case in the previous quarter, the Energy, Information Technology and Industrials sectors led the way in performance during the third quarter. Reflecting the unease in the housing and credit markets, both the Financials and Consumer Discretionary sectors declined during the quarter. The month of October lived up to its volatile history. While worries over housing weakness, the credit crunch, and decreases in earnings expectations provided powerful ammunition for the "bears," monetary policy and continued economic gains enabled the "bulls" to propel markets higher. Market gains were broad based with all of the major markets advancing during the month. Even with the U.S. economy continuing to display very impressive resilience, "to forestall some of the adverse effects on the broader economy," the Fed cut interest rates by 25 basis points (0.25%) to 4.50% at its October 31st meeting. 2 PERFORMANCE OVERVIEW AMERICAN BEACON BALANCED FUND(SM) OCTOBER 31, 2007 (UNAUDITED) The Balanced Fund's Institutional Class returned 9.31% for the twelve months ended October 31, 2007, lagging both the 60% S&P 500 Citigroup Value/40% Lehman Brothers Aggregate Index benchmark return of 10.33% and the Lipper Mixed-Asset Target Allocation Growth Funds Index return of 13.58%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 10/31/97 THROUGH 10/31/07 (PERFORMANCE GRAPH) ANNUALIZED TOTAL RETURNS VALUE OF PERIODS ENDED 10/31/07 $10,000 --------------------------- 10/31/97- 1 YEAR 5 YEARS 10 YEARS 10/31/07 ------ ------- -------- --------- Institutional Class(1,6).... 9.31% 13.16% 7.76% $21,111 PlanAhead Class(1,6)........ 9.06% 12.80% 7.47% 20,552 Service Class(1,2,6)........ 8.76% 12.62% 7.38% 20,385 AMR Class(1,6).............. 9.59% 13.42% 8.05% 21,687 Balanced Composite Index(3)................. 10.33% 11.77% 7.52% 20,648 Balanced Composite Index(4)New.............. 8.74% 11.59% 8.11% 21,817 Linked S&P 500/ Citigroup Value Index (5)...................... 13.55% 16.67% 8.03% 21,659 Russell 1000 Value Index (5)...................... Lehman Bros. Aggregate Index(5)................. 5.38% 4.41% 5.91% 17,754 Lipper Mixed-Asset Target Allocation Growth Funds Index (5)................ 13.58% 12.36% 7.32% 20,267 (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 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 through the periods or for the entirety of each period. A portion of the fees charged to the Service Class of the Fund was waived through 2005. Performance prior to waiving fees was lower than actual returns shown for periods through 2005. (3.) 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. (4.) To reflect the Fund's allocation of its assets between investment grade fixed-income securities and equity securities, the returns of the Russell 1000 Value Index and the Lehman Brothers Aggregate Index have been combined in a 60%/40% proportion. Effective November 1, 2007, the benchmark for the Fund's equity securities will change from the Linked S&P 500/Citigroup Value Index to the Russell 1000 Value Index, as it is a more widely accepted benchmark for large cap value stocks. (5.) 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. Russell 1000(R) Value Index is a registered trademark of Frank Russell Company. The Russell 1000 Value Index is an unmanaged index of those stocks in the Russell 1000 Index with lower price-to-book ratios and lower forecasted growth values. 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 Growth Funds category. Lipper is an independent mutual fund research and ranking service. One cannot directly invest in an index (6.) The total annual Fund operating expense ratio set forth in the most recent Fund prospectus for the Institutional, PlanAhead, Service and AMR Class shares was 0.62%, 0.88%, 1.25% and 0.36%, respectively. After expense reimbursements, the net expense ratio disclosed in the most recent prospectus for the Service Class was 1.10%. The expense ratios above may vary from the expense ratios presented in other sections of this report that are based on expenses incurred during the period covered by this report. 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 63% in equities/equitized cash and 37% in fixed-income securities. 3 PERFORMANCE OVERVIEW AMERICAN BEACON BALANCED FUND(SM) OCTOBER 31, 2007 (UNAUDITED) The equity portion of the Fund (excluding equitized cash) returned 11.9%, underperforming the S&P 500/Citigroup Value Index (the "Index") return of 13.6%. The Fund's equities underperformed the Index due to both stock selection and sector allocation. Poor stock selection in the Consumer Discretionary, Health Care, and Financials sectors contributed most to the Fund's underperformance. In the Consumer Discretionary sector, Centex (down 51.9% for the period the Fund owned the security), Pulte Homes (down 51.8%) and Lennar (down 45.4% for the period the Fund owned the security) detracted from Fund performance. The Fund's holdings in the Health Care sector that had the largest negative impact for the period the Fund owned the securities were Pfizer (down 3.7%) and Tenet HealthCare (down 52.0%), while Washington Mutual (down 30.1%) and Citigroup (down 13.0%) accounted for a large portion of the Financials sector's underperformance. Equity sector allocation detracted modestly from the Fund's relative returns during the twelve-month period, mainly due to an overweight in the Consumer Discretionary sector, one of the poorer performing sectors in the Index, and a slight underweight in the Information Technology sector, one of the better performing sectors in the Index. The negative sector allocation performance was somewhat offset by an underweighting in Financials, the worst performing sector in the Index. The fixed-income portion of the Fund returned 5.6% for the period, outperforming the Lehman Brothers Aggregate Index ("Lehman Index") return of 5.4%. Most of the Fund's excess performance was due to good issuer selection in the Corporate and Collateralized Mortgage Obligations sectors. The Fund also benefited from its duration positioning, as its duration was longer than that of the Lehman Index in the first half of the period when interest rates fluctuated in a narrow range. The Fund's duration was fairly neutral relative to the Lehman Index early in the third quarter when interest rates peaked, and it maintained a longer duration in the latter part of the period as the flight to quality rally led to a decline in interest rates. The sub-advisors continue to focus on the disciplined selection of attractive securities that should allow the Fund to benefit long term. TOP TEN EQUITY HOLDINGS % OF EQUITIES -------- Bank of America Corp. 1.9% ConocoPhillips 1.8% Citigroup, Inc. 1.6% AT&T, Inc. 1.4% Pfizer, Inc. 1.3% International Business Machines Corp. 1.3% Verizon Communications, Inc. 1.3% JPMorgan Chase & Co. 1.2% Honeywell International, Inc. 1.2% Imperial Tobacco Group plc 1.1% EQUITY SECTOR ALLOCATION % OF EQUITIES -------- Financials 27.4% Industrials 12.9% Consumer Discretionary 10.7% Information Technology 10.2% Health Care 10.1% Energy 9.0% Consumer Staples 6.6% Utilities 5.7% Telecommunication Services 4.7% Materials 2.7% FIXED-INCOME SECTOR ALLOCATION % OF EQUITIES -------- U.S. Treasury 30.0% Corporate Bonds 26.4% Mortgage-Backed 25.5% Agency 16.3% Asset-Backed 1.8% Investing in debt securities entails interest rate risk which is the risk that debt securities will decrease in value with increases in market interest 4 PERFORMANCE OVERVIEW AMERICAN BEACON LARGE CAP GROWTH FUND(SM) OCTOBER 31, 2007 (UNAUDITED) The Institutional Class of the Large Cap Growth Fund returned 11.84% for the twelve months ended October 31, 2007, compared to the Russell 1000(R) Growth Index (the "Index") return of 19.22% and the Lipper Large-Cap Growth Funds Index return of 23.14%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 7/31/00* THROUGH 10/31/07 (PERFORMANCE GRAPH) * Inception of Fund ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/07 VALUE OF ------------------------------- $10,000 SINCE INCEP. 7/31/00- 1 YEAR 5 YEARS (7/31/00) 10/31/07 ------ ------- ------------ -------- Institutional Class(1,3)......... 11.84% 11.64% -3.26% $7,864 AMR Class(1,3)........ 12.07% 11.84% -3.08% 7,968 Russell 1000 Growth Index(2).... 19.22% 12.61% -2.66% 8,222 Lipper Large-Cap Growth Funds Index(2)........... 23.14% 12.26% -2.64% 8,240 (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 since 2004. Performance prior to waiving the fees was lower than the actual returns shown for periods since 2004. (2.) Russell 1000 Growth Index is a registered trademark of Frank Russell Company. The Russell 1000 Growth Index is an unmanaged index of those stocks in the Russell 1000 Index with higher price-to-book ratios and higher forecasted growth values. 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. (3.) The total annual Fund operating expense ratio set forth in the most recent Fund prospectus for the Institutional and AMR Class shares was 1.00% and 0.59%, respectively. After expense reimbursements, the net expense ratio disclosed in the most recent prospectus for the Institutional Class was 0.90%. The expense ratios above may vary from the expense ratios presented in other sections of this report that are based on expenses incurred during the period covered by this report. The Fund underperformed the Index primarily through stock selection, as sector allocation detracted modestly from the Fund's performance. The Fund had poor stock selection in the Consumer Discretionary, Information Technology, Health Care, and Financials sectors. Positions in Harley Davidson (down 31.5% for the period the Fund held the security) and Circuit City Stores (down 24.2% for the period the Fund held the security) detracted most from the Consumer Discretionary sector's relative performance. In the Information Technology sector, the largest detractors were Lexmark International (down 34.0%) and Symantec (down 9.9% for the period the Fund held the security), while Amgen (down 21.2% for the period the Fund held the security) hurt the Fund's Health Care sector returns. Moody's (down 36.8% for the period the Fund held the security) and CB Richard Ellis (down 33.2% for the period the Fund held the security) detracted value relative to the Index in the Financials sector. The underperformance was slightly offset by good stock selection in the Telecommunication Services sector, where AT&T (up 26.6%) was the largest contributor. The Fund's underweighting in the Information Technology sector, one of the better performing sectors of the Index, detracted value from relative performance, as did an overweighting in Consumer Discretionary, the second worst performing sector of the Index. Looking forward, 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. 5 PERFORMANCE OVERVIEW AMERICAN BEACON LARGE CAP GROWTH FUND(SM) OCTOBER 31, 2007 (UNAUDITED) TOP TEN HOLDINGS % OF NET ASSETS ---------- Microsoft Corporation 4.3% Cisco Systems, Inc. 2.3% Dell, Inc. 2.0% Gilead Sciences, Inc. 1.8% Manpower, Inc. 1.5% Exxon Mobil Corp. 1.5% NVIDIA Corp. 1.5% Honeywell International Inc. 1.5% Medco Health Solutions, Inc. 1.4% Hewlett-Packard Co. 1.4% SECTOR ALLOCATION % OF EQUITIES -------- Information Technology 24.2% Industrials 15.5% Consumer Discretionary 14.2% Health Care 13.9% Energy 9.9% Financials 8.5% Consumer Staples 6.9% Materials 3.6% Telecommunication Services 1.9% Utilities 1.4% 6 PERFORMANCE OVERVIEW AMERICAN BEACON MID-CAP VALUE FUND(SM) OCTOBER 31, 2007 (UNAUDITED) The Institutional Class of the Mid-Cap Value Fund returned 4.87% for the twelve months ended October 31, 2007. The Fund trailed the Russell Midcap(R) Value Index (the "Index") return of 9.73% and the Lipper Mid-Cap Value Funds Index return of 14.26%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 6/30/04* THROUGH 10/31/07 (PERFORMANCE GRAPH) * Inception of Fund ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/07 VALUE OF ------------------------------- $10,000 SINCE INCEP. 6/30/04- 1 YEAR 3 YEARS (6/30/04) 10/31/07 ------ ------- ------------ -------- Institutional Class(1,3,5).. 4.87% 12.66% 12.20% $14,684 PlanAhead Class (1,2,5)..... 4.68% 12.52% 12.08% 14,630 Service Class (1,5,6)....... 4.58% 12.49% 12.05% 14,616 AMR Class (1,5)............. 5.19% 12.84% 12.37% 14,756 Russell Midcap Value Index(4)................. 9.73% 16.48% 16.10% 16,448 Lipper Mid-Cap Value Funds Index(4)................. 14.26% 15.01% 13.60% 15,300 (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 for the three-year and since inception periods represents the total returns achieved by the AMR Class 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 through the periods for the entirety of each period. (3.) Fund performance for the three-year and since inception periods 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 through the periods for the entirety of each period. (4.) Russell Midcap Value Index and Russell 1000 Index are registered trademarks of Frank Russell Company. The Russell Midcap Value Index is an unmanaged index of those stocks in the Russell Midcap Index with lower price-to-book ratios and lower forecasted growth values. The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index. 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 directly invest in an index. (5.) The total annual Fund operating expense ratio set forth in the most recent Fund prospectus for the Institutional, PlanAhead, Service, and AMR Class shares was 1.22%, 1.64%, 1.56%, and 0.95%, respectively. After expense reimbursements, the net expense ratio disclosed in the most recent prospectus for the Institutional and PlanAhead Class was 0.90% and 1.23%, respectively. The expense ratios above may vary from the expense ratios presented in other sections of this report that are based on expenses incurred during the period covered by this report. (6.) Fund performance represents the total returns achieved by the AMR class from 6/30/04 up to 11/30/05, the returns of the Institutional Class from 11/30/05 up to 3/1/06, the returns of the PlanAhead Class from 3/1/06 up to 6/30/07, 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 AMR, 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 (through the periods or for the entirety of each period). The Fund underperformed the Index through both stock selection and sector allocation. Holdings in the Utilities, Financials, and Industrials sectors detracted the most value from stock selection. In the Utilities sector, holdings in Pinnacle West Capital (down 11.4%) and Wisconsin Energy (up 6.5%) were the largest detractors. American Home Mortgage (down 99.1%) followed by Radian Group (down 56.2% for the period the Fund owned the security) hurt performance most in the Financials sector, while Kelly Services (down 26.3%) and Ryder Systems (down 7.7%) were the largest detractors in the Industrials sector. Large underweightings in the Materials and Energy sectors, the two best performing sectors in the Index, were two of the largest detractors 7 PERFORMANCE OVERVIEW AMERICAN BEACON MID-CAP VALUE FUND(SM) APRIL 30, 2007 (UNAUDITED) through sector allocation. A significant overweight in Consumer Discretionary, one of the poorer performing sectors in the Index, also hurt relative performance. An underweight in Financials, the worst performing sector in the Index, added value to the Fund's performance relative to the Index. 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. TOP TEN HOLDINGS % OF NET ASSETS ---------- L-3 Communications Holdings, Inc. 3.7% Whirlpool Corp. 2.2% Murphy Oil Corp. 2.2% Computer Sciences Corp. 2.1% Rent-A-Center, Inc. 2.0% Black & Decker Corp. 1.9% Regis Corp. 1.9% XL Capital Ltd. 1.9% Coventry Health Care, Inc. 1.8% Torchmark Corp. 1.8% SECTOR ALLOCATION % OF EQUITIES -------- Financials 26.3% Consumer Discretionary 23.7% Industrials 13.4% Health Care 10.8% Utilities 8.5% Information Technology 8.0% Consumer Staples 5.4% Energy 3.9% Investing in the securities of mid-capitalization companies involves greater risk and the possibility of greater price volatility than investing in larger capitalization and more established companies. 8 PERFORMANCE OVERVIEW AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND(SM) OCTOBER 31, 2007 (UNAUDITED) The Institutional Class of the Small Cap Value Opportunity Fund returned 1.08% for the twelve months ended October 31, 2007. The Fund underperformed the Russell 2000 Value Index (the "Index") return of 2.05% and the Lipper Small-Cap Value Funds Index return of 7.17% for the same period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 3/31/06* THROUGH 10/31/07 (PERFORMANCE GRAPH) * Inception of Fund ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/07 VALUE OF ------------------------ $10,000 SINCE INCEP. 3/31/06- 1 YEAR (3/31/06) 10/31/07 ------ ------------ -------- Institutional Class(1,3).... 1.08% 2.32% $10,371 PlanAhead Class(1,3)........ 0.96% 2.24% 10,358 Russell 2000 Value Index (2) ............... 2.05% 4.37% 10,701 Lipper Small-Cap Value Funds Index (2).... 7.17% 5.25% 10,845 (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 prior to waiving fees was lower than the actual returns shown. (2.) Russell 2000 Value Index is a registered trademark of Frank Russell Company. The Russell 2000 Value Index is an unmanaged index of those stocks in the Russell 2000 Index with lower price-to-book ratios and lower 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. (3.) The total annual Fund operating expense ratio, gross of fee waivers, set forth in the most recent Fund prospectus for the Institutional and PlanAhead Class shares was 6.14% and 20.07%, respectively. After expense reimbursements, the net expense ratio set forth in the most recent Fund prospectus was 1.05% and 1.30%, respectively. The expense ratios above may vary from the expense ratios presented in other sections of this report that are based on expenses incurred during the period covered by this report. 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. Gross of Fund expenses, the Fund added value entirely through stock selection, as sector allocation was a modest detractor. The Fund's holdings in the Information Technology sector added the most value relative to the Index, followed by the Telecommunication Services and Consumer Discretionary sectors. In the Information Technology sector, the companies that had the largest impact were Commscope (up 47.8%) and ON Semiconductor (up 64.0% for the period the Fund owned the security). The largest contributors in the Telecommunication Services sector were Golden Telecom (up 181.1%) and Premiere Global Services (up 98.1%). In the Consumer Discretionary sector, most of the excess performance, for the period the Fund owned the securities, came from Warnaco (up 55.8%) and Tupperware (up 58.5%). Poor stock selection in Industrials, mostly in Saia (down 47.4%) and Griffon (down 36.3% for the period the Fund owned the security), and in Materials, primarily in Spartech (down 40.9% for the period the Fund owned the security) and NN, Inc. (down 2.8% for the period the Fund owned the security), detracted value versus the Index. Small overweightings in the Financials and Consumer Discretionary sectors, the two worst performing sectors in the Index, detracted value relative to the Index. The sub-advisor's disciplined approach of investing in a diversified portfolio of small cap value companies should allow the Fund to generate competitive performance over longer periods of time. 9 PERFORMANCE OVERVIEW AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND(SM) OCTOBER 31, 2007 (UNAUDITED) TOP TEN HOLDINGS % OF NET ASSETS ---------- Tupperware Corp. 1.2% Warnaco Group, Inc. 1.1% Premiere Global Services, Inc. 1.1% ProAssurance Corp. 1.1% JDA Software Group, Inc. 1.1% Potlatch Corp. 1.1% Golden Telecom, Inc. 1.1% Navigators Group, Inc. 1.1% Sciele Pharma, Inc. 1.0% Insight Enterprises, Inc. 1.0% SECTOR ALLOCATION % OF EQUITIES -------- Financials 30.4% Industrials 15.7% Consumer Discretionary 12.6% Information Technology 11.9% Materials 7.8% Health Care 5.9% Utilities 5.3% Energy 4.8% Consumer Staples 3.2% Telecommunication Services 2.4% 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. 10 PERFORMANCE OVERVIEW AMERICAN BEACON EMERGING MARKETS FUND(SM) OCTOBER 31, 2007 (UNAUDITED) Thus far in 2007, emerging markets have been on par to deliver their fifth year of consecutive double-digit returns. This has been the longest winning streak since the inception of the MSCI Emerging Markets ("MSCI EM") Index in 1988. For the past several years, there has been a persistent trend of large cap companies (stocks over $10 billion in market cap) outperforming most of the MSCI EM. Elevated liquidity created by extended monetary easing has fueled gains in emerging markets, especially those stocks that are relatively easy to trade. This has contributed to a significant valuation premium for larger stocks in the MSCI EM, regardless of fundamentals or long-term growth prospects. During the first half of 2007, the liquidity premium trade had begun to moderate, implying broader participation in market returns. This trend was short-lived, however. Market volatility surged during the third quarter as the U.S. subprime lending crisis reverberated to global credit markets. Heavy selling triggered by margin calls and losses across several quantitative hedge funds reversed when the Federal Reserve Board (the "Fed") lowered the discount rate to 5.75% on August 16th. The liquidity injection boosted stock markets around the world, particularly emerging markets. Since then, the Fed made a larger than expected 50-basis-point cut (0.50%) to the Fed Funds rate to 4.75%, and global equities surged further. Indeed, there was a euphoric response from investors who flocked back to emerging markets. But not just any emerging equities - the most dramatic price movement was in the biggest and most expensive securities in the MSCI EM. The liquidity trade had returned. In September alone, just 2% of the companies in the MSCI EM (or 15 of the 842 stocks in the MSCI EM, representing nearly 20% of the market cap) contributed 40% of the return. 11 PERFORMANCE OVERVIEW AMERICAN BEACON EMERGING MARKETS FUND(SM) OCTOBER 31, 2007 (UNAUDITED) The Institutional Class of the Emerging Markets Fund returned 60.83% for the twelve months ended October 31, 2007. The Fund underperformed the MSCI Emerging Markets Index (the "Index") return of 67.85%, but outperformed the Lipper Emerging Market Funds Index return of 60.31% for the period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 7/31/00* THROUGH 10/31/07 (PERFORMANCE GRAPH) * Inception of Fund ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/07 ---------------------------- VALUE OF SINCE $10,000 INCEP. 7/31/00- 1 YEAR 5 YEARS (7/31/00) 10/31/07 ------ ------- --------- -------- Institutional Class(1,4).... 60.83% 37.97% 19.57% $36,542 PlanAhead Class(1,2,4) ..... 60.17% 37.61% 19.33% 36,014 AMR Class(1,4).............. 61.19% 38.33% 19.87% 37,220 MSCI Emg Mkts Index(3)...... 67.85% 39.86% 20.04% 37,590 Lipper Emg Mkt Funds Index(3)................. 60.31% 38.93% 19.54% 36,478 (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 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. (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. (4.) The total annual Fund operating expense ratio set forth in the most recent Fund prospectus for the Institutional, PlanAhead and AMR Class shares was 1.57%, 1.92% and 1.31%, respectively. The expense ratios above may vary from the expense ratios presented in other sections of this report that are based on expenses incurred during the period covered by this report. The Fund underperformed the Index by 7.02% over the twelve-month period due to stock selection, sub-Index returns on the Fund's cash balances, and Fund expenses. Although the average cash balance was a fairly modest 5.5%, it created a drag on Fund performance, given the strength of the emerging markets asset class during the period. Poor stock selection during the twelve-month period in Brazil, Taiwan, and India contributed to the Fund's underperformance, overcoming good selections in Russia. In Russia, Materials companies Evraz Group, MMC Norilsk Nickel, and Mechel each exceeded 110% appreciation for the one-year period, and were among the country's main contributors. All but two of the Fund's Brazilian holdings appreciated over the one-year period, but most lagged their home market, leading to underperformance relative to the Index. Significant detractors included Grupo Pao de Acucar (up 8.0%), Braskem (up 33.7%), Embraer (up 19.1%), and Tele Norte Leste Participacoes (up 54.8%). In Taiwan, the Fund was negatively impacted by investments in Financial companies SinoPac Financial Holdings Co. (down 6.7%) and Chinatrust Financial Holding Co. (up 0.3%), and Information Technology companies United Microelectronics Corp. (up 0.5%) and Qisda Corp. (down 23.6%). Indian holdings Infosys Technologies (up 1.2%), Hindustan Petroleum Corp. (down 9.1%), and Bharat Petroleum Corp. (up 3.7%) also hindered the Fund's performance. 12 PERFORMANCE OVERVIEW AMERICAN BEACON EMERGING MARKETS FUND(SM) OCTOBER 31, (UNAUDITED) Country allocation added value for the period. Underweighting Russia (up 33.6%), overweighting Brazil (up 110.2%), and underweighting Taiwan (up 38.6%) benefited the Fund, while underweighting China (up 155.7%) and overweighting Mexico (up 32.9%) detracted from performance. The Fund's basic philosophy remains focused on investing in attractively valued companies with above-average earnings growth expectation. TOP TEN HOLDINGS % OF NET ASSETS ---------- RAO Gazprom 2.7% Companhia Vale do Rio Doce 2.2% Petroleo Brasileiro S.A. 2.1% China Mobile Ltd. 1.7% Samsung Electronics Company Ltd. 1.5% Unibanco - Uniao de Bancos Brasileiros S.A. 1.2% America Movil, S.A.B. de C.V. 1.1% LUKOIL Oil Co. 1.0% Sberbank RF 1.0% Kookmin Bank 0.9% SECTOR ALLOCATION % OF EQUITIES -------- Financials 23.0% Telecommunication Services 13.4% Materials 13.8% Industrials 13.1% Energy 10.2% Information Technology 9.5% Consumer Discretionary 9.1% Utilities 3.3% Consumer Staples 3.3% Health Care 1.3% COUNTRY ALLOCATION* (PIE CHART) % OF EQUITIES -------- China/Hong Kong 15.9% South Korea 14.7% Brazil 12.7% Other Europe, Middle East, Africa 9.7% Taiwan 9.5% Russia 8.8% India 8.6% South Africa 7.3% Other Asia 6.7% Mexico 5.3% Other Latin America 0.8% 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, 2007 (UNAUDITED) For the twelve-month period ended October 31, 2007, the investment grade fixed income market, as defined by the Lehman Brothers Aggregate Index (the "Index"), produced a 5.38% total return. Volatility rose substantially during the period as uncertainty surrounding subprime mortgages and related complex securities sent investors fleeing to quality. As a result, for the first time in several years, government securities posted the highest returns among the major Index sectors. TOTAL RETURNS PERIODS ENDED 10/31/07 ---------------------- 6 MONTH 12 MONTH ------- -------- Lehman Aggregate 2.68 5.38 Lehman Gov/Credit 2.83 5.37 SECTOR U.S. Treasury 3.64 5.91 U.S. Agency 3.23 5.81 Mortgage-Backed 2.65 5.68 Commercial MBS 1.44 3.88 Asset-Backed 1.64 4.12 U.S. Credit 1.78 4.62 CREDIT RATING Aaa 2.95 5.62 Aa 1.72 4.28 A 1.52 4.11 Baa 1.55 4.91 U.S.TREASURY YIELD 6 MONTH 12 MONTH - ------------------ ------- -------- 2 Year 3.36 5.76 3 Year 3.81 6.27 5 Year 3.78 6.25 10 Year 3.43 5.33 30 Year 3.40 3.88 The yield curve steepened substantially during the period as the Federal Reserve Bank (the "Fed") lowered the Fed Funds rate in response to the events that shook the bond market in mid-August. Subprime mortgages took center stage in what became an historic disruption in the residential mortgage market. The Fed responded aggressively by reducing the Fed Funds rate 50 basis points (0.50%) in September and another 25 basis points (0.25%) in late October leaving the Fed Funds rate at 4.50% at period end. Through much of 2007, the Fed's primary concern was that inflationary pressures from the tight labor market and rising commodity prices would threaten economic stability. However, the subprime disruption was so large and rapid that the Fed had to change course. While the Fed did make progress in calming the markets, additional rate cuts were expected by investors at period end. (PERFORMANCE GRAPH) All credit sectors were adversely affected by the subprime mortgage disruption, but the Finance sector was at ground zero. The Finance sector, through its normal business operations, held a significant amount of exposure to subprime borrowers in the form of residential mortgages, asset-backed securities, and derivatives. While some entities fared better than others, the nature of the credit freeze was that entire sectors were pulled down - even those issuers with no subprime exposure at all. The element of uncertainty during market crises tends to broaden the scope of damage. Another disturbing aspect of this credit crunch was the speed with which it spread throughout the system. Subprime mortgages have been in existence for a long time, and the Fed had been raising interest rates for a long time (June 2004 - June 2006). However, the weak link was the fact that long-term assets (mortgages) were being financed by short-term investments (commercial paper), and when credit losses began to mount, short-term investors fled. In a sense, this disruption was caused by a classic mismatch of assets and liabilities. The credit losses initiated the problem, but the flight of capital substantially exacerbated it. Additionally, many of the structures in which subprime mortgages resided had capital requirements and other safeguards that required the sale of assets if credit losses rose. Unfortunately, selling assets into an illiquid market only makes things worse 14 DOMESTIC BOND MARKET OVERVIEW OCTOBER 31, 2007 (UNAUDITED) Credit spreads moved out substantially during the period with 'A' and 'Aa' rated issuers performing the worst. These ratings primarily include the Finance sector issuers. (PERFORMANCE GRAPH) Source: Lehman Brothers One positive outcome for investment grade fixed-income investors was that leveraged buyout ("LBO") activity came to a halt. With cheap capital no longer available, equity-activist investors were forced to the sidelines. Furthermore, given the toll on bank balance sheets, several of the LBO deals that were in the pipeline were cancelled or restructured as the banks no longer had capacity to provide liquidity or bridge financing. Nearly every transaction that required financing from non-government sources was strained. Fortunately, Freddie Mac's and Fannie Mae's balance sheets were cleaned up over the past several years, and they had ample capacity during the crisis to fund agency-eligible prime mortgages. The markets were undoubtedly tested during the period, and the challenges will likely continue into 2008. The banks and brokerage companies that engineered this new-era capital are on the mend, and only small amounts of capital have been trickling into the affected markets. Unfortunately, housing is a large part of the economy, and the challenges run deep. The recovery from this disruption may take longer than many anticipate. 15 HIGH YIELD BOND MARKET OVERVIEW OCTOBER 31, 2007 (UNAUDITED) The year ended October 2007 was characterized by two rather divergent periods. For the seven-month period through May 2007, high yield corporate bond valuations continued to tighten, with the JPMorgan Global High-Yield Index's yield spread (the difference in yield between the Index and Treasuries) narrowing from approximately 3.5% over Treasuries to an all-time range of just over 2.5%, as default rates remained very low and financial market liquidity was abundant. However, beginning in June 2007, the difficulties in the housing market, which had become evident in subprime mortgage securities, began to filter into the broader financial markets. As a result, investors became more risk averse and pending high yield supply (which was dominated by lower-rated leveraged buyout transactions) began to have difficulty getting done. Consequently, from June through the end of October 2007, yield spreads rose to approximately 4.5%. At period end, concerns regarding the expected slowdown in domestic economic growth and corporate earnings weighed on the corporate market. Moreover, the lower quality of recent high yield issuance was expected to put upward pressure on high yield default rates beginning in 2008. Nonetheless, actual defaults remained near 25-year lows at the end of October - consequently, the market appeared to already be pricing in a meaningful rise in intermediate-term default rates into the current level of yield spreads. 16 PERFORMANCE OVERVIEW AMERICAN BEACON HIGH YIELD BOND FUND(SM) OCTOBER 31, 2007 (UNAUDITED) The Institutional Class of the High Yield Bond Fund returned 6.85% for the twelve months ended October 31, 2007. The Fund underperformed the JP Morgan Global High-Yield Index (the "Index") return of 7.62% and the Lipper High Current Yield Funds Index, which gained 7.11% for the period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 12/29/00* THROUGH 10/31/07 (PERFORMANCE GRAPH) * Inception of Fund ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/07 ----------------------------- VALUE OF SINCE $10,000 INCEP. 12/29/00- 1 YEAR 5 YEARS (12/29/00) 10/31/07 ------ ------- ---------- --------- Institutional Class(1,5) ...... 6.85% 9.65% 8.75% $17,742 PlanAhead Class(1,2,5) ........ 6.52% 9.33% 8.49% 17,458 AMR Class (1,3,5) ............. 6.90% 9.66% 8.75% 17,750 JPMorgan Global High-Yield Index (4) ................. 7.62% 12.71% 9.44% 18,527 Lipper High Current Yield Funds Index (4) ............ 7.11% 11.98% 7.05% 15,929 (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 through 2004. (2.) Fund performance for the since inception period 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.) Fund performance for the one-year, five-year and since inception periods represents the total returns achieved by the Institutional Class from 12/29/00 up to 9/4/07, the inception date of the AMR Class, and the returns of the AMR Class since its inception. 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 12/29/00. (4.) The JPMorgan Global High-Yield Index ("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 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. (5.) The total annual Fund operating expense ratio set forth in the most recent Fund prospectus for the Institutional, PlanAhead and AMR Class shares was 0.86%, 1.09% and 0.60%, respectively. The expense ratios above may vary from the expense ratios presented in other sections of this report that are based on expenses incurred during the period covered by this report. The Fund underperformed the Index over the twelve-month period due to sub-Index returns on the Fund's cash balances and Fund expenses. Although the average cash balance over the period was a fairly modest 4.8%, it created a drag on Fund performance. These factors more than offset strong issue selection and sector allocation achieved by the Fund during the period. Issue selection in the Manufacturing sector added value, while selections in the Other Corporate and Cable/Media sectors detracted from performance for the period. From a sector allocation perspective, underweighting the Finance sector (up 1.8%) helped the Fund's relative performance, as it was the worst-performing sector for the period. The Fund's overweight position in the Cable/Media sector (up 9.1%) also added value, as the sector finished the twelve-month period as the third-best performing sector in the Index. 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) OCTOBER 31, 2007 (UNAUDITED) TOP TEN HOLDINGS % OF NET ASSETS ---------- General Motors Acceptance Corp., 6.875%, Due 9/15/2011 1.4% Ford Motor Credit Co. LLC, 9.875%, Due 8/10/2011 1.0% United Components, Inc., 9.375%, Due 6/15/2013 1.0% Umbrella Acquisition, Inc., 9.750%, Due 3/15/2015 1.0% Penske Auto Group, Inc., 7.750%, Due 12/15/2016 1.0% Sheridan Group, Inc., 10.250%, Due 8/15/2011 1.0% Newark Group, Inc., 9.750%, Due 3/15/2014 1.0% Edison Mission Energy, 7.000%, Due 5/15/2017 1.0% Prestige Brands, Inc., 9.250%, Due 4/15/2012 0.9% E*Trade Financial Corp., 8.000%, Due 6/15/2011 0.9% SECTOR ALLOCATION % OF FIXED INCOME ------------ Corporate 100.0% Investing in debt securities entails interest rate risk which is the risk that debt securities will decrease in value with increases in market interest rates. Investing in high yield securities involves additional risks when compared to investing in investment grade securities. These include a greater risk of default or bankruptcy and an increased sensitivity to financial difficulties or changes in interest rates. 18 PERFORMANCE OVERVIEW AMERICAN BEACON ENHANCED INCOME FUND(SM) OCTOBER 31, 2007 (UNAUDITED) The PlanAhead Class of the Enhanced Income Fund returned 6.76% for the twelve months ended October 31, 2007. Its benchmark, a blend of 75% Lehman Brothers Aggregate and 25% Merrill Lynch All U.S. Convertibles Index, returned 7.21%. The Fund's peer group, the Lipper Intermediate Investment Grade Index, returned 4.67% for the same period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 7/1/03* THROUGH 10/31/07 (PERFORMANCE GRAPH) * Inception of Fund ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/07 --------------------------- VALUE OF SINCE $10,000 INCEP. 7/1/03- 1 YEAR 3 YEARS (7/1/03) 10/31/07 ------ ------- -------- -------- PlanAhead Class(1,4) ........ 6.75% 4.78% 4.46% $12,083 Enhanced Income Composite Index(2) ....... 7.21% 5.08% 4.94% 12,324 Linked Lehman Bros Aggregrate Index (3) ..... 5.38% 3.88% 6.11% 11,427 Merrill Lynch All U.S. Convertibles Index (3) ... 12.72% 10.04% 10.38% 15,339 Lipper Intermediate Investment Grade Index (3) ...................... 4.67% 3.70% 3.58% 11,643 (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.) To reflect the Fund's allocation of its assets between investment grade fixed-income securities and convertible securities, the returns of the Linked Lehman Brothers Aggregate Index and the Merrill Lynch All U.S. Convertibles Index have been combined in a 75%/25% proportion. (3.) The Linked Lehman Brothers Aggregate Index represents returns of the Lehman Bros. Gov./Credit Intermediate Index ("Intermediate Index") up to October 31, 2006 and the Lehman Bros. Aggregate Index ("Aggregate Index") thereafter. The Intermediate Index is an unmanaged index of investment grade corporate and government debt issues with maturities between one and ten years. The Aggregate Index is a market value weighted index of government, corporate, mortgage-backed and asset-backed fixed-rate debt securities of all maturities. 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. (4.) The total annual Fund operating expense ratio set forth in the most recent Fund prospectus for the PlanAhead Class shares was 0.96%. The expense ratio above may vary from the expense ratio presented in other sections of this report that is based on expenses incurred during the period covered by this report. 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 which invests in convertible bonds, convertible preferreds, high yield bonds, and equities in order to enhance the potential return of the Fund. During the twelve-month period, the investment grade bond portion of the Fund returned 5.3% before expenses, compared to a 5.4% return for the Lehman Brothers Aggregate Index. This portion of the Fund benefited from security selection in the Asset-Backed sector, from an underweight position in Collateralized Mortgage-Backed Securities, the worst performing sector in the Lehman Brothers Aggregate, and from security selection in the U.S. Treasuries sector. This positive performance was offset by both security selection and an overweight position in Corporates, the second worst performing sector in the Index. The remaining portion of the Fund, managed by the Fund's sub-advisor, returned 15.2% before expenses. These results outperformed the 12.7% return of the Merrill Lynch All U.S. Convertibles Index ("ML Index"). This portion of the Fund was helped by having greater equity sensitivity relative to the ML Index. Convertible issues with higher equity sensitivity performed well, reflecting the positive returns within the equity markets for the period. However, this portion of the Fund also held common stocks and corporate bonds, in an effort to manage the risk/reward potential of the portfolio. While the common stocks outperformed the convertible market and the stock market as well, the higher-quality 19 PERFORMANCE OVERVIEW AMERICAN BEACON ENHANCED INCOME FUND(SM) OCTOBER 31, 2007 straight corporate debt detracted slightly from performance. The Manager and the Fund's sub-advisor remain focused on the Fund's investment objectives of generating income and capital appreciation. TOP TEN HOLDINGS % OF NET ASSETS ---------- U.S. Treasury Note, 4.500%, Due 3/31/2012 3.8% Federal Home Loan Mortgage Corp., Pool #08079, 5.000%, Due 9/1/2035 2.5% U.S. Treasury Note, 4.875%, Due 4/30/2011 2.2% Federal Home Loan Mortgage Corp., 5.125%, Due 4/18/2011 1.9% U.S. Treasury Bond, 7.875%, Due 2/15/2021 1.8% U.S. Treasury Note, 4.750%, Due 5/15/2014 1.8% Federal National Mortgage Association, Pool #897820, 6.000%, Due 9/1/2036 1.7% Federal National Mortgage Association, Pool #745418, 5.500%, Due 4/1/2036 1.7% Federal National Mortgage Association, Pool #745275, 5.000%, Due 2/1/2036 1.7% Federal National Mortgage Association, 5.375%, Due 6/12/2017 1.4% FIXED-INCOME SECTOR ALLOCATION % OF FIXED INCOME ------------ Corporate Bonds 31.4% Mortgage-Backed 27.2% U.S. Treasury 17.5% Convertible Bonds 15.0% U.S. Agency 4.6% Asset-Backed 4.3% EQUITY SECTOR ALLOCATION % OF EQUITIES -------- Industrials 27.4% Information Technology 21.0% Financials 19.1% Health Care 18.7% Consumer Staples 6.1% Consumer Discretionary 4.0% Materials 3.7% Investing in debt securities entails interest rate risk which is the risk that debt securities will decrease in value with increases in market interest rates. 20 PERFORMANCE OVERVIEW AMERICAN BEACON INTERMEDIATE BOND FUND(SM) OCTOBER 31, 2007 (UNAUDITED) The Institutional Class of the Intermediate Bond Fund returned 5.83% for the twelve months ended October 31, 2007, outperforming the Lehman Brothers Aggregate Index (the "Index") return of 5.38% and the Lipper Intermediate Investment Grade Index return of 4.67% for the same period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 10/31/97 THROUGH 10/31/07 (PERFORMANCE GRAPH) ANNUALIZED TOTAL RETURNS VALUE OF PERIODS ENDED 10/31/07 $10,000 --------------------------- 10/31/97- 1 YEAR 5 YEARS 10 YEARS 10/31/07 ------ ------- -------- --------- Institutional Class(1,3) ... 5.83% 4.40% 5.57% $17,611 Lehman Bros. Agg. Index (2) ............... 5.38% 4.41% 5.91% 17,754 Lipper Intermediate Inv. Grade Index (2) ......... 4.67% 4.59% 5.51% 17,102 (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.) 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. (3.) The total annual Fund operating expense ratio set forth in the most recent Fund prospectus for the Institutional Class shares was 0.38%. The expense ratio above may vary from the expense ratio presented in other sections of this report that is based on expenses incurred during the period covered by this report. A portion of the Fund's excess performance during the period was due to class action settlement proceeds that the Fund received in December 2006 related to investment activities in 2002. The remainder of the Fund's excess performance relative to the Index was primarily due to good security selection in the Corporate sector, where many of the Fund's holdings experienced upgrades in their quality ratings, and in the Collateralized Mortgage Obligations (CMO) sector. Although the Fund's average duration was similar to that of the Index over the course of the twelve-month period, it was overweighted in intermediate maturities (2 to 4 years), which was beneficial as the yield curve steepened. 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 % OF NET ASSETS ---------- U.S. Treasury Note, 4.750%, Due 5/15/2014 5.3% U.S. Treasury Note, 4.500%, Due 3/31/2012 2.3% U.S. Treasury Note, 4.875%, Due 4/30/2011 2.2% U.S. Treasury Bond, 4.125%, Due 8/31/2012 2.0% U.S. Treasury Note, 4.750%, Due 8/15/2017 1.6% U.S. Treasury Note, 4.125%, Due 5/15/2015 1.3% Federal Home Loan Mortgage Corp., 5.125%, Due 4/18/2011 1.3% Federal Home Loan Mortgage Corp., 5.250%, Due 2/24/2011 1.2% U.S. Treasury Bond, 4.750%, Due 2/15/2037 1.1% Federal National Mortgage Association, TBA Nov 30, 6.500%, Due 12/1/2099 1.1% SECTOR ALLOCATION % OF FIXED INCOME ------ Mortgage-Backed 36.9% Corporates 28.8% U.S. Treasury 22.6% U.S. Agency 8.9% Asset-Backed 2.8% Investing in debt securities entails interest rate risk which is the risk that debt securities will decrease in value with increases in market interest rates. 21 PERFORMANCE OVERVIEW AMERICAN BEACON SHORT-TERM BOND FUND(SM) OCTOBER 31, 2007 The Institutional Class of the Short-Term Bond Fund returned 5.61% for the twelve months ended October 31, 2007, which slightly underperformed the Merrill Lynch 1-3 Year Gov/Corp Index (the "Index") return of 5.67% but substantially outperformed the Lipper Short Investment Grade Bond Funds Index ("Lipper") return of 4.50%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 10/31/97 THROUGH 10/31/07 (PERFORMANCE GRAPH) ANNUALIZED TOTAL RETURNS VALUE OF PERIODS ENDED 10/31/07 $10,000 --------------------------- 10/31/97- 1 YEAR 5 YEARS 10 YEARS 10/31/07 ------ ------- -------- --------- Institutional Class(1,3 .... 5.61% 3.46% 4.76% $15,914 PlanAhead Class(1,3 ........ 5.08% 2.94% 4.25% 15,167 Merrill Lynch 1-3 Yr. Gov./Corp. Index(2) ..... 5.67% 3.20% 4.88% 16,106 Lipper Short Inv. Grade Index (2 ................ 4.50% 3.05% 4.29% 15,215 (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. (3.) The total annual Fund operating expense ratio set forth in the most recent Fund prospectus for the Institutional and PlanAhead Class shares was 0.36% and 0.91%, respectively. The expense ratios above may vary from the expense ratios presented in other sections of this report that are based on expenses incurred during the period covered by this report. A portion of the Fund's return during the period was attributable to class action settlement proceeds that the Fund received in December 2006 that were related to investment activity in 2002. The Fund's relative return during the period reflects a combination of an overweight position in the credit sectors, which underperformed, and a slightly longer duration than the Index, which resulted in outperformance. As compared to Lipper, the Fund outperformed due to Lipper's exposure to high-yield corporates, subprime mortgages and home-equity mortgages - all of which underperformed significantly. The Fund had no exposure to these asset classes. During the period, the Fund held an overweight position in investment-grade corporates, which underperformed as credit spreads widened during the credit market turmoil. The Fund generally maintains an overweight position in this sector to generate incremental yield to maturity; however, periodic market disruptions can cause corporates to underperform. To protect against these events, the Fund's holdings are limited to investment-grade issuers that we believe are likely to weather such unexpected volatility. The Fund benefited from its slightly longer duration, relative to the Index, as interest rates declined during the period. Treasuries and agencies saw the most significant decline during the flight-to-quality, but corporate and asset-backed yields declined as well. The Fund will likely maintain a slightly longer duration until the economic situation begins to stabilize. Overall, the period was challenging, but we continue to be confident in the long-term success of the Fund's investment strategy. As market conditions begin to stabilize in upcoming periods, we will look to take advantage of opportunities to generate attractive long-term returns. 22 PERFORMANCE OVERVIEW AMERICAN BEACON SHORT-TERM BOND FUND(SM) OCTOBER 31, 2007 TOP TEN HOLDINGS % OF NET ASSETS ---------- General Electric Capital Corp., 5.875%, Due 2/15/2012 3.3% USAA Auto Owner Trust, 5.550%, Due 2/15/2013 3.3% Banc of America Securities Auto Trust, 4.080%, Due 4/18/2010 3.2% HSBC Automotive Trust, 4.350%, Due 6/18/2012 3.2% Merrill Lynch & Co., Inc., 6.00%, Due 2/17/2009 2.7% John Deere Capital Corp., 4.125%, Due 1/15/2010 2.7% Comerica Bank, 6.000%, Due 10/1/2008 2.4% MBNA Corp., 7.500% , Due 3/15/2012 2.3% John Hancock Global Funding II, 7.900%, Due 7/2/2010 2.3% National Westminster Bank plc, 7.375%, Due 10/1/2009 2.3% SECTOR ALLOCATION % OF FIXED INCOME ------------ Corporate 68.9% Asset-Backed 25.2% Mortgage-Backed 5.9% Investing in debt securities entails interest rate risk which is the risk that debt securities will decrease in value with increases in market interest rates. 23 FUND EXPENSES - HYPOTHETICAL OCTOBER 31, 2007 (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, 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 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, 2007 through October 31, 2007. ACTUAL EXPENSES The following tables provide information about actual account values and actual expenses. You may use the information on this page, 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 "Expenses Paid During Period" for the applicable Fund 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. SMALL CAP LARGE CAP VALUE EMERGING BALANCED GROWTH MID-CAP OPPORTUNITY MARKETS HIGH YIELD INTERMEDIATE SHORT-TERM INSTITUTIONAL CLASS FUND FUND VALUE FUND FUND FUND BOND FUND BOND FUND BOND FUND - ------------------- --------- --------- ---------- ----------- --------- ---------- ------------ ---------- Beginning Account Value 5/1/07 ................. $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 10/31/07 ............... $1,014.51 $1,055.02 $ 949.95 $ 939.09 $1,354.23 $1,005.02 $1,026.96 $1,024.25 Expenses Paid During Period 5/1/07-10/31/07 * ...... $ 2.89 $ 4.66 $ 4.47 $ 5.13 $ 10.15 $ 4.35 $ 1.79 $ 1.94 Annualized Expense Ratio .. 0.57% 0.90% 0.91% 1.05% 1.71% 0.86% 0.35% 0.38% SMALL CAP MID-CAP VALUE EMERGING ENHANCED BALANCED VALUE OPPORTUNITY MARKETS HIGH YIELD INCOME SHORT-TERM PLANAHEAD CLASS FUND FUND FUND FUND BOND FUND FUND BOND FUND - --------------- --------- --------- ----------- --------- ---------- --------- ---------- Beginning Account Value 5/1/07 ................. $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 Ending Account Value 10/31/07 ............... $1,013.43 $ 949.74 $ 939.67 $1,351.41 $1,002.99 $1,033.69 $1,022.85 Expenses Paid During Period 5/1/07-10/31/07 * ...... $ 4.21 $ 6.09 $ 6.40 $ 12.09 $ 5.45 $ 4.87 $ 4.49 Annualized Expense Ratio .. 0.83% 1.24% 1.31% 2.04% 1.08% 0.95% 0.88% MID-CAP BALANCED VALUE SERVICE CLASS FUND FUND** - ------------- --------- --------- Beginning Account Value 5/1/07 ................. $1,000.00 $1,000.00 Ending Account Value 10/31/07 ............... $1,012.19 $ 933.50 Expenses Paid During Period 5/1/07-10/31/07 * ...... $ 5.38 $ 4.93 Annualized Expense Ratio .. 1.06% 1.50% LARGE CAP EMERGING BALANCED GROWTH MID-CAP MARKETS HIGH YIELD AMR CLASS FUND FUND VALUE FUND FUND BOND FUND** - --------- --------- --------- ---------- --------- ----------- Beginning Account Value 5/1/07 ................. $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 Ending Account Value 10/31/2007 ............. $1,016.41 $1,056.09 $ 952.71 $1,356.14 $1,029.41 Expenses Paid During Period 5/1/07-10/31/07 * ...... $ 1.58 $ 3.16 $ 3.49 $ 8.73 $ 0.97 Annualized Expense Ratio .. 0.31% 0.61% 0.71% 1.47% 0.61% - ---------- * 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. ** Beginning Account Value for the Mid-Cap Value Fund - Service Class is as of 6/29/07 and for the High-Yield Bond Fund - AMR Class is as of 9/4/07 (inception dates of the Classes). Expenses are equal to the Class' annualized ratios for the period multiplied by the average account value for the period multiplied by the number derived by dividing the number of days in the period (125) and (58), respectively by days in the year (365). See accompanying notes 24 FUND EXPENSES - ACTUAL OCTOBER 31, 2007 (UNAUDITED HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The following tables 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, such as redemption fees as applicable. 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 following tables 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. SMALL CAP LARGE CAP VALUE EMERGING BALANCED GROWTH MID-CAP OPPORTUNITY MARKETS HIGH YIELD INTERMEDIATE SHORT-TERM INSTITUTIONAL CLASS FUND FUND VALUE FUND FUND FUND BOND FUND BOND FUND BOND FUND - ------------------- --------- --------- ---------- ----------- --------- ---------- ------------ ---------- Beginning Account Value 5/1/07 ................. $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 10/31/07 ............... $1,022.33 $1,020.67 $1,020.62 $1,019.91 $1,016.59 $1,020.87 $1,023.44 $1,023.29 Expenses Paid During Period 5/1/07-10/31/07 * ...... $ 2.91 $ 4.58 $ 4.63 $ 5.35 $ 8.69 $ 4.38 $ 1.79 $ 1.94 Annualized Expense Ratio .. 0.57% 0.90% 0.91% 1.05% 1.71% 0.86% 0.35% 0.38% SMALL CAP MID-CAP VALUE EMERGING ENHANCED BALANCED VALUE OPPORTUNITY MARKETS HIGH YIELD INCOME SHORT-TERM PLANAHEAD CLASS FUND FUND FUND FUND BOND FUND FUND BOND FUND - --------------- --------- --------- ----------- --------- ---------- --------- ---------- Beginning Account Value 5/1/07 ................. $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 Ending Account Value 10/31/07 ............... $1,021.02 $1,018.95 $1,018.60 $1,014.92 $1,019.76 $1,020.42 $1,020.77 Expenses Paid During Period 5/1/07-10/31/07 * ...... $ 4.23 $ 6.31 $ 6.67 $ 10.36 $ 5.50 $ 4.84 $ 4.48 Annualized Expense Ratio .. 0.83% 1.24% 1.31% 2.04% 1.08% 0.95% 0.88% MID-CAP BALANCED VALUE SERVICE CLASS FUND FUND** - ------------- --------- --------- Beginning Account Value 5/1/07 $1,000.00 $1,000.00 Ending Account Value 10/31/07 $1,019.86 $1,017.64 Expenses Paid During Period 5/1/07-10/31/07 * $ 5.40 $ 7.63 Annualized Expense Ratio 0.83% 1.24% LARGE CAP EMERGING BALANCED GROWTH MID-CAP MARKETS HIGH YIELD AMR CLASS FUND FUND VALUE FUND FUND BOND FUND** - --------- --------- --------- ---------- --------- ----------- Beginning Account Value 5/1/07 ................. $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 Ending Account Value 10/31/07 ............... $1,023.64 $1,022.13 $1,021.63 $1,017.80 $1,022.13 Expenses Paid During Period 5/1/07-10/31/07 * ...... $ 1.58 $ 3.11 $ 3.62 $ 7.48 $ 3.11 Annualized Expense Ratio .. 0.31% 0.61% 0.71% 1.47% 0.61% * 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. ** Beginning Account Value for the Mid-Cap Value Fund - Service Class is as of 6/29/07 and for the High-Yield Bond Fund - AMR Class is as of 9/4/07 (inception dates of the Classes). Expenses are equal to the Class' annualized ratios for the period multiplied by the average account value for the period multiplied by the number derived by dividing the number of days in the period (125) and (58), respectively by days in the year (365). See accompanying notes 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, 2007, and the related statements 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 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 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, 2007, 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, 2007, the results of their operations for the year then ended, the changes in their 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 21, 2007 See accompanying notes 26 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 57.50% CONSUMER DISCRETIONARY - 6.17% HOTELS, RESTAURANTS & LEISURE - 1.00% Carnival Corp. + .................................. 155,300 $ 7,451 Wyndham Worldwide Corp. ........................... 127,200 4,176 ---------- 11,627 ---------- HOUSEHOLD DURABLES - 1.53% Centex Corp. + .................................... 168,200 4,215 Fortune Brands, Inc. .............................. 54,200 4,541 Koninklijke (Royal) Philips Electronics NV ........ 31,931 1,320 Lennar Corp. + .................................... 107,000 2,445 Newell Rubbermaid, Inc. ........................... 60,400 1,761 Pulte Homes, Inc. + ............................... 234,100 3,474 ---------- 17,756 ---------- MEDIA - 1.16% CBS Corp. ......................................... 83,900 2,408 Citadel Broadcasting Corp. + ...................... 6,427 28 Idearc, Inc. + .................................... 54,600 1,473 Interpublic Group of Cos., Inc. ## + .............. 361,700 3,744 R.H. Donnelley Corp. ## + ......................... 49,700 2,726 Walt Disney Co. Ltd. .............................. 89,400 3,096 ---------- 13,475 ---------- MULTILINE RETAIL - 1.34% Macy's, Inc. ...................................... 121,154 3,880 Target Corp. ...................................... 65,500 4,019 Wal-Mart Stores, Inc. ............................. 170,000 7,686 ---------- 15,585 ---------- SPECIALTY RETAIL - 1.14% Gap, Inc. ......................................... 202,300 3,824 Home Depot, Inc. .................................. 278,750 8,783 Liz Claiborne, Inc. + ............................. 23,600 672 ---------- 13,279 ---------- TOTAL CONSUMER DISCRETIONARY ......................... 71,722 ---------- CONSUMER STAPLES - 3.81% BEVERAGES - 0.54% Diageo plc, ADR ................................... 68,200 6,257 ---------- FOOD & DRUG RETAILING - 0.18% Safeway, Inc. ..................................... 60,100 2,043 ---------- FOOD PRODUCTS - 0.60% General Mills, Inc. ............................... 24,200 1,397 Kraft Foods, Inc. ................................. 168,045 5,615 ---------- 7,012 ---------- SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) TOBACCO - 2.49% Altria Group, Inc. ................................ 164,700 $ 12,012 Imperial Tobacco Group plc, ADR ................... 121,900 12,390 UST, Inc. + ....................................... 85,100 4,537 ---------- 28,939 ---------- TOTAL CONSUMER STAPLES ............................... 44,251 ---------- ENERGY - 5.19% OIL & GAS - 5.19% Chevron Corp. ..................................... 92,028 8,421 ConocoPhillips .................................... 240,976 20,473 Devon Energy Corp. ................................ 111,100 10,377 Duke Energy Corp. ................................. 224,700 4,308 Occidental Petroleum Corp. ........................ 158,200 10,924 Royal Dutch Shell plc, ADR ........................ 46,900 4,092 Sunoco, Inc. ...................................... 23,700 1,744 ---------- TOTAL ENERGY ......................................... 60,339 ---------- FINANCIALS - 15.72% BANKS - 4.68% Bank of America Corp. ............................. 454,996 21,967 Bank of New York Mellon Corp. ..................... 77 4 Comerica, Inc. .................................... 33,500 1,564 First Horizon National Corp. + .................... 29,500 769 KeyCorp + ......................................... 29,200 831 National City Corp. ............................... 75,300 1,826 SunTrust Banks, Inc. .............................. 18,500 1,343 U.S. Bancorp ...................................... 126,360 4,190 UnionBanCal Corp. ................................. 15,900 859 Wachovia Corp. .................................... 164,100 7,504 Washington Mutual, Inc. + ......................... 317,000 8,838 Wells Fargo & Co. ................................. 138,000 4,693 ---------- 54,388 ---------- DIVERSIFIED FINANCIALS - 6.24% Bear Stearns Cos., Inc. + ......................... 80,600 9,156 Capital One Financial Corp. ....................... 31,000 2,033 Citigroup, Inc. ................................... 450,042 18,857 Discover Financial Services ....................... 30,600 591 Federal Home Loan Mortgage Corp. .................. 89,700 4,685 Federal National Mortgage Association ............. 46,700 2,664 Goldman Sachs Group, Inc. ......................... 21,100 5,231 JP Morgan Chase & Co. ............................. 299,534 14,078 Merrill Lynch & Co., Inc. ......................... 49,400 3,261 Morgan Stanley Dean Witter & Co. .................. 62,600 4,211 SLM Corp. ......................................... 165,200 7,791 ---------- 72,558 ---------- See accompanying notes 27 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) INSURANCE - 4.61% ACE Ltd. .......................................... 87,300 $ 5,291 Allstate Corp. .................................... 28,800 1,509 American International Group, Inc. ................ 145,400 9,178 Conseco, Inc. ## .................................. 100,900 1,593 Genworth Financial, Inc. .......................... 178,500 4,873 Hartford Financial Services Group, Inc. ........... 16,800 1,630 MetLife, Inc. ..................................... 136,080 9,369 Travelers Companies, Inc. ......................... 161,800 8,448 UnumProvident Corp. + ............................. 106,300 2,481 XL Capital Ltd. ................................... 128,100 9,217 ---------- 53,589 ---------- REAL ESTATE - 0.19% St. Joe Co. + ..................................... 63,400 2,147 ---------- TOTAL FINANCIALS ..................................... 182,682 ---------- HEALTH CARE - 5.82% HEALTH CARE EQUIPMENT & SUPPLIES - 0.87% Baxter International, Inc. ........................ 119,300 7,159 Covidien Ltd. ..................................... 71,525 2,976 ---------- 10,135 ---------- HEALTH CARE PROVIDERS & SERVICES - 1.19% Cigna Corp. ....................................... 104,100 5,464 Omnicare, Inc. + .................................. 6,800 201 UnitedHealth Group, Inc. .......................... 56,600 2,782 WellPoint, Inc. ## ................................ 68,300 5,411 ---------- 13,858 ---------- PHARMACEUTICALS - 3.76% Amgen, Inc. ## .................................... 11,400 662 AstraZeneca plc, ADR .............................. 53,900 2,646 Bristol-Myers Squibb Co. .......................... 342,900 10,284 Eli Lilly & Co. ................................... 108,200 5,859 Johnson & Johnson ................................. 54,400 3,545 Merck & Co., Inc. ................................. 28,900 1,684 Pfizer, Inc. ...................................... 629,400 15,490 Wyeth Corp. ....................................... 72,100 3,506 ---------- 43,676 ---------- TOTAL HEALTH CARE .................................... 67,669 ---------- INDUSTRIALS - 7.38% AEROSPACE & DEFENSE - 1.69% Boeing Co. ........................................ 60,700 5,984 Northrop Grumman Corp. ............................ 52,500 4,390 Raytheon Co. ...................................... 78,900 5,019 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) United Technologies Corp. ......................... 56,100 $ 4,297 ---------- 19,690 ---------- AIR FREIGHT & COURIERS - 0.22% FedEx Corp. ....................................... 24,500 2,532 ---------- INDUSTRIAL CONGLOMERATES - 3.20% 3M Co. ............................................ 54,900 4,741 General Electric Co. .............................. 237,700 9,784 Honeywell International, Inc. ..................... 221,500 13,381 Textron, Inc. ..................................... 72,200 4,997 Tyco International Ltd. ........................... 104,025 4,282 ---------- 37,185 ---------- MACHINERY - 1.76% Caterpillar, Inc. ................................. 75,900 5,663 Flowserve Corp. ................................... 17,600 1,389 Illinois Tool Works, Inc. + ....................... 143,900 8,240 ITT Industries, Inc. .............................. 77,000 5,153 ---------- 20,445 ---------- TRANSPORTATION INFRASTRUCTURE - 0.51% Burlington Northern Santa Fe Corp. ................ 68,900 6,005 ---------- TOTAL INDUSTRIALS .................................... 85,857 ---------- INFORMATION TECHNOLOGY - 5.87% COMMUNICATIONS EQUIPMENT - 0.32% Nokia Corp., ADR .................................. 93,500 3,714 ---------- COMPUTERS & PERIPHERALS - 2.30% Hewlett-Packard Co. ............................... 230,800 11,928 International Business Machines Corp. ............. 126,900 14,735 ---------- 26,663 ---------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.72% Intel Corp. ....................................... 124,300 3,343 Tyco Electronics Ltd. ............................. 141,625 5,052 ---------- 8,395 ---------- IT CONSULTING & SERVICES - 0.70% Electronic Data Systems Corp. ..................... 378,000 8,161 ---------- SOFTWARE - 1.83% CA, Inc. .......................................... 371,274 9,820 Microsoft Corp. ................................... 235,700 8,676 Oracle Corp. ## ................................... 125,100 2,774 ---------- 21,270 ---------- TOTAL INFORMATION TECHNOLOGY ......................... 68,203 ---------- See accompanying notes 28 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) MATERIALS - 1.56% CHEMICALS - 1.56% Air Products & Chemicals, Inc. .................... 31,200 $ 3,053 Dow Chemical Co. .................................. 50,100 2,256 E. I. du Pont de Nemours & Co. .................... 154,700 7,659 Eastman Chemical Co. + ............................ 40,600 2,704 PPG Industries, Inc. .............................. 32,600 2,437 ---------- TOTAL MATERIALS ...................................... 18,109 ---------- TELECOMMUNICATION SERVICES - 2.70% DIVERSIFIED TELECOMMUNICATION - 2.70% AT&T, Inc. ........................................ 400,277 16,728 Verizon Communications, Inc. ...................... 318,028 14,651 ---------- TOTAL TELECOMMUNICATION SERVICES ..................... 31,379 ---------- UTILITIES - 3.28% ELECTRIC UTILITIES - 2.75% CenterPoint Energy, Inc. + ........................ 143,000 2,397 Dominion Resources, Inc. .......................... 56,800 5,205 Entergy Corp. ..................................... 76,800 9,206 Exelon Corp. ...................................... 137,100 11,349 FPL Group, Inc. ................................... 31,600 2,162 Public Service Enterprise Group, Inc. ............. 17,600 1,682 ---------- 32,001 ---------- GAS UTILITIES - 0.53% Spectra Energy Corp. .............................. 236,100 6,134 ---------- TOTAL UTILITIES ...................................... 38,135 ---------- TOTAL COMMON STOCKS .................................. 668,346 ---------- PAR AMOUNT ---------- CORPORATE OBLIGATIONS - 9.85% AEROSPACE & DEFENSE - 0.05% Raytheon Co., 5.375%, Due 4/1/2013 ........................... $ 550 551 ---------- BANKS - 1.32% Banco Popular North America, Inc., 4.25%, Due 4/1/2008 ............................ 500 498 Bank of America Corp., 5.375%, Due 8/15/2011 .......................... 570 575 5.375%, Due 6/15/2014 .......................... 595 593 7.80%, Due 9/15/2016 ........................... 1,000 1,118 6.00%, Due 9/1/2017 ............................ 600 612 Bank One Corp., 5.90%, Due 11/15/2011 .......................... 1,225 1,253 4.90%, Due 4/30/2015 ........................... 450 428 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Citigroup, Inc., 5.125%, Due 2/14/2011 .......................... $ 2,700 $ 2,702 Credit Suisse First Boston, 6.50%, Due 5/1/2008 + ++ ....................... 750 755 ING Bank, NV, 5.125%, Due 5/1/2015 ++ ........................ 450 434 JP Morgan Chase & Co., 6.75%, Due 2/1/2011 ............................ 1,350 1,413 National City Bank, 4.50%, Due 3/15/2010 ........................... 1,500 1,484 Synovus Financial Corp., 4.875%, Due 2/15/2013 .......................... 450 443 Wachovia Corp., 5.30%, Due 10/15/2011 .......................... 500 500 5.70%, Due 8/1/2013 ............................ 405 408 Washington Mutual Finance Corp., 6.875%, Due 5/15/2011 .......................... 660 696 Washington Mutual, Inc., 8.25%, Due 4/1/2010 ............................ 500 525 4.625%, Due 4/1/2014 ........................... 1,050 911 ---------- 15,348 ---------- BASIC MATERIALS - 0.03% Weyerhaeuser Co., 5.95%, Due 11/1/2008 ........................... 340 342 ---------- COMMUNICATIONS - 0.77% Comcast Cable Communications Holdings, Inc., 8.375%, Due 3/15/2013 .......................... 1,050 1,185 Comcast Corp., 5.30%, Due 1/15/2014 ........................... 710 698 5.875%, Due 2/15/2018 .......................... 500 499 6.45%, Due 3/15/2037 ........................... 2,630 2,651 Time Warner Cable, Inc., 5.85%, Due 5/1/2017 ............................ 1,180 1,170 Viacom, Inc., 6.875%, Due 4/30/2036 .......................... 2,685 2,724 ---------- 8,927 ---------- CONSUMER DISCRETIONARY - 0.16% Costco Wholesale Corp., 5.50%, Due 3/15/2017 ........................... 415 408 Wal-Mart Stores, Inc., 4.55%, Due 5/1/2013 ............................ 790 772 7.55%, Due 2/15/2030 ........................... 550 642 ---------- 1,822 ---------- See accompanying notes 29 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) CONSUMER STAPLES - 0.09% Diageo Capital PLC, 5.75%, Due 10/23/2017 ............................. $ 440 $ 438 PepsiCo, Inc., 5.15%, Due 5/15/2012 .............................. 670 679 ---------- 1,117 ---------- ELECTRIC/GAS - 0.06% Kraft Foods, Inc., 6.50%, Due 8/11/2017 .............................. 655 687 ---------- ELECTRONIC COMPONENTS - 0.12% Tyco Electronics Group SA, 6.55%, Due 10/1/2017 ++ ........................... 845 862 7.125%, Due 10/1/2037 ++ .......................... 500 523 ---------- 1,385 ---------- ENERGY - 0.36% Apache Corp., 5.25%, Due 4/15/2013 .............................. 1,055 1,057 Canadian Natural Resources Ltd., 6.70%, Due 7/15/2011 .............................. 410 430 5.70%, Due 5/15/2017 .............................. 520 515 6.25%, Due 3/15/2038 .............................. 500 494 EOG Resources, Inc., 4.75%, Due 3/15/2014 ++ ........................... 550 539 5.875%, Due 9/15/2017 ............................. 375 383 Marathon Oil Corp., 6.60%, Due 10/1/2037 .............................. 240 250 Weatherford International, Inc., 5.95%, Due 6/15/2012 ++ ........................... 510 520 ---------- 4,188 ---------- FINANCE - 1.97% American General Finance Corp., 4.875%, Due 5/15/2010 ............................. 500 497 4.00%, Due 3/15/2011 .............................. 1,245 1,189 Ameriprise Financial, Inc., 5.35%, Due 11/15/2010 ............................. 975 983 Capital One Financial Corp., 5.70%, Due 9/15/2011 .............................. 490 485 Federal National Mortgage Association, 6.00%, Due 4/18/2036 + ............................ 6,680 6,872 General Electric Capital Corp., 4.375%, Due 3/3/2012 .............................. 995 966 5.65%, Due 6/9/2014 ............................... 1,050 1,070 Goldman Sachs Group, Inc., 4.75%, Due 7/15/2013 .............................. 550 527 6.25%, Due 9/1/2017 ............................... 550 559 6.75%, Due 10/1/2037 .............................. 1,237 1,242 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) HSBC Finance Corp., 5.25%, Due 1/14/2011 .............................. $ 2,150 $ 2,139 International Lease Finance Corp., 6.375%, Due 3/15/2009 ............................. 1,025 1,042 5.75%, Due 6/15/2011 .............................. 475 480 Lehman Brothers Holdings, Inc., 4.25%, Due 1/27/2010 .............................. 450 436 6.20%, Due 9/26/2014 .............................. 150 151 6.875%, Due 7/17/2037 ............................. 2,695 2,670 Merrill Lynch & Co., Inc., 6.11%, Due 1/29/2037 .............................. 560 515 Wells Fargo & Co., 5.25%, Due 10/23/2012 ............................. 1,040 1,042 ---------- 22,865 ---------- HEALTH CARE - 0.03% Covidien International Finance SA, 5.45%, Due 10/15/2012 ++ .......................... 360 361 ---------- HEALTH CARE EQUIPMENT & SUPPLIES - 0.01% 6.00%, Due 10/15/2017 ++ .......................... 180 182 ---------- INDUSTRIALS - 1.49% Caterpillar Financial Services Corp., 4.15%, Due 1/15/2010 .............................. 500 493 Con-way, Inc., 8.875%, Due 5/1/2010 .............................. 1,850 1,999 Covidien International Finance SA, 6.55%, Due 10/15/2037 ++ .......................... 578 589 CRH America, Inc., 6.00%, Due 9/30/2016 .............................. 985 970 Daimler Finance NA LLC, 7.75%, Due 1/18/2011 .............................. 1,000 1,076 5.875%, Due 3/15/2011 ............................. 450 460 5.75%, Due 9/8/2011 ............................... 550 560 John Deere Capital Corp., 4.125%, Due 1/15/2010 ............................. 1,250 1,231 5.40%, Due 10/17/2011 ............................. 655 662 Kraft Foods, Inc., 7.00%, Due 8/11/2037 .............................. 1,990 2,162 Masco Corp., 6.125%, Due 10/3/2016 ............................. 430 427 Nissan Motor Acceptance Corp., 5.625%, Due 3/14/2011 ++ .......................... 500 508 Norfolk Southern Corp., 8.625%, Due 5/15/2010 ............................. 500 541 Starbucks Corp., 6.25%, Due 8/15/2017 .............................. 400 408 See accompanying notes 30 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Target Corp., 6.50%, Due 10/15/2037 ............................. $ 445 $ 451 Unilever Capital Corp., 7.125%, Due 11/1/2010 ............................. 2,000 2,133 Union Pacific Corp., 3.875%, Due 2/15/2009 ............................. 775 763 6.50%, Due 4/15/2012 .............................. 450 470 Wal-Mart Stores, Inc., 6.50%, Due 8/15/2037 .............................. 1,340 1,409 ---------- 17,312 ---------- INSURANCE - 0.98% Aegon Funding Corp., 5.75%, Due 12/15/2020 ............................. 450 451 American International Group, Inc., 6.25%, Due 5/1/2036 ............................... 550 562 ASIF Global Financing, 3.90%, Due 10/22/2008 ++ .......................... 700 691 Hartford Financial Services Group, Inc., 5.25%, Due 10/15/2011 ............................. 1,150 1,144 5.375%, Due 3/15/2017 ............................. 685 669 John Hancock Global Funding II, 7.90%, Due 7/2/2010 ++ ............................ 1,500 1,609 Liberty Mutual Insurance Co., 7.875%, Due 10/15/2026 + ++ ....................... 1,500 1,693 Lincoln National Corp., 4.75%, Due 2/15/2014 .............................. 200 192 MetLife, Inc., 5.375%, Due 12/15/2012 ............................ 660 665 5.00%, Due 6/15/2015 .............................. 485 463 6.375%, Due 6/15/2034 ............................. 525 531 Metropolitan Life Global Funding I, 4.625%, Due 8/19/2010 ++ .......................... 1,200 1,197 Prudential Financial, Inc., 4.50%, Due 7/15/2013 .............................. 550 524 5.10%, Due 9/20/2014 .............................. 690 666 Willis North America, Inc., 6.20%, Due 3/28/2017 .............................. 360 363 ---------- 11,420 ---------- PHARMACEUTICALS - 0.55% Abbott Laboratories, 5.60%, Due 5/15/2011 .............................. 305 312 Amgen, Inc., 4.00%, Due 11/18/2009 ............................. 540 531 AstraZeneca plc, 5.40%, Due 9/15/2012 .............................. 980 989 6.45%, Due 9/15/2037 .............................. 2,480 2,613 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Hospira, Inc., 6.05%, Due 3/30/2017 .............................. $ 360 $ 359 Schering-Plough Corp., 6.75%, Due 12/1/2033 .............................. 600 642 Wyeth Corp., 5.50%, Due 2/1/2014 ............................... 935 938 ---------- 6,384 ---------- REAL ESTATE - 0.38% Equity Residential, 5.125%, Due 3/15/2016 ............................. 895 839 iStar Financial, Inc., 5.85%, Due 3/15/2017 + ............................ 750 669 ProLogis Trust, 7.10%, Due 4/15/2008 .............................. 470 472 5.50%, Due 4/1/2012 ............................... 450 445 5.625%, Due 11/15/2016 ............................ 450 432 Simon Property Group LP, 6.375%, Due 11/15/2007 ............................ 400 400 5.375%, Due 6/1/2011 .............................. 450 449 5.75%, Due 12/1/2015 .............................. 710 696 ---------- 4,402 ---------- TECHNOLOGY - 0.10% Cisco Systems, Inc., 5.25%, Due 2/22/2011 .............................. 450 455 5.50%, Due 2/22/2016 .............................. 725 728 ---------- 1,183 ---------- TELEPHONE - 0.58% America Movil, S.A. de C.V., 6.375%, Due 3/1/2035 .............................. 550 565 AT&T Wireless Services, Inc., 7.875%, Due 3/1/2011 .............................. 550 596 AT&T, Inc., 5.10%, Due 9/15/2014 .............................. 625 614 5.625%, Due 6/15/2016 ............................. 1,140 1,151 6.80%, Due 5/15/2036 .............................. 225 246 Cingular Wireless Services, Inc., 8.75%, Due 3/1/2031 ............................... 445 575 Deutsche Telekom AG, 8.00%, Due 6/15/2010 .............................. 380 407 Nextel Communications, Inc., 6.875%, Due 10/31/2013 ............................ 615 617 Telecom Italia S.p.A., 4.00%, Due 11/15/2008 ............................. 580 573 Telefonica Emisiones SAU, 5.984%, Due 6/20/2011 ............................. 380 390 Verizon Communications, Inc., 5.50%, Due 4/1/2017 + ............................. 500 500 See accompanying notes 31 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Vodafone Group plc, 6.15%, Due 2/27/2037 .............................. $ 500 $ 491 ---------- 6,725 ---------- UTILITIES - 0.80% American Water Capital Corp., 6.593%, Due 10/15/2037 ++ ......................... 1,492 1,516 Columbus Southern Power Co., 5.50%, Due 3/1/2013 ............................... 830 827 Dominion Resources, Inc., Series A, 5.60%, Due 11/15/2016 ...................... 500 491 Duke Energy Indiana, Inc., 6.05%, Due 6/15/2016 .............................. 520 530 FPL Group Capital, Inc., 5.625%, Due 9/1/2011 .............................. 1,175 1,195 MidAmerican Energy Holdings Co., 5.875%, Due 10/1/2012 ............................. 1,070 1,096 6.125%, Due 4/1/2036 .............................. 550 544 Public Service Enterprise Group, Inc., 6.95%, Due 6/1/2012 ............................... 925 984 Southern Power Co., 6.25%, Due 7/15/2012 .............................. 690 712 Virginia Electric and Power Co., 6.00%, Due 5/15/2037 .............................. 360 354 Xcel Energy, Inc., 5.613%, Due 4/1/2017 ++ ........................... 1,089 1,073 ---------- 9,322 ---------- TOTAL CORPORATE OBLIGATIONS .......................... 114,523 ---------- NON-AGENCY MORTGAGE-BACKED OBLIGATIONS - 2.01% COMMERCIAL MORTGAGE-BACKED SECURITY - 1.12% Banc of America Commercial Mortgage, Inc., 2005-6, 5.001%, Due 9/10/2047 ..................... 758 757 2007-2 A2, 5.634%, Due 4/10/2049 .................. 1,100 1,109 Bear Stearns Commercial Mortgage Securities, Inc., 2006-T22 A2, 5.465%, Due 4/12/2038 ................ 590 595 2006-PW13 A4, 5.54%, Due 9/11/2041 ................ 1,260 1,253 2004-PWR5 A4, 4.831%, Due 7/11/2042 ............... 2,010 1,954 2005-T20 A2, 5.127%, Due 10/12/2042 ............... 875 873 Citigroup Commercial Mortgage Trust, 2004-C2 A3, 4.38%, Due 10/15/2041 ................. 995 967 General Electric Capital Commercial Mortgage Corp., 2003-C2 A2, 4.17%, Due 7/10/2037 .................. 430 425 JP Morgan Chase Commercial Mortgage Securities Corp., 2004-CBX A4, 4.529%, Due 1/12/2037 ................ 555 543 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) 2005-LDP3 A1, 4.655%, Due 8/15/2042 ............... $ 285 $ 283 2005-LDP4 A1, 4.613%, Due 10/15/2042 .............. 113 112 2005-LDP1 A2, 4.625%, Due 3/15/2046 ............... 1,035 1,023 2007-CB19 A4, 5.747%, Due 2/12/2049 ............... 800 806 2007-CB20 A2, 5.629%, Due 2/12/2051 ............... 1,050 1,056 LB-UBS Commercial Mortgage Trust, 2004-C1 A4, 5.424%, Due 2/15/2040 ................. 750 737 Wachovia Bank Commercial Mortgage Trust, 2007-C32 A2, 5.736%, Due 6/15/2049 ................ 530 536 ---------- 13,029 ---------- WHOLE LOAN COLLATERALIZED MORTGAGE OBLIGATIONS - 0.89% Banc of America Mortgage Securities, Inc., 2004-8 3A1, 5.25%, Due 10/25/2019 ................. 1,158 1,142 Chase Mortgage Finance Corp., 2006-A1 A1, 6.045%, Due 9/25/2036 # ............... 1,612 1,619 Citicorp Mortgage Securities, Inc., 2006-3 2A1, 5.50%, Due 6/25/2021 .................. 1,515 1,502 Countrywide Home Loan Mortgage Pass Through Trust, 2007-18 A1, 6.00%, Due 9/25/2037 .................. 1,613 1,603 Prime Mortgage Trust, 2005-2, 5.25%, Due 7/25/2020 ...................... 1,938 1,915 Wells Fargo Mortgage Backed Securities Trust, 2006-11 A8, 6.00%, Due 9/25/2036 .................. 956 948 2007-7 A1, 6.00%, Due 6/25/2037 ................... 1,578 1,565 ---------- 10,294 ---------- TOTAL NON-AGENCY MORTGAGE-BACKED OBLIGATIONS ......... 23,323 ---------- ASSET-BACKED SECURITIES - 0.67% American Express Credit Account Master Trust, 2006-2 A, 5.35%, Due 1/15/2014 .................... 2,150 2,182 Capital Auto Receivables Asset Trust, 2006-SN1A A4A, 5.32%, Due 3/20/2010 ++ ............ 1,500 1,506 Capital One Multi-Asset Execution Trust, 2006-A10 A10, 5.15%, Due 6/15/2014 ................ 1,600 1,613 Chase Issuance Trust, 2007-15 A, 4.96%, Due 9/17/2012 ................... 1,515 1,518 Volkswagen Auto Loan Enhanced Trust, 2005-1 A4, 4.86%, Due 4/20/2012 ................... 1,000 1,000 ---------- TOTAL ASSET-BACKED SECURITIES ........................ 7,819 ---------- U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS - 7.52% FEDERAL HOME LOAN MORTGAGE CORPORATION - 3.64% 5.50%, Due 8/1/2017 .................................. 71 71 See accompanying notes 32 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) 5.50%, Due 9/1/2017 ............................... $ 324 $ 326 5.50%, Due 6/1/2018 ............................... 148 149 5.50%, Due 10/1/2018 .............................. 1,246 1,252 4.50%, Due 3/1/2019 ............................... 925 896 5.00%, Due 10/1/2020 .............................. 1,301 1,283 5.50%, Due 5/1/2021 ............................... 785 786 5.00%, Due 7/1/2021 ............................... 1,864 1,837 5.50%, Due 9/1/2021 ............................... 400 401 5.00%, Due 11/1/2021 .............................. 694 684 5.50%, Due 4/1/2022 ............................... 425 426 5.00%, Due 5/1/2022 ............................... 631 622 6.50%, Due 5/1/2029 ............................... 64 66 6.50%, Due 6/1/2029 ............................... 12 12 6.50%, Due 7/1/2029 ............................... 205 211 6.00%, Due 8/1/2029 ............................... 110 112 5.00%, Due 8/1/2033 ............................... 1,713 1,648 5.50%, Due 2/1/2034 ............................... 1,703 1,680 5.00%, Due 3/1/2034 ............................... 1,344 1,293 6.00%, Due 6/1/2034 ............................... 1,027 1,036 6.00%, Due 8/1/2034 ............................... 933 941 5.00%, Due 8/1/2035 ............................... 1,200 1,153 5.00%, Due 9/1/2035 ............................... 1,713 1,646 5.50%, Due 11/1/2036 .............................. 1,737 1,710 5.897%, Due 12/1/2036 # ........................... 2,088 2,108 5.851%, Due 1/1/2037 # ............................ 2,676 2,705 5.783%, Due 3/1/2037 # ............................ 1,489 1,502 5.267%, Due 4/1/2037 # ............................ 1,789 1,781 5.50%, Due 4/1/2037 ............................... 1,965 1,934 5.50%, Due 5/1/2037 ............................... 6,423 6,324 6.00%, Due 7/1/2037 ............................... 4,422 4,451 6.50%, Due 8/1/2037 ............................... 576 590 6.00%, Due 8/1/2037 ............................... 619 623 ---------- 42,259 ---------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 3.36% 5.50%, Due 2/1/2014 ............................... 490 492 6.00%, Due 4/1/2016 ............................... 375 382 5.00%, Due 12/1/2017 .............................. 954 944 5.00%, Due 6/1/2018 ............................... 2,001 1,976 4.50%, Due 9/1/2018 ............................... 1,514 1,468 5.50%, Due 12/1/2018 .............................. 97 97 4.00%, Due 8/1/2020 ............................... 1,121 1,057 5.50%, Due 4/1/2021 ............................... 1,211 1,214 6.00%, Due 1/1/2029 ............................... 582 591 5.50%, Due 11/1/2033 .............................. 2,291 2,264 5.00%, Due 3/1/2034 ............................... 1,774 1,707 4.50%, Due 9/1/2034 ............................... 779 727 6.50%, Due 3/1/2035 ............................... 290 298 5.00%, Due 11/1/2035 .............................. 874 840 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) 5.50%, Due 12/1/2035 .............................. $ 1,439 $ 1,420 5.50%, Due 12/1/2035 .............................. 438 432 5.50%, Due 1/1/2036 ............................... 1,557 1,536 5.50%, Due 1/1/2036 ............................... 3,244 3,200 5.50%, Due 2/1/2036 ............................... 1,058 1,043 5.00%, Due 2/1/2036 ............................... 873 839 5.50%, Due 3/1/2036 ............................... 377 372 5.50%, Due 4/1/2036 ............................... 2,558 2,523 6.00%, Due 8/1/2036 ............................... 679 684 6.00%, Due 9/1/2036 ............................... 1,212 1,221 6.00%, Due 9/1/2036 ............................... 234 236 6.00%, Due 10/1/2036 .............................. 1,461 1,472 6.00%, Due 11/1/2036 .............................. 2,446 2,464 5.50%, Due 12/1/2036 .............................. 1,979 1,950 6.00%, Due 2/1/2037 ............................... 763 769 5.00%, Due 5/1/2037 ............................... 641 616 6.50%, Due 10/1/2037 .............................. 1,584 1,611 6.50%, Due TBA .................................... 2,570 2,630 ---------- 39,075 ---------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.52% 7.00%, Due 12/15/2025 ............................. 345 363 4.201%, Due 8/16/2026 ............................. 831 818 6.50%, Due 8/15/2027 .............................. 415 429 6.50%, Due 11/15/2027 ............................. 412 425 7.50%, Due 12/15/2028 ............................. 308 326 5.50%, Due 7/15/2033 .............................. 1,085 1,080 6.00%, Due 12/15/2033 ............................. 1,149 1,166 5.50%, Due 2/20/2034 .............................. 1,442 1,426 ---------- 6,033 ---------- TOTAL U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS ........ 87,367 ---------- U.S. AGENCY OBLIGATIONS - 6.07% FEDERAL HOME LOAN BANK - 0.45% 5.00%, Due 10/16/2009 + ........................... 2,280 2,290 5.25%, Due 11/3/2009 .............................. 1,360 1,370 4.50%, Due 9/16/2013 + ............................ 1,600 1,580 ---------- 5,240 ---------- FEDERAL HOME LOAN MORTGAGE CORPORATION - 3.91% 5.25%, Due 2/24/2011 + ............................ 2,860 2,886 5.875%, Due 3/21/2011 + ........................... 610 637 5.125%, Due 4/18/2011 + ........................... 3,700 3,780 4.50%, Due 1/15/2015 + ............................ 34,290 33,609 5.40%, Due 3/17/2021 .............................. 2,740 2,779 6.00%, Due 12/15/2031 ............................. 1,665 1,684 ---------- 45,375 ---------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 1.71% 4.704%, Due 11/13/2007 + .......................... 2,570 2,566 See accompanying notes 33 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) 5.125%, Due 1/2/2014 + ............................ $ 820 $ 828 5.375%, Due 6/12/2017 + ........................... 2,650 2,736 6.25%, Due 5/15/2029 + ............................ 12,200 13,762 ---------- 19,892 ---------- TOTAL U.S. AGENCY OBLIGATIONS ........................ 70,507 ---------- U.S. TREASURY OBLIGATIONS - 10.75% 9.125%, Due 5/15/2018 ............................. 1,750 2,411 7.875%, Due 2/15/2021 + ........................... 1,200 1,570 6.25%, Due 8/15/2023 + ............................ 1,400 1,625 6.875%, Due 8/15/2025 ............................. 1,580 1,969 5.25%, Due 11/15/2028 + ........................... 1,750 1,856 5.25%, Due 2/15/2029 + ............................ 25,630 27,180 5.375%, Due 2/15/2031 + ........................... 1,675 1,815 4.75%, Due 2/15/2037 + ............................ 3,355 3,353 4.625%, Due 3/31/2008 + ........................... 25,325 25,378 4.875%, Due 8/15/2009 + ........................... 3,560 3,615 3.50%, Due 11/15/2009 + ........................... 5,850 5,804 4.875%, Due 4/30/2011 + ........................... 6,550 6,731 4.50%, Due 3/31/2012 + ............................ 4,760 4,833 4.125%, Due 8/31/2012 + ........................... 14,265 14,251 4.75%, Due 5/15/2014 + ............................ 10,740 11,038 4.125%, Due 5/15/2015 + ........................... 4,150 4,091 4.75%, Due 8/15/2017 + ............................ 7,220 7,379 ---------- TOTAL U.S. TREASURY OBLIGATIONS ...................... 124,899 ---------- SHARES ---------- SHORT TERM INVESTMENTS - 5.38% American Beacon Money Market Select Fund ** ....... 57,101,907 57,102 PAR AMOUNT ---------- United States Treasury Bill, 3.873%, Due 12/6/2007 * ........................... $ 5,490 5,467 ---------- TOTAL SHORT TERM INVESTMENTS ......................... 62,569 ---------- SHARES ----------- SECURITIES LENDING COLLATERAL - 20.67% American Beacon Cash Plus Trust ** ................ 173,236,788 173,237 American Beacon Money Market Select Fund ** ....... 66,952,904 66,953 ---------- TOTAL SECURITIES LENDING COLLATERAL .................. 240,190 ---------- TOTAL INVESTMENTS 120.42% - (COST $1,258,229) ........ 1,399,543 LIABILITIES, NET OF OTHER ASSETS - (20.42%) .......... (237,306) ---------- TOTAL NET ASSETS - 100.00% ........................... $1,162,237 ========== See accompanying notes 34 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 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, 2007. ++ 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 $14,558 or 1.25% 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. ** The Fund/Trust is affiliated by having the same investment advisor. * At October 31, 2007, 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 .... 773 Dec 2007 $60,097 $2,014 ======= ====== See accompanying notes 35 AMERICAN BEACON LARGE CAP GROWTH FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 94.93% CONSUMER DISCRETIONARY - 13.51% AUTO COMPONENTS - 0.93% Johnson Controls, Inc. + .......................... 21,609 $ 945 ---------- HOTELS, RESTAURANTS & LEISURE - 1.70% Carnival Corp. + .................................. 100 5 Marriott International, Inc. ...................... 1,950 80 McDonald's Corp. .................................. 16,684 996 Wynn Resorts Ltd. + ............................... 1,400 226 Yum! Brands, Inc. + ............................... 10,500 423 ---------- 1,730 ---------- HOUSEHOLD DURABLES - 0.60% Garmin Ltd. + ..................................... 5,100 548 The Toro Co. + .................................... 1,100 61 ---------- 609 ---------- INTERNET & CATALOG RETAIL - 1.06% Amazon.com, Inc. ## + ............................. 7,800 695 eBay, Inc. ## ..................................... 1,900 69 Expedia, Inc. ## + ................................ 9,800 320 ---------- 1,084 ---------- MEDIA - 3.52% CBS Corp. + ....................................... 41,245 1,184 The DIRECTV Group, Inc. ## + ...................... 396 10 Liberty Media Holding Corp. ## .................... 200 25 Omnicom Group, Inc. ............................... 16,708 852 Time Warner, Inc. ................................. 59,900 1,094 Walt Disney Co. Ltd. .............................. 12,200 422 ---------- 3,587 ---------- MULTILINE RETAIL - 2.14% Big Lots, Inc. ## + ............................... 1,800 43 BJ's Wholesale Club, Inc. ## + .................... 800 29 J.C. Penney Company, Inc. + ....................... 10,552 593 Kohl's Corp. ## + ................................. 14,872 818 Nordstrom, Inc. + ................................. 15,938 629 Wal-Mart Stores, Inc. ............................. 1,400 63 ---------- 2,175 ---------- SPECIALTY RETAIL - 3.56% American Eagle Outfitters, Inc. + ................. 31,205 742 AutoNation, Inc. ## + ............................. 6,501 115 Best Buy Company, Inc. + .......................... 18,065 876 GameStop Corp. ## ................................. 5,600 332 Home Depot, Inc. .................................. 2,200 69 Nike, Inc. ........................................ 15,485 1,026 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) RadioShack Corp. + ................................ 22,700 $ 468 ---------- 3,628 ---------- TOTAL CONSUMER DISCRETIONARY ......................... 13,758 ---------- CONSUMER STAPLES - 6.53% BEVERAGES - 2.44% Coca-Cola Co. ..................................... 22,207 1,372 Hansen Natural Corp. ## + ......................... 3,200 218 PepsiCo, Inc. ..................................... 12,200 899 ---------- 2,489 ---------- FOOD & DRUG RETAILING - 1.81% The Kroger Co. .................................... 31,230 918 Sysco Corp. ....................................... 4,900 168 Walgreen Co. + .................................... 19,118 758 ---------- 1,844 ---------- FOOD PRODUCTS - 0.49% General Mills, Inc. ............................... 2,000 115 Tyson Foods, Inc. ................................. 24,100 381 ---------- 496 ---------- HOUSEHOLD PRODUCTS - 0.96% Colgate-Palmolive Co. ............................. 12,880 982 ---------- TOBACCO - 0.83% Altria Group, Inc. ................................ 200 15 UST, Inc. + ....................................... 15,500 826 ---------- 841 ---------- TOTAL CONSUMER STAPLES ............................... 6,652 ---------- ENERGY - 9.37% ENERGY EQUIPMENT & SERVICES - 5.96% Cameron International Corp. ## + .................. 10,147 988 Dresser-Rand Group, Inc. ## ....................... 8,100 313 Global Industries Ltd. ## ......................... 7,700 190 GlobalSantaFe Corp. + ............................. 10,000 810 Grant Prideco, Inc. ## + .......................... 14,661 721 Halliburton Co. ................................... 28,913 1,140 National Oilwell Varco, Inc. ## ................... 13,252 971 Patterson-UTI Energy, Inc. ## + ................... 4,200 84 Smith International, Inc. ......................... 12,750 842 Tidewater, Inc. + ................................. 100 5 ---------- 6,064 ---------- OIL & GAS - 3.41% Devon Energy Corp. ................................ 5,100 476 Exxon Mobil Corp. ................................. 16,800 1,546 Frontier Oil Corp. ................................ 800 37 See accompanying notes 36 AMERICAN BEACON LARGE CAP GROWTH FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Holly Corp. + ..................................... 3,700 $ 232 Murphy Oil Corp. + ................................ 12,878 948 Western Refining, Inc. + .......................... 6,500 238 ---------- 3,477 ---------- TOTAL ENERGY ......................................... 9,541 ---------- FINANCIALS - 8.11% BANKS - 0.21% Bank of New York Mellon Corp. ........................ 4,400 215 ---------- DIVERSIFIED FINANCIALS - 4.90% Discover Financial Services ....................... 7,400 143 Federated Investors, Inc. + ....................... 900 39 Franklin Resources, Inc. .......................... 6,554 850 JP Morgan Chase & Co. ............................. 7,300 343 Mastercard, Inc. + ................................ 2,600 493 Merrill Lynch & Co., Inc. ......................... 10,942 722 Moody's Corp. + ................................... 15,400 673 Morgan Stanley Dean Witter & Co. .................. 11,886 800 State Street Corp. ................................ 11,674 931 ---------- 4,994 ---------- INSURANCE - 1.53% American International Group, Inc. ................ 11,735 741 Prudential Financial, Inc. ........................ 8,485 820 ---------- 1,561 ---------- REAL ESTATE - 1.47% CB Richard Ellis Group, Inc. ## + ................. 14,600 356 General Growth Properties, Inc. ................... 4,200 228 iStar Financial, Inc. + ........................... 2,200 67 Jones Lang LaSalle, Inc. + ........................ 2,200 210 ProLogis .......................................... 7,100 510 Ventas, Inc. ...................................... 1,000 43 Vornado Realty Trust .............................. 700 78 ---------- 1,492 ---------- TOTAL FINANCIALS ..................................... 8,262 ---------- HEALTH CARE - 13.21% BIOTECHNOLOGY - 3.09% Biogen Idec, Inc. ## .............................. 15,100 1,124 Gen-Probe, Inc. ## ................................ 1,200 84 Gilead Sciences, Inc. ## .......................... 39,456 1,823 Invitrogen Corp. ## ............................... 1,300 118 ---------- 3,149 ---------- HEALTH CARE EQUIPMENT & SUPPLIES - 1.15% Becton, Dickinson and Co. ......................... 11,107 927 Kinetic Concepts, Inc. ## + ....................... 1,900 114 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Medtronic, Inc. ................................... 200 $ 9 St. Jude Medical, Inc. ## ......................... 2,500 102 Zimmer Holdings, Inc. ## .......................... 200 14 ---------- 1,166 ---------- HEALTH CARE PROVIDERS & SERVICES - 2.98% AmerisourceBergen Corp. ........................... 18,600 876 Cigna Corp. ....................................... 7,500 394 Express Scripts, Inc. ## .......................... 15,628 986 Health Net, Inc. ## ............................... 200 11 UnitedHealth Group, Inc. .......................... 15,698 771 ---------- 3,038 ---------- PHARMACEUTICALS - 5.99% Abbott Laboratories ............................... 2,000 109 Amgen, Inc. ## .................................... 3,400 197 Eli Lilly & Co. ................................... 18,405 997 Johnson & Johnson ................................. 13,596 886 Medco Health Solutions, Inc. ## ................... 15,300 1,444 Merck & Co., Inc. ................................. 7,600 443 Pfizer, Inc. ...................................... 43,200 1,063 Schering-Plough Corp. ............................. 5,500 168 Watson Pharmaceuticals, Inc. ## + ................. 2,100 64 Wyeth Corp. ....................................... 14,881 724 ---------- 6,095 ---------- TOTAL HEALTH CARE .................................... 13,448 ---------- INDUSTRIALS - 14.69% AEROSPACE & DEFENSE - 4.59% Boeing Co. ........................................ 7,743 763 Lockheed Martin Corp. ............................. 8,793 968 Northrop Grumman Corp. ............................ 11,200 937 Precision Castparts Corp. ......................... 1,600 240 Raytheon Co. ...................................... 12,500 795 Rockwell Collins Inc. ............................. 1,700 127 United Technologies Corp. ......................... 10,972 840 ---------- 4,670 ---------- BUILDING PRODUCTS - 0.08% Masco Corp. + ..................................... 3,400 82 ---------- COMMERCIAL SERVICES & SUPPLIES - 2.29% Apollo Group, Inc. ## ............................. 800 63 ITT Educational Services, Inc. ## ................. 4,700 598 Manpower, Inc. + .................................. 20,718 1,549 Sotheby's + ....................................... 2,200 119 ---------- 2,329 ---------- See accompanying notes 37 AMERICAN BEACON LARGE CAP GROWTH FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) CONSTRUCTION & ENGINEERING - 0.11% McDermott International, Inc. ## .................. 1,800 $ 110 ---------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 2.10% Emerson Electric Co. .............................. 17,806 931 Energizer Holdings, Inc. ## + ..................... 6,400 667 PerkinElmer, Inc. ................................. 1,500 41 Rockwell Automation, Inc. + ....................... 7,300 503 ---------- 2,142 ---------- INDUSTRIAL CONGLOMERATES - 2.56% 3M Co. ............................................ 12,768 1,103 Honeywell International, Inc. ..................... 24,854 1,501 ---------- 2,604 ---------- MACHINERY - 2.52% AGCO Corp. ## + ................................... 13,800 824 Illinois Tool Works, Inc. + ....................... 14,480 829 SPX Corp. ......................................... 1,600 162 Terex Corp. ## + .................................. 10,186 756 ---------- 2,571 ---------- RENTAL AUTO/EQUIPMENT - 0.24% Avis Budget Group, Inc. ## + ...................... 11,700 244 ---------- ROAD & RAIL - 0.14% JB Hunt Transport Services, Inc. + ................ 5,100 141 ---------- TRADING COMPANIES & DISTRIBUTORS - 0.06% Genuine Parts Co. ................................. 1,200 59 ---------- TOTAL INDUSTRIALS .................................... 14,952 ---------- INFORMATION TECHNOLOGY - 23.01% COMMUNICATIONS EQUIPMENT - 3.56% Cisco Systems, Inc. ## ............................ 71,157 2,353 Juniper Networks, Inc. ## ......................... 35,200 1,267 ---------- 3,620 ---------- COMPUTERS & PERIPHERALS - 7.11% Apple Computer, Inc. ## ........................... 3,800 722 Dell, Inc. ## + ................................... 67,918 2,078 Hewlett-Packard Co. ............................... 26,959 1,393 International Business Machines Corp. ............. 11,754 1,365 Lexmark International, Inc. ## + .................. 2,200 92 NCR Corp. ## + .................................... 2,500 69 NVIDIA Corp. ## ................................... 42,807 1,515 ---------- 7,234 ---------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 1.87% Avnet, Inc. ## .................................... 7,700 321 Intel Corp. ....................................... 37,800 1,017 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Riverbed Technology, Inc. ## + .................... 1,500 $ 51 Tyco Electronics Ltd. ............................. 13,700 488 Waters Corp. ## ................................... 400 31 ---------- 1,908 ---------- INTERNET SOFTWARE & SERVICES - 0.36% Google, Inc. ## ................................... 200 141 VeriSign, Inc. ## + ............................... 6,700 229 ---------- 370 ---------- IT CONSULTING & SERVICES - 1.29% Accenture Ltd. + .................................. 31,324 1,223 Tech Data Corp. ## ................................ 2,300 91 ---------- 1,314 ---------- SEMICONDUCTOR EQUIPMENT & PRODUCTS - 2.72% Analog Devices, Inc. .............................. 16,400 549 Lam Research Corp. ## + ........................... 14,020 704 MEMC Electronic Materials, Inc. ## + .............. 13,195 966 National Semiconductor Corp. ## + ................. 2,500 63 Novellus Systems, Inc. ## + ....................... 2,200 63 RF Micro Devices, Inc. ## + ....................... 6,500 40 Texas Instruments, Inc. ........................... 11,700 381 ---------- 2,766 ---------- SOFTWARE - 6.10% Cadence Design Systems, Inc. ## ................... 5,800 114 Fair Isaac Corp. + ................................ 1,200 46 Microsoft Corp. ................................... 118,229 4,352 Oracle Corp. ## ................................... 40,027 887 Symantec Corp. ## ................................. 34,100 640 Synopsys, Inc. ## ................................. 6,100 172 ---------- 6,211 ---------- TOTAL INFORMATION TECHNOLOGY ......................... 23,423 ---------- MATERIALS - 3.45% CHEMICALS - 1.04% Celanese Corp. .................................... 700 29 Monsanto Co. ...................................... 1,400 137 Praxair, Inc. ..................................... 10,490 897 ---------- 1,063 ---------- METALS & MINING - 2.41% AK Steel Holding Corp. ## + ....................... 800 40 Cleveland-Cliffs, Inc. + .......................... 1,600 153 Freeport-McMoRan Copper & Gold, Inc. .............. 8,751 1,030 Newmont Mining Corp. .............................. 100 5 Nucor Corp. ....................................... 12,928 802 See accompanying notes 38 AMERICAN BEACON LARGE CAP GROWTH FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Southern Copper Corp. + ........................... 3,000 $ 419 ---------- 2,449 ---------- TOTAL MATERIALS ...................................... 3,512 ---------- TELECOMMUNICATION SERVICES - 1.76% DIVERSIFIED TELECOMMUNICATION - 1.64% AT&T, Inc. ........................................ 21,195 886 Embarq Corp. ...................................... 2,800 148 Sprint Nextel Corp. ............................... 37,000 632 ---------- 1,666 ---------- WIRELESS TELECOMMUNICATION SERVICES - 0.12% Telephone and Data Systems, Inc. .................. 1,800 126 ---------- TOTAL TELECOMMUNICATION SERVICES ..................... 1,792 ---------- UTILITIES - 1.29% ELECTRIC UTILITIES - 1.29% NRG Energy, Inc. ## + ............................. 1,000 46 PG&E Corp. + ...................................... 100 5 Reliant Energy, Inc. ## ........................... 45,825 1,261 ---------- TOTAL UTILITIES ...................................... 1,312 ---------- TOTAL COMMON STOCKS .................................. 96,652 ---------- SHORT TERM INVESTMENTS - 4.89% American Beacon Money Market Select Fund++ ........ 4,534,228 4,534 PAR AMOUNT ---------- United States Treasury Bill, 3.873%, Due 12/6/2007 # ........................... $ 450 448 ---------- TOTAL SHORT TERM INVESTMENTS ......................... 4,982 ---------- SHARES ---------- SECURITIES LENDING COLLATERAL - 20.51% American Beacon Cash Plus Trust ++ 15,058,709 15,059 American Beacon Money Market Select Fund ++ 5,819,920 5,820 ---------- TOTAL SECURITIES LENDING COLLATERAL 20,879 ---------- TOTAL INVESTMENTS 120.33% - (COST $111,028) 122,513 LIABILITIES, NET OF OTHER ASSETS - (20.33%) (20,696) ---------- TOTAL NET ASSETS - 100.00% $ 101,817 ========== 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, 2007. See accompanying notes 39 AMERICAN BEACON LARGE CAP GROWTH FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 ++ The Fund/Trust is affiliated by having the same investment advisor. # At October 31, 2007, 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 .... 65 Dec 2007 $5,053 $34 ====== === See accompanying notes 40 AMERICAN BEACON MID-CAP VALUE FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 97.62% CONSUMER DISCRETIONARY - 23.14% AUTO COMPONENTS - 3.95% Advance Auto Parts, Inc. .......................... 46,300 $ 1,580 Lear Corp. ## ..................................... 59,200 2,103 Magna International, Inc. ......................... 14,550 1,379 ---------- 5,062 ---------- HOTELS, RESTAURANTS & LEISURE - 1.67% Royal Caribbean Cruises Ltd. + .................... 50,000 2,144 ---------- HOUSEHOLD DURABLES - 5.78% Black & Decker Corp. + ............................ 27,600 2,482 Stanley Works ..................................... 35,600 2,049 Whirlpool Corp. + ................................. 36,150 2,862 ---------- 7,393 ---------- LEISURE EQUIPMENT & PRODUCTS - 0.77% Hasbro, Inc. + .................................... 32,975 984 ---------- MEDIA - 1.06% Idearc, Inc. + .................................... 50,100 1,352 ---------- MULTILINE RETAIL - 1.04% Family Dollar Stores, Inc. + ...................... 52,300 1,326 ---------- SPECIALTY RETAIL - 8.04% Hanesbrands, Inc. ## + ............................ 46,900 1,456 Office Depot, Inc. ## + ........................... 38,400 720 Regis Corp. + ..................................... 73,425 2,467 Rent-A-Center, Inc. ## + .......................... 156,825 2,509 Sherwin-Williams Co. + ............................ 19,800 1,266 TJX Cos., Inc. + .................................. 64,675 1,871 ---------- 10,289 ---------- TEXTILES & APPAREL - 0.83% Sealy Corp. + ..................................... 80,525 1,064 ---------- TOTAL CONSUMER DISCRETIONARY ......................... 29,614 ---------- CONSUMER STAPLES - 5.27% FOOD PRODUCTS - 1.43% Del Monte Foods Co. + ............................. 176,100 1,821 ---------- TOBACCO - 3.84% Loews Corp. ....................................... 24,300 2,084 Reynolds American, Inc. + ......................... 32,300 2,081 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) UST, Inc. + ....................................... 14,100 $ 752 ---------- 4,917 ---------- TOTAL CONSUMER STAPLES ............................... 6,738 ---------- ENERGY - 3.82% OIL & GAS - 3.82% El Paso Corp. + ................................... 115,600 2,042 Murphy Oil Corp. .................................. 38,700 2,849 ---------- TOTAL ENERGY ......................................... 4,891 ---------- FINANCIALS - 25.66% BANKS - 5.53% Comerica, Inc. + .................................. 34,425 1,607 New York Community Bancorp, Inc. + ................ 51,600 960 People's United Financial, Inc. + ................. 108,654 1,932 Popular, Inc. + ................................... 41,750 441 South Financial Group, Inc. + ..................... 43,800 905 UnionBanCal Corp. ................................. 22,725 1,227 ---------- 7,072 ---------- DIVERSIFIED FINANCIALS - 1.97% CIT Group, Inc. + ................................. 25,400 895 Countrywide Financial Corp. + ..................... 63,600 987 Mastercard, Inc. + ................................ 3,400 644 ---------- 2,526 ---------- INSURANCE - 14.31% AON Corp. + ....................................... 28,650 1,298 Axis Capital Holdings Ltd. + ...................... 33,100 1,315 Conseco, Inc. ## + ................................ 57,300 905 Delphi Financial Group, Inc. + .................... 18,800 728 First American Corp. .............................. 31,600 951 IPC Holdings Ltd. + ............................... 41,950 1,255 Old Republic International Corp. .................. 80,387 1,232 Protective Life Corp. ............................. 45,975 1,971 RenaissanceRe Holdings Ltd. ....................... 39,675 2,315 Torchmark Corp. ................................... 35,875 2,338 Willis Group Holdings Ltd. ........................ 37,200 1,575 XL Capital Ltd. ................................... 33,850 2,436 ---------- 18,319 ---------- REAL ESTATE - 3.85% American Financial Realty Trust + ................. 84,400 569 Annaly Capital Management, Inc. + ................. 136,300 2,329 First Industrial Realty Trust, Inc. + ............. 49,900 2,034 ---------- 4,932 ---------- TOTAL FINANCIALS ..................................... 32,849 ---------- See accompanying notes 41 AMERICAN BEACON MID-CAP VALUE FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) HEALTH CARE - 10.50% HEALTH CARE EQUIPMENT & SUPPLIES - 2.90% Hillenbrand Industries, Inc. + .................... 30,175 $ 1,666 IMS Health, Inc. .................................. 81,025 2,043 ---------- 3,709 ---------- HEALTH CARE PROVIDERS & SERVICES - 6.93% AmerisourceBergen Corp. + ......................... 35,875 1,690 Coventry Health Care, Inc. ## + ................... 39,200 2,364 McKesson Corp. .................................... 23,575 1,559 Omnicare, Inc. + .................................. 61,600 1,817 Quest Diagnostics, Inc. + ......................... 27,100 1,441 ---------- 8,871 ---------- PHARMACEUTICALS - 0.67% Valeant Pharmaceuticals International + ........... 59,400 864 ---------- TOTAL HEALTH CARE .................................... 13,444 ---------- INDUSTRIALS - 13.06% AEROSPACE & DEFENSE - 5.27% Goodrich Corp. + .................................. 28,800 2,006 L-3 Communications Holdings, Inc. ................. 43,150 4,731 ---------- 6,737 ---------- COMMERCIAL SERVICES & SUPPLIES - 4.40% Avery Dennison Corp. .............................. 28,300 1,638 Con-way, Inc. ..................................... 27,200 1,159 Kelly Services, Inc. + ............................ 32,375 681 Pitney Bowes, Inc. ................................ 21,700 869 Spherion Corp. ## + ............................... 50,850 443 United Stationers, Inc. ## + ...................... 14,550 843 ---------- 5,633 ---------- ELECTRICAL EQUIPMENT - 0.54% Brady Corp. + ..................................... 18,850 696 ---------- FREIGHT TRANSPORTATION - 1.19% Ryder System, Inc. + .............................. 31,900 1,527 ---------- MACHINERY - 1.66% Briggs & Stratton Corp. + ......................... 35,000 788 ITT Industries, Inc. .............................. 20,000 1,338 ---------- 2,126 ---------- TOTAL INDUSTRIALS .................................... 16,719 ---------- INFORMATION TECHNOLOGY - 7.83% COMMUNICATIONS EQUIPMENT - 1.13% Alcatel-Lucent, ADR ............................... 149,898 1,453 ---------- SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) IT CONSULTING & SERVICES - 5.13% Affiliated Computer Services, Inc. ## ............. 44,500 $ 2,254 Computer Sciences Corp. ## + ...................... 46,700 2,727 Tech Data Corp. ## ................................ 40,150 1,579 ---------- 6,560 ---------- SOFTWARE - 1.57% CA, Inc. + ........................................ 76,000 2,010 ---------- TOTAL INFORMATION TECHNOLOGY ......................... 10,023 ---------- UTILITIES - 8.34% ELECTRIC UTILITIES - 5.61% CenterPoint Energy, Inc. + ........................ 76,700 1,286 Pinnacle West Capital Corp. + ..................... 40,800 1,648 Wisconsin Energy Corp. ............................ 47,325 2,266 Xcel Energy, Inc. + ............................... 87,500 1,973 ---------- 7,173 ---------- GAS UTILITIES - 2.73% MDU Resources Group, Inc. + ....................... 66,650 1,877 Sempra Energy ..................................... 26,375 1,622 ---------- 3,499 ---------- TOTAL UTILITIES ...................................... 10,672 ---------- TOTAL COMMON STOCKS .................................. 124,950 ---------- SHORT TERM INVESTMENTS - 2.76% American Beacon Money Market Select Fund ++ ....... 2,298,053 2,298 PAR AMOUNT ---------- United States Treasury Bill, 3.873%, Due 12/6/2007 # ........................ $ 1,235 1,230 ---------- TOTAL SHORT TERM INVESTMENTS ......................... 3,528 ---------- SHARES ---------- SECURITIES LENDING COLLATERAL - 15.22% American Beacon Cash Plus Trust ++ ................ 14,053,384 14,054 American Beacon Money Market Select Fund ++ ....... 5,431,380 5,431 ---------- TOTAL SECURITIES LENDING COLLATERAL .................. 19,485 ---------- TOTAL INVESTMENTS 115.60% - (COST $146,069) .......... 147,963 LIABILITIES, NET OF OTHER ASSETS - (15.60%) .......... (19,963) ---------- TOTAL NET ASSETS - 100.00% ........................... $ 128,000 ========== See accompanying notes 42 AMERICAN BEACON MID-CAP VALUE FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 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, 2007. ++ The Fund/Trust is affiliated by having the same investment advisor. # At October 31, 2007, 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 40 Dec 2007 $3,648 $100 ====== ==== See accompanying notes 43 AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 99.12% CONSUMER DISCRETIONARY - 12.53% HOTELS, RESTAURANTS & LEISURE - 1.91% Bob Evans Farms, Inc. + ........................... 5,675 $ 160 Domino's Pizza, Inc. + ............................ 7,010 108 Jack in the Box, Inc. ## + ........................ 7,270 228 Ruby Tuesday, Inc. + .............................. 4,420 71 ---------- 567 ---------- HOUSEHOLD DURABLES - 1.53% Ethan Allen Interiors, Inc. + ..................... 3,510 108 Tupperware Corp. + ................................ 9,560 345 ---------- 453 ---------- INTERNET & CATALOG RETAIL - 1.00% Insight Enterprises, Inc. ## + .................... 10,735 297 ---------- LEISURE EQUIPMENT & PRODUCTS - 0.53% Polaris Industries, Inc. + ........................ 3,230 159 ---------- SPECIALTY RETAIL - 2.85% Asbury Automotive Group, Inc. + ................... 4,755 87 Charming Shoppes, Inc. ## + ....................... 17,265 128 Collective Brands, Inc. ## + ...................... 9,390 174 Men's Wearhouse, Inc. + ........................... 2,255 95 Regis Corp. ....................................... 5,860 197 Sonic Automotive, Inc., A Shares + ................ 6,505 164 ---------- 845 ---------- TEXTILES & APPAREL - 4.71% Brown Shoe Company, Inc. + ........................ 7,490 153 Hartmarx Corp. ## + ............................... 17,360 89 Maidenform Brands, Inc. ## + ...................... 7,255 108 Movado Group, Inc. + .............................. 5,650 170 Perry Ellis International, Inc. ## + .............. 9,294 216 Phillips-Van Heusen Corp. ......................... 2,870 137 Unifirst Corp. .................................... 5,090 192 Warnaco Group, Inc. ## ............................ 8,240 335 ---------- 1,400 ---------- TOTAL CONSUMER DISCRETIONARY ......................... 3,721 ---------- CONSUMER STAPLES - 3.17% FOOD & DRUG RETAILING - 2.46% Casey's General Stores, Inc. + .................... 6,330 180 Longs Drug Stores Corp. + ......................... 2,385 125 Ruddick Corp. + ................................... 7,440 253 Spartan Stores, Inc. + ............................ 7,700 171 ---------- 729 ---------- SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) PERSONAL PRODUCTS - 0.71% Elizabeth Arden, Inc. ## + ........................ 8,505 $ 212 ---------- TOTAL CONSUMER STAPLES ............................... 941 ---------- ENERGY - 4.72% ENERGY EQUIPMENT & SERVICES - 3.46% Grey Wolf, Inc. ## + .............................. 23,705 134 Gulfmark Offshore, Inc. ## ........................ 2,815 131 Oil States International, Inc. ## + ............... 5,955 257 Parker Drilling Co. ## + .......................... 33,335 281 Trico Marine Services, Inc. ## + .................. 6,905 224 ---------- 1,027 ---------- OIL & GAS - 1.26% Comstock Resources, Inc. ## ....................... 4,740 173 Swift Energy Co. ## ............................... 4,205 200 ---------- 373 ---------- TOTAL ENERGY ......................................... 1,400 ---------- FINANCIALS - 30.11% BANKS - 10.10% Banco Latinoamericano de Exportaciones SA ......... 6,030 117 BankUnited Financial Corp. + ...................... 7,425 64 Boston Private Financial Holdings, Inc. + ......... 8,375 241 Central Pacific Financial Corp. + ................. 6,675 150 F.N.B. Corp. + .................................... 8,860 147 First Community Bancorp, Inc. + ................... 5,100 248 First Niagara Financial Group, Inc. + ............. 12,265 162 FirstFed Financial Corp. ## + ..................... 5,170 221 FirstMerit Corp. + ................................ 6,865 146 Franklin Bank Corp. ## + .......................... 9,640 75 Hanmi Financial Corp. + ........................... 4,395 49 Irwin Financial Corp. + ........................... 12,780 123 Pacific Capital Bancorp NA + ...................... 5,650 117 Preferred Bank/Los Angeles CA ## .................. 3,510 104 Prosperity Bancshares, Inc. + ..................... 4,675 151 South Financial Group, Inc. + ..................... 6,475 134 Sterling Bancshares, Inc. + ....................... 7,842 96 Sterling Financial Corp. .......................... 7,690 173 SVB Financial Group ## + .......................... 4,070 211 UMB Financial Corp. + ............................. 6,410 269 ---------- 2,998 ---------- DIVERSIFIED FINANCIALS - 2.96% Advanta Corp., Class A Shares ..................... 570 8 Advanta Corp., Class B Shares + ................... 7,732 122 Cash America International, Inc. + ................ 4,580 178 CompuCredit Corp. ## + ............................ 6,010 120 See accompanying notes 44 AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) MCG Capital Corp. + ............................... 10,470 $ 147 Ocwen Financial Corp. ## + ........................ 4,395 33 SWS Group, Inc. ................................... 8,680 165 World Acceptance Corp. ## + ....................... 3,260 105 ---------- 878 ---------- INSURANCE - 8.13% Argo Group International Holdings Ltd. ## ......... 5,851 249 Aspen Insurance Holdings Ltd. + ................... 4,550 124 Delphi Financial Group, Inc. + .................... 7,425 288 FPIC Insurance Group, Inc. ## ..................... 1,865 78 Harleysville Group, Inc. + ........................ 7,160 223 LandAmerica Financial Group, Inc. + ............... 2,255 63 Navigators Group, Inc. ## ......................... 5,170 312 Phoenix Cos., Inc. + .............................. 5,844 81 Platinum Underwriters Holdings Ltd. ............... 3,620 130 ProAssurance Corp. ## + ........................... 5,900 325 SeaBright Insurance Holdings, Inc. ## ............. 12,660 211 Selective Insurance Group, Inc. + ................. 8,505 207 Stewart Information Services Corp. + .............. 4,205 122 ---------- 2,413 ---------- REAL ESTATE - 8.92% Arbor Realty Trust, Inc. + ........................ 4,580 87 Ashford Hospitality Trust, Inc. + ................. 19,055 188 Capital Trust, Inc. + ............................. 2,940 99 DiamondRock Hospitality Co. + ..................... 14,220 272 Entertainment Properties Trust + .................. 1,720 94 Equity Lifestyle Properties, Inc. + ............... 1,870 94 FelCor Lodging Trust, Inc. ........................ 7,320 153 Gramercy Capital Corp. + .......................... 9,480 250 LaSalle Hotel Properties + ........................ 6,835 282 Lexington Realty Trust + .......................... 9,960 197 Nationwide Health Properties, Inc. ................ 4,395 137 PS Business Parks, Inc. ........................... 1,720 100 Senior Housing Properties Trust + ................. 5,740 129 Strategic Hotel Capital, Inc. + ................... 10,335 226 Sunstone Hotel Investors, Inc. + .................. 8,865 247 Tanger Factory Outlet Centers, Inc. + ............. 2,255 95 ---------- 2,650 ---------- TOTAL FINANCIALS ..................................... 8,939 ---------- HEALTH CARE - 5.82% HEALTH CARE EQUIPMENT & SUPPLIES - 0.74% STERIS Corp. + .................................... 7,610 221 ---------- HEALTH CARE PROVIDERS & SERVICES - 4.05% Centene Corp. ## .................................. 6,955 162 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Gentiva Health Services, Inc. ## .................. 10,080 $ 191 Owens & Minor, Inc. + ............................. 5,395 219 PSS World Medical, Inc. ## + ...................... 8,120 164 Res-Care, Inc. ## ................................. 11,205 275 Stewart Enterprises, Inc. + ....................... 20,930 190 ---------- 1,201 ---------- PHARMACEUTICALS - 1.03% Sciele Pharma, Inc. ## + .......................... 11,965 305 ---------- TOTAL HEALTH CARE .................................... 1,727 ---------- INDUSTRIALS - 15.58% BUILDING PRODUCTS - 2.27% Goodman Global, Inc. ## ........................... 7,760 191 Lennox International, Inc. ........................ 6,010 215 NCI Building Systems, Inc. ## + ................... 3,860 151 Universal Forest Products, Inc. + ................. 3,260 117 ---------- 674 ---------- COMMERCIAL SERVICES & SUPPLIES - 4.68% ABM Industries, Inc. + ............................ 5,005 118 Atlas Air Worldwide Holdings, Inc. ## + ........... 2,645 155 Bowne & Co., Inc. + ............................... 3,440 60 Consolidated Graphics, Inc. ## .................... 3,110 199 Deluxe Corp. + .................................... 5,440 219 Ennis, Inc. ....................................... 11,605 237 Kelly Services, Inc. + ............................ 4,420 93 Korn/Ferry International ## + ..................... 8,330 160 United Stationers, Inc. ## + ...................... 2,565 148 ---------- 1,389 ---------- CONSTRUCTION & ENGINEERING - 0.67% EMCOR Group, Inc. ## .............................. 5,775 199 ---------- DIVERSIFIED MANUFACTURING - 2.77% Acuity Brands, Inc. ............................... 3,720 178 Andersons, Inc. + ................................. 2,144 106 Barnes Group, Inc. + .............................. 6,635 244 Kennametal, Inc. .................................. 3,245 296 ---------- 824 ---------- ELECTRICAL EQUIPMENT - 2.11% A.O. Smith Corp. .................................. 4,140 155 Anixter International, Inc. ## + .................. 2,910 209 Belden, Inc. + .................................... 3,125 182 Regal-Beloit Corp. + .............................. 1,630 80 ---------- 626 ---------- MACHINERY - 1.36% Applied Industrial Technologies, Inc. + ........... 6,665 236 See accompanying notes 45 AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) EnPro Industries, Inc. ## ......................... 4,115 $ 169 ---------- 405 ---------- RENTAL AUTO/EQUIPMENT - 0.49% Dollar Thrifty Automotive Group, Inc. ## .......... 4,180 144 ---------- ROAD & RAIL - 0.43% Saia, Inc. ## ..................................... 9,025 127 ---------- TRANSPORT-SERVICES - 0.80% Bristow Group, Inc. ## + .......................... 4,740 237 ---------- TOTAL INDUSTRIALS .................................... 4,625 ---------- INFORMATION TECHNOLOGY - 11.84% COMMUNICATIONS EQUIPMENT - 0.66% Black Box Corp. ................................... 3,580 143 CommScope, Inc. ## + .............................. 1,125 53 ---------- 196 ---------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 3.44% Benchmark Electronics, Inc. ## .................... 6,865 141 Checkpoint Systems, Inc. ## + ..................... 7,770 235 CTS Corp. + ....................................... 7,690 95 MTS Systems Corp. ................................. 3,750 167 Park Electrochemical Corp. + ...................... 5,515 173 Technitrol, Inc. + ................................ 7,130 209 ---------- 1,020 ---------- IT CONSULTING & SERVICES - 3.10% Agilysys, Inc. + .................................. 2,425 42 CACI International, Inc. ## + ..................... 3,045 164 MPS Group, Inc. ## + .............................. 17,055 208 Ness Technologies, Inc. ## + ...................... 16,455 193 Perot Systems Corp. ## + .......................... 12,475 182 SYKES Enterprises, Inc. ## + ...................... 7,490 132 ---------- 921 ---------- SEMICONDUCTOR EQUIPMENT & PRODUCTS - 2.67% Advanced Energy Industries, Inc. ## ............... 6,355 102 Brooks Automation, Inc. ## + ...................... 7,190 93 ON Semiconductor Corp. ## + ....................... 19,330 197 Photronics, Inc. ## + ............................. 14,705 161 Standard Microsystems Corp. ## .................... 6,130 239 ---------- 792 ---------- SOFTWARE - 1.97% JDA Software Group, Inc. ## ....................... 12,900 322 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) TIBCO Software, Inc. ## + ......................... 28,795 $ 265 ---------- 587 ---------- TOTAL INFORMATION TECHNOLOGY ......................... 3,516 ---------- MATERIALS - 7.73% CHEMICALS - 1.75% H.B. Fuller Co. + ................................. 8,295 244 Rockwood Holdings, Inc. ## + ...................... 5,225 204 Spartech Corp. + .................................. 4,620 71 ---------- 519 ---------- CONTAINERS & PACKAGING - 2.70% AptarGroup, Inc. + ................................ 5,810 260 Greif, Inc. + ..................................... 3,115 198 Rock-Tenn Co. ..................................... 5,730 167 Silgan Holdings, Inc. + ........................... 3,220 176 ---------- 801 ---------- METALS & MINING - 1.62% AMCOL International Corp. + ....................... 2,810 113 Commercial Metals Co. + ........................... 1,715 54 Compass Minerals International, Inc. + ............ 4,860 179 NN, Inc. .......................................... 12,525 134 ---------- 480 ---------- PAPER & FOREST PRODUCTS - 1.66% Buckeye Technologies, Inc. ## + ................... 9,960 179 Potlatch Corp. + .................................. 6,615 315 ---------- 494 ---------- TOTAL MATERIALS ...................................... 2,294 ---------- TELECOMMUNICATION SERVICES - 2.41% DIVERSIFIED TELECOMMUNICATION - 2.41% General Communication, Inc. ## .................... 5,860 68 Golden Telecom, Inc. .............................. 3,025 313 Premiere Global Services, Inc. ## ................. 20,260 334 ---------- TOTAL TELECOMMUNICATION SERVICES ..................... 715 ---------- UTILITIES - 5.21% ELECTRIC UTILITIES - 3.62% Black Hills Corp. + ............................... 6,475 288 El Paso Electric Co. ## + ......................... 10,885 265 Empire District Electric Co. ...................... 9,160 220 PNM Resources, Inc. + ............................. 6,195 155 Portland General Electric Co. ..................... 5,275 148 ---------- 1,076 ---------- GAS UTILITIES - 1.59% Atmos Energy Corp. ................................ 4,115 116 See accompanying notes 46 AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Southwest Gas Corp. + ............................. 3,910 $ 116 WGL Holdings, Inc. ................................ 7,050 239 ---------- 471 ---------- TOTAL UTILITIES ...................................... 1,547 ---------- TOTAL COMMON STOCKS .................................. 29,425 ---------- SHORT TERM INVESTMENTS - 1.10% American Beacon Money Market Select Fund ++ ....... 29,480 29 iShares Russell 2000 Value Index Fund + ............ 3,858 299 ---------- TOTAL SHORT TERM INVESTMENTS ......................... 328 ---------- SECURITIES LENDING COLLATERAL - 25.32% American Beacon Cash Plus Trust ++ ................ 5,421,079 5,421 American Beacon Money Market Select Fund ++ ....... 2,095,150 2,095 ---------- TOTAL SECURITIES LENDING COLLATERAL .................. 7,516 ---------- TOTAL INVESTMENTS 125.54% - (COST $38,997) ........... 37,269 LIABILITIES, NET OF OTHER ASSETS - (25.54%) .......... (7,582) ---------- TOTAL NET ASSETS - 100.00% ........................... $ 29,687 ========== 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, 2007. ++ The Fund/Trust is affiliated by having the same investment advisor. See accompanying notes 47 AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) ARGENTINA - 0.58% COMMON STOCKS - 0.58% Petrobras Energia Participaciones S.A., ADR + ..... 35,700 $ 427 Tenaris S.A., ADR ................................. 24,034 1,293 ---------- TOTAL ARGENTINA ...................................... 1,720 ---------- AUSTRIA - 0.37% COMMON STOCKS - 0.37% Raiffeisen International Bank-Holding AG + ........ 6,648 1,105 ---------- BRAZIL - 11.81% COMMON STOCKS - 6.95% Aracruz Celulose S.A., ADR + ...................... 5,900 454 Banco Bradesco S.A., ADR .......................... 10,677 365 Banco Itau Holding Financeira S.A., ADR ## + ...... 58,740 1,677 Banco Nossa Caixa S.A ............................. 32,300 572 Braskem S.A., ADR + ............................... 3,300 62 Centrais Eletricas Brasileiras S.A ................ 29,466 457 Companhia Brasileira de Distribuicao (Pao de Acucar), ADR + ................................. 33,630 1,082 Companhia de Saneamento Basico do Estado de Sao Paulo, ADR + ..................... 2,330 121 Companhia Energetica de Minas Gerais, ADR + ....... 53,980 1,166 CPFL Energia S.A .................................. 15,800 347 Cyrela Brazil Realty S.A .......................... 48,396 842 Empresa Brasileira de Aeronautica S.A (Embraer), ADR + ............................... 13,810 674 Gerdau S.A., ADR + ................................ 15,768 490 Grendene S.A ...................................... 63,100 860 Petroleo Brasileiro S.A., ADR ..................... 31,464 3,009 Petroleo Brasileiro S.A., A Shares, ADR ........... 40,030 3,330 TIM Participacoes S.A ............................. 9,100 63 TIM Participacoes S.A., ADR + ..................... 9,173 426 Unibanco - Uniao de Bancos Brasileiros S.A ........ 15,378 244 Unibanco - Uniao de Bancos Brasileiros S.A., GDR .. 21,782 3,442 Usinas Siderurgicas de Minas Gerais S.A ........... 5,126 432 Votorantim Celulose e Papel S.A., ADR ............. 17,330 543 ---------- TOTAL COMMON STOCKS .................................. 20,658 ---------- PREFERRED STOCKS - 4.86% All America Latina Logistica S.A .................. 46,827 744 Banco Itau Holding Financeira S.A. ## ............. 17,048 487 Braskem S.A ....................................... 112,100 1,056 Centrais Eletricas Brasileiras S.A ................ 37,040 559 Companhia de Tecidos Norte de Minas ............... 94,762 750 Companhia Energetica de Minas Gerais .............. 24,529 526 Companhia Energetica de Sao Paulo ## .............. 12,695 241 Companhia Vale do Rio Doce, ADR ## ................ 203,196 6,415 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Companhia Vale do Rio Doce, A Shares .............. 7,504 $ 237 Gerdau S.A ........................................ 9,650 301 Itausa - Investimentos Itau S.A ................... 83,922 638 Net Servicos de Comunicacao S.A. ## ............... 3,238 52 Tele Norte Leste Participacoes S.A., ADR .......... 69,710 1,520 Telemig Celular Participacoes S.A ................. 14,454 451 Usinas Siderurgicas de Minas Gerais S.A ........... 5,823 457 ---------- TOTAL PREFERRED STOCKS ............................... 14,434 ---------- TOTAL BRAZIL ......................................... 35,092 ---------- CHILE - 0.16% COMMON STOCKS - 0.16% United Breweries Co., Inc., ADR ................... 11,210 471 ---------- CZECH REPUBLIC - 0.80% COMMON STOCKS - 0.80% Central European Media Enterprises Ltd. ## + ...... 16,184 1,857 Komercni Banka, a.s ............................... 2,200 510 ---------- TOTAL CZECH REPUBLIC ................................. 2,367 ---------- EGYPT - 0.44% COMMON STOCKS - 0.44% El Ezz Steel Rebars Co. ........................... 53,601 528 El Sewedy Cables Holding Co. ## ................... 39,595 782 ---------- TOTAL EGYPT .......................................... 1,310 ---------- HONG KONG/CHINA - 14.77% COMMON STOCKS - 14.77% Anhui Expressway Co. Ltd. ......................... 202,000 166 Bank of China Ltd. + .............................. 2,580,000 1,733 Brilliance China Automotive Holdings Ltd. ## + .... 1,296,000 351 Chaoda Modern Agriculture (Holdings) Ltd. + ....... 202,000 184 China Coal Energy Ltd. ## + ....................... 723,000 2,454 China Communications Construction Co. Ltd. ........ 444,000 1,412 China Construction Bank Corp. + ................... 2,399,000 2,729 China COSCO Holdings Co. Ltd. ..................... 611,500 2,758 China Merchants Bank Co. Ltd. ..................... 189,500 990 China Mobile Ltd. ................................. 237,000 4,985 China Netcom Group Corp. (Hong Kong) Ltd. + ....... 338,000 1,049 China Petroleum & Chemical Corp. .................. 676,000 1,028 China Ping'an Insurance Co. Ltd. + ................ 93,500 1,307 China Power International Development Ltd. ## + ... 2,535,800 1,375 China Resources Power Holdings Co. ................ 308,000 1,168 China Shenhua Energy Company Ltd. + ............... 99,000 651 China Telecom Corp. Ltd. + ........................ 827,100 733 CNOOC Ltd. ........................................ 994,400 2,170 COSCO Pacific Ltd. + .............................. 224,000 694 See accompanying notes 48 AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Datang International Power Generation Co. Ltd. .... 54,000 $ 61 Denway Motors Ltd. + .............................. 1,524,700 1,075 Dongfeng Motor Group Co. Ltd. + ................... 1,196,000 1,101 Global Bio-chem Technology Group Co. Ltd. ......... 1,723,800 638 GOME Electrical Appliances Holdings Ltd. + ........ 591,000 1,352 Harbin Power Equipment Co. Ltd. ................... 438,000 1,457 Hopson Development Holdings Ltd. .................. 102,000 396 Huaneng Power International, Inc. + ............... 371,900 446 Industrial & Commercial Bank of China + ........... 2,746,000 2,617 Maanshan Iron & Steel Co. Ltd. + .................. 1,005,000 896 Moulin Global Eyecare Holdings Ltd. ## ++ ......... 96,000 -- NWS Holdings Ltd. ................................. 61,000 238 PetroChina Co. Ltd. ............................... 652,000 1,692 Shanghai Industrial Holdings Ltd. + ............... 190,000 1,133 Sino-Ocean Land Holdings Ltd. ## .................. 15,000 27 Sinotrans Ltd. + .................................. 553,000 356 Texwinca Holdings Ltd. ............................ 764,000 674 TPV Technology Ltd. ............................... 1,100,000 740 Weiqiao Textile Co. Ltd. + ........................ 567,100 1,065 ---------- TOTAL HONG KONG/CHINA ................................ 43,901 ---------- HUNGARY - 0.54% COMMON STOCKS - 0.54% Magyar Telekom Telecommunications plc ............. 106,350 574 OTP Bank .......................................... 18,943 1,030 ---------- TOTAL HUNGARY ........................................ 1,604 ---------- INDIA - 8.03% COMMON STOCKS - 8.03% Aban Offshore Ltd. ................................ 6,600 796 Andhra Bank ....................................... 79,870 181 Asea Brown Boveri India Ltd. ...................... 30,000 1,212 Axis Bank Ltd. .................................... 46,100 1,093 Bharat Heavy Electricals Ltd. ..................... 21,700 1,452 Bharat Petroleum Corp. Ltd. ....................... 120,203 1,064 Bharti Airtel Ltd. ## ............................. 50,100 1,313 Deccan Chronicle Holdings Ltd. .................... 88,779 436 Glenmark Pharmaceuticals Ltd. ..................... 55,800 697 GVK Power & Infrastructure Ltd. ................... 23,000 418 HCL Technologies Ltd. ............................. 71,100 570 HDFC Bank Ltd. .................................... 23,000 989 HDFC Bank Ltd., ADR + ............................. 7,300 1,015 Hero Honda Motors Ltd. ............................ 10,878 202 Hindalco Industries Ltd. .......................... 153,740 781 Hindalco Industries Ltd., GDR # ................... 162,100 794 Hindustan Petroleum Corporation Ltd. .............. 135,560 831 India Cements Ltd. ................................ 63,400 459 Infosys Technologies Ltd. ......................... 20,500 970 Infosys Technologies Ltd., ADR + .................. 1,300 66 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Mahanagar Telephone Nigam Ltd. .................... 126,680 $ 582 Maruti Udyog Ltd. ................................. 21,300 590 Oil & Natural Gas Corp. Ltd. ...................... 53,271 1,715 Praj Industries Ltd. ## ........................... 45,500 239 Reliance Communications Ltd. ...................... 34,400 685 Reliance Industries Ltd. .......................... 20,300 1,441 Satyam Computer Services Ltd. ..................... 8,470 103 State Bank of India Ltd., GDR ..................... 15,530 1,926 Tata Motors Ltd. .................................. 27,706 537 Television Eighteen India Ltd. ## ................. 14,000 182 Zee Entertainment Enterprises Ltd. ................ 62,500 529 ---------- TOTAL INDIA .......................................... 23,868 ---------- INDONESIA - 1.84% COMMON STOCKS - 1.84% PT Astra International Tbk ........................ 232,900 662 PT Bank Central Asia Tbk .......................... 523,000 424 PT Bank Mandiri (Persero) Tbk ..................... 445,000 187 PT Bank Rakyat Indonesia Tbk ...................... 490,500 422 PT Bumi Resources Tbk ............................. 1,896,000 1,015 PT Gudang Garam Tbk ............................... 559,800 619 PT Indosat Tbk .................................... 405,800 392 PT International Nickel Indonesia Tbk ............. 60,000 600 PT Perusahaan Gas Negara .......................... 115,500 180 PT Tambang Batubara Bukit Asam Tbk ................ 352,000 355 PT Telekomunikasi Indonesia Tbk ................... 511,500 617 ---------- TOTAL INDONESIA ...................................... 5,473 ---------- ISRAEL - 1.04% COMMON STOCKS - 1.04% Bank Leumi le-Israel B.M .......................... 165,200 794 Israel Discount Bank Ltd. ## ...................... 355,255 906 Teva Pharmaceutical Industries Ltd., ADR .......... 31,530 1,388 ---------- TOTAL ISRAEL ......................................... 3,088 ---------- MALAYSIA - 2.24% COMMON STOCKS - 2.24% AMMB Holdings Bhd ................................. 294,000 375 Gamuda Bhd ........................................ 118,700 167 Hap Seng Plantations Holdings Bhd ## .............. 21,000 19 IOI Corp Bhd ...................................... 324,350 741 Malayan Banking Bhd ............................... 562,000 1,896 Proton Holdings Bhd ## ............................ 40,300 64 Resorts World Bhd ................................. 645,000 747 Sime Darby Bhd .................................... 372,400 1,250 Telekom Malaysia Bhd .............................. 194,200 596 Tenaga Nasional Bhd ............................... 280,800 791 ---------- TOTAL MALAYSIA ....................................... 6,646 ---------- See accompanying notes 49 AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) MEXICO - 4.95% COMMON STOCKS - 4.95% America Movil, S.A.B. de C.V., ADR ................ 50,541 $ 3,305 Cemex, S.A.B. de C.V. + ........................... 251,775 765 Cemex, S.A.B. de C.V., ADR + ...................... 11,710 359 Coca-Cola Femsa, S.A. de C.V., ADR + .............. 16,085 745 Consorcio ARA, S.A. de C.V ........................ 75,900 84 Controladora Commercial Mexicana, S.A. de C.V ..... 285,700 890 Corp GEO, S.A. de C.V. ## + ....................... 96,099 355 Embotelladoras Arca, S.A. + ....................... 119,130 472 Gruma, S.A. de C.V. + ............................. 99,200 356 Grupo Continential, S.A.B ......................... 391,250 917 Grupo Financiero Banorte, S.A. de C.V ............. 174,200 789 Grupo Mexico, S.A.B de C.V ........................ 44,100 401 Grupo Modelo, S.A.B de C.V ........................ 102,900 480 Grupo Televisa, S.A., ADR ......................... 43,733 1,087 Kimberly-Clark de Mexico, S.A. de C.V. + .......... 93,200 398 Telefonos de Mexico, S.A. de C.V., ADR ............ 26,580 972 Urbi Desarrollos Urbanos, S.A. de C.V ## + ........ 102,484 398 Wal-Mart de Mexico, S.A.B. de C.V. + .............. 394,148 1,601 Wal-Mart de Mexico, S.A.B. de C.V., ADR + ......... 8,448 342 ---------- TOTAL MEXICO ......................................... 14,716 ---------- MOROCCO - 0.14% COMMON STOCKS - 0.14% Douja Promotion Groupe Addoha S.A. ................ 1,000 414 ---------- PHILIPPINES - 0.72% COMMON STOCKS - 0.72% ABS-CBN Broadcasting Corp. ........................ 211,200 171 Ayala Corp. ....................................... 23,006 332 Bank of the Philippine Islands .................... 307,623 465 Manila Electric Co. ............................... 127,720 245 Philippine Long Distance Telephone Co. ............ 4,110 282 PNOC Energy Development Corp. ..................... 2,214,000 389 Union Bank of the Philippines ..................... 232,300 268 ---------- TOTAL PHILIPPINES .................................... 2,152 ---------- POLAND - 2.54% COMMON STOCKS - 2.54% Bank Handlowy W Warszawie S.A. .................... 12,048 565 Bank Millennium S.A. .............................. 155,725 848 Bank Pekao S.A. ................................... 13,506 1,445 Bank Zachodni WBK S.A. ............................ 6,034 671 Budimex S.A. ## ................................... 5,184 154 KGHM Polska Miedz S.A. ............................ 13,463 730 PBG S.A. ## ....................................... 1,269 173 Polimex Mostostal S.A. ............................ 76,800 321 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Polski Koncern Naftowy Orlen S.A. ## .............. 27,350 $ 633 Telekomunikacja Polska S.A. ....................... 121,370 1,152 TVN S.A. .......................................... 85,637 857 ---------- TOTAL POLAND ......................................... 7,549 ---------- RUSSIA - 8.16% COMMON STOCKS - 8.16% Cherepovets MK Severstal, GDR # ................... 11,810 281 CTC Media, Inc. ## + .............................. 31,794 798 Evraz Group S.A., GDR ## .......................... 14,525 1,097 Golden Telecom, Inc. ## ........................... 11,729 1,213 JSC Surgutneftegaz, ADR ## + ...................... 5,000 327 LUKOIL Oil Co., ADR ............................... 34,300 3,104 Mechel OAO, ADR ## + .............................. 9,729 819 Mobile TeleSystems OJSC, ADR ## ................... 12,646 1,050 OJSC MMC Norilsk Nickel, ADR ...................... 5,782 1,821 RAO Gazprom, ADR ## ............................... 36,049 1,802 RAO Gazprom, ADR ## + ............................. 124,908 6,220 Sberbank RF, GDR ## ............................... 5,929 2,912 Severstal OAO, GDR ## ............................. 31,237 743 TMK OAO, GDR ## + ................................. 4,302 191 TMK OAO, GDR ## # ................................. 16,028 713 VTB Bank OJSC, GDR ## # ........................... 47,360 455 Wimm-Bill-Dann Foods OJSC, ADR + .................. 6,002 719 ---------- TOTAL RUSSIA ......................................... 24,265 ---------- SOUTH AFRICA - 6.80% COMMON STOCKS - 6.67% AngloGold Ashanti Ltd., ADR ....................... 29,430 1,367 ArcelorMittal South Africa Ltd. ................... 53,009 1,203 Aspen Pharmacare Holdings Ltd. .................... 136,350 798 Barloworld Ltd. ................................... 17,122 334 Bidvest Group Ltd. ................................ 19,654 416 Ellerine Holdings Ltd. ............................ 51,150 689 Exxaro Resources Ltd. ............................. 52,000 845 Gold Fields Ltd., ADR ............................. 18,250 330 Group Five Ltd. ................................... 69,696 693 JD Group Ltd. ..................................... 62,620 606 Mr Price Group Ltd. ............................... 106,600 436 MTN Group Ltd. .................................... 140,200 2,737 Murray & Roberts Holdings Ltd. .................... 51,397 788 Nampak Ltd. ....................................... 320,820 1,076 Nedbank Group Ltd. ................................ 101,190 2,229 Raubex Group Ltd. ## .............................. 63,413 350 Sanlam Ltd. ....................................... 262,940 964 Sappi Ltd. ........................................ 75,830 1,160 Sasol Ltd. ........................................ 22,650 1,171 Standard Bank Group Ltd. .......................... 48,240 876 See accompanying notes 50 AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Steinhoff International Holdings Ltd. ............. 239,359 $ 745 ---------- TOTAL COMMON STOCKS .................................. 19,813 ---------- PREFERRED STOCKS - 0.13% Allied Electronics Corp. Ltd. ..................... 53,370 386 ---------- TOTAL SOUTH AFRICA ................................... 20,199 ---------- SOUTH KOREA - 13.63% COMMON STOCKS - 13.41% Amorepacific Corp. ................................ 561 536 Cheil Communications, Inc. ........................ 1,596 462 Cheil Industries, Inc. ............................ 6,790 450 Doosan Infracore Co. Ltd. ......................... 13,722 597 GS Engineering & Construction Corp. ............... 4,464 943 Hana Financial Group, Inc. ........................ 17,111 872 Hanwha Chemical Corp. ............................. 7,400 221 Hite Brewery Co. Ltd. ............................. 2,489 377 Hynix Semiconductor, Inc. ## ...................... 12,102 342 Hyundai Heavy Industries .......................... 2,857 1,618 Hyundai Mipo Dockyard Co. Ltd. .................... 3,156 1,413 Hyundai Mobis ..................................... 13,159 1,337 Hyundai Motor Co. Ltd. ............................ 21,746 1,729 Kookmin Bank ...................................... 27,813 2,297 Kookmin Bank, ADR ## .............................. 6,160 503 Korea Electric Power Corp. ........................ 22,295 994 Korea Electric Power Corp., ADR ## ................ 7,200 160 Korea Exchange Bank ............................... 22,290 371 Korea Line Corp. .................................. 1,600 476 KT Corp. .......................................... 11,820 560 KT Corp., ADR ..................................... 44,440 1,045 Kumho Tire Co., Inc. .............................. 57,050 908 LG Chem Ltd. ...................................... 6,450 806 LG Electronics, Inc. .............................. 7,704 810 LG Philips LCD Co. Ltd. ## ........................ 21,620 1,209 Lotte Shopping Co. Ltd. ........................... 3,412 1,605 NHN Corp. ## ...................................... 4,637 1,505 Nong Shim Holdings Co. Ltd. ....................... 2,401 532 Orion Corp. ....................................... 1,452 465 POSCO ............................................. 3,598 2,627 Samsung Electronics Co. Ltd. ...................... 6,205 3,853 Samsung Fire & Marine Insurance Co. Ltd. .......... 2,924 812 Samsung SDI Co. Ltd. .............................. 3,559 287 Shinhan Financial Group Co. Ltd. .................. 30,590 1,994 SK Energy Co. Ltd. ## ............................. 1,476 344 SK Telecom Co. Ltd. ............................... 2,336 550 SK Telecom Co. Ltd., ADR ## + ..................... 35,670 1,099 S-Oil Corp. ....................................... 7,099 651 SSCP Co. Ltd. ## .................................. 10,230 422 STX Pan Ocean Co. Ltd. ## ......................... 333,880 1,159 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Woongjin Coway Co. Ltd. ........................... 23,466 $ 897 ---------- TOTAL COMMON STOCKS .................................. 39,838 ---------- PREFERRED STOCKS - 0.22% Samsung Electronics Co. Ltd. ...................... 1,384 665 ---------- TOTAL SOUTH KOREA .................................... 40,503 ---------- TAIWAN - 8.83% COMMON STOCKS - 8.83% Asustek Computer, Inc. ............................ 200,655 718 AU Optronics Corp. ................................ 1,016,946 2,200 AU Optronics Corp., ADR + ......................... 13,680 297 Chi Mei Optoelectronics Corp. ..................... 69,000 101 China Motor Corp. ................................. 603,245 560 China Steel Corp. ................................. 197,000 281 Chinatrust Financial Holding Co. Ltd. ## .......... 1,647,149 1,218 Chunghwa Telecom Co. Ltd., ADR .................... 84,601 1,624 Compal Electronics, Inc. .......................... 1,540,885 1,981 First Financial Holding Co. Ltd. .................. 1,768,496 1,468 Formosa Plastics Corp. ............................ 411,000 1,284 Foxconn Technology Co. Ltd. ....................... 71,550 877 HON HAI Precision Industry Co. Ltd. ............... 41,600 320 InnoLux Display Corp. ............................. 14,000 67 MediaTek, Inc. .................................... 49,715 986 Mega Financial Holding Co. Ltd. ................... 706,000 464 Nan Ya Printed Circuit Board Corp. ................ 61,480 408 Nien Hsing Textile Co. Ltd. ....................... 317,000 218 Powerchip Semiconductor Corp. ..................... 1,159,444 540 Quanta Computer, Inc. ............................. 1,124,675 1,900 Radiant Opto-Electronics Corp. .................... 336,329 539 Siliconware Precision Industries Co. Ltd. ......... 341,000 736 SinoPac Financial Holdings Co. Ltd. ............... 2,872,987 1,341 Taiwan Cement Corp. ............................... 448,000 776 Taiwan Semiconductor Manufacturing Co. Ltd ........ 158,474 316 Taiwan Semiconductor Manufacturing Co. Ltd., ADR .. 48,305 514 Tatung Co. Ltd. ## ................................ 994,000 551 Tripod Technology Corp. ........................... 67,034 275 TXC Corp. ......................................... 79,059 165 United Microelectronics Corp. ..................... 3,618,542 2,402 United Microelectronics Corp., ADR + .............. 16,051 61 Yaego Corp. ....................................... 1,524,000 603 Yang Ming Marine Transport Corp. ## ............... 535,823 444 ---------- TOTAL TAIWAN ......................................... 26,235 ---------- THAILAND - 1.42% COMMON STOCKS - 1.42% Bangkok Bank PCL .................................. 218,400 825 Charoen Pokphand Foods PCL ........................ 4,347,400 588 See accompanying notes 51 AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Delta Electronics PCL ............................. 189,800 $ 121 Italian -Thai Development PCL ## .................. 1,031,200 250 Kasikornbank PCL .................................. 299,800 799 Krung Thai Bank PCL ............................... 1,851,700 642 Siam Cement PCL ................................... 78,800 612 Siam Makro PCL ++ ................................. 42,000 122 Thai Union Frozen Products PCL .................... 371,200 262 ---------- TOTAL THAILAND ....................................... 4,221 ---------- TURKEY - 3.13% COMMON STOCKS - 3.13% Akcansa Cimento A.S. .............................. 44,937 329 Aksigorta A.S. .................................... 79,460 590 KOC Holding A.S. ## ............................... 117,788 647 Petrol Ofisi A.S. ## .............................. 12,315 64 TURK Sise ve Cam Fabrikalari A.S. (Sisecam) ....... 214,207 474 Turkcell Iletisim Hizmetleri A.S. ................. 199,717 1,921 Turkcell Iletisim Hizmetleri A.S., ADR ............ 1,600 38 Turkiye Garanti Bankasi A.S. ...................... 173,813 1,610 Turkiye Halk Bankasi A.S. ## ...................... 63,527 541 Turkiye Is Bankasi (Isbank) ....................... 261,109 1,797 Yapi ve Kredi Bankasi A.S. ## ..................... 330,501 1,296 ---------- TOTAL TURKEY ......................................... 9,307 ---------- SHORT TERM INVESTMENTS - 6.07% American Beacon Money Market Select Fund ** ....... 17,218,023 17,218 PAR AMOUNT ---------- United States Treasury Bill, 3.873%, Due 12/6/2007 * $ 840 837 ---------- TOTAL SHORT TERM INVESTMENTS 18,055 ---------- SHARES ---------- SECURITIES LENDING COLLATERAL - 10.36% American Beacon Cash Plus Trust ** ................ 22,207,419 22,207 American Beacon Money Market Select Fund ** ....... 8,582,768 8,583 ---------- TOTAL SECURITIES LENDING COLLATERAL .................. 30,790 ---------- TOTAL INVESTMENTS 109.37% - (COST $233,306) .......... 325,051 LIABILITIES, NET OF OTHER ASSETS - (9.37%) ........... (27,858) ---------- TOTAL NET ASSETS - 100.00% ........................... $ 297,193 ========== 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, 2007. ++ Valued at fair value pursuant to procedures approved by the Board of Trustees. See accompanying notes 52 AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 # 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 $2,243 or 0.75% 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. * At October 31, 2007, 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 .. 261 Dec 2007 $20,291 $192 ======= ==== FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS (DOLLARS IN THOUSANDS) SETTLEMENT MARKET UNREALIZED DATE VALUE GAIN/(LOSS) ---------- ------ ----------- CONTRACTS TO DELIVER 12,518 South African Rand 11/16/2007 $1,921 $(221) ------ ----- TOTAL CONTRACTS TO DELIVER (RECEIVABLE AMOUNT $1,700) $1,921 $(221) ------ ----- NET CURRENCY FLUCTUATION $(221) ===== SECTOR DIVERSIFICATION Percent of Net Assets ---------- Communications .................... 1.52% Consumer Discretionary ............ 8.50% Consumer Staples .................. 3.10% Energy ............................ 9.50% Financials ........................ 21.35% Health Care ....................... 1.18% Industrials ....................... 12.16% Information Technology ............ 8.79% Materials ......................... 12.84% Telecommunication Services ........ 10.92% Utilities ......................... 3.07% Short Term Investments ............ 16.44% Liabilities, Net of Other Assets .. (9.37)% ------ 100.00% ====== See accompanying notes 53 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) CORPORATE OBLIGATIONS - 95.54% AUTO COMPONENTS - 2.82% Pep Boys, Inc., 7.50%, Due 12/15/2014 ............. $ 1,135 $ 1,092 Stanadyne Corp., 10.00%, Due 8/15/2014 ............ 1,000 1,015 TriMas Corp., 9.875%, Due 6/15/2012 ............... 965 992 TRW Automotive, Inc., 7.25%, Due 3/15/2017 ++ ..... 1,000 974 United Components, Inc., 9.375%, Due 6/15/2013 .... 2,250 2,295 ---------- 6,368 ---------- AUTO LOAN - 3.17% Ford Motor Credit Co. LLC, 9.75%, Due 9/15/2010 ........................... 1,700 1,693 9.875%, Due 8/10/2011 .......................... 2,300 2,296 General Motors Acceptance Corp., 6.875%, Due 9/15/2011 + ................................ 3,450 3,180 ---------- 7,169 ---------- AUTOMOBILES - 1.40% Ford Motor Co., 8.875%, Due 1/15/2022 .......................... 200 172 7.45%, Due 7/16/2031 ........................... 725 573 General Motors Corp., 7.70%, Due 4/15/2016 + ......................... 1,400 1,288 8.25%, Due 7/15/2023 ........................... 800 722 7.40%, Due 9/1/2025 ............................ 500 415 ---------- 3,170 ---------- CASINO/GAMING - 0.29% Fontainebleau Las Vegas Holdings LLC, 10.25%, Due 6/15/2015 ++ ............................... 600 561 Pinnacle Entertainment, Inc., 8.75%, Due 10/1/2013 .................................. 100 104 ---------- 665 ---------- COMMERCIAL SERVICES - 1.80% Harland Clarke Holdings, 10.308%, Due 5/15/2015 ... 1,500 1,350 Iron Mountain, Inc., 6.625%, Due 1/1/2016 ........................... 750 713 8.75%, Due 7/15/2018 + ......................... 1,000 1,050 RSC Equipment Rental, Inc., 9.50%, Due 12/1/2014 .................................. 1,000 961 ---------- 4,074 ---------- COMMUNICATIONS - 12.70% American Tower Corp., 7.00%, Due 10/15/2017 ++ .... 1,000 1,023 Cadmus Communications Corp., 8.375%, Due 6/15/2014 .................................. 1,700 1,573 CanWest Media, Inc., 8.00%, Due 9/15/2012 ......... 1,000 975 Charter Communications Holdings LLC, 10.25%, Due 9/15/2010 .......................... 1,900 1,936 11.00%, Due 10/1/2015 .......................... 1,700 1,647 CSC Holdings, Inc., 7.625%, Due 4/1/2011 ........................... 200 200 7.625%, Due 7/15/2018 .......................... 800 768 See accompanying notes 54 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Dex Media, Inc., 9.875%, Due 8/15/2013 .......................... $ 200 $ 213 Zero Coupon, Due 11/15/2013 ## # ............... 945 895 Digicel Group Ltd., 8.875%, Due 1/15/2015 + ++ .... 900 840 Echostar DBS Corp., 6.375%, Due 10/1/2011 .......................... 100 101 7.125%, Due 2/1/2016 ........................... 700 732 FTD, Inc., 7.75%, Due 2/15/2014 ................... 923 879 Insight Communications Co., Inc., 12.25%, Due 2/15/2011 .................................. 1,000 1,033 Intelsat Intermediate Holding Co. Ltd., Zero Coupon, Due 2/1/2015 ## # ................. 800 658 Intelsat Subsidiary Holding Co. Ltd., 8.25%, Due 1/15/2013 .................................. 800 806 L-3 Communications Corp., 6.125%, Due 7/15/2013 .................................. 800 794 Lamar Media Corp., 7.25%, Due 1/1/2013 ............ 1,000 1,003 Liberty Media LLC, 5.70%, Due 5/15/2013 ........... 1,000 937 LIN Television Corp., 6.50%, Due 5/15/2013 ........ 800 776 MasTec, Inc., 7.625%, Due 2/1/2017 ................ 1,000 970 MetroPCS Wireless, Inc., 9.25%, Due 11/1/2014 ++ ............................... 1,000 992 Network Communications, Inc., 10.75%, Due 12/1/2013 .................................. 1,000 1,006 Quebecor Media, Inc., 7.75%, Due 3/15/2016 ........................... 900 871 7.75%, Due 3/15/2016 ++ ........................ 100 97 Qwest Communications International, Inc., 7.50%, Due 2/15/2014 ........................... 1,200 1,215 Radio One, Inc., 6.375%, Due 2/15/2013 ............ 800 704 Reader's Digest Association, Inc., 9.00%, Due 2/15/2017 ++ ........................ 2,000 1,782 Umbrella Acquisition, Inc., 9.75%, Due 3/15/2015 ++ ............................... 2,300 2,254 West Corp., 9.50%, Due 10/15/2014 ................. 1,000 1,027 ---------- 28,707 ---------- CONSTRUCTION & ENGINEERING - 0.90% Beazer Homes USA, Inc., 8.125%, Due 6/15/2016 + ........................ 200 159 KB Home, 7.75%, Due 2/1/2010 ............................ 1,000 965 6.25%, Due 6/15/2015 + ......................... 600 540 7.25%, Due 6/15/2018 ........................... 400 371 ---------- 2,035 ---------- CONSUMER DISCRETIONARY - 3.82% Commercial Vehicle Group, Inc., 8.00%, Due 7/1/2013 ............................ 400 384 Dollar General Corp., 10.625%, Due 7/15/2015 + ++ ............................. 900 864 Fresenius Medical Care Capital Trust IV, 7.875%, Due 6/15/2011 .......................... 900 941 Michaels Stores, Inc., 10.00%, Due 11/1/2014 + ........................ 1,000 1,007 OSI Restaurant Partners, Inc., 10.00%, Due 6/15/2015 + ++ ..................... 600 516 Penske Auto Group, Inc., 7.75%, Due 12/15/2016 .... 2,250 2,188 Simmons Co., 7.875%, Due 1/15/2014 ................ 1,750 1,676 Travelport LLC, 10.246%, Due 9/1/2014 # ........... 1,050 1,055 ---------- 8,631 ---------- See accompanying notes 55 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) CONSUMER STAPLES - 5.15% Blyth, Inc., 5.50%, Due 11/1/2013 ................. $ 1,500 $ 1,297 Collective Brands, Inc., 8.25%, Due 8/1/2013 ...... 1,500 1,483 Cott Beverages USA, Inc., 8.00%, Due 12/15/2011 .......................... 1,600 1,548 Jarden Corp., 7.50%, Due 5/1/2017 ................. 1,900 1,805 Prestige Brands, Inc., 9.25%, Due 4/15/2012 ....... 2,000 2,020 Rafaella Apparel Group, Inc., 11.25%, Due 6/15/2011 .......................... 1,079 1,047 Reynolds American, Inc., 7.625%, Due 6/1/2016 ..... 1,200 1,298 Smithfield Foods, Inc., 7.75%, Due 5/15/2013 ...... 1,100 1,128 ---------- 11,626 ---------- ENERGY - 12.96% AmeriGas Partners LP, 7.125%, Due 5/20/2016 ....... 1,150 1,124 Aquila, Inc., 9.95%, Due 2/1/2011 ................. 1,000 1,082 Chesapeake Energy Corp., 7.625%, Due 7/15/2013 .......................... 1,805 1,886 6.625%, Due 1/15/2016 .......................... 1,200 1,176 Cie Generale de Geophysique-Veritas, 7.50%, Due 5/15/2015 ........................... 700 714 7.75%, Due 5/15/2017 ........................... 300 309 Copano Energy LLC, 8.125%, Due 3/1/2016 ........... 1,000 1,027 Dynegy Holdings, Inc., 8.375%, Due 5/1/2016 ....... 1,100 1,103 Edison Mission Energy, 7.00%, Due 5/15/2017 ++ .... 2,200 2,150 El Paso Corp., 6.875%, Due 6/15/2014 .............. 1,200 1,202 Energy Future Holdings, 5.55%, Due 11/15/2014 ..... 300 234 Inergy L.P./Inergy Finance Corp., 6.875%, Due 12/15/2014 ......................... 1,474 1,445 Intergen NV, 9.00%, Due 6/30/2017 ++ .............. 900 952 Mariner Energy, Inc., 7.50%, Due 4/15/2013 ........ 900 875 MarkWest Energy Partners LP, 6.875%, Due 11/1/2014 .......................... 900 842 Massey Energy Co., 6.875%, Due 12/15/2013 ......... 525 496 Mirant Americas Generation LLC, 8.30%, Due 5/1/2011 ............................ 700 708 Mirant North America LLC, 7.375%, Due 12/31/2013 ......................... 1,000 1,014 NRG Energy, Inc., 7.25%, Due 2/1/2014 ............................ 700 700 7.375%, Due 2/1/2016 ........................... 1,900 1,895 Peabody Energy Corp., 6.875%, Due 3/15/2013 .......................... 300 302 7.375%, Due 11/1/2016 .......................... 700 728 PetroQuest Energy, Inc., 10.375%, Due 5/15/2012 ......................... 1,115 1,143 Pogo Producing Co., 6.875%, Due 10/1/2017 ......... 500 506 Regency Energy Partners LP, 8.375%, Due 12/15/2013 ......................... 877 923 Swift Energy Co., 7.625%, Due 7/15/2011 ........... 900 909 Tenaska, Inc., 6.528%, Due 12/30/2014 ++ .......... 1,195 1,203 Tesoro Corp., 6.50%, Due 6/1/2017 ++ .............. 900 889 VeraSun Energy Corp., 9.375%, Due 6/1/2017 ++ ..... 500 411 See accompanying notes 56 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Williams Cos., Inc., 7.625%, Due 7/15/2019 .......................... $ 500 $ 542 7.875%, Due 9/1/2021 ........................... 300 330 8.75%, Due 3/15/2032 ........................... 400 466 ---------- 29,286 ---------- FINANCE - 4.45% ARAMARK Corp., 8.50%, Due 2/1/2015 ................ 1,100 1,114 CPI International, Inc., 11.063%, Due 2/1/2015 # ........................ 920 950 E*Trade Financial Corp., 8.00%, Due 6/15/2011 ..... 2,125 2,019 Forest City Enterprises, Inc., 7.625%, Due 6/1/2015 ........................... 600 589 Icahn Enterprises LP, 7.125%, Due 2/15/2013 ++ .... 1,697 1,654 Leucadia National Corp., 7.125%, Due 3/15/2017 .... 1,750 1,645 Petroplus Finance Ltd., 6.75%, Due 5/1/2014 ++ .... 800 760 Pinnacle Foods Finance LLC/Pinnacle Foods Finance Corp., 9.25%, Due 4/1/2015 ++ .......... 1,400 1,330 ---------- 10,061 ---------- HEALTH CARE - 6.29% Angiotech Pharmaceuticals, Inc., 9.371%, Due 12/1/2013 # ........................ 1,750 1,733 DaVita, Inc., 7.25%, Due 3/15/2015 ................ 1,000 1,011 Elan Finance PLC/Elan Finance Corp., 8.875%, Due 12/1/2013 .......................... 1,250 1,253 9.705%, Due 12/1/2013 # ........................ 1,075 1,064 FMC Finance III S.A., 6.875%, Due 7/15/2017 ++ .... 200 200 HCA, Inc., 9.125%, Due 11/15/2014 ......................... 900 932 6.50%, Due 2/15/2016 ........................... 1,100 939 Interactive Health, 7.25%, Due 4/1/2011 ++ ........ 1,259 1,058 Omnicare, Inc., 6.75%, Due 12/15/2013 .......................... 500 482 6.875%, Due 12/15/2015 ......................... 500 480 Skilled Healthcare Group, Inc., 11.00%, Due 1/15/2014 .......................... 845 919 Tenet Healthcare Corp., 6.375%, Due 12/1/2011 .......................... 100 88 9.875%, Due 7/1/2014 + ......................... 1,200 1,092 US Oncology Holdings, Inc., 10.759%, Due 3/15/2012 ++ # .................... 900 792 US Oncology, Inc., 9.00%, Due 8/15/2012 ........................... 500 501 10.75%, Due 8/15/2014 .......................... 760 790 Vanguard Health Holding Co. II LLC, 9.00%, Due 10/1/2014 ........................... 900 878 ---------- 14,212 ---------- HOTELS, RESTAURANTS & LEISURE - 4.34% Host Hotels & Resorts LP, 6.875%, Due 11/1/2014 .......................... 800 806 Host Marriott LP, 7.125%, Due 11/1/2013 ........... 500 507 Majestic Star Casino LLC, 9.50%, Due 10/15/2010 .......................... 500 492 MGM Mirage, 6.75%, Due 4/1/2013 + .......................... 1,250 1,219 See accompanying notes 57 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) 6.625%, Due 7/15/2015 .......................... $ 1,600 $ 1,512 Pinnacle Entertainment, Inc., 8.25%, Due 3/15/2012 ........................... 100 103 Royal Caribbean Cruises Ltd., 7.25%, Due 3/15/2018 ........................... 1,200 1,173 San Pasqual Casino Development Group, 8.00%, Due 9/15/2013 ++ ........................ 1,550 1,565 Station Casinos, Inc., 6.875%, Due 3/1/2016 ........................... 900 745 7.75%, Due 8/15/2016 ........................... 200 196 Turning Stone Casino Resort, 9.125%, Due 12/15/2010 ++ ...................... 1,460 1,489 ---------- 9,807 ---------- INDUSTRIALS - 15.80% Allied Waste North America, Inc., 6.875%, Due 6/1/2017 ........................... 800 800 Altra Industrial Motion, Inc., 9.00%, Due 12/1/2011 ........................... 1,600 1,608 Berry Plastics Holding Corp., 8.875%, Due 9/15/2014 .......................... 850 871 Bristow Group, Inc., 7.50%, Due 9/15/2017 ++ ...... 300 309 Case New Holland, Inc., 7.125%, Due 3/1/2014 ...... 800 828 CEVA Group plc, 10.00%, Due 9/1/2014 ++ ........... 800 833 Clean Harbors, Inc., 11.25%, Due 7/15/2012 ........ 650 700 Coleman Cable, Inc., 9.875%, Due 10/1/2012 ........ 1,000 985 Communications & Power Industries, Inc., 8.00%, Due 2/1/2012 ............................ 750 754 Crown Americas LLC, 7.75%, Due 11/15/2015 ......... 1,000 1,030 DRS Technologies, Inc., 6.875%, Due 11/1/2013 .......................... 800 800 7.625%, Due 2/1/2018 ........................... 200 205 Dycom Industries, Inc., 8.125%, Due 10/15/2015 .... 1,000 1,018 Equistar Chemicals LP, 10.625%, Due 5/1/2011 ...... 714 746 Ford Motor Credit Co. LLC, 5.80%, Due 1/12/2009 ........................... 400 386 Freescale Semiconductor, Inc., 8.875%, Due 12/15/2014 ......................... 800 757 GenCorp, Inc., 9.50%, Due 8/15/2013 ............... 1,500 1,567 Greenbrier Cos., Inc., 8.375%, Due 5/15/2015 ...... 800 791 Impress Holdings BV, 8.368%, Due 9/15/2013 ++ # ..................... 1,400 1,395 Intertape Polymer US, Inc., 8.50%, Due 8/1/2014 ............................ 1,300 1,209 Nortek, Inc., 8.50%, Due 9/1/2014 ................. 1,000 885 Nova Chemicals Corp., 8.484%, Due 11/15/2013 # .... 1,070 1,051 Novelis, Inc., 7.25%, Due 2/15/2015 1,000 960 Owens-Brockway Glass Containers, Inc., 8.25%, Due 5/15/2013 ........................... 1,750 1,820 6.75%, Due 12/1/2014 ........................... 1,100 1,103 Plastipak Holdings, Inc., 8.50%, Due 12/15/2015 ++ ....................... 1,050 1,082 RBS Global, Inc., 9.50%, Due 8/1/2014 ............. 1,000 1,032 Sanmina-SCI Corp., 8.444%, Due 6/15/2014 ++ # ..................... 100 97 8.125%, Due 3/1/2016 + ......................... 900 790 Smurfit Kappa Funding plc, 7.75%, Due 4/1/2015 .... 1,000 985 Stewart & Stevenson LLC, 10.00%, Due 7/15/2014 .... 1,000 1,027 Superior Essex Communications, 9.00%, Due 4/15/2012 ........................... 1,400 1,382 See accompanying notes 58 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) TransDigm, Inc., 7.75%, Due 7/15/2014 $ 1,000 $ 1,017 United Rentals North America, Inc., 6.50%, Due 2/15/2012 1,800 1,863 7.75%, Due 11/15/2013 400 426 United Surgical Partners International, Inc., 9.25%, Due 5/1/2017 500 500 Valassis Communications, Inc., 8.25%, Due 3/1/2015 1,250 1,053 WCA Waste Corp., 9.25%, Due 6/15/2014 1,000 1,035 ---------- 35,700 ---------- MATERIALS - 6.88% Compass Minerals International, Inc., Zero Coupon, Due 6/1/2013 ## # 1,825 1,839 Freeport-McMoRan Copper & Gold, Inc., 8.375%, Due 4/1/2017 900 985 Hercules, Inc., 6.75%, Due 10/15/2029 1,750 1,702 Huntsman International LLC, 7.875%, Due 11/15/2014 700 752 Ineos Group Holdings plc, 8.50%, Due 2/15/2016 + ++ 1,100 1,045 Lyondell Chemical Co., 8.00%, Due 9/15/2014 1,200 1,329 MacDermid, Inc., 9.50%, Due 4/15/2017 ++ 900 859 Nalco Co., 8.875%, Due 11/15/2013 1,000 1,053 Neenah Paper, Inc., 7.375%, Due 11/15/2014 1,500 1,448 Newark Group, Inc., 9.75%, Due 3/15/2014 2,200 2,156 Phibro Animal Health Corp., 10.00%, Due 8/1/2013 ++ 1,250 1,284 PNA Group, Inc., 10.75%, Due 9/1/2016 1,075 1,099 ---------- 15,551 ---------- MEDIA - 3.59% Allbritton Communications Co., 7.75%, Due 12/15/2012 600 609 IESY Repository GmbH, 10.375%, Due 2/15/2015 ++ 1,500 1,575 Kabel Deutschland GmbH, 10.625%, Due 7/1/2014 1,156 1,254 R.H. Donnelley Corp., 8.875%, Due 1/15/2016 1,400 1,400 8.875%, Due 10/15/2017 ++ 200 200 Sheridan Group, Inc., 10.25%, Due 8/15/2011 2,125 2,178 WMG Acquisition Corp., 7.375%, Due 4/15/2014 1,000 888 ---------- 8,104 ---------- RETAIL - 1.35% Jostens Holding Corp., 10.25%, Due 12/1/2013 # 1,900 1,777 Jostens IH Corp., 7.625%, Due 10/1/2012 500 514 Susser Holdings LLC, 10.625%, Due 12/15/2013 736 765 ---------- 3,056 ---------- SERVICES - 0.74% Knowledge Learning Corp, Inc., 7.75%, Due 2/1/2015 ++ 1,700 1,662 ---------- TECHNOLOGY - 2.29% Alion Science and Technology Corp., 10.25%, Due 2/1/2015 600 561 Amkor Technology, Inc., 7.75%, Due 5/15/2013 850 822 First Data Corp., 9.875%, Due 9/24/2015 ++ 900 862 Freescale Semiconductor, Inc., 9.569%, Due 12/15/2014 # 650 597 See accompanying notes 59 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- --------- (DOLLARS IN THOUSANDS) NXP BV/NXP Funding LLC, 7.875%, Due 10/15/2014 $ 800 $ 781 Sungard Data Systems, Inc., 9.125%, Due 8/15/2013 100 102 10.25%, Due 8/15/2015 + 1,400 1,460 --------- 5,185 --------- TELECOMMUNICATION SERVICES - 3.48% Block Communications, Inc., 8.25%, Due 12/15/2015 ++ 2,000 2,010 Inmarsat Finance plc, Zero Coupon, Due 11/15/2012 ## # 900 868 Intelsat Bermuda Ltd., 9.25%, Due 6/15/2016 1,600 1,660 Millicom International Cellular S.A., 10.00%, Due 12/1/2013 800 861 Rural Cellular Corp., 8.25%, Due 3/15/2012 750 782 Stratos Global Corp., 9.875%, Due 2/15/2013 750 788 Wind Acquisition Finance S.A., 10.75%, Due 12/1/2015 ++ 800 890 --------- 7,859 --------- TELEPHONE - 0.43% iPCS, Inc., 7.481%, Due 5/1/2013 # 1,000 975 --------- UTILITIES - 0.89% The AES Corp., 8.00%, Due 10/15/2017 ++ 1,000 1,009 Texas Competitive Electric Holdings Co LLC, 10.25%, Due 11/1/2015 ++ 1,000 1,005 --------- 2,014 --------- TOTAL CORPORATE OBLIGATIONS 215,917 --------- SHARES ---------- SHORT TERM INVESTMENTS - 3.13% American Beacon Money Market Select Fund ** 7,084,982 7,085 --------- PAR AMOUNT ---------- SECURITIES LENDING COLLATERAL - 4.59% AIM Short-Term Investment Company Liquid Asset Fund $ 363 363 Banc of America Securities LLC Repo * 10,000 10,000 --------- TOTAL SECURITIES LENDING COLLATERAL 10,363 --------- TOTAL INVESTMENTS - 103.26% (COST $236,116) $ 233,365 LIABILITIES, NET OF OTHER ASSETS - (3.26%) (7,374) --------- TOTAL NET ASSETS - 100.00% $ 225,991 ========= See accompanying notes 60 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 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, 2007. ++ 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 $40,473 or 17.91% 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. ** The Fund/Trust is affiliated by having the same investment advisor. * Held at Bank of New York, Collateralized by Corporate Obligations valued at $10,200, 8.25%, 6/15/2030 See accompanying notes 61 AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 4.91% CONSUMER DISCRETIONARY - 0.28% INTERNET & CATALOG RETAIL - 0.02% Expedia, Inc., Warrant ## ......................... 4,000 $ 24 ---------- SPECIALTY RETAIL - 0.26% Nike, Inc. + ...................................... 3,890 258 ---------- TOTAL CONSUMER DISCRETIONARY ......................... 282 ---------- CONSUMER STAPLES - 0.44% BEVERAGES - 0.44% Coca-Cola Co. + ................................... 7,060 436 ---------- FINANCIALS - 0.57% DIVERSIFIED FINANCIALS - 0.32% Franklin Resources, Inc. + ........................ 2,450 318 ---------- INSURANCE - 0.25% AON Corp. + ....................................... 5,555 252 ---------- TOTAL FINANCIALS ..................................... 570 ---------- HEALTH CARE - 0.85% BIOTECHNOLOGY - 0.28% Biogen Idec, Inc. ## + ............................ 3,825 285 ---------- OPTICAL SUPPLIES - 0.25% Alcon, Inc. ....................................... 1,630 248 ---------- PHARMACEUTICALS - 0.32% Merck & Co., Inc. ................................. 5,425 316 ---------- TOTAL HEALTH CARE .................................... 849 ---------- INDUSTRIALS - 1.28% COMMERCIAL SERVICES & SUPPLIES - 0.80% Apollo Group, Inc. ## + ........................... 3,735 296 ITT Educational Services, Inc. ## + ............... 3,920 498 ---------- 794 ---------- INDUSTRIAL CONGLOMERATES - 0.23% Honeywell International, Inc. + ................... 3,890 235 ---------- MACHINERY - 0.25% Illinois Tool Works, Inc. + ....................... 4,310 247 ---------- TOTAL INDUSTRIALS .................................... 1,276 ---------- SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) INFORMATION TECHNOLOGY - 1.49% COMMUNICATIONS EQUIPMENT - 0.40% Cisco Systems, Inc. ## ............................ 12,180 $ 403 ---------- IT CONSULTING & SERVICES - 0.50% Accenture Ltd. + .................................. 7,470 292 Cognizant Technology Solutions Corp. ## + ......... 5,000 207 ---------- 499 ---------- SOFTWARE - 0.59% Microsoft Corp. ................................... 7,500 276 Oracle Corp. ## ................................... 14,000 310 ---------- 586 ---------- TOTAL INFORMATION TECHNOLOGY ......................... 1,488 ---------- TOTAL COMMON STOCKS .................................. 4,901 ---------- CONVERTIBLE PREFERRED STOCKS - 2.20% FINANCIALS - 0.79% DIVERSIFIED FINANCIALS - 0.32% Lazard Ltd. ....................................... 7,420 313 ---------- INSURANCE - 0.47% MetLife, Inc. ..................................... 14,100 473 ---------- TOTAL FINANCIALS ..................................... 786 ---------- HEALTH CARE - 0.47% PHARMACEUTICALS - 0.47% Schering-Plough Corp. ............................. 1,785 475 ---------- INDUSTRIALS - 0.67% AUTOMOBILES - 0.40% General Motors Corp. .............................. 15,500 399 ---------- HOUSEHOLD DURABLES - 0.27% Stanley Works ..................................... 255 270 ---------- TOTAL INDUSTRIALS .................................... 669 ---------- MATERIALS - 0.27% METALS & MINING - 0.27% Freeport-McMoRan Copper & Gold, Inc. .............. 1,560 266 ---------- TOTAL CONVERTIBLE PREFERRED STOCKS ................... 2,196 ---------- See accompanying notes 62 AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) CORPORATE OBLIGATIONS - 27.88% AEROSPACE & DEFENSE - 0.25% Raytheon Co., 5.375%, Due 4/1/2013 .............................. $ 250 $ 251 ---------- BANKS - 6.62% Banco Popular North America, Inc., 4.25%, Due 4/1/2008 ............................... 300 299 Bank of America Corp., 7.80%, Due 9/15/2016 .............................. 600 671 6.00%, Due 9/1/2017 + ............................. 200 204 Bank One Corp., 4.90%, Due 4/30/2015 .............................. 350 333 Citigroup, Inc., 5.125%, Due 2/14/2011 ............................. 1,300 1,301 Credit Suisse First Boston, 6.50%, Due 5/1/2008 + ++ .......................... 500 503 ING Bank, NV, 5.125%, Due 5/1/2015 ++ ........................... 300 290 JP Morgan Chase & Co., 6.75%, Due 2/1/2011 ............................... 650 681 National City Bank, 4.50%, Due 3/15/2010 .............................. 900 890 Synovus Financial Corp., 4.875%, Due 2/15/2013 ............................. 350 344 Wachovia Corp., 5.30%, Due 10/15/2011 ............................. 300 300 Washington Mutual, Inc., 8.25%, Due 4/1/2010 ............................... 300 315 4.625%, Due 4/1/2014 .............................. 550 477 ---------- 6,608 ---------- BEVERAGES - 0.30% Constellation Brands, Inc., 7.25%, Due 9/1/2016 ............................... 300 302 ---------- COMMUNICATIONS - 1.52% Comcast Cable Communications Holdings, Inc., 8.375%, Due 3/15/2013 ............................. 550 621 DirecTV Holdings LLC/DirecTV Financing Co., 8.375%, Due 3/15/2013 ............................. 300 313 Idearc, Inc., 8.00%, Due 11/15/2016 ............................. 285 286 Time Warner Cable, Inc., 5.85%, Due 5/1/2017 ............................... 300 297 ---------- 1,517 ---------- PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) CONSUMER DISCRETIONARY - 0.77% Supervalu, Inc., 7.50%, Due 11/15/2014 ............................. $ 325 $ 334 Wal-Mart Stores, Inc., 7.55%, Due 2/15/2030 .............................. 250 292 Wesco Distribution, Inc., 7.50%, Due 10/15/2017 ............................. 150 140 ---------- 766 ---------- CONSUMER STAPLES - 0.28% Dole Food Co., Inc., 8.875%, Due 3/15/2011 ............................. 142 139 Hanesbrands, Inc., 8.784%, Due 12/15/2014 # .......................... 140 141 ---------- 280 ---------- ENERGY - 0.54% Canadian Natural Resources Ltd., 6.25%, Due 3/15/2038 .............................. 300 296 EOG Resources, Inc., 4.75%, Due 3/15/2014 ++ ........................... 250 245 ---------- 541 ---------- FINANCE - 4.87% American General Finance Corp., 4.875%, Due 5/15/2010 ............................. 300 298 Capital One Financial Corp., 5.70%, Due 9/15/2011 .............................. 310 307 E*Trade Financial Corp., 7.875%, Due 12/1/2015 + ........................... 300 285 General Electric Capital Corp., 5.65%, Due 6/9/2014 ............................... 550 560 Goldman Sachs Group, Inc., 4.75%, Due 7/15/2013 .............................. 250 240 6.25%, Due 9/1/2017 ............................... 250 254 HSBC Finance Corp., 5.25%, Due 1/14/2011 + ............................ 1,050 1,045 International Lease Finance Corp., 6.375%, Due 3/15/2009 ............................. 725 737 Lehman Brothers Holdings, Inc., 4.25%, Due 1/27/2010 + ............................ 350 339 Merrill Lynch & Co., Inc., 6.11%, Due 1/29/2037 .............................. 250 230 Wells Fargo & Co., 5.25%, Due 10/23/2012 ............................. 560 561 ---------- 4,856 ---------- HEALTH CARE - 0.37% Psychiatric Solutions, Inc., 7.75%, Due 7/15/2015 .............................. 125 127 See accompanying notes 63 AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Tenet Healthcare Corp., 9.25%, Due 2/1/2015 + ............................. $ 275 $ 242 ---------- 369 ---------- INDUSTRIALS - 3.70% Caterpillar Financial Services Corp., 4.15%, Due 1/15/2010 .............................. 300 296 Daimler Finance NA LLC, 5.875%, Due 3/15/2011 ............................. 350 357 5.75%, Due 9/8/2011 ............................... 250 255 Ford Motor Credit Co. LLC, 8.625%, Due 11/1/2010 ............................. 285 277 Gardner Denver, Inc., 8.00%, Due 5/1/2013 ............................... 300 306 Goodyear Tire & Rubber Co., 7.857%, Due 8/15/2011 ............................. 300 310 John Deere Capital Corp., 4.125%, Due 1/15/2010 + ........................... 750 739 NBTY, Inc., 7.125%, Due 10/1/2015 ............................. 150 148 Nissan Motor Acceptance Corp., 5.625%, Due 3/14/2011 ++ .......................... 300 305 Norfolk Southern Corp., 8.625%, Due 5/15/2010 ............................. 310 336 Union Pacific Corp., 6.50%, Due 4/15/2012 .............................. 350 366 ---------- 3,695 ---------- INSURANCE - 3.73% Aegon Funding Corp., 5.75%, Due 12/15/2020 ............................. 350 351 American International Group, Inc., 6.25%, Due 5/1/2036 ............................... 250 255 ASIF Global Financing, 3.90%, Due 10/22/2008 ++ .......................... 500 494 Hartford Financial Services Group, Inc., 5.25%, Due 10/15/2011 ............................. 700 696 John Hancock Global Funding II, 7.90%, Due 7/2/2010 ++ ............................ 675 724 Lincoln National Corp., 4.75%, Due 2/15/2014 .............................. 200 192 MetLife, Inc., 6.375%, Due 6/15/2034 + ........................... 275 278 Metropolitan Life Global Funding I, 4.625%, Due 8/19/2010 ++ .......................... 500 499 Prudential Financial, Inc., 4.50%, Due 7/15/2013 .............................. 250 238 ---------- 3,727 ---------- PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) INTERNET & CATALOG RETAIL - 0.31% Expedia, Inc., 7.456%, Due 8/15/2018 ............................. $ 300 $ 309 ---------- REAL ESTATE - 1.84% iStar Financial, Inc., 5.85%, Due 3/15/2017 + ............................ 450 402 ProLogis Trust, 5.50%, Due 4/1/2012 ............................... 350 346 5.625%, Due 11/15/2016 ............................ 350 336 Simon Property Group LP, 6.375%, Due 11/15/2007 ............................ 400 400 5.375%, Due 6/1/2011 .............................. 350 349 ---------- 1,833 ---------- TECHNOLOGY - 0.86% Cisco Systems, Inc., 5.25%, Due 2/22/2011 .............................. 350 354 Sungard Data Systems, Inc., 9.125%, Due 8/15/2013 ............................. 300 306 Syniverse Technologies, Inc., 7.75%, Due 8/15/2013 .............................. 200 197 ---------- 857 ---------- TELEPHONE - 1.67% America Movil, S.A. de C.V., 6.375%, Due 3/1/2035 + ............................ 250 257 AT&T Wireless Services, Inc., 7.875%, Due 3/1/2011 + ............................ 250 271 AT&T, Inc., 5.625%, Due 6/15/2016 ............................. 350 353 6.80%, Due 5/15/2036 + ............................ 175 192 Verizon Communications, Inc., 5.50%, Due 4/1/2017 + ............................. 300 300 Vodafone Group plc, 6.15%, Due 2/27/2037 .............................. 300 294 ---------- 1,667 ---------- UTILITIES - 0.25% MidAmerican Energy Holdings Co., 6.125%, Due 4/1/2036 .............................. 250 247 ---------- TOTAL CORPORATE OBLIGATIONS .......................... 27,825 ---------- CONVERTIBLE OBLIGATIONS - 13.29% BANKS - 0.28% Bank of America Corp., 0.25%, Due 2/15/2012 .............................. 270 278 ---------- See accompanying notes 64 AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) COMMUNICATIONS - 1.89% Juniper Networks, Inc., Zero Coupon, Due 6/15/2008 ## ..................... $ 292 $ 524 Liberty Media LLC, 0.75%, Due 3/30/2023 .............................. 320 350 Omnicom Group, Inc., Zero Coupon, Due 7/1/2038 ## + .................... 270 297 VeriSign, Inc., 3.25%, Due 8/15/2037 ++ ........................... 410 489 Walt Disney Co., 2.125%, Due 4/15/2023 + ........................... 185 224 ---------- 1,884 ---------- CONSUMER DISCRETIONARY - 0.42% Carnival Corp., 2.00%, Due 4/15/2021 .............................. 335 417 ---------- ELECTRIC UTILITIES - 0.17% CenterPoint Energy, Inc., 3.75%, Due 5/15/2023 .............................. 110 166 ---------- ENERGY - 1.51% Cameron International Corp., 2.50%, Due 6/15/2026 .............................. 275 431 Nabors Industries, Inc., Zero Coupon, Due 6/15/2023 ## + ................... 280 283 Schlumberger Ltd., 2.125%, Due 6/1/2023 .............................. 145 350 SESI LLC, 1.50%, Due 12/15/2026 ++ .......................... 270 283 Transocean, Inc., 1.50%, Due 5/15/2021 + ............................ 100 165 ---------- 1,512 ---------- FINANCE - 0.32% Lehman Brothers Holdings, Inc., 0.25%, Due 2/16/2012 .............................. 270 323 ---------- HEALTH CARE - 0.29% Medtronic, Inc., 1.50%, Due 4/15/2011 + ............................ 280 289 ---------- INDUSTRIALS - 1.66% Alliant Techsystems, Inc., 2.75%, Due 9/15/2011 ++ ........................... 320 407 Danaher Corp., Zero Coupon, Due 1/22/2021 ## ..................... 205 255 Fisher Scientific International, Inc., 3.25%, Due 3/1/2024 + ............................. 400 635 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Lockheed Martin Corp., 5.308%, Due 8/15/2033 # ........................... $ 83 $ 127 Tektronix, Inc., 1.625%, Due 7/15/2012 ++ .......................... 225 237 ---------- 1,661 ---------- INSURANCE - 0.45% Prudential Financial, Inc., 3.304%, Due 12/12/2036 + # ........................ 435 445 ---------- PHARMACEUTICALS - 2.26% Beckman Coulter, Inc., 2.50%, Due 12/15/2036 + ........................... 203 231 2.50%, Due 12/15/2036 ++ .......................... 210 238 Charles River Laboratories International, Inc., 2.25%, Due 6/15/2013 .............................. 273 359 Gilead Sciences, Inc., 0.50%, Due 5/1/2011 ++ ............................ 360 468 Invitrogen Corp., 1.50%, Due 2/15/2024 .............................. 246 257 Sciele Pharma, Inc., 2.625%, Due 5/15/2027 ............................. 430 470 Watson Pharmaceuticals, Inc., 1.75%, Due 3/15/2023 .............................. 236 228 ---------- 2,251 ---------- REAL ESTATE - 0.24% GSC Holdings Corp., 8.00%, Due 10/1/2012 .............................. 225 235 ---------- SERVICES - 0.95% priceline.com, Inc., 0.50%, Due 9/30/2011 ++ ........................... 160 374 2.25%, Due 1/15/2025 + ............................ 140 339 Quanta Services, Inc., 3.75%, Due 4/30/2026 ++ ........................... 150 237 ---------- 950 ---------- TECHNOLOGY - 2.85% Cadence Design Systems, Inc., 1.375%, Due 12/15/2011 ++ ......................... 305 330 Cypress Semiconductor Corp., 1.00%, Due 9/15/2009 + ............................ 210 334 DRS Technologies, Inc., 2.00%, Due 2/1/2026 ++ ............................ 310 342 Electronics for Imaging, Inc., 1.50%, Due 6/1/2023 ............................... 212 219 EMC Corp., 1.75%, Due 12/1/2011 .............................. 280 471 See accompanying notes 65 AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Intel Corp., 2.95%, Due 12/15/2035 ............................. $ 486 $ 519 Linear Technology Corp., 3.00%, Due 5/1/2027 ............................... 90 86 3.00%, Due 5/1/2027 ++ ............................ 138 131 ON Semiconductor Corp., 2.625%, Due 12/15/2026 ++ ......................... 140 168 Tech Data Corp., 2.75%, Due 12/15/2026 ............................. 250 248 ---------- 2,848 ---------- TOTAL CONVERTIBLE OBLIGATIONS ........................ 13,259 ---------- NON-AGENCY MORTGAGE-BACKED OBLIGATIONS - 3.24% COMMERCIAL MORTGAGE-BACKED SECURITY - 3.24% Banc of America Commercial Mortgage, Inc., 2005-6, 5.001%, Due 9/10/2047 ..................... 607 605 2007-2 A2, 5.634%, Due 4/10/2049 .................. 650 655 JP Morgan Chase Commercial Mortgage Securities Corp., 2005-LDP3 A1, 4.655%, Due 8/15/2042 ............... 221 220 2005-LDP4 A1, 4.613%, Due 10/15/2042 .............. 88 88 2007-CB19 A4, 5.747%, Due 2/12/2049 ............... 400 403 2007-CB20 A2, 5.629%, Due 2/12/2051 ............... 550 553 LB-UBS Commercial Mortgage Trust, 2004-C1 A4, 5.424%, Due 2/15/2040 ................. 450 442 Wachovia Bank Commercial Mortgage Trust, 2007-C32 A2, 5.736%, Due 6/15/2049 ................ 260 263 ---------- TOTAL NON-AGENCY MORTGAGE-BACKED OBLIGATIONS ......... 3,229 ---------- ASSET-BACKED SECURITIES - 3.78% American Express Credit Account Master Trust, 2006-2 A, 5.35%, Due 1/15/2014 .................... 1,050 1,066 Capital Auto Receivables Asset Trust, 2006-SN1A A4A, 5.32%, Due 3/20/2010 ++ ............ 900 904 Capital One Multi-Asset Execution Trust, 2006-A10 A10, 5.15%, Due 6/15/2014 ................ 800 806 Volkswagen Auto Loan Enhanced Trust, 2005-1 A4, 4.86%, Due 4/20/2012 ................... 1,000 1,000 ---------- TOTAL ASSET-BACKED SECURITIES ........................ 3,776 ---------- U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS - 20.92% FEDERAL HOME LOAN MORTGAGE CORPORATION - 8.33% 5.00%, Due 2/1/2021 ............................... 1,369 1,349 4.50%, Due 4/1/2021 ............................... 1,258 1,217 5.00%, Due 5/1/2021 ............................... 1,286 1,268 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) 5.50%, Due 11/1/2021 .............................. $ 1,041 $ 1,043 5.00%, Due 9/1/2035 ............................... 2,570 2,469 5.50%, Due 4/1/2037 ............................... 982 967 ---------- 8,313 ---------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 8.71% 6.50%, Due 7/1/2032 ............................... 493 508 5.50%, Due 6/1/2033 ............................... 1,069 1,056 5.50%, Due 6/1/2034 ............................... 544 537 4.50%, Due 9/1/2034 ............................... 467 436 5.50%, Due 12/1/2035 .............................. 1,100 1,086 5.00%, Due 2/1/2036 ............................... 1,745 1,677 5.50%, Due 4/1/2036 ............................... 1,705 1,682 6.00%, Due 9/1/2036 ............................... 1,696 1,709 ---------- 8,691 ---------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 3.88% 4.201%, Due 8/16/2026 ............................. 646 636 6.00%, Due 2/15/2033 .............................. 1,026 1,042 5.50%, Due 4/15/2033 .............................. 1,316 1,309 5.00%, Due 5/15/2033 .............................. 908 883 ---------- 3,870 ---------- TOTAL U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS ........ 20,874 ---------- U.S. AGENCY OBLIGATIONS - 4.13% FEDERAL HOME LOAN BANK - 0.79% 4.50%, Due 9/16/2013 + ............................ 800 790 ---------- FEDERAL HOME LOAN MORTGAGE CORPORATION - 1.94% 5.125%, Due 4/18/2011 + ........................... 1,900 1,941 ---------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 1.40% 5.375%, Due 6/12/2017 + ........................... 1,350 1,393 ---------- TOTAL U.S. AGENCY OBLIGATIONS ........................ 4,124 ---------- U.S. TREASURY OBLIGATIONS - 15.50% 7.875%, Due 2/15/2021 + ........................... 1,400 1,831 6.25%, Due 8/15/2023 + ............................ 650 754 6.875%, Due 8/15/2025 + ........................... 800 997 5.25%, Due 11/15/2028 + ........................... 900 955 5.375%, Due 2/15/2031 + ........................... 825 894 3.875%, Due 5/15/2010 + ........................... 1,000 999 4.875%, Due 4/30/2011 + ........................... 2,100 2,158 4.50%, Due 3/31/2012 + ............................ 3,740 3,797 4.75%, Due 5/15/2014 + ............................ 1,700 1,747 4.125%, Due 5/15/2015 + ........................... 1,350 1,331 ---------- TOTAL U.S. TREASURY OBLIGATIONS ...................... 15,463 ---------- See accompanying notes 66 AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) SHORT TERM INVESTMENTS - 3.30% American Beacon Money Market Select Fund **........ 3,296,718 $ 3,297 ---------- SECURITIES LENDING COLLATERAL - 24.80% American Beacon Cash Plus Trust **....... ......... 17,847,800 17,848 American Beacon Money Market Select Fund **........ 6,897,854 6,898 ---------- TOTAL SECURITIES LENDING COLLATERAL .................. 24,746 ---------- TOTAL INVESTMENTS 123.95% - (COST $120,208) .......... 123,690 LIABILITIES, NET OF OTHER ASSETS - (23.95%) .......... (23,901) ---------- TOTAL NET ASSETS - 100.00% ........................... $ 99,789 ========== 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, 2007. ++ 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 $7,668 or 7.68% 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. ** The Fund/Trust is affiliated by having the same investment advisor. See accompanying notes 67 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) CORPORATE OBLIGATIONS - 27.93% AEROSPACE & DEFENSE - 0.18% Raytheon Co., 5.375%, Due 4/1/2013 ................ $ 200 $ 200 ---------- BANKS - 5.40% Banco Popular North America, Inc., 4.25%, Due 4/1/2008 ................................... 200 199 Bank of America Corp., 5.375%, Due 8/15/2011 + ........................ 185 187 5.375%, Due 6/15/2014 + ........................ 200 199 7.80%, Due 9/15/2016 ........................... 400 447 6.00%, Due 9/1/2017 ............................ 200 204 Bank One Corp., 5.90%, Due 11/15/2011 .......................... 440 450 4.90%, Due 4/30/2015 ........................... 200 190 Citigroup, Inc., 5.125%, Due 2/14/2011 ........... 1,000 1,001 Credit Suisse First Boston, 6.50%, Due 5/1/2008 + ++ .................................. 350 352 ING Bank, NV, 5.125%, Due 5/1/2015 ++ ............. 250 241 JP Morgan Chase & Co., 6.75%, Due 2/1/2011 ........ 500 524 National City Bank, 4.50%, Due 3/15/2010 .......... 600 594 Synovus Financial Corp., 4.875%, Due 2/15/2013 .... 200 197 Wachovia Corp., 5.30%, Due 10/15/2011 .......................... 200 200 5.70%, Due 8/1/2013 ............................ 135 136 Washington Mutual Finance Corp., 6.875%, Due 5/15/2011 .......................... 230 242 Washington Mutual, Inc., 8.25%, Due 4/1/2010 ............................ 200 210 4.625%, Due 4/1/2014 ........................... 400 347 ---------- 5,920 ---------- BASIC MATERIALS - 0.19% Weyerhaeuser Co., 5.95%, Due 11/1/2008 ............ 210 211 ---------- COMMUNICATIONS - 1.12% Comcast Cable Communications Holdings, Inc., 8.375%, Due 3/15/2013 .......................... 400 452 Comcast Corp., 5.30%, Due 1/15/2014 ........................... 220 216 5.875%, Due 2/15/2018 .......................... 135 135 Time Warner Cable, Inc., 5.85%, Due 5/1/2017 ...... 435 431 ---------- 1,234 ---------- CONSUMER DISCRETIONARY - 0.58% Costco Wholesale Corp., 5.50%, Due 3/15/2017 ...... 135 133 Wal-Mart Stores, Inc., 4.55%, Due 5/1/2013 ............................ 280 273 7.55%, Due 2/15/2030 ........................... 200 234 ---------- 640 ---------- CONSUMER STAPLES - 0.35% Diageo Capital PLC, 5.75%, Due 10/23/2017 ......... 145 144 See accompanying notes 68 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) PepsiCo, Inc., 5.15%, Due 5/15/2012 + ............. $ 235 $ 238 ---------- 382 ---------- ELECTRIC/GAS - 0.21% Kraft Foods, Inc., 6.50%, Due 8/11/2017 ........... 215 226 ---------- ELECTRONIC COMPONENTS - 0.14% Tyco Electronics Group SA, 6.55%, Due 10/1/2017 ++ ............................... 150 153 ---------- ENERGY - 1.30% Apache Corp., 5.25%, Due 4/15/2013 ................ 360 361 Canadian Natural Resources Ltd., 6.70%, Due 7/15/2011 ........................... 135 142 5.70%, Due 5/15/2017 ........................... 140 139 6.25%, Due 3/15/2038 ........................... 200 198 EOG Resources, Inc., 4.75%, Due 3/15/2014 ++ ........................ 200 196 5.875%, Due 9/15/2017 .......................... 125 127 Marathon Oil Corp., 6.60%, Due 10/1/2037 .......... 80 83 Weatherford International, Inc., 5.95%, Due 6/15/2012 ++ ................................... 180 183 ---------- 1,429 ---------- FINANCE - 3.96% American General Finance Corp., 4.875%, Due 5/15/2010 .......................... 200 199 4.00%, Due 3/15/2011 ........................... 385 367 Ameriprise Financial, Inc., 5.35%, Due 11/15/2010 ................................. 335 338 Capital One Financial Corp., 5.70%, Due 9/15/2011 + ................................ 200 198 General Electric Capital Corp., 4.375%, Due 3/3/2012 + ......................... 350 340 5.65%, Due 6/9/2014 + .......................... 400 407 Goldman Sachs Group, Inc., 4.75%, Due 7/15/2013 ........................... 200 192 6.25%, Due 9/1/2017 ............................ 200 203 6.75%, Due 10/1/2037 ........................... 60 60 HSBC Finance Corp., 5.25%, Due 1/14/2011 + ........ 800 796 International Lease Finance Corp., 6.375%, Due 3/15/2009 .......................... 250 254 5.75%, Due 6/15/2011 + ......................... 165 167 Lehman Brothers Holdings, Inc., 4.25%, Due 1/27/2010 ........................... 200 194 6.20%, Due 9/26/2014 ........................... 50 50 Merrill Lynch & Co., Inc., 6.11%, Due 1/29/2037 ... 190 175 Wells Fargo & Co., 5.25%, Due 10/23/2012 .......... 400 401 ---------- 4,341 ---------- See accompanying notes 69 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ---------- ---------- (DOLLARS IN THOUSANDS) HEALTH CARE - 0.11% Covidien International Finance SA, 5.45%, Due 10/15/2012 ++ ....................... $ 120 $ 120 ---------- HEALTH CARE EQUIPMENT & SUPPLIES - 0.06% Covidien International Finance SA, 6.00%, Due 10/15/2017 ++ .............................. 60 61 ---------- INDUSTRIALS - 2.75% Caterpillar Financial Services Corp., 4.15%, Due 1/15/2010 .................................. 200 197 CRH America, Inc., 6.00%, Due 9/30/2016 ........... 315 310 Daimler Finance NA LLC, 5.875%, Due 3/15/2011 .......................... 200 204 5.75%, Due 9/8/2011 + .......................... 200 204 John Deere Capital Corp., 4.125%, Due 1/15/2010 + ........................ 500 492 5.40%, Due 10/17/2011 .......................... 235 238 Kraft Foods, Inc., 7.00%, Due 8/11/2037 ........... 135 147 Masco Corp., 6.125%, Due 10/3/2016 + .............. 135 134 Nissan Motor Acceptance Corp., 5.625%, Due 3/14/2011 ++ ............................... 200 203 Norfolk Southern Corp., 8.625%, Due 5/15/2010 ..... 190 206 Starbucks Corp., 6.25%, Due 8/15/2017 ............. 135 138 Union Pacific Corp., 3.875%, Due 2/15/2009 .......................... 335 330 6.50%, Due 4/15/2012 ........................... 200 209 ---------- 3,012 ---------- INSURANCE - 3.24% Aegon Funding Corp., 5.75%, Due 12/15/2020 ........ 200 200 American International Group, Inc., 6.25%, Due 5/1/2036 ................................... 200 204 ASIF Global Financing, 3.90%, Due 10/22/2008 ++ ... 300 296 Hartford Financial Services Group, Inc., 5.25%, Due 10/15/2011 + ........................ 450 448 5.375%, Due 3/15/2017 .......................... 195 190 John Hancock Global Funding II, 7.90%, Due 7/2/2010 ++ ................................ 550 590 Lincoln National Corp., 4.75%, Due 2/15/2014 ...... 100 96 MetLife, Inc., 5.375%, Due 12/15/2012 + ....................... 240 242 5.00%, Due 6/15/2015 ........................... 170 162 6.375%, Due 6/15/2034 .......................... 200 203 Metropolitan Life Global Funding I, 4.625%, Due 8/19/2010 ++ ............................... 400 399 Prudential Financial, Inc., 4.50%, Due 7/15/2013 + ......................... 200 191 5.10%, Due 9/20/2014 ........................... 210 203 Willis North America, Inc., 6.20%, Due 3/28/2017 .................................. 130 131 ---------- 3,555 ---------- See accompanying notes 70 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ----------- ---------- (DOLLARS IN THOUSANDS) PHARMACEUTICALS - 1.30% Abbott Laboratories, 5.60%, Due 5/15/2011 ........ $ 100 $ 102 Amgen, Inc., 4.00%, Due 11/18/2009 ............... 210 206 AstraZeneca plc, 5.40%, Due 9/15/2012 .......................... 320 323 6.45%, Due 9/15/2037 .......................... 125 132 Hospira, Inc., 6.05%, Due 3/30/2017 .............. 130 130 Schering-Plough Corp., 6.75%, Due 12/1/2033 ...... 185 198 Wyeth Corp., 5.50%, Due 2/1/2014 ................. 335 336 ---------- 1,427 ---------- REAL ESTATE - 1.62% Equity Residential, 5.125%, Due 3/15/2016 ........ 355 333 iStar Financial, Inc., 5.85%, Due 3/15/2017 + .... 300 268 ProLogis Trust, 7.10%, Due 4/15/2008 .......................... 220 221 5.50%, Due 4/1/2012 ........................... 200 197 5.625%, Due 11/15/2016 + ...................... 200 192 Simon Property Group LP, 6.375%, Due 11/15/2007 ........................ 200 200 5.375%, Due 6/1/2011 .......................... 200 199 5.75%, Due 12/1/2015 .......................... 170 167 ---------- 1,777 ---------- TECHNOLOGY - 0.43% Cisco Systems, Inc., 5.25%, Due 2/22/2011 .......................... 200 202 5.50%, Due 2/22/2016 + ........................ 270 271 ---------- 473 ---------- TELEPHONE - 2.37% America Movil, S.A. de C.V., 6.375%, Due 3/1/2035 + ................................ 200 206 AT&T Wireless Services, Inc., 7.875%, Due 3/1/2011 .................................. 200 217 AT&T, Inc., 5.10%, Due 9/15/2014 .......................... 220 216 5.625%, Due 6/15/2016 + ....................... 395 399 6.80%, Due 5/15/2036 + ........................ 100 109 Cingular Wireless Services, Inc., 8.75%, Due 3/1/2031 .................................. 170 220 Deutsche Telekom AG, 8.00%, Due 6/15/2010 ........ 150 161 Nextel Communications, Inc., 6.875%, Due 10/31/2013 + .............................. 290 291 Telecom Italia S.p.A., 4.00%, Due 11/15/2008 ..... 220 217 Telefonica Emisiones SAU, 5.984%, Due 6/20/2011 + ............................... 160 164 Verizon Communications, Inc., 5.50%, Due 4/1/2017 + ................................ 200 200 Vodafone Group plc, 6.15%, Due 2/27/2037 ......... 200 196 ---------- 2,596 ---------- UTILITIES - 2.62% Columbus Southern Power Co., 5.50%, Due 3/1/2013 + ................................ 320 319 Dominion Resources, Inc., Series A, 5.60%, Due 11/15/2016 ................................ 135 132 See accompanying notes 71 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ----------- ---------- (DOLLARS IN THOUSANDS) Duke Energy Indiana, Inc., 6.05%, Due 6/15/2016 + ............................... $ 205 $ 209 FPL Group Capital, Inc., 5.625%, Due 9/1/2011 .... 390 397 MidAmerican Energy Holdings Co., 5.875%, Due 10/1/2012 ......................... 405 415 6.125%, Due 4/1/2036 .......................... 200 198 Public Service Enterprise Group, Inc., 6.95%, Due 6/1/2012 .................................. 355 377 Southern Power Co., 6.25%, Due 7/15/2012 ......... 270 279 Virginia Electric and Power Co., 6.00%, Due 5/15/2037 ................................. 125 123 Xcel Energy, Inc., 5.613%, Due 4/1/2017 ++ ....... 431 424 ---------- 2,873 ---------- TOTAL CORPORATE OBLIGATIONS ...................... 30,630 ---------- NON-AGENCY MORTGAGE-BACKED OBLIGATIONS - 8.16% Banc of America Commercial Mortgage, Inc., 2005-6, 5.001%, Due 9/10/2047 ................. 303 303 2007-2 A2, 5.634%, Due 4/10/2049 .............. 450 453 Banc of America Mortgage Securities, Inc., 2004-8 3A1, 5.25%, Due 10/25/2019 .................... 618 609 Bear Stearns Commercial Mortgage Securities, Inc., 2006-T22 A2, 5.465%, Due 4/12/2038 ............ 265 267 2006-PW13 A4, 5.54%, Due 9/11/2041 ............ 95 94 2004-PWR5 A4, 4.831%, Due 7/11/2042 ........... 535 520 2005-T20 A2, 5.127%, Due 10/12/2042 ........... 430 429 Chase Mortgage Finance Corp., 2006-A1 A1, 6.045%, Due 9/25/2036 # ............................... 1,134 1,138 Citicorp Mortgage Securities, Inc., 2006-3 2A1, 5.50%, Due 6/25/2021 .......................... 494 490 Citigroup Commercial Mortgage Trust, 2004-C2 A3, 4.38%, Due 10/15/2041 ......................... 470 457 Countrywide Home Loan Mortgage Pass Through Trust, 2007-18 A1, 6.00%, Due 9/25/2037 .............. 372 370 General Electric Capital Commercial Mortgage Corp., 2003-C2 A2, 4.17%, Due 7/10/2037 ....... 312 309 JP Morgan Chase Commercial Mortgage Securities Corp., 2004-CBX A4, 4.529%, Due 1/12/2037 ............ 255 249 2005-LDP3 A1, 4.655%, Due 8/15/2042 ........... 127 126 2005-LDP4 A1, 4.613%, Due 10/15/2042 .......... 50 50 2005-LDP1 A2, 4.625%, Due 3/15/2046 ........... 505 499 2007-CB19 A4, 5.747%, Due 2/12/2049 ........... 300 302 2007-CB20 A2, 5.629%, Due 2/12/2051 ........... 400 402 LB-UBS Commercial Mortgage Trust, 2004-C1 A4, 5.424%, Due 2/15/2040 ......................... 300 295 Prime Mortgage Trust, 2005-2, 5.25%, Due 7/25/2020 ................................. 474 468 Wachovia Bank Commercial Mortgage Trust, 2007-C32 A2, 5.736%, Due 6/15/2049 ..................... 210 213 Wells Fargo Mortgage Backed Securities Trust, 2006-11 A8, 6.00%, Due 9/25/2036 .............. 389 386 2007-7 A1, 6.00%, Due 6/25/2037 ............... 519 515 ---------- TOTAL NON-AGENCY MORTGAGE-BACKED OBLIGATIONS ..... 8,944 ---------- ASSET-BACKED SECURITIES - 2.75% American Express Credit Account Master Trust, 2006-2 A, 5.35%, Due 1/15/2014 ................ 800 812 Capital Auto Receivables Asset Trust, 2006-SN1A A4A, 5.32%, Due 3/20/2010 ++ .................. 600 602 See accompanying notes 72 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ----------- ---------- (DOLLARS IN THOUSANDS) Capital One Multi-Asset Execution Trust, 2006-A10 A10, 5.15%, Due 6/15/2014 ..................... $ 600 $ 605 Chase Issuance Trust, 2007-15 A, 4.96%, Due 9/17/2012 ................................. 500 501 Volkswagen Auto Loan Enhanced Trust, 2005-1 A4, 4.86%, Due 4/20/2012 .......................... 500 500 ---------- TOTAL ASSET-BACKED SECURITIES .................... 3,020 ---------- U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS - 27.62% FEDERAL HOME LOAN MORTGAGE CORPORATION - 11.36% 5.50%, Due 9/1/2017 ........................... 216 217 4.50%, Due 3/1/2019 ........................... 616 598 5.00%, Due 10/1/2020 .......................... 612 604 5.00%, Due 7/1/2021 ........................... 538 530 5.50%, Due 11/1/2021 .......................... 434 434 5.00%, Due 11/1/2021 .......................... 96 94 5.50%, Due 4/1/2022 ........................... 46 46 5.00%, Due 5/1/2022 ........................... 184 182 6.50%, Due 9/1/2028 ........................... 89 92 6.00%, Due 8/1/2029 ........................... 314 319 5.00%, Due 8/1/2033 ........................... 779 749 5.50%, Due 2/1/2034 ........................... 1,135 1,120 6.00%, Due 8/1/2034 ........................... 549 554 6.50%, Due 4/1/2035 ........................... 47 48 5.00%, Due 8/1/2035 ........................... 514 494 5.00%, Due 9/1/2035 ........................... 428 411 5.50%, Due 11/1/2036 .......................... 866 853 5.897%, Due 12/1/2036 # ....................... 611 617 5.851%, Due 1/1/2037 # ........................ 756 764 5.783%, Due 3/1/2037 # ........................ 543 547 5.267%, Due 4/1/2037 # ........................ 591 589 5.50%, Due 4/1/2037 ........................... 982 967 5.50%, Due 5/1/2037 ........................... 1,117 1,100 6.00%, Due 7/1/2037 ........................... 485 488 6.50%, Due 8/1/2037 ........................... 40 41 ---------- 12,458 ---------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 14.36% 6.50%, Due 2/1/2017 ........................... 277 285 5.50%, Due 8/1/2017 ........................... 369 371 5.00%, Due 12/1/2017 .......................... 954 943 4.50%, Due 9/1/2018 ........................... 649 629 5.50%, Due 11/1/2018 .......................... 180 180 5.50%, Due 12/1/2018 .......................... 167 167 5.00%, Due 3/1/2020 ........................... 216 213 4.00%, Due 8/1/2020 ........................... 480 453 5.50%, Due 4/1/2021 ........................... 20 20 5.50%, Due 11/1/2021 .......................... 51 51 See accompanying notes 73 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ----------- ---------- (DOLLARS IN THOUSANDS) 5.00%, Due 3/1/2034 ........................... $ 979 $ 942 4.50%, Due 9/1/2034 ........................... 312 291 5.50%, Due 2/1/2035 ........................... 1,223 1,209 5.00%, Due 11/1/2035 .......................... 874 840 5.50%, Due 12/1/2035 .......................... 442 436 5.50%, Due 1/1/2036 ........................... 799 788 5.50%, Due 1/1/2036 ........................... 788 777 5.50%, Due 3/1/2036 ........................... 679 670 5.50%, Due 4/1/2036 ........................... 853 841 6.00%, Due 9/1/2036 ........................... 520 523 6.00%, Due 10/1/2036 .......................... 9 9 5.50%, Due 11/1/2036 .......................... 760 749 6.00%, Due 11/1/2036 .......................... 853 859 6.00%, Due 11/1/2036 .......................... 411 415 6.00%, Due 12/1/2036 .......................... 809 815 6.00%, Due 2/1/2037 ........................... 266 268 5.00%, Due 5/1/2037 ........................... 252 241 6.50%, Due 10/1/2037 .......................... 525 533 6.50%, Due TBA ................................ 1,200 1,228 ---------- 15,746 ---------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.90% 4.201%, Due 8/16/2026 ......................... 369 364 6.50%, Due 3/15/2028 .......................... 492 509 6.00%, Due 4/15/2031 .......................... 591 601 5.50%, Due 2/20/2034 .......................... 618 611 ---------- 2,085 ---------- TOTAL U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS ....... 30,289 ---------- U.S. AGENCY OBLIGATIONS - 8.60% FEDERAL HOME LOAN BANK - 1.69% 5.00%, Due 10/16/2009 + ....................... 1,005 1,009 5.25%, Due 11/3/2009 .......................... 250 252 4.50%, Due 9/16/2013 .......................... 600 593 ---------- 1,854 ---------- FEDERAL HOME LOAN MORTGAGE CORPORATION - 4.37% 5.25%, Due 2/24/2011 .......................... 1,260 1,271 5.875%, Due 3/21/2011 + ....................... 380 397 5.125%, Due 4/18/2011 + ....................... 1,400 1,430 5.40%, Due 3/17/2021 .......................... 965 979 6.00%, Due 12/15/2031 ......................... 710 718 ---------- 4,795 ---------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 2.54% 4.704%, Due 11/13/2007 ........................ 1,200 1,198 5.125%, Due 1/2/2014 .......................... 545 550 See accompanying notes 74 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ----------- ---------- (DOLLARS IN THOUSANDS) 5.375%, Due 6/12/2017 + ....................... $ 1,000 $ 1,033 ---------- 2,781 ---------- TOTAL U.S. AGENCY OBLIGATIONS ....................... 9,430 ---------- U.S. TREASURY OBLIGATIONS - 21.89% 9.125%, Due 5/15/2018 ......................... 400 551 7.875%, Due 2/15/2021 + ....................... 750 981 6.25%, Due 8/15/2023 + ........................ 650 754 6.875%, Due 8/15/2025 + ....................... 470 586 5.25%, Due 11/15/2028 + ....................... 650 690 5.375%, Due 2/15/2031 + ....................... 650 704 4.75%, Due 2/15/2037 + ........................ 1,240 1,239 4.875%, Due 8/15/2009 + ....................... 135 137 3.50%, Due 11/15/2009 + ....................... 1,000 992 3.875%, Due 5/15/2010 + ....................... 1,200 1,199 4.875%, Due 4/30/2011 + ....................... 2,300 2,364 4.50%, Due 3/31/2012 + ........................ 2,500 2,538 4.125%, Due 8/31/2012 + ....................... 2,165 2,163 4.75%, Due 5/15/2014 + ........................ 5,670 5,827 4.125%, Due 5/15/2015 + ....................... 1,500 1,479 4.75%, Due 8/15/2017 + ........................ 1,770 1,809 ---------- TOTAL U.S. TREASURY OBLIGATIONS .................. 24,013 ---------- SHARES ----------- SHORT TERM INVESTMENTS - 3.06% American Beacon Money Market Select Fund ** .................................. 3,358,978 3,359 ---------- SECURITIES LENDING COLLATERAL - 25.27% American Beacon Cash Plus Trust ** .......... 19,986,281 19,986 American Beacon Money Market Select Fund ** .................................. 7,724,339 7,725 ---------- TOTAL SECURITIES LENDING COLLATERAL .............. 27,711 ---------- TOTAL INVESTMENTS - 125.28% (COST $137,187) ......... $ 137,396 LIABILITIES, NET OF OTHER ASSETS - (25.28%) ......... (27,722) ---------- TOTAL NET ASSETS - 100.00% .......................... $ 109,674 ========== See accompanying notes 75 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 Percentages are stated as a percent of net assets. + All or a portion of this security is on loan at October 31, 2007. ++ 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 $3,820 or 3.48% 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. ** The Fund/Trust is affiliated by having the same investment advisor. See accompanying notes 76 AMERICAN BEACON SHORT-TERM BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ----------- ---------- (DOLLARS IN THOUSANDS) CORPORATE OBLIGATIONS - 62.63% BANKS - 17.78% Citigroup, Inc., 4.125%, Due 2/22/2010 ......................... $ 1,000 $ 983 4.625%, Due 8/3/2010 + ........................ 1,000 994 Comerica Bank, 6.00%, Due 10/1/2008 .............. 2,200 2,216 HSBC Bank USA NA, 3.875%, Due 9/15/2009 .......... 2,000 1,960 JP Morgan Chase & Co., 6.75%, Due 2/1/2011 ....... 2,000 2,094 National City Bank, 4.50%, Due 3/15/2010 ......... 2,000 1,979 National Westminster Bank plc, 7.375%, Due 10/1/2009 ................................. 2,000 2,103 Wachovia Corp., 5.30%, Due 10/15/2011 ............ 2,000 1,999 Washington Mutual, Inc., 8.25%, Due 4/1/2010 ..... 2,000 2,100 ---------- 16,428 ---------- COMMUNICATIONS - 2.18% Comcast Cable Communications, Inc., 6.20%, Due 11/15/2008 ................................ 2,000 2,018 ---------- FINANCE - 16.47% Capital One Financial Corp., 5.70%, Due 9/15/2011 ................................. 1,000 989 Countrywide Home Loans, Inc., 3.25%, Due 5/21/2008 + ............................... 2,000 1,901 Credit Suisse USA, Inc., 4.70%, Due 6/1/2009 + ................................ 2,000 1,994 General Electric Capital Corp., 5.875%, Due 2/15/2012 ................................. 3,000 3,089 Goldman Sachs Group, Inc., 6.65%, Due 5/15/2009 .. 1,000 1,021 Lehman Brothers Holdings, Inc., 4.25%, Due 1/27/2010 + ............................... 1,600 1,551 MBNA Corp., 7.50%, Due 3/15/2012 ................. 2,000 2,168 Merrill Lynch & Co., Inc., 6.00%, Due 2/17/2009 .. 2,500 2,503 ---------- 15,216 ---------- INDUSTRIALS - 8.05% Bunge Limited Finance Corp., 4.375%, Due 12/15/2008 ................................ 1,000 992 Caterpillar Financial Services Corp., 4.15%, Due 1/15/2010 ................................. 2,000 1,971 Daimler Finance NA LLC, 5.75%, Due 9/8/2011 ...... 1,000 1,019 John Deere Capital Corp., 4.125%, Due 1/15/2010 .. 2,500 2,463 Nissan Motor Acceptance Corp., 4.625%, Due 3/8/2010 ++ ............................... 1,000 991 ---------- 7,436 ---------- INSURANCE - 9.52% ASIF Global Financing, 3.90%, Due 10/22/2008 ++ .. 2,000 1,974 Hartford Financial Services Group, Inc., 5.25%, Due 10/15/2011 ................................ 700 696 ING Security Life Institutional Funding, 4.25%, Due 1/15/2010 ++ .............................. 1,500 1,491 John Hancock Global Funding II, 7.90%, Due 7/2/2010 ++ ............................... 2,000 2,145 Metropolitan Life Global Funding I, 4.625%, Due 8/19/2010 ++ .............................. 1,500 1,496 Monumental Global Funding II, 4.625%, Due 3/15/2010 ++ .............................. 1,000 993 ---------- 8,795 ---------- REAL ESTATE - 3.21% iStar Financial, Inc., 5.375%, Due 4/15/2010 ..... 1,000 964 Simon Property Group LP, 6.375%, Due 11/15/2007 .. 2,000 2,000 ---------- 2,964 ---------- See accompanying notes 77 AMERICAN BEACON SHORT-TERM BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 PAR AMOUNT VALUE ----------- ---------- (DOLLARS IN THOUSANDS) TELEPHONE - 3.28% AT&T Corp., 6.00%, Due 3/15/2009 ................. $ 2,000 $ 2,027 Vodafone Group plc, 5.50%, Due 6/15/2011 ......... 1,000 1,009 ---------- 3,036 ---------- UTILITIES - 2.14% MidAmerican Energy Holdings Co., 3.50%, Due 5/15/2008 ................................. 2,000 1,983 ---------- TOTAL CORPORATE OBLIGATIONS ...................... 57,876 ---------- NON-AGENCY MORTGAGE-BACKED OBLIGATIONS - 2.35% Banc of America Commercial Mortgage, Inc., 2005-6, 5.001%, Due 9/10/2047 ................. 607 605 2007-2 A2, 5.634%, Due 4/10/2049 .............. 800 806 Wachovia Bank Commercial Mortgage Trust, 2006-C23 A1, 5.203%, Due 1/15/2045 ..................... 762 762 ---------- TOTAL NON-AGENCY MORTGAGE-BACKED OBLIGATIONS ..... 2,173 ---------- ASSET-BACKED SECURITIES - 22.90% Banc of America Securities Auto Trust, 2005-WF1 A4, 4.08%, Due 4/18/2010 ...................... 3,000 2,981 Capital Auto Receivables Asset Trust, 2006-SN1A A4A, 5.32%, Due 3/20/2010 ++ ........ 2,000 2,008 2006-1 A4, 5.04%, Due 5/17/2010 ............... 250 251 CarMax Auto Owner Trust, 2005-3 A4, 4.91%, Due 1/18/2011 ................................. 1,200 1,201 Chase Manhattan Auto Owner Trust, 2006-A A4, 5.36%, Due 1/15/2013 .......................... 2,000 2,018 DaimlerChrysler Auto Trust, 2004-C A4, 3.28%, Due 12/8/2009 ................................. 2,041 2,023 Harley-Davidson Motorcycle Trust, 5.52%, Due 11/15/2013 ................................ 2,000 2,019 HSBC Automotive Trust, 2005-1 A4, 4.35%, Due 6/18/2012 ................................. 3,000 2,979 USAA Auto Owner Trust, 5.55%, Due 2/15/2013 ...... 3,000 3,051 Volkswagen Auto Loan Enhanced Trust, 2005-1 A4, 4.86%, Due 4/20/2012 .......................... 1,500 1,500 Wells Fargo Financial Auto Owner Trust, 2004-A A4, 2.67%, Due 8/16/2010 .......................... 1,130 1,129 ---------- TOTAL ASSET-BACKED SECURITIES .................... 21,160 ---------- U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS - 2.98% GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 2.98% 4.968%, Due 9/15/2008 ......................... 936 933 4.201%, Due 8/16/2026 ......................... 1,846 1,817 ---------- TOTAL U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS .... 2,750 ---------- SHARES ----------- SHORT TERM INVESTMENTS - 8.22% American Beacon Money Market Select Fund # ....... 7,599,385 7,599 ---------- SECURITIES LENDING COLLATERAL - 4.89% American Beacon Cash Plus Trust # ................ 3,257,727 3,258 See accompanying notes 77 AMERICAN BEACON SHORT-TERM BOND FUND SCHEDULE OF INVESTMENTS OCTOBER 31, 2007 SHARES VALUE ----------- ---------- (DOLLARS IN THOUSANDS) American Beacon Money Market Select Fund # ....... $ 1,259,053 $ 1,259 ---------- TOTAL SECURITIES LENDING COLLATERAL .............. 4,517 ---------- TOTAL INVESTMENTS - 103.97% (COST $95,935) .......... $ 96,075 LIABILITIES, NET OF OTHER ASSETS - (3.97%) .......... (3,672) ---------- TOTAL NET ASSETS - 100.00% .......................... $ 92,403 ========== Percentages are stated as a percent of net assets. + All or a portion of this security is on loan at October 31, 2007. ++ 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 $11,098 or 12.01% 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 79 AMERICAN BEACON FUNDS STATEMENTS OF ASSETS AND LIABILITIES OCTOBER 31, 2007 (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) BALANCED LARGE CAP MID-CAP FUND GROWTH FUND VALUE FUND ----------- ----------- ---------- ASSETS: Investments in unaffiliated securities, at value (A D) ...... $ 1,102,251 $ 97,100 $ 126,180 Investments in affiliated securities, at value (B) ........ 297,292 25,413 21,783 Foreign currency, at value (C) ..... -- -- -- Cash ............................... -- -- -- Receivable for investments sold .... 740 131 461 Dividends and interest receivable .. 5,429 71 102 Receivable for fund shares sold .... 1,095 135 105 Receivable for tax reclaims ........ 7 -- -- Receivable for expense reimbursement ................... -- -- -- Receivable for variation margin on open futures contracts .......... 727 57 58 Prepaid Expenses ................... 16 -- 16 ----------- ----------- ---------- TOTAL ASSETS .................... 1,407,557 122,907 148,705 ----------- ----------- ---------- LIABILITIES: Payable for investments purchased .. 3,723 -- 252 Payable upon return of securities loaned .......................... 240,190 20,879 19,485 Payable for fund shares redeemed ... 370 20 629 Dividends payable .................. -- -- -- Payable under excess expense reimbursement plan .............. 1 -- 8 Management and investment advisory fees payable (Note 2) ........... 766 149 271 Administrative service and service fees payable .................... 100 -- 19 Net unrealized depreciation on foreign currency contracts ...... -- -- -- Other liabilities .................. 170 42 41 ----------- ----------- ---------- TOTAL LIABILITIES ............... 245,320 21,090 20,705 ----------- ----------- ---------- NET ASSETS ............................ $ 1,162,237 $ 101,817 $ 128,000 =========== =========== ========== ANALYSIS OF NET ASSETS: Paid-in-capital ....................... 938,715 87,335 117,684 Undistributed net investment income ... 26,249 552 1,243 Accumulated net realized gain (loss) .. 53,946 2,411 7,079 Unrealized appreciation (depreciation) of investments, futures contracts, and foreign currency ............... 143,327 11,519 1,994 ----------- ----------- ---------- NET ASSETS ............................ $ 1,162,237 $ 101,817 $ 128,000 =========== =========== ========== Shares outstanding (no par value): Institutional Class ................ 3,194,857 15,475 549,062 =========== =========== ========== PlanAhead Class .................... 13,437,427 N/A 3,939,042 =========== =========== ========== Service Class ...................... 635,889 N/A 84 =========== =========== ========== AMR Class .......................... 58,024,587 13,164,840 7,116,449 =========== =========== ========== Net asset value, offering and redemption price per share: Institutional Class ................ $ 16.09 $ 7.67 $ 11.01 =========== =========== ========== PlanAhead Class .................... $ 15.09 N/A $ 10.96 =========== =========== ========== Service Class ...................... $ 14.95 N/A $ 10.94 =========== =========== ========== AMR Class .......................... $ 15.49 $ 7.72 $ 11.07 =========== =========== ========== A Cost of investments in unaffiliated securities ......................... $ 960,937 $ 85,615 $ 124,286 B Cost of investments in affiliated securities ......................... $ 297,292 $ 25,413 $ 21,783 C Cost of foreign currency ............ $ -- $ -- $ -- D Market value of securities on loan ............................... $ 250,817 $ 23,775 $ 19,957 See accompanying notes 80 SMALL CAP VALUE EMERGING ENHANCED OPPORTUNITY MARKETS HIGH YIELD INCOME INTERMEDIATE SHORT-TERM FUND FUND BOND FUND FUND BOND FUND BOND FUND ----------- ----------- ----------- ---------- ------------ ----------- ASSETS: Investments in unaffiliated securities, at value (A D) ...... $ 29,724 $ 277,043 $ 226,280 $ 95,648 $ 106,326 $ 83,959 Investments in affiliated securities, at value (B) ........ 7,545 48,008 7,085 28,042 31,070 12,116 Foreign currency, at value (C) ..... -- 1,980 -- -- -- -- Cash ............................... -- -- 16 -- -- -- Receivable for investments sold .... -- 1,002 -- 213 114 -- Dividends and interest receivable .. 21 345 4,817 817 1,016 796 Receivable for fund shares sold .... -- 1,034 198 8 325 116 Receivable for tax reclaims ........ -- 7 9 1 1 -- Receivable for expense reimbursement ................... 5 -- -- -- -- -- Receivable for variation margin on open futures contracts .......... -- 240 -- -- -- -- Prepaid Expenses ................... -- 10 11 3 8 12 ---------- ----------- ----------- ---------- ----------- ----------- TOTAL ASSETS .................... 37,295 329,669 238,416 124,732 138,860 96,999 ---------- ----------- ----------- ---------- ----------- ----------- LIABILITIES: Payable for investments purchased .. -- 699 -- -- 1,327 -- Payable upon return of securities loaned .......................... 7,516 30,790 10,390 24,746 27,711 4,517 Payable for fund shares redeemed ... 5 -- 1,417 30 89 24 Dividends payable .................. -- -- 149 -- -- -- Payable under excess expense reimbursement plan .............. -- 8 -- -- -- -- Management and investment advisory fees payable (Note 2) ........... 47 602 366 89 23 20 Administrative service and service fees payable .................... 6 7 32 39 -- 3 Net unrealized depreciation on foreign currency contracts ...... -- 221 -- -- -- -- Other liabilities .................. 34 149 71 39 36 32 ---------- ----------- ----------- ---------- ----------- ----------- TOTAL LIABILITIES ............... 7,608 32,476 12,425 24,943 29,186 4,596 ---------- ----------- ----------- ---------- ----------- ----------- NET ASSETS ............................ $ 29,687 $ 297,193 $ 225,991 $ 99,789 $ 109,674 $ 92,403 ========== =========== =========== ========== =========== =========== ANALYSIS OF NET ASSETS: Paid-in-capital ....................... 31,648 160,956 230,153 93,725 117,822 99,446 Undistributed net investment income ... 126 2,180 503 575 502 19 Accumulated net realized gain (loss) .. (359) 42,193 (1,914) 2,007 (8,859) (7,202) Unrealized appreciation (depreciation) of investments, futures contracts, and foreign currency ............... (1,728) 91,864 (2,751) 3,482 209 140 ---------- ----------- ----------- ---------- ----------- ----------- NET ASSETS ............................ $ 29,687 $ 297,193 $ 225,991 $ 99,789 $ 109,674 $ 92,403 ========== =========== =========== ========== =========== =========== Shares outstanding (no par value): Institutional Class ................ 2,864,987 569,015 11,369,985 N/A 10,862,137 10,170,069 ========== =========== =========== ========== =========== =========== PlanAhead Class .................... 8,891 489,048 2,843,594 9,501,527 N/A 337,989 ========== =========== =========== ========== =========== =========== Service Class ...................... N/A N/A N/A N/A N/A N/A ========== =========== =========== ========== =========== =========== AMR Class .......................... N/A 11,147,877 8,143,965 N/A N/A N/A ========== =========== =========== ========== =========== =========== Net asset value, offering and redemption price per share: Institutional Class ................ $ 10.33 $ 24.20 $ 10.11 N/A $ 10.10 $ 8.79 ========== =========== =========== ========== =========== =========== PlanAhead Class .................... $ 10.28 $ 23.91 $ 10.11 $ 10.50 N/A $ 8.81 ========== =========== =========== ========== =========== =========== Service Class ...................... N/A N/A N/A N/A N/A N/A ========== =========== =========== ========== =========== =========== AMR Class .......................... N/A $ 24.37 $ 10.11 N/A N/A N/A ========== =========== =========== ========== =========== =========== A Cost of investments in unaffiliated securities .......................... $ 31,452 $ 185,298 $ 229,031 $ 92,166 $ 106,117 $ 83,819 B Cost of investments in affiliated securities .......................... $ 7,545 $ 48,008 $ 7,085 $ 28,042 $ 31,070 $ 12,116 C Cost of foreign currency ............ $ -- $ 1,951 $ -- $ -- $ -- $ -- D Market value of securities on loan ............................... $ 7,414 $ 30,083 $ 10,105 $ 24,308 $ 27,031 $ 4,419 See accompanying notes 81 AMERICAN BEACON FUNDS STATEMENTS OF OPERATIONS YEAR ENDED OCTOBER 31, 2007 (IN THOUSANDS) LARGE CAP MID-CAP BALANCED GROWTH VALUE FUND FUND FUND -------- --------- ------- INVESTMENT INCOME: Dividend income from unaffiliated securities (net of foreign taxes) (A) ...................... $14,285 $ 1,098 $ 2,174 Dividend income from affiliated securities ...................... 3,585 257 604 Interest income .................... 19,756 21 59 Income derived from securities lending, net .................... 366 16 38 ------- ------- ------- TOTAL INVESTMENT INCOME ...... 37,992 1,392 2,875 ------- ------- ------- EXPENSES: Management and investment advisory fees (Note 2) ................... 2,937 513 890 Administrative service fees (Note 2): Institutional Class ............. 117 -- 13 PlanAhead Class ................. 405 -- 87 Service Class ................... 12 -- -- Transfer agent fees: Institutional Class ............. 6 -- 5 PlanAhead Class ................. 43 -- 5 AMR Class .......................... 48 8 4 Custody and fund accounting fees ... 94 10 11 Professional fees .................. 47 26 25 Registration fees and expenses ..... 60 2 37 Service fees: PlanAhead Class ................. 405 -- 87 Service Class ................... 12 -- -- Distribution fees- Service Class (Note 2) ........................ 12 -- -- Prospectus and shareholder reports ......................... 52 4 12 Other expenses ..................... 117 14 22 ------- ------- ------- TOTAL EXPENSES ............... 4,367 577 1,198 ------- ------- ------- Net (fees waived and expenses reimbursed)/recouped by Manager (Note 2) ........................ -- -- (24) ------- ------- ------- NET EXPENSES ................. 4,367 577 1,174 ------- ------- ------- NET INVESTMENT INCOME ................. 33,625 815 1,701 ------- ------- ------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain from: (B) Investments ..................... 53,118 5,793 5,476 Commission recapture ............ 27 18 30 Foreign currency transactions ... -- -- -- Futures contracts ............... 7,668 462 2,397 Change in net unrealized appreciation or depreciation of: (C) Investments ..................... 2,634 4,104 (3,566) Foreign currency translations ... -- -- -- Futures contracts ............... (628) (19) (413) ------- ------- ------- NET GAIN (LOSS) ON INVESTMENTS 62,819 10,358 3,924 ------- ------- ------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .......... $96,444 $11,173 $ 5,625 ======= ======= ======= A Foreign taxes ....................... $ 28 $ -- $ 11 B Net of foreign withholding taxes on capital gains ...................... $ -- $ -- $ -- C Net of unrealized appreciation of foreign withholding taxes on capital gains .............................. $ -- $ -- $ -- See accompanying notes 82 SMALL CAP HIGH VALUE EMERGING YIELD ENHANCED OPPORTUNITY MARKETS BOND INCOME INTERMEDIATE SHORT-TERM FUND FUND FUND FUND BOND FUND BOND FUND ----------- -------- ------- -------- ------------ ---------- INVESTMENT INCOME: Dividend income from unaffiliated securities (net of foreign taxes) (A) ...................... $ 280 $ 4,648 $ -- $ 204 $ -- $ -- Dividend income from affiliated securities ...................... 20 502 751 203 194 330 Interest income .................... -- 33 24,627 4,304 5,046 3,908 Income derived from securities lending, net .................... 10 81 50 29 44 2 ------- -------- -------- ------ ------- ------- TOTAL INVESTMENT INCOME ...... 310 5,264 25,428 4,740 5,284 4,240 ------- -------- -------- ------ ------- ------- EXPENSES: Management and investment advisory fees (Note 2) ................... 85 1,638 1,572 366 254 219 Administrative service fees (Note 2): Institutional Class ............. 38 44 560 -- -- -- PlanAhead Class ................. -- 20 168 256 1 13 Service Class ................... -- -- -- -- -- -- Transfer agent fees: Institutional Class ............. 1 2 71 -- 6 2 PlanAhead Class ................. -- 8 1 4 1 6 AMR Class .......................... -- 13 5 -- -- -- Custody and fund accounting fees ... 2 1,011 41 14 13 11 Professional fees .................. 25 36 39 26 30 25 Registration fees and expenses ..... 38 30 36 17 29 27 Service fees: PlanAhead Class ................. -- 20 168 256 1 13 Service Class ................... -- -- -- -- -- -- Distribution fees- Service Class (Note 2) ........................ -- -- -- -- -- -- Prospectus and shareholder reports ......................... 2 9 30 9 10 12 Other expenses ..................... 6 19 21 18 8 24 ------- -------- -------- ------ ------- ------- TOTAL EXPENSES ............... 197 2,850 2,712 966 353 352 ------- -------- -------- ------ ------- ------- Net (fees waived and expenses reimbursed)/recouped by Manager (Note 2) ........................ (35) -- (23) -- (1) (5) ------- -------- -------- ------ ------- ------- NET EXPENSES ................. 162 2,850 2,689 966 352 347 ------- -------- -------- ------ ------- ------- NET INVESTMENT INCOME ................. 148 2,414 22,739 3,774 4,932 3,893 ------- -------- -------- ------ ------- ------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain from: (B) Investments ..................... (372) 41,112 1,834 2,870 280 237 Commission recapture ............ 1 -- -- -- -- -- Foreign currency transactions ... -- 1,410 -- -- -- -- Futures contracts ............... -- 985 -- -- -- -- Change in net unrealized appreciation or depreciation of: (C) Investments ..................... (1,878) 48,633 (3,549) 212 560 624 Foreign currency translations ... -- 6,877 -- -- -- -- Futures contracts ............... -- (170) -- -- -- -- ------- -------- -------- ------ ------- ------- NET GAIN (LOSS) ON INVESTMENTS (2,249) 98,847 (1,715) 3,082 840 861 ------- -------- -------- ------ ------- ------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .......... $(2,101) $101,261 $21,024 $6,856 $5,772 $4,754 ======= ======== ======= ====== ====== ====== A Foreign taxes ....................... $ -- $ 494 $ -- $ -- $ -- $ -- B Net of foreign withholding taxes on capital gains ...................... $ -- $ 108 $ -- $ -- $ -- $ -- C Net of unrealized appreciation of foreign withholding taxes on capital gains .............................. $ -- $ (122) $ -- $ -- $ -- $ -- See accompanying notes 83 AMERICAN BEACON FUNDS STATEMENTS OF CHANGES IN NET ASSETS (IN THOUSANDS) BALANCED FUND LARGE CAP GROWTH FUND MID-CAP VALUE FUND ---------------------- ---------------------- ---------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER OCTOBER OCTOBER OCTOBER OCTOBER OCTOBER 31, 2007 31, 2006 31, 2007 31, 2006 31, 2007 31, 2006 ---------- ---------- ---------- ---------- ---------- ---------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income ........................ $ 33,625 $ 26,125 $ 815 $ 628 $ 1,701 $ 647 Net realized gain (loss) on investments, futures contracts, and foreign currency transactions .............................. 60,813 44,566 6,273 3,826 7,903 2,249 Change in net unrealized appreciation or depreciation of investments, futures contracts, and foreign currency translations .............................. 2,006 42,383 4,085 3,999 (3,979) 6,534 ---------- -------- -------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .............. 96,444 113,074 11,173 8,453 5,625 9,430 ---------- -------- -------- -------- -------- -------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class ....................... (762) (359) (1) (1) (22) (9) PlanAhead Class ........................... (3,106) (2,286) -- -- (206) -- Service Class ............................. (43) -- -- -- -- -- AMR Class ................................. (23,927) (20,180) (737) (376) (563) (481) Net realized gain on investments: Institutional Class ....................... (1,300) (674) -- -- (86) (136) PlanAhead Class ........................... (5,825) (4,591) -- -- (706) -- Service Class ............................. (77) -- -- -- -- -- AMR Class ................................. (38,430) (35,228) -- -- (1,766) (9,132) ---------- -------- -------- -------- -------- -------- NET DISTRIBUTIONS TO SHAREHOLDERS ...... (73,470) (63,318) (738) (377) (3,349) (9,758) ---------- -------- -------- -------- -------- -------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares ................ 239,343 118,740 44,637 24,244 85,804 59,595 Reinvestment of dividends and distributions .. 72,959 62,858 738 376 3,346 9,756 Cost of shares redeemed ...................... (126,358) (91,106) (36,145) (13,832) (60,513) (16,516) Redemption fees .............................. -- -- -- -- 161 77 ---------- -------- -------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS ........................ 185,944 90,492 9,230 10,788 28,798 52,912 ---------- -------- -------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS ........... 208,918 140,248 19,665 18,864 31,074 52,584 ---------- -------- -------- -------- -------- -------- NET ASSETS: Beginning of period .......................... 953,319 813,071 82,152 63,288 96,926 44,342 ---------- -------- -------- -------- -------- -------- END OF PERIOD * .............................. $1,162,237 $953,319 $101,817 $ 82,152 $128,000 $ 96,926 ========== ======== ======== ======== ======== ======== *Includes undistributed net investment income (loss) of ............................. $ 26,249 $ 19,982 $ 552 $ 479 $ 1,243 $ 479 ========== ======== ======== ======== ======== ======== See accompanying notes 84 SMALL CAP VALUE EMERGING ENHANCED OPPORTUNITY FUND MARKETS FUND HIGH YIELD BOND FUND INCOME FUND ------------------ ------------------ -------------------- ------------------ FROM YEAR MARCH YEAR YEAR YEAR YEAR YEAR YEAR ENDED 31 TO ENDED ENDED ENDED ENDED ENDED ENDED OCTOBER OCTOBER OCTOBER OCTOBER OCTOBER OCTOBER OCTOBER OCTOBER 31, 2007 31, 2006 31, 2007 31, 2006 31, 2007 31, 2006 31, 2007 31, 2006 -------- -------- -------- -------- --------- -------- -------- -------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income ........................ $ 148 $ 4 $ 2,414 $ 1,361 $ 22,739 $ 23,832 $ 3,774 $ 3,578 Net realized gain (loss) on investments, futures contracts, and foreign currency transactions .............................. (371) 8 43,507 22,344 1,834 (3,640) 2,870 335 Change in net unrealized appreciation or depreciation of investments, futures contracts, and foreign currency translations .............................. (1,878) 150 55,340 14,943 (3,549) 6,614 212 3,410 ------- ------ -------- -------- --------- --------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .............. (2,101) 162 101,261 38,648 21,024 26,806 6,856 7,323 ------- ------ -------- -------- --------- --------- -------- -------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class ....................... (17) -- (101) (163) (16,871) (16,799) -- -- PlanAhead Class ........................... -- -- (15) (36) (4,915) (7,065) (4,171) (3,905) Service Class ............................. -- -- -- -- -- -- -- -- AMR Class ................................. -- -- (1,130) (1,551) (949) (1) -- -- Net realized gain on investments: Institutional Class ....................... (9) -- (2,407) (1,683) -- (2,254) -- -- PlanAhead Class ........................... -- -- (922) (425) -- (1,092) (74) (14) Service Class ............................. -- -- -- -- -- -- -- -- AMR Class ................................. -- -- (19,268) (14,022) -- -- -- -- ------- ------ -------- -------- --------- --------- -------- -------- NET DISTRIBUTIONS TO SHAREHOLDERS ...... (26) -- (23,843) (17,880) (22,735) (27,211) (4,245) (3,919) ------- ------ -------- -------- --------- --------- -------- -------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares ................ 29,224 4,644 87,824 34,209 209,900 161,075 15,667 30,206 Reinvestment of dividends and distributions .. 26 -- 23,764 17,795 19,203 23,167 4,245 3,919 Cost of shares redeemed ...................... (2,199) (43) (49,405) (22,127) (313,378) (208,965) (48,649) (23,955) Redemption fees .............................. -- -- 53 90 -- -- -- -- ------- ------ -------- -------- --------- --------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS ........................ 27,051 4,601 62,236 29,967 (84,275) (24,723) (28,737) 10,170 ------- ------ -------- -------- --------- --------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS ........... 24,924 4,763 139,654 50,735 (85,986) (25,128) (26,126) 13,574 ------- ------ -------- -------- --------- --------- -------- -------- NET ASSETS: Beginning of period .......................... 4,763 -- 157,539 106,804 311,977 337,105 125,915 112,341 ------- ------ -------- -------- --------- --------- -------- -------- END OF PERIOD * .............................. $29,687 $4,763 $297,193 $157,539 $ 225,991 $ 311,977 $ 99,789 $125,915 ======= ====== ======== ======== ========= ========= ======== ======== *Includes undistributed net investment income (loss) of ............................. $ 126 $ 7 $ 2,180 $ 1,129 $ 503 $ 499 $ 575 $ (1,012) ======= ====== ======== ======== ========= ========= ======== ======== See accompanying notes 85 AMERICAN BEACON FUNDS STATEMENTS OF CHANGES IN NET ASSETS (IN THOUSANDS) INTERMEDIATE SHORT-TERM BOND FUND BOND FUND --------------------- ------------------- YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED OCTOBER OCTOBER OCTOBER OCTOBER 31, 2007 31, 2006 31, 2007 31, 2006 ---------- -------- -------- -------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income .................................. $ 4,932 $ 4,299 $ 3,893 $ 2,997 Net realized gain (loss) on investments, futures contracts, and foreign currency transactions ........ 280 (987) 237 (294) Change in net unrealized appreciation or depreciation of investments, futures contracts, and foreign currency translations ............................... 560 1,283 624 952 --------- -------- -------- -------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ....................................... 5,772 4,595 4,754 3,655 --------- -------- -------- -------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class ................................. (4,946) (4,367) (4,046) (3,409) PlanAhead Class ..................................... (13) (41) (227) (375) --------- -------- -------- -------- NET DISTRIBUTIONS TO SHAREHOLDERS ................ (4,959) (4,408) (4,273) (3,784) --------- -------- -------- -------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares .......................... 26,882 18,558 22,984 13,507 Reinvestment of dividends and distributions ............ 4,957 4,405 4,264 3,775 Cost of shares redeemed ................................ (21,223) (19,229) (15,932) (24,812) --------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS ............................ 10,616 3,734 11,316 (7,530) --------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS ..................... 11,429 3,921 11,797 (7,659) --------- -------- -------- -------- NET ASSETS: Beginning of period .................................... 98,245 94,324 80,606 88,265 --------- -------- -------- -------- END OF PERIOD * ........................................ $ 109,674 $ 98,245 $ 92,403 $ 80,606 ========= ======== ======== ======== *Includes undistributed net investment income (loss) of ... $ 502 $ 502 $ 19 $ (304) ========= ======== ======== ======== See accompanying notes 86 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 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, as amended (the "Act"), 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 Administrative Service Fee - 0.25% investment of $2 million PLANAHEAD CLASS General public and investors Administrative Service Fee - 0.25% investing through an intermediary Service Fee - 0.25% SERVICE CLASS Investors investing through an Administrative Service Fee - 0.25% intermediary Service Fee - 0.25% Distribution Fee - 0.25% AMR CLASS Investors in the tax-exempt N/A retirement and benefit 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. Effective February 28, 2007, the PlanAhead Class of the Intermediate 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. 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 independent brokers. 87 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 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 Trust's 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, 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 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. The Fund bears the market risk that arises from changes in foreign exchange rates, and accordingly, the unrealized gain (loss) on these contracts is reflected in the accompanying financial statements. The Fund also bears the credit risk if the counterparty fails to perform under the contract. 88 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 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 at least 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 at least 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. 89 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 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, the Manager does not anticipate the adoption of FIN 48 to have a material impact on the financial statements. 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, 2007, the Manager does not believe the adoption of FAS 157 will materially impact the amounts represented in the financial statements; however, additional disclosures will be required about the inputs used to develop the measurements of fair value. 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. 90 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 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 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 that 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 its 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 Short-Term Bond Fund an annualized fee equal to 0.25% of the average daily net assets of the Fund. Management fees paid during the year ended October 31, 2007 were as follows (dollars in thousands): AMOUNTS PAID TO NET AMOUNTS MANAGEMENT FEE RATE MANAGEMENT FEE INVESTMENT ADVISORS RETAINED BY MANAGER ------------------- -------------- ------------------- ------------------- Balanced...................... 0.225%-0.70% $2,937 $1,855 $1,082 Large Cap Growth.............. 0.35%-0.55% 513 417 96 Mid-Cap Value................. 0.40%-1.10% 890 756 134 Small Cap Value Opportunity... 0.45%-0.55% 85 69 16 Emerging Markets.............. 0.79%-1.20% 1,638 1,436 202 High Yield Bond............... 0.35%-0.52% 1,572 1,268 304 Enhanced Income............... 0.25%-0.85% 366 264 102 Intermediate Bond............. 0.25% 254 82 172 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 Statements of Operations. During the year ended October 31, 2007, securities lending fees paid to the Manager were as follows (in thousands): Balanced ................................................................. $64 Large Cap Growth ......................................................... 3 Mid-Cap Value ............................................................ 7 Small Cap Value Opportunity .............................................. 2 Emerging Markets ......................................................... 14 High Yield Bond .......................................................... 8 Enhanced Income .......................................................... 5 Intermediate Bond ........................................................ 8 Short-Term Bond .......................................................... 1 Administrative Services Agreement The Manager and the Trust entered into an Administrative Services Agreement which obligates the Manager to provide or oversee administrative 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. 91 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 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 and administrative service 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 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 sub-advisor 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 $1,020 and $326, respectively for the year ended October 31, 2007. Investment in Affiliated Funds The Fund is permitted, pursuant to an exemptive order issued 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 (the "Cash Trust") (collectively, the "Affiliated Funds"). The Funds and 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, 2007, fees earned by the Manager from the Affiliated Funds were as follows: SECURITIES LENDING DIRECT INVESTMENT IN COLLATERAL INVESTED IN AFFILIATED FUNDS AFFILIATED FUNDS TOTAL -------------------- ---------------------- -------- Balanced...................... $68,111 $213,913 $282,024 Large Cap Growth.............. 1,620 12,319 13,939 Mid-Cap Value................. 11,464 22,713 34,177 Small Cap Value Opportunity... 379 3,538 3,917 Emerging Markets.............. 9,546 20,032 29,578 High Yield Bond............... 14,258 -- 14,258 Enhanced Income............... 3,856 24,447 28,303 Intermediate Bond............. 3,673 24,493 28,166 Short-Term Bond............... 6,272 3,072 9,344 92 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 Interfund Lending Program Pursuant to an exemptive order issued 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 year ended October 31, 2007, the following Funds had borrowings: DAYS INTEREST AVERAGE DEBT WEIGHTED AVERAGE OUTSTANDING CHARGES UTILIZED INTEREST RATE ----------- -------- ------------ ---------------- Large Cap Growth ... 4 $ 837 $1,409,316 5.42% High Yield Bond .... 5 2,022 2,719,130 5.43% Enhanced Income .... 16 8,912 3,762,586 5.40% Reimbursement of Expenses The Manager agreed to reimburse the following Funds to the extent that total annual fund operating expenses exceeded the Fund's expense cap. For the period ended October 31, 2007, the Manager waived or reimbursed expenses as follows: Expense Cap ------------------ 11/1/06 3/1/07 WAIVED OR TO TO REIMBURSED FUND CLASS 2/28/07 10/31/07 EXPENSES - ---- ----- ------- -------- ---------- Balanced ..................... Service 1.09% 1.10% -- Large Cap Growth ............. Institutional 0.90% 0.90% $ 178 Mid-Cap Value ................ Institutional 1.01% 0.90% 8,634 Mid-Cap Value ................ PlanAhead 1.23% 1.23% 10,507 Mid-Cap Value ................ Service N/A 1.50% -- Small Cap Value Opportunity .. Institutional 1.06% 1.05% 33,886 Small Cap Value Opportunity .. PlanAhead 1.31% 1.30% 803 Emerging Markets ............. PlanAhead 2.00% N/A -- Intermediate Bond ............ PlanAhead 0.95% N/A 783 Short-Term Bond .............. PlanAhead 0.87% 0.87% 5,426 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 causing its expense ratio to exceed the previously agreed upon contractual expense limit. The activity related to repayment of prior year fee waivers and expense reimbursements during the year ended October 31, 2007 was as follows: Balanced- Service Class. EXPIRATION LIABILITY AT LIABILITY AT YEAR 10/31/06 ACCRUED EXPIRED RECOUPED 10/31/07 - ---------- ------------ ------- ------- -------- ------------ 2007 $ -- $-- $-- $ -- $ -- 2008 1,650 -- -- 634 1,016 2009 13 -- -- -- 13 ------ --- --- ---- ------ $1,663 $-- $-- $634 $1,029 ====== === === ==== ====== 93 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 Emerging Markets- PlanAhead Class EXPIRATION LIABILITY AT LIABILITY AT YEAR 10/31/06 ACCRUED EXPIRED RECOUPED 10/31/07 - ---------- ------------ ------- ------- -------- ------------ 2007 $ 399 $-- $-- $399 $ -- 2008 5,148 -- -- 415 4,734 2009 2,926 -- -- -- 2,926 ------ --- --- ---- ------ $8,473 $-- $-- $814 $7,660 ====== === === ==== ====== Mid-Cap Value- AMR Class EXPIRATION LIABILITY AT LIABILITY AT YEAR 10/31/06 ACCRUED EXPIRED RECOUPED 10/31/07 - ---------- ------------ ------- ------- -------- ------------ 2007 $11,997 $-- $2,784 $9,213 $ -- 2008 7,258 -- 1,662 -- 5,596 2009 2,537 -- -- -- 2,537 ------- --- ------ ------ ------ $21,792 $-- $4,446 $9,213 $8,133 ======= === ====== ====== ====== High Yield Bond-Institutional Class EXPIRATION LIABILITY AT LIABILITY AT YEAR 10/31/06 ACCRUED EXPIRED RECOUPED 10/31/07 - ---------- ------------ ------- ------- -------- ------------ 2007 $34,513 $-- $22,697 $11,816 $-- 2008 62 -- -- 62 -- 2009 -- -- -- -- -- ------- --- ------- ------- --- $34,575 $-- $22,697 $11,878 $-- ======= === ======= ======= === The remaining Funds have not recorded a liability for potential reimbursement, due to the current assessment that a reimbursement is unlikely. Other At October 31, 2007, AMR Corporation and subsidiary companies and employee benefit trusts thereof owned the following percentage of each Fund: % OWNERSHIP ----------- Balanced ......................................................... 77% Large Cap Growth ................................................. 100% Mid-Cap Value .................................................... 61% Small Cap Value Opportunity ...................................... 7% Emerging Markets ................................................. 91% High Yield Bond .................................................. 36% Intermediate Bond ................................................ 98% Short-Term Bond .................................................. 93% 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 during the fiscal years ended October 31, 2007 and October 31, 2006 were as follows (in thousands): 94 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 BALANCED LARGE CAP GROWTH MID-CAP VALUE ------------------------- ------------------------- ------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, 2007 2006 2007 2006 2007 2006 ----------- ----------- ----------- ----------- ----------- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME* Institutional Class .......... $ 906 $ 405 $ 1 $ 1 $ 84 $ 114 PlanAhead Class .............. 3,751 2,594 -- -- 714 -- Service Class ................ 52 -- -- -- -- -- AMR Class .................... 28,183 22,546 737 376 1,835 7,556 LONG-TERM CAPITAL GAIN Institutional Class .......... 1,156 629 -- -- 24 31 PlanAhead Class .............. 5,180 4,282 -- -- 198 -- Service Class ................ 68 -- -- -- -- -- AMR Class .................... 34,174 32,862 -- -- 494 2,057 ------- ------- ---- ---- ------ ------ TOTAL DISTRIBUTIONS PAID .. $73,470 $63,318 $738 $377 $3,349 $9,758 ======= ======= ==== ==== ====== ====== * For tax purposes, short-term capital gains are considered ordinary income distributions. SMALL CAP VALUE OPPORTUNITY EMERGING MARKETS HIGH YIELD BOND ------------------------- ------------------------- ------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, 2007 2006 2007 2006 2007 2006 ----------- ----------- ----------- ----------- ----------- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME* Institutional Class .......... $25 $-- $ 412 $ 416 $16,871 $16,799 PlanAhead Class .............. 1 -- 135 100 4,915 7,065 Service Class ................ -- -- -- -- -- 1 AMR Class .................... -- -- 3,613 3,660 949 -- LONG-TERM CAPITAL GAIN Institutional Class .......... -- -- 2,096 1,430 -- 2,254 PlanAhead Class .............. -- -- 802 361 -- 1,092 Service Class ................ -- -- -- -- -- -- AMR Class .................... -- -- 16,785 11,913 -- -- --- --- ------- ------- ------- ------- TOTAL DISTRIBUTIONS PAID .. $26 $-- $23,843 $17,880 $22,735 $27,211 === === ======= ======= ======= ======= * For tax purposes, short-term capital gains are considered ordinary income distributions. ENHANCED INCOME INTERMEDIATE BOND SHORT-TERM BOND ------------------------- ------------------------- ------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, 2007 2006 2007 2006 2007 2006 ----------- ----------- ----------- ----------- ----------- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME* Institutional Class .......... $ -- $ -- $4,946 $4,367 $4,046 $3,409 PlanAhead Class .............. 4,171 3,905 13 41 227 375 AMR Class .................... -- -- -- -- -- -- LONG-TERM CAPITAL GAIN Institutional Class .......... -- -- -- -- -- -- PlanAhead Class .............. 74 14 -- -- -- -- AMR Class .................... -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ TOTAL DISTRIBUTIONS PAID .. $4,245 $3,919 $4,959 $4,408 $4,273 $3,784 ====== ====== ====== ====== ====== ====== * For tax purposes, short-term capital gains are considered ordinary income distributions. 95 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 As of October 31, 2007, the components of distributable earnings on a tax basis were as follows (in thousands): LARGE SMALL CAP CAP MID-CAP VALUE EMERGING BALANCED GROWTH VALUE OPPORTUNITY MARKETS ---------- -------- -------- ----------- -------- Cost basis of investments for federal income tax purposes $1,262,386 $111,333 $146,408 $39,028 $234,726 Unrealized appreciation 160,785 13,661 9,858 1,576 92,225 Unrealized depreciation (23,628) (2,481) (8,303) (3,335) (1,900) ---------- -------- -------- ------- -------- Net unrealized appreciation/(depreciation) 137,157 11,180 1,555 (1,759) 90,325 Undistributed ordinary income 40,288 551 2,208 110 12,607 Undistributed long-term gain/(loss) 46,054 2,751 6,553 (313) 33,156 ---------- -------- -------- ------- -------- Distributable earnings $ 223,499 $ 14,482 $ 10,316 $(1,962) $136,088 ========== ======== ======== ======= ======== HIGH YIELD ENHANCED INTERMEDIATE SHORT-TERM BOND INCOME BOND BOND ---------- -------- ------------ ---------- Cost basis of investments for federal income tax purposes $236,258 $120,605 $137,196 $96,452 Unrealized appreciation 2,060 3,800 869 343 Unrealized depreciation (4,953) (715) (669) (720) -------- -------- -------- ------- Net unrealized appreciation/(depreciation) (2,893) 3,085 200 (377) Undistributed ordinary income 652 1,518 500 537 Undistributed long-term gain/(loss) (1,772) 1,461 (8,850) (7,202) -------- -------- -------- ------- Distributable earnings $ (4,013) $ 6,064 $ (8,150) $(7,042) ======== ======== ======== ======= 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, 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 Statements 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, 2007 (in thousands): SMALL CAP HIGH SHORT- LARGE CAP MID-CAP VALUE EMERGING YIELD ENHANCED INTERMEDIATE TERM BALANCED GROWTH VALUE OPPORTUNITY MARKETS BOND INCOME BOND BOND -------- --------- ------- ----------- -------- ----- -------- ------------ ------- Paid-in-capital ................. $ 6 $ 1 $ (1) $ (1) $ (1) $-- $(1,120) $ -- $(1,991) Undistributed net investment income ....................... 480 (4) (146) (12) (117) -- 1,984 27 703 Accumulated net realized gain (loss) ....................... (485) 5 146 13 117 -- (864) (27) 1,287 Unrealized appreciation (depreciation) of investments, futures contracts and foreign currency ..................... (1) (2) 1 -- 1 -- -- -- 1 96 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 At October 31, 2007, capital loss carry forward positions for federal income tax purposes were as follows (in thousands): FUND 2008 2009 2010 2011 2012 2013 2014 2015 TOTAL - ---- ------ ---- ---- ---- ---- ------ ------ ---- ------ Small Cap Value Opportunity .. $ -- $-- $ -- $ -- $ -- $ -- $ -- $313 $ 313 High Yield Bond .............. -- -- -- -- -- -- 1,772 -- 1,772 Intermediate Bond ............ 7,108 -- 328 -- -- 318 1,097 -- 8,851 Short-Term Bond .............. 1,218 -- 913 161 800 1,256 2,387 467 7,202 The Large Cap Growth Fund, High Yield Bond Fund and Intermediate Bond Fund utilized $3,602, $1,844 and $259 respectively, of net capital loss carryovers, and the Short-Term Bond Fund had $1,991 of expired capital loss carryovers for the year ended October 31, 2007. 4. INVESTMENT TRANSACTIONS The aggregate cost of purchases and proceeds from sales and maturities of long-term investments during the year ended October 31, 2007 were as follows (in thousands): SMALL CAP HIGH SHORT- LARGE CAP MID-CAP VALUE EMERGING YIELD ENHANCED INTERMEDIATE TERM BALANCED GROWTH VALUE OPPORTUNITY MARKETS BOND INCOME BOND BOND -------- --------- ------- ----------- -------- -------- -------- ------------ ------- Purchases (excluding U.S. government securities) ....... $454,008 $124,906 $84,740 $35,638 $186,405 $261,565 $68,993 $55,508 $37,967 Sales and maturities (excluding U.S. government securities) .. 308,009 114,917 41,348 8,429 155,508 337,493 78,964 47,729 32,046 Purchases of U.S. government securities ................... 202,180 -- -- -- -- -- 32,924 40,065 -- Sales and maturities of U.S. government securities ........ 197,372 -- -- -- -- -- 43,238 36,016 -- A summary of the Funds' direct transactions in Affiliated Funds for the year ended October 31, 2007 is set forth below (in thousands): OCTOBER 31, 2006 OCTOBER 31, 2007 AFFILIATE SHARES/MARKET VALUE PURCHASES SALES SHARES/MARKET VALUE ----------- ------------------- --------- -------- ------------------- Balanced......................... Select Fund $64,379 $497,667 $504,944 $57,102 Large Cap Growth................. Select Fund 4,783 84,525 84,774 4,534 Mid-Cap Value.................... Select Fund 15,621 153,748 167,070 2,299 Small Cap Value Opportunity...... Select Fund 49 29,142 29,161 30 Emerging Markets................. Select Fund 8,172 149,634 140,588 17,218 High Yield Bond.................. Select Fund 13,082 237,999 243,997 7,084 Enhanced Income.................. Select Fund 11,924 53,529 62,156 3,297 Intermediate Bond................ Select Fund 2,890 44,156 43,687 3,359 Short-Term Bond.................. Select Fund 2,054 31,621 26,076 7,599 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. 97 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 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 borrowers and transaction costs. To the extent that a loan is secured by non-cash collateral, borrowers 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, 2007, the value of outstanding securities on loan and the value of collateral was as follows (in thousands): MARKET VALUE OF NON-CASH FUND SECURITIES ON LOAN COLLATERAL CASH COLLATERAL - ---- ------------------ ---------- --------------- Balanced ..................... $250,817 $17,286 $240,190 Large Cap Growth ............. 23,775 3,142 20,879 Mid-Cap Value ................ 19,957 856 19,485 Small Cap Value Opportunity .. 7,414 -- 7,516 Emerging Markets ............. 30,083 721 30,790 High Yield Bond .............. 10,105 -- 10,390 Enhanced Income .............. 24,308 63 24,746 Intermediate Bond ............ 27,031 -- 27,711 Short-Term Bond .............. 4,419 -- 4,517 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 Affiliated Funds. 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 a 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 Funds (shares and dollars in thousands): YEAR ENDED OCTOBER 31, 2007 INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS ----------------- ----------------- ---------------- ----------------- BALANCED FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------ -------- ------ -------- ------ ------- ------ -------- Shares sold ......................... 2,632 $ 40,892 9,160 $133,607 637 $ 9,354 3,668 $ 55,490 Reinvestment of dividends ........... 133 2,010 596 8,472 9 120 4,292 62,357 Shares redeemed ..................... (997) (15,809) (3,818) (56,412) (115) (1,681) (3,474) (52,456) ----- -------- ------ -------- ---- ------- ------ -------- Net increase in shares outstanding .. 1,768 $ 27,093 5,938 $ 85,667 531 7,793 4,486 $ 65,391 ===== ======== ====== ======== ==== ======= ====== ======== 98 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 INSTITUTIONAL CLASS AMR CLASS ------------------- ------------------ LARGE CAP GROWTH FUND SHARES AMOUNT SHARES AMOUNT - --------------------- ------ ------ ------ --------- Shares sold ......................... 6 $ 42 6,219 $ 44,595 Reinvestment of dividends ........... -- 1 106 737 Shares redeemed ..................... (6) (47) (4,970) (36,098) --- ---- ------ -------- Net increase (decrease) in shares outstanding ...................... -- $ (4) 1,355 $ 9,234 === ==== ====== ======== INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS ------------------- ---------------- --------------- ----------------- MID-CAP VALUE FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - ------------------ ------ ------- ------ ------- ------ ------ ------ -------- Shares sold ......................... 306 $ 3,462 2,186 $24,108 -- $1 5,200 $ 58,233 Reinvestment of dividends ........... 10 106 85 911 -- - 215 2,329 Shares redeemed ..................... (81) (899)* (854) (9,358)* -- - (4,398) (50,095)* --- ------- ----- ------- --- -- ------ -------- Net increase in shares outstanding .. 235 $ 2,669 1,417 $15,661 -- $1 1,017 $ 10,467 === ======= ===== ======= === == ====== ======== * Net of Redemption Fees INSTITUTIONAL CLASS PLANAHEAD CLASS ------------------- --------------- SMALL CAP VALUE OPPORTUNITY FUND SHARES AMOUNT SHARES AMOUNT - -------------------------------- ------ ------- ------ ------ Shares sold ......................... 2,568 $28,729 46 $ 495 Reinvestment of dividends ........... 3 25 -- 1 Shares redeemed ..................... (163) (1,721) (44) (478) ----- ------- --- ----- Net increase in shares outstanding .. 2,408 $27,033 2 $ 18 ===== ======= === ===== INSTITUTIONAL CLASS PLANAHEAD CLASS AMR CLASS ------------------- ---------------- ----------------- EMERGING MARKETS FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - --------------------- ------ -------- ------ ------- ------ -------- Shares sold ......................... 158 $ 2,910 276 $ 5,295 3,940 $ 79,619 Reinvestment of dividends ........... 150 2,456 56 910 1,236 20,398 Shares redeemed ..................... (689) (13,376)* (182) (3,347)* (1,740) (32,629)* ---- -------- ---- ------- ------ -------- Net increase (decrease) in shares outstanding ...................... (381) $ (8,010) 150 $ 2,858 3,436 $ 67,388 ==== ======== ==== ======= ====== ======== * Net of Redemption Fees INSTITUTIONAL CLASS PLANAHEAD CLASS AMR CLASS ------------------- ----------------- ---------------- HIGH YIELD BOND FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - -------------------- ------- --------- ------ -------- ------ ------- Shares sold ......................... 8,987 $ 92,399 2,989 $ 30,489 8,737 $87,012 Reinvestment of dividends ........... 1,310 13,435 470 4,820 94 948 Shares redeemed ..................... (21,641) (219,761) (8,481) (86,687) (687) (6,930) ------- --------- ------ -------- ----- ------- Net increase (decrease) in shares outstanding ...................... (11,344) $(113,927) (5,022) $(51,378) 8,144 $81,030 ======= ========= ====== ======== ===== ======= PLANAHEAD CLASS ----------------- ENHANCED INCOME FUND SHARES AMOUNT - -------------------- ------ -------- Shares sold ......................... 1,524 $ 15,667 Reinvestment of dividends ........... 412 4,245 Shares redeemed ..................... (4,716) (48,649) ====== ======== Net (decrease) in shares outstanding ...................... (2,780) $(28,737) ------ -------- 99 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 INSTITUTIONAL CLASS PLANAHEAD CLASS ------------------- ---------------- INTERMEDIATE BOND FUND SHARES AMOUNT SHARES AMOUNT - ---------------------- ------ -------- ------ ------- Shares sold ......................... 2,676 $ 26,814 7 $ 68 Reinvestment of dividends ........... 493 4,945 1 12 Shares redeemed ..................... (2,019) (20,209) (100) (1,014) ------ -------- ---- ------- Net increase (decrease) in shares outstanding ...................... 1,150 $ 11,550 (92) $ (934) ====== ======== ==== ======= INSTITUTIONAL CLASS PLANAHEAD CLASS ------------------- ---------------- SHORT-TERM BOND FUND SHARES AMOUNT SHARES AMOUNT - -------------------- ------ ------- ------ ------- Shares sold ......................... 2,310 $20,272 309 $2,712 Reinvestment of dividends ........... 461 4,044 25 220 Shares redeemed ..................... (999) (8,754) (817) (7,178) ----- ------- ---- ------- Net increase (decrease) in shares outstanding ...................... 1,772 $15,562 (483) $(4,246) ===== ======= ==== ======= 100 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 PERIOD ENDED OCTOBER 31, 2006 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 ==== ======= ====== ======== === ====== ====== ======== 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 === ==== ====== ======== 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 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 === ====== === ==== 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 101 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 (UNAUDITED) 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) ======= ========= ====== ======== === ==== 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 ====== ======== 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) ====== ======== === ===== 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) ====== ======== ====== ======= 7. SUBSEQUENT EVENT On November 1, 2007, a shareholder of the Small Cap Value Opportunity Fund - Institutional Class redeemed 1,766,785 shares totaling $17,385,164. 102 (This page intentionally left blank) AMERICAN BEACON BALANCED FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class --------------------------------------------- Year Ended October 31 --------------------------------------------- 2007 2006 2005 2004 2003 ------- ------- ------- ------ ------ Net asset value, beginning of period ....................... $ 15.83 $ 15.00 $ 14.31 $12.99 $10.97 ------- ------- ------- ------ ------ Income from investment operations: Net investment income(A) ................................ 0.50 0.39 0.36 0.29 0.31(B) Net gains on securities (both realized and unrealized) .. 0.90 1.54 1.11 1.36 1.84(B) ------- ------- ------- ------ ------ Total income from investment operations .................... 1.40 1.93 1.47 1.65 2.15 ------- ------- ------- ------ ------ Less distributions: Dividends from net investment income .................... (0.42) (0.38) (0.31) (0.33) (0.13) Distributions from net realized gains on securities ..... (0.72) (0.72) (0.47) -- -- ------- ------- ------- ------ ------ Total distributions ........................................ (1.14) (1.10) (0.78) (0.33) (0.13) ------- ------- ------- ------ ------ Net asset value, end of period ............................. $ 16.09 $ 15.83 $ 15.00 $14.31 $12.99 ======= ======= ======= ====== ====== Total return ............................................... 9.31% 13.60% 10.53% 10.53% 19.77% ======= ======= ======= ====== ====== Ratios and supplemental data: Net assets, end of period (in thousands) ................ $51,399 $22,587 $14,122 $8,378 $9,041 Ratios to average net assets (annualized): Expenses, net of waivers ................................ 0.57% 0.59% 0.56% 0.63% 0.63% Expenses, before waivers ................................ 0.57% 0.59% 0.56% 0.63% 0.63% Net investment income, net of waivers ................... 2.91% 2.81% 2.45% 2.15% 2.74% Net investment income (loss), before waivers ............ 2.91% 2.81% 2.45% 2.15% 2.74% Portfolio turnover rate ................................. 50% 59% 58% 62% 69% PlanAhead Class ------------------------------------------------ Year Ended October 31 ------------------------------------------------ 2007 2006 2005 2004 2003 -------- -------- ------- ------- ------ Net asset value, beginning of period ....................... $ 14.91 $ 14.20 $ 13.62 $ 12.40 $10.81 -------- -------- ------- ------- ------ Income from investment operations: Net investment income(A) ................................ 0.41 0.35 0.34 0.27 0.28(B) Net gains on securities (both realized and unrealized) .. 0.87 1.44 1.01 1.25 1.74(B) -------- -------- ------- ------- ------ Total income from investment operations .................... 1.28 1.79 1.35 1.52 2.02 -------- -------- ------- ------- ------ Less distributions: Dividends from net investment income .................... (0.38) (0.36) (0.30) (0.30) (0.43) Distributions from net realized gains on securities ..... (0.72) (0.72) (0.47) -- -- -------- -------- ------- ------- ------ Total distributions ........................................ (1.10) (1.08) (0.77) (0.30) (0.43) -------- -------- ------- ------- ------ Net asset value, end of period ............................. $ 15.09 $ 14.91 $ 14.20 $ 13.62 $12.40 ======== ======== ======= ======= ====== Total return ............................................... 9.06% 13.31% 10.12% 12.44% 19.36% ======== ======== ======= ======= ====== Ratios and supplemental data: Net assets, end of period (in thousands) ................ $202,750 $111,837 $86,875 $21,571 $3,321 Ratios to average net assets (annualized): Expenses, net of waivers ................................ 0.83% 0.85% 0.86% 0.93% 0.94% Expenses, before waivers ................................ 0.83% 0.85% 0.86% 0.93% 0.94% Net investment income, net of waivers ................... 2.65% 2.55% 2.14% 1.84% 2.40% Net investment income (loss), before waivers ............ 2.65% 2.55% 2.14% 1.84% 2.40% Portfolio turnover rate ................................. 50% 59% 58% 62% 69% 104 Service Class --------------------------- Year Ended May 31 to October 31 October --------------- 31, 2007 2006 2005 ------ ------ --------- Net asset value, beginning of period ....................... $14.83 $14.16 $ 13.96 ------ ------ --------- Income from investment operations: Net investment income(A) ................................ 0.41 0.38 0.09 Net gains on securities (both realized and unrealized) .. 0.83 1.35 0.11 ------ ------ --------- Total income from investment operations .................... 1.24 1.73 0.20 ------ ------ --------- Less distributions: Dividends from net investment income .................... (0.40) (0.34) -- Distributions from net realized gains on securities ..... (0.72) (0.72) -- ------ ------ --------- Total distributions ........................................ (1.12) (1.06) -- ------ ------ --------- Net asset value, end of period ............................. $14.95 $14.83 $ 14.16 ====== ====== ========= Total return ............................................... 8.76% 13.01% 1.43%(C) ====== ====== ========= Ratios and supplemental data: Net assets, end of period (in thousands) ................ $9,504 $1,562 $ 1 Ratios to average net assets (annualized): Expenses, net of waivers ................................ 1.07% 1.22% 1.09%(D) Expenses, before waivers ................................ 1.07% 1.22% 360.24%(D) Net investment income, net of waivers ................... 2.34% 2.18% 1.52%(D) Net investment income (loss), before waivers ............ 2.34% 2.17% (357.63)%(D) Portfolio turnover rate ................................. 50% 59% 58%(E) AMR Class ---------------------------------------------------- Year Ended October 31 ---------------------------------------------------- 2007 2006 2005 2004 2003 -------- -------- -------- -------- -------- Net asset value, beginning of period ....................... $ 15.27 $ 14.49 $ 13.87 $ 12.60 $ 10.98 -------- -------- -------- -------- -------- Income from investment operations: Net investment income(A) ................................ 0.50 0.45 0.39 0.32 0.34 Net gains on securities (both realized and unrealized) .. 0.89 1.46 1.05 1.31 1.78 -------- -------- -------- -------- -------- Total income from investment operations .................... 1.39 1.91 1.44 1.63 2.12 -------- -------- -------- -------- -------- Less distributions: Dividends from net investment income .................... (0.45) (0.41) (0.35) (0.36) (0.50) Distributions from net realized gains on securities ..... (0.72) (0.72) (0.47) -- -- -------- -------- -------- -------- -------- Total distributions ........................................ (1.17) (1.13) (0.82) (0.36) (0.50) -------- -------- -------- -------- -------- Net asset value, end of period ............................. $ 15.49 $ 15.27 $ 14.49 $ 13.87 $ 12.60 ======== ======== ======== ======== ======== Total return ............................................... 9.59% 13.98% 10.63% 13.13% 20.06% ======== ======== ======== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands) ................ $898,584 $817,333 $712,073 $636,420 $557,612 Ratios to average net assets (annualized): Expenses, net of waivers ................................ 0.31% 0.33% 0.33% 0.37% 0.38% Expenses, before waivers ................................ 0.31% 0.33% 0.33% 0.37% 0.38% Net investment income, net of waivers ................... 3.21% 3.08% 2.70% 2.40% 2.98% Net investment income (loss), before waivers ............ 3.21% 3.08% 2.70% 2.40% 2.98% Portfolio turnover rate ................................. 50% 59% 58% 62% 69% (A) Class expenses per share were subtracted from net investment income per share for the Fund before class expenses to determine n et investment income per share through October 31, 2005. (B) For the year ended October 31, 2003, the net investment income and net gains (losses) on securities (both realized and unrealiz ed) has been restated from 0.30 and 1.85, respectively for Institutional Class and 0.36 and 1.66, respectively for PlanAhead Class. (C) Not annualized. (D) Annualized. (E) Portfolio turnover rate is for the period from November 1, 2004 through October 31, 2005. 105 AMERICAN BEACON LARGE CAP GROWTH FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class ---------------------------------------------- Year Ended October 31 ---------------------------------------------- 2007 2006(A) 2005 2004 2003 ------ ------- ------ ------- ------ Net asset value, beginning of period ....................... $ 6.89 $ 6.18 $ 5.82 $ 5.47 $ 4.53 ------ ------ ------ ------- ------ Income from investment operations: Net investment income ................................... 0.04 0.04 0.04 0.02 0.02 Net gains on securities (both realized and unrealized) .. 0.77 0.70 0.37 0.35 0.94 ------ ------ ------ ------- ------ Total income from investment operations .................... 0.81 0.74 0.41 0.37 0.96 ------ ------ ------ ------- ------ Less distributions: Dividends from net investment income .................... (0.03) (0.03) (0.05) (0.02) (0.02) Distributions from net realized gains on securities ..... -- -- -- -- -- ------ ------ ------ ------- ------ Total distributions ........................................ (0.03) (0.03) (0.05) (0.02) (0.02) ------ ------ ------ ------- ------ Net asset value, end of period ............................. $ 7.67 $ 6.89 $ 6.18 $ 5.82 $ 5.47 ====== ====== ====== ======= ====== Total return ............................................... 11.84% 12.04% 7.06% 6.71% 21.15% ====== ====== ====== ======= ====== Ratios and supplemental data: Net assets, end of period (in thousands) ................ $ 119 $ 110 $ 105 $ 1 $ 1 Ratios to average net assets (annualized): Expenses, net of waivers ................................ 0.90% 0.90% 0.89% 0.84% 0.87% Expenses, before waivers ................................ 1.06% 0.99% 4.64% 13.22% 0.87% Net investment income (loss), net of waivers ............ 0.58% 0.56% (0.18)% 0.18% 0.18% Net investment income (loss), before waivers ............ 0.42% 0.48% (3.93)% (12.20)% 0.18% Portfolio turnover rate ................................. 128% 181% 164% 131% 138% 106 AMR Class ------------------------------------------------ Year Ended October 31 ------------------------------------------------ 2007 2006(A) 2005 2004 2003 -------- ------- ------- ------- ------- Net asset value, beginning of period ....................... $ 6.95 $ 6.21 $ 5.84 $ 5.48 $ 4.54 -------- ------- ------- ------- ------- Income from investment operations: Net investment income ................................... 0.06 0.05 0.06 0.02 0.02 Net gains on securities (both realized and unrealized) .. 0.77 0.73 0.36 0.36 0.93 -------- ------- ------- ------- ------- Total income from investment operations .................... 0.83 0.78 0.42 0.38 0.95 -------- ------- ------- ------- ------- Less distributions: Dividends from net investment income .................... (0.06) (0.04) (0.05) (0.02) (0.01) Distributions from net realized gains on securities ..... -- -- -- -- -- -------- ------- ------- ------- ------- Total distributions ........................................ (0.06) (0.04) (0.05) (0.02) (0.01) -------- ------- ------- ------- ------- Net asset value, end of period ............................. $ 7.72 $ 6.95 $ 6.21 $ 5.84 $ 5.48 ======== ======= ======= ======= ======= Total return ............................................... 12.07% 12.52% 7.22% 6.88% 21.09% ======== ======= ======= ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands) ................ $101,698 $82,042 $63,183 $55,121 $48,926 Ratios to average net assets (annualized): Expenses, net of waivers ................................ 0.60% 0.59% 0.64% 0.71% 0.68% Expenses, before waivers ................................ 0.60% 0.59% 0.64% 0.71% 0.68% Net investment income (loss), net of waivers ............ 0.85% 0.88% 0.98% 0.34% 0.40% Net investment income (loss), before waivers ............ 0.85% 0.88% 0.98% 0.34% 0.40% Portfolio turnover rate ................................. 128% 181% 164% 131% 138% (A) 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. 107 AMERICAN BEACON MID-CAP VALUE FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class PlanAhead Class ------------------------ ------------------------ Year Ended November 30 Year Ended February 28 October to October October to October 31, 2007 31, 2006 31, 2007 31, 2006 ---------- ----------- ---------- ----------- Net asset value, beginning of period .......... $10.81 $12.09 $ 10.80 $ 9.80 ------ ------ ------- ------- Income from investment operations: Net investment income ...................... 0.12 0.21 0.10 0.01 Net gains (losses) on securities (both realized and unrealized) ................ 0.41 1.25 0.40 0.99 ------ ------ ------- ------- Total income (loss) from investment operations ................................. 0.53 1.46 0.50 1.00 ------ ------ ------- ------- Less distributions: Dividends from net investment income ....... (0.07) (0.16) (0.08) -- Distributions from net realized gains on securities .............................. (0.26) (2.58) (0.26) -- ------ ------ ------- ------- Total distributions ........................... (0.33) (2.74) (0.34) -- ------ ------ ------- ------- Redemption fees added to beneficial interests .................................. -- -- -- -- Net asset value, end of period ................ $11.01 $10.81 $ 10.96 $ 10.80 ====== ====== ======= ======= Total return .................................. 4.87% 15.30%(C) 4.68% 10.20%(C) ====== ====== ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands) ... $6,047 $3,396 $43,158 $27,240 Ratios to average net assets (annualized): Expenses, net of waivers ................... 0.92% 1.19%(D) 1.23% 1.49%(D) Expenses, before waivers ................... 1.09% 1.19%(D) 1.26% 1.61%(D) Net investment income, net of waivers ...... 1.22% 1.11%(D) 0.93% 0.57%(D) Net investment income, before waivers ...... 1.05% 1.11%(D) 0.90% 0.44%(D) Portfolio turnover rate .................... 35% 42%(E) 35% 42%(E) (A) 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. (B) Based on average shares outstanding. (C) Not annualized. (D) Annualized. (E) Portfolio turnover rate is for the period from November 1, 2005 through October 31, 2006. (F) Portfolio turnover rate is for the period from November 1, 2006 through October 31, 2007. 108 AMR Class (formerly Institutional Class Service prior to December 1, 2005)(A) Class ---------------------------------------- June 29 Year Ended October 31 June 30 to to October --------------------------- October 31, 2007 2007 2006 2005 31, 2004 ---------- ------- ------- ------- ---------- Net asset value, beginning of period ....... $11.73 $ 10.87 $ 11.72 $ 10.27 $ 10.00 ------ ------- ------- ------- ------- Income from investment operations: Net investment income ................... 0.01 0.18 0.12 0.13 0.02(B) Net gains (losses) on securities (both realized and unrealized) ............. 0.80 0.36 1.75 1.37 0.25 ------ ------- ------- ------- ------- Total income (loss) from investment operations .............................. 0.79 0.54 1.87 1.50 0.27 ------ ------- ------- ------- ------- Less distributions: Dividends from net investment income .... -- (0.08) (0.14) (0.05) -- Distributions from net realized gains on securities .................. -- (0.26) (2.58) -- -- ------ ------- ------- ------- ------- Total distributions ........................ -- (0.34) (2.72) (0.05) -- ------ ------- ------- ------- ------- Redemption fees added to beneficial interests ............................... -- -- -- -- -- Net asset value, end of period ............. $10.94 $ 11.07 $ 10.87 $ 11.72 $ 10.27 ====== ======= ======= ======= ======= Total return ............................... 6.65%(C) 5.19% 19.16% 14.63% 2.70%(C) ====== ======= ======= ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands) ....................... $ 1 $78,794 $66,290 $44,342 $25,546 Ratios to average net assets (annualized): Expenses, net of waivers ................ 1.50%(D) 0.75% 0.97% 1.01% 1.14%(D) Expenses, before waivers ................ 1.80%(D) 0.75% 0.92% 1.02% 1.34%(D) Net investment income, net of waivers ... 0.32%(D) 1.41% 1.38% 0.92% 0.73%(D) Net investment income, before waivers ... 0.02%(D) 1.40% 1.42% 0.91% 0.53%(D) Portfolio turnover rate ................. 35%(F) 35% 42% 298% 6%(C) 109 AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class PlanAhead Class ------------------------ ------------------------ Year Ended March 31 to Year Ended March 31 October October October to October 31, 2007 31, 2006 31, 2007 31, 2006 ---------- ----------- ---------- ---------- Net asset value, beginning of period ...... $ 10.26 $10.00 $10.26 $ 10.00 ------- ------ ------ - ----- Income from investment operations: Net investment income .................. 0.11(A) 0.01 0.14(A) 0.01 Net gains (losses) on securities ....... (both realized and unrealized) ...... --(A) 0.25 (0.05)(A) 0.25 ------- ------ ------ ------- Total income from investment operations ... 0.11 0.26 0.09 0.26 ------- ------ ------ ------- Less distributions: Dividends from net investment income ... (0.03) -- (0.06) -- Distributions from net realized gains on securities ....................... (0.01) -- (0.01) -- ------- ------ ------ ------- Total distributions ....................... (0.04) -- (0.07) -- ------- ------ ------ ------- Net asset value, end of period ............ $ 10.33 $10.26 $10.28 $ 10.26 ======= ====== ====== ======= Total return .............................. 1.08% 2.60%(B) 0.96% 2.60%(B) ======= ====== ====== ======= Ratios and supplemental data: Net assets, end of period (in thousands) ...................... $29,596 $4,693 $ 91 $ 70 Ratios to average net assets (annualized): Expenses, net of waivers ............... 1.05% 1.03% 1.30% 1.28% Expenses, before waivers ............... 1.27% 6.12% 1.70% 20.05% Net investment income, net of waivers .......................... 0.96% 0.30% 0.97% 0.21% Net investment income (loss), before waivers ...................... 0.73% (4.80)% 0.57% (18.56)% Portfolio turnover rate ................ 58% 32%(B) 58% 32%(B) (A) Based upon average shares outstanding. (B) Not annualized. 110 (This page intentionally left blank) AMERICAN BEACON EMERGING MARKETS FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class -------------------------------------------------- Year Ended October 31 -------------------------------------------------- 2007 2006 2005 2004 2003 ------- ------- ------ ------ ------ Net asset value, beginning of period .................... $ 17.42 $ 15.10 $12.64 $10.62 $ 7.20 ------- ------- ------ ------ ------ Income from investment operations: Net investment income ................................ 0.26 0.11 0.15 0.07 0.04 Net gains on securities (both realized and unrealized) ....................................... 9.11 4.63 3.45 2.01 3.43 ------- ------- ------ ------ ------ Total income from investment operations ................. 9.37 4.74 3.60 2.08 3.47 ------- ------- ------ ------ ------ Less distributions: Dividends from net investment income ................. (0.10) (0.21) (0.06) (0.06) (0.05) Distributions from net realized gains on Securities .. (2.49) (2.21) (1.08) -- -- ------- ------- ------ ------ ------ Total distributions ..................................... (2.59) (2.42) (1.14) (0.06) (0.05) ------- ------- ------ ------ ------ Redemption fees added to beneficial Interests ........... --(A) -- --(A) --(A) -- Net asset value, end of period .......................... $ 24.20 $ 17.42 $15.10 $12.64 $10.62 ======= ======= ====== ====== ====== Total return ............................................ 60.83% 34.49% 30.11% 19.65% 48.45% ======= ======= ====== ====== ====== Ratios and supplemental data: Net assets, end of period (in thousands) ............. $13,773 $16,552 $9,348 $7,282 $3,557 Ratios to average net assets (annualized): Expenses, net of waivers ............................. 1.60% 1.56% 1.52% 1.85% 1.76% Expenses, before waivers ............................. 1.60% 1.56% 1.52% 1.85% 1.76% Net investment income, net of waivers ................ 0.93% 0.80% 1.22% 0.74% 0.62% Net investment income, before waivers ................ 0.93% 0.80% 1.22% 0.74% 0.62% Portfolio turnover rate .............................. 81% 67% 63% 76% 80% 112 PlanAhead Class ------------------------------------------------- Year Ended October 31 ------------------------------------------------- 2007 2006 2005 2004 2003 ------- ------ ------ ------ ------ Net asset value, beginning of period .................... $ 17.22 $14.98 $12.53 $10.55 $ 7.19 ------- ------ ------ ------ ------ Income from investment operations: Net investment income ................................ 0.11 0.09 0.15 0.04 0.09 Net gains on securities (both realized and unrealized) ....................................... 9.11 4.55 3.41 1.99 3.34 ------- ------ ------ ------ ------ Total income from investment operations ................. 9.22 4.64 3.56 2.03 3.43 ------- ------ ------ ------ ------ Less distributions: Dividends from net investment income ................. (0.04) (0.19) (0.03) (0.05) (0.07) Distributions from net realized gains on Securities .. (2.49) (2.21) (1.08) -- -- ------- ------ ------ ------ ------ Total distributions ..................................... (2.53) (2.40) (1.11) (0.05) (0.07) ------- ------ ------ ------ ------ Redemption fees added to beneficial Interests ........... --(A) -- --(A) --(A) --(A) Net asset value, end of period .......................... $ 23.91 $17.22 $14.98 $12.53 $10.55 ======= ====== ====== ====== ====== Total return ............................................ 60.17% 34.16% 29.95% 19.33% 48.07% ======= ====== ====== ====== ====== Ratios and supplemental data: Net assets, end of period (in thousands) ............. $11,694 $5,841 $2,592 $1,214 $ 492 Ratios to average net assets (annualized): Expenses, net of waivers ............................. 1.96% 2.04% 1.75% 2.14% 2.08% Expenses, before waivers ............................. 1.96% 1.91% 2.01% 2.20% 2.08% Net investment income, net of waivers ................ 0.65% 0.49% 1.16% 0.37% 0.57% Net investment income, before waivers ................ 0.65% 0.62% 0.90% 0.31% 0.57% Portfolio turnover rate .............................. 81% 67% 63% 76% 80% AMR Class --------------------------------------------------- Year Ended October 31 --------------------------------------------------- 2007 2006 2005 2004 2003 -------- -------- ------- ------- ------- Net asset value, beginning of period .................... $ 17.52 $ 15.17 $ 12.68 $ 10.66 $ 7.22 -------- -------- ------- ------- ------- Income from investment operations: Net investment income ................................ 0.19 0.15 0.24 0.10 0.07 Net gains on securities (both realized and unrealized) ....................................... 9.30 4.65 3.42 2.00 3.44 -------- -------- ------- ------- ------- Total income from investment operations ................. 9.49 4.80 3.66 2.10 3.51 -------- -------- ------- ------- ------- Less distributions: Dividends from net investment income ................. (0.15) (0.24) (0.09) (0.08) (0.07) Distributions from net realized gains on Securities .. (2.49) (2.21) (1.08) -- -- -------- -------- ------- ------- ------- Total distributions ..................................... (2.64) (2.45) (1.17) (0.08) (0.07) -------- -------- ------- ------- ------- Redemption fees added to beneficial Interests ........... --(A) -- -- -- -- Net asset value, end of period .......................... $ 24.37 $ 17.52 $ 15.17 $ 12.68 $ 10.66 ======== ======== ======= ======= ======= Total return ............................................ 61.19% 34.87% 30.43% 20.00% 48.84% ======== ======== ======= ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands) ............. $271,726 $135,146 $94,864 $74,199 $51,498 Ratios to average net assets (annualized): Expenses, net of waivers ............................. 1.37% 1.30% 1.25% 1.59% 1.50% Expenses, before waivers ............................. 1.37% 1.30% 1.25% 1.59% 1.50% Net investment income, net of waivers ................ 1.25% 1.01% 1.60% 1.01% 0.92% Net investment income, before waivers ................ 1.25% 1.01% 1.60% 1.01% 0.92% Portfolio turnover rate .............................. 81% 67% 63% 76% 80% (A) Amounts represent less than $0.01 per share. 113 AMERICAN BEACON HIGH YIELD BOND FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class ---------------------------------------------------- Year Ended October 31 ---------------------------------------------------- 2007 2006(A) 2005 2004 2003 -------- -------- -------- -------- -------- Net asset value, beginning of period .................... $ 10.20 $ 10.22 $ 10.86 $ 10.73 $ 9.63 -------- -------- -------- -------- -------- Income from investment operations: Net investment income ................................ 0.77 0.88 0.76 0.78 0.78 Net gains (losses) on securities (both realized and unrealized) ....................................... (0.09) 0.09 (0.84) 0.27 1.10 -------- -------- -------- -------- -------- Total income (loss) from investment operations .......... 0.68 0.97 (0.08) 1.05 1.88 -------- -------- -------- -------- -------- Less distributions: Dividends from net investment income ................. (0.77) (0.88) (0.76) (0.78) (0.78) Distributions from net realized gains on securities .. -- (0.11) 0.20 (0.14) -- -------- -------- -------- -------- -------- Total distributions ..................................... (0.77) (0.99) (0.56) (0.92) (0.78) -------- -------- -------- -------- -------- Net asset value, end of period .......................... $ 10.11 $ 10.20 $ 10.22 $ 10.86 $ 10.73 ======== ======== ======== ======== ======== Total return ............................................ 6.85% 8.78% 3.03% 10.19% 20.11% ======== ======== ======== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands) ............. $114,911 $231,693 $216,744 $241,777 $161,380 Ratios to average net assets (annualized): Expenses, net of waivers ............................. 0.85% 0.85% 0.84% 0.88% 0.90% Expenses, before waivers ............................. 0.86% 0.85% 0.84% 0.92% 1.00% Net investment income, net of waivers ................ 7.55% 7.55% 7.24% 7.27% 7.51% Net investment income, before waivers ................ 7.54% 7.55% 7.24% 7.23% 7.41% Portfolio turnover rate .............................. 92% 88% 128% 138% 114% 114 AMR Class PlanAhead Class --------- -------------------------------------------------- September Year Ended October 31 4 to -------------------------------------------------- October 2007 2006(A) 2005 2004 2003 31, 2007 ------- ------- -------- -------- -------- --------- Net asset value, beginning of period .................... $ 10.21 $ 10.22 $ 10.87 $ 10.73 $ 9.63 $ 9.94 ------- ------- -------- -------- -------- ------- Income from investment operations: Net investment income ................................ 0.75 0.85 0.74 0.74 0.75 0.12 Net gains (losses) on securities (both realized and unrealized) ....................................... (0.10) 0.10 (0.85) 0.28 1.10 0.17 ------- ------- -------- -------- -------- ------- Total income (loss) from investment operations .......... 0.65 0.95 (0.11) 1.02 1.85 0.29 ------- ------- -------- -------- -------- ------- Less distributions: Dividends from net investment income ................. (0.75) (0.85) (0.74) (0.74) (0.75) (0.12) Distributions from net realized gains on securities .. -- (0.11) 0.20 (0.14) -- -- ------- ------- -------- -------- -------- ------- Total distributions ..................................... (0.75) (0.96) (0.54) (0.88) (0.75) (0.12) ------- ------- -------- -------- -------- ------- Net asset value, end of period .......................... $ 10.11 $ 10.21 $ 10.22 $ 10.87 $ 10.73 $ 10.11 ======= ======= ======== ======== ======== ======= Total return ............................................ 6.52% 8.63% 2.69% 9.94% 19.57%(B) 2.94%(B) ======= ======= ======== ======== ======== ======= Ratios and supplemental data: Net assets, end of period (in thousands) ............. $28,758 $80,284 $120,360 $148,266 $125,654 $82,322 Ratios to average net assets (annualized): Expenses, net of waivers ............................. 1.08% 1.08% 1.08% 1.20% 1.24% 0.61%(C) Expenses, before waivers ............................. 1.08% 1.08% 1.08% 1.20% 1.24% 0.61%(C) Net investment income, net of waivers ................ 7.32% 7.33% 7.00% 6.95% 7.11% 7.54%(C) Net investment income, before waivers ................ 7.32% 7.33% 7.00% 6.95% 7.11% 7.54%(C) Portfolio turnover rate .............................. 92% 88% 128% 138% 114% 92%(D) (A) Franklin Advisers, Inc. was added as an investment advisor to the High Yield Bond Fund on September 12, 2006. (B) Not annualized. (C) Annualized. (D) Portfolio turnover rate is for the period from November 1, 2006 through October 31, 2007. 115 AMERICAN BEACON ENHANCED INCOME FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) PlanAhead Class --------------------------------------------------- June Year Ended October 31 30 to ---------------------------------------- October 2007 2006 2005 2004 31, 2003 ------- -------- -------- -------- -------- Net asset value, beginning of period ..................... $ 10.25 $ 9.98 $ 10.16 $ 9.96 $ 10.00 ------- -------- -------- -------- -------- Income from investment operations: Net investment income ................................. 0.36 0.33 0.29 0.26 0.07(A) Net gains (losses) on securities (both realized and unrealized) .................................... 0.32 0.29 (0.16) 0.20 (0.04) ------- -------- -------- -------- -------- Total income from investment operations .................. 0.68 0.62 0.13 0.46 0.03 ------- -------- -------- -------- -------- Less distributions: Dividends from net investment income .................. (0.42) (0.35) (0.31) (0.26) (0.07) Distributions from net realized gains on securities ... (0.01) -- -- -- -- ------- -------- -------- -------- -------- Total distributions ...................................... (0.43) (0.35) (0.31) (0.26) (0.07) ------- -------- -------- -------- -------- Net asset value, end of period ........................... $ 10.50 $ 10.25 $ 9.98 $ 10.16 $ 9.96 ======= ======== ======== ======== ======== Total return ............................................. 6.75% 6.36% 1.32% 4.70% 0.32%(B) ======= ======== ======== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands) .............. $99,789 $125,915 $112,341 $103,897 $101,072 Ratios to average net assets (annualized): Expenses .............................................. 0.94% 0.93% 0.92% 1.00% 0.93% Net investment income ................................. 3.69% 3.21% 2.79% 2.54% 2.20% Portfolio turnover rate ............................... 103% 65% 41% 72% 57%(B) (A) Based on average shares outstanding. (B) Not annualized. 116 AMERICAN BEACON INTERMEDIATE BOND FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class (formerly AMR Class prior to 3/1/05) ------------------------------------------------- Year Ended October 31 ------------------------------------------------- 2007 2006 2005(A) 2004 2003 -------- ------- ------- ------- -------- Net asset value, beginning of period ........ $ 10.02 $ 10.01 $ 10.33 $ 10.24 $ 10.22 -------- ------- ------- ------- -------- Income from investment operations: Net investment income .................... 0.50 0.46 0.42 0.40 0.45 Net gains (losses) on securities (both realized and unrealized) .............. 0.07 0.02 (0.29) 0.14 0.02 -------- ------- ------- ------- -------- Total income from investment operations ..... 0.57 0.48 0.13 0.54 0.47 -------- ------- ------- ------- -------- Less distributions: Dividends from net investment income ..... (0.49) (0.47) (0.45) (0.45) (0.45) Distributions from net realized gains on securities ......................... -- -- -- -- -- -------- ------- ------- ------- -------- Total distributions ......................... (0.49) (0.47) (0.45) (0.45) (0.45) -------- ------- ------- ------- -------- Net asset value, end of period .............. $ 10.10 $ 10.02 $ 10.01 $ 10.33 $ 10.24 ======== ======= ======= ======= ======== Total return ................................ 5.83% 4.96% 1.26% 5.38% 4.62% ======== ======= ======= ======= ======== Ratios and supplemental data: Net assets, end of period (in thousands) ........................ $109,674 $97,319 $93,270 $96,242 $131,927 Ratios to average net assets (annualized): Expenses, net of waivers ................. 0.34% 0.35% 0.31% 0.34% 0.32% Expenses, before waivers ................. 0.34% 0.35% 0.31% 0.34% 0.32% Net investment income, net of waivers .... 4.86% 4.64% 4.12% 3.97% 4.32% Net investment income, before waivers .... 4.86% 4.64% 4.12% 3.97% 4.32% Portfolio turnover rate .................. 85% 122% 119% 106% 187% (A) 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. 117 AMERICAN BEACON SHORT-TERM BOND FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class PlanAhead Class -------------------------------------- --------------------------------------------------- Year Ended October 31, Year Ended October 31, -------------------------------------- --------------------------------------------------- 2007 2006 2005(A) 2004 2003 2007 2006 2005 2004 2003 ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ Net asset value, beginning of period .................... $ 8.74 $ 8.75 $ 9.07 $ 9.31 $ 9.44 $ 8.76 $ 8.77 $ 9.09 $ 9.33 $ 9.45 ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ Income from investment operations: Net investment income (loss) ................. 0.39(B) 0.32(B) 0.29 0.27 0.42 0.35(B) 0.27(B) 0.28 0.25 0.39 Net gains (losses) on securities (both realized and unrealized) ............ 0.09 0.07 (0.20) (0.05) (0.07) 0.09 0.07 (0.24) (0.07) (0.08) ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ Total income from investment operations ..... 0.48 0.39 0.09 0.22 0.35 0.44 0.34 0.04 0.18 0.31 ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ Less distributions: Dividends from net investment income ..... (0.43) (0.40) (0.41) (0.46) (0.48) (0.39) (0.35) (0.36) (0.42) (0.43) Distributions from net realized gains on securities ............. -- -- -- -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ Total distributions ........... (0.43) (0.40) (0.41) (0.46) (0.48) (0.39) (0.35) (0.36) (0.42) (0.43) ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ Net asset value, end of period ................. $ 8.79 $ 8.74 $ 8.75 $ 9.07 $ 9.31 $ 8.81 $ 8.76 $ 8.77 $ 9.09 $ 9.33 ======= ======= ======= ======= ======= ====== ====== ====== ====== ====== Total return ................. 5.61% 4.56% 1.00% 2.39% 3.82% 5.08% 4.01% 0.46% 1.84% 3.38% ======= ======= ======= ======= ======= ====== ====== ====== ====== ====== Ratios and supplemental data: Net assets, end of period (in thousands) ......... $89,427 $73,417 $79,683 $80,504 $91,911 $2,976 $7,189 $8,582 $7,781 $5,783 Ratios to average net assets (annualized): Expenses, net of waivers .. 0.37% 0.35% 0.33% 0.33% 0.33% 0.87% 0.88% 0.87% 0.87% 0.86% Expenses, before waivers .. 0.37% 0.35% 0.33% 0.33% 0.33% 0.98% 0.90% 0.94% 0.87% 0.86% Net investment income, net of waivers ......... 4.48% 3.64% 3.15% 3.00% 4.54% 3.91% 3.10% 2.59% 2.44% 4.00% Net investment income, before waivers ......... 4.48% 3.64% 3.15% 3.00% 4.54% 3.81% 3.08% 2.52% 2.44% 4.00% Portfolio turnover rate ... 40% 48% 38% 41% 81% 40% 48% 38% 41% 81% (A) 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. (B) 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. 118 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. 119 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, 2007, which is designated as qualifying for the dividends-received deduction, is as follows: Balanced Fund 26.32% Large Cap Growth Fund 68.15% Mid-Cap Value Fund 9.51% Small Cap Value Opportunity Fund 17.15% Emerging Markets Fund 0.10% Enhanced Income Fund 2.86% For shareholders in the Funds, the percentage of dividend income distributed for the year ended October 31, 2007, which is designated as qualified dividends income under the Jobs and Growth Tax Relief Act of 2003, is as follows: Balanced Fund 30.25% Large Cap Growth Fund 100.00% Mid-Cap Value Fund 12.96% Small Cap Value Opportunity Fund 33.65% Emerging Markets Fund 33.33% Enhanced Income Fund 4.23% Shareholders will receive notification in January 2008 of the percentage applicable to the preparation of their 2007 income tax returns. Pursuant to Section 852 of the Internal Revenue Code, the Funds designated the following amounts as long-term capital gain dividends for their taxable year ended October 31, 2007. Balanced Fund $40,578,148 Mid-Cap Value Fund 716,015 Emerging Markets Fund 19,682,948 Enhanced Income Fund 74,500 120 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENT (UNAUDITED) At its May 25, 2007 meeting, the Board of Trustees ("Board" or "Trustees") considered the renewal of the existing Management Agreement between the Manager and the American Beacon Funds (the "Funds") and each Investment Advisory Agreement between the Manager and a subadvisor. In preparation for the Board's consideration to renew these Agreements, the Board and its Investment Committee undertook steps to gather and consider information furnished by the Manager, the subadvisors and Lipper, Inc. ("Lipper"). The Board, with the assistance of independent legal counsel, requested and received certain relevant information from the Manager and each subadvisor. In addition, the Board's Investment Committee worked with Lipper to obtain relevant comparative information regarding the performance, fees and expenses of the Funds. The Investment Committee held a separate meeting on May 4, 2007 to consider the information provided by Lipper. Further, the Board took into consideration information furnished for the Board's review and consideration throughout the year at regular Board and Investment Committee meetings, as well as information specifically prepared in connection with the renewal process. The Trustees considered, among other materials, responses by the Manager and the subadvisors to inquiries requesting: - a description of any significant changes (actual or anticipated) to principal activities, personnel, services provided to the Funds, or any other area, including how these changes might affect the Funds; - a copy of the firm's most recent audited or unaudited financial statements as well as its SEC Form ADV registration statement; - a summary of any material past, pending or anticipated litigation or regulatory proceedings involving the firm or its personnel, including the results of any recent regulatory examination or independent audit; - a comparison of the performance of that portion of Fund assets managed by each firm with performance of other similar accounts managed by the firm, including a discussion of relative performance versus a peer group average and any remedial measures if the firm's performance was materially below that of the peer group; - a profit/loss analysis of the firm and any actual or anticipated economies of scale in relation to the services it provides to each Fund; - a description of any payments by the firm to support the Funds' marketing efforts; - an analysis of compensation, including a comparison with fees charged to other clients for which similar services are provided, any proposed changes to the fee schedule and the effect of any fee waivers; - an evaluation of other benefits to the firm or Funds as a result of their relationship, if any; - confirmation that the firm's financial condition does not raise concerns that the firm would be unable to continue providing the same scope and quality of services to the Funds; - a description of the scope of portfolio management services provided to the Funds and the firm's other clients, including other registered investment companies, whether such services differ, and any advantages or disadvantages that might accrue to the Funds due to the firm's involvement in other activities; - a description of the personnel who are assigned primary responsibility for managing the Funds, including any changes during the past year, and a discussion of the adequacy of current and projected staffing levels to service the Funds; - a description of the basis upon which portfolio managers are compensated, including any "incentive" arrangements; - a discussion regarding the firm's participation in "soft dollar" arrangements, if any, or other brokerage allocation policies with respect to Fund transactions, including the firm's methodology for obtaining the most favorable execution and the use of any affiliated broker-dealers; - a discussion of whether the firm receives, with respect to the Funds, other compensation, including any payment for order flow or ECN liquidity rebates; - a description of any actual or potential conflicts of interest anticipated in managing Fund assets; - a description of trade allocation procedures among accounts managed by the firm; 121 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENT (UNAUDITED) - a summary of any material changes to the firm's compliance program with regard to federal, state, corporate and Fund requirements and a certification regarding the reasonable design of the compliance program; - a discussion of any material compliance problems and remedial actions; - information regarding the firm's code of ethics, insider trading policy and disaster recovery plan, including a description of any material changes thereto; - a description of the firm's affiliation with any broker-dealer; - a discussion of any anticipated change in the firm's controlling persons; and - verification of the firm's insurance coverage with regards to the services provided to the Funds. In addition to the foregoing, the Manager provided the following information specific to the renewal of each Management Agreement: - a comparison of the performance of each Fund to comparable investment companies and appropriate indices, including comments on the relative performance of each subadvisor and each Fund versus the respective peer group average; - a discussion, if applicable, of any underperformance by a subadvisor relative to its peer group and what, if any, remedial measures the Manager has or intends to take; - a comparison of advisory fees and expense ratios for comparable mutual funds; - an analysis of any material complaints received from Fund shareholders; - a description of the Manager's securities lending practices and the fees received from such practices; - a description of any revenue sharing activities with respect to the Funds; - a discussion of any rebate arrangements between the Manager and a service provider to the Funds pursuant to which the Manager receives direct or indirect benefits from the service provider; - a description of the portfolio turnover rate and average execution costs for each Fund and each subadvisor to a Fund; and - a description of how expenses that are not readily identifiable to a particular Fund are allocated. The Board also obtained an analysis provided by Lipper that compared: (i) investment performance of each Fund versus comparable investment companies and appropriate indices; (ii) total Fund expenses of each Fund versus comparable mutual funds, and (iii) each Fund's investment advisory fees versus comparable mutual funds. For each Fund, the class used for comparative purposes was the class with the longest performance history, which in most cases is the Institutional Class. References below to each Fund's Lipper peer group are to the group of comparable mutual funds included in the analysis provided by Lipper. The Trustees also received a memorandum from their legal counsel detailing the Board's responsibilities pertaining to the renewal of the Management and Investment Advisory Agreements. This memorandum explained the regulatory requirements surrounding the Trustees' process for evaluating investment advisors and the terms of the contracts. Provided below is an overview of the primary factors the Board considered at its May 25, 2007 meeting. The Board did not identify any particular information that was most relevant to its consideration to renew the Management and Investment Advisory Agreements, and each Trustee may have afforded different weight to the various factors. CONSIDERATIONS WITH RESPECT TO ALL FUNDS In determining whether to approve the continuance of each Management Agreement and each Investment Advisory Agreement, the Trustees considered the best interests of each Fund separately. In addition, while the Management and Investment Advisory Agreements for all of the Funds were considered at the same Board meeting, the Board considered each Fund's investment management and subadvisory relationships separately. In each instance, the Board considered, among other things, the following factors: (1) the nature and quality of the services provided; (2) the investment performance of the Fund and the 122 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENT (UNAUDITED) investment advisor; (3) the Manager's or subadvisor's cost for providing the services and the profitability of the advisory business to the Manager or subadvisor; (4) the extent to which economies of scale have been taken into account in setting the fee schedule; (5) whether fee levels reflect these economies of scale for the benefit of Fund investors; (6) comparisons of services and fees with contracts entered into by the Manager or a subadvisor or their affiliates with other clients (such as pension funds and other institutional funds); and (7) any other benefits derived or anticipated to be derived by the Manager or a subadvisor from their relationship with a Fund. The Trustees posed questions to various management personnel of the Manager regarding certain key aspects of the material submitted in support of the renewal. Nature, Extent and Quality of Services. With respect to the renewal of each Management Agreement, the Board considered: the background and experience of key investment personnel and the Manager's ability to retain them; the Manager's disciplined investment approach and goal to provide consistent above average long-term performance at a low cost; the Manager's continuing efforts to add new series and share classes to enhance the Funds' product line; the Manager's record in building improved compliance, control and credit functions that reduce risks to the Funds; the addition of personnel to manage the Funds, promote sales and improve services, including the addition of a separate new information technology (IT) department at the Manager; the high rankings received by the Funds in service surveys; and the active role played by the Manager in monitoring and, as appropriate, recommending replacements for the investment subadvisors and master portfolios. With respect to the renewal of the Investment Advisory Agreements, the Trustees considered the background and experience of each subadvisor's investment personnel responsible for managing the Funds, the size of the subadvisor and their ability to continue to attract and retain qualified investment personnel. Based on the foregoing information, the Board concluded that the nature, extent and quality of the management and advisory services provided by the Manager and each subadvisor were appropriate for each Fund and, thus, supported a decision to renew the Management and each Investment Advisory Agreement. Investment Performance. The Board evaluated the comparative information provided by Lipper and the Manager regarding each Fund's investment performance relative to its benchmark index(es) and peer group. With respect to Lipper data, the Board considered the information provided by Lipper regarding its independent peer selection methodology to select all peer groups and universes. The Board also considered the performance reports and discussions with management at Board and Committee meetings throughout the year. The Manager also noted that it generally was satisfied with the performance of the subadvisors. A discussion regarding the Board's considerations with respect to each Fund's performance appears below under "Additional Considerations and Conclusions with Respect to Each Fund." Cost of Services and Profits Realized. In analyzing the cost of services and profitability of the Manager and a subadvisor by Fund, the Board considered the revenues earned and the expenses incurred by the Manager and those subadvisors that provided such data. The profitability levels were noted at both an individual Fund level and at an aggregate level for all Funds. The Board also considered that the Management Agreements for the American Beacon Funds, American Beacon Mileage Funds, and American Beacon Select Funds stipulate that to the extent that a Fund invests all of its investable assets in another registered investment company, the Fund will not pay the Manager a management fee. Although the Board noted that, in certain cases, the fee rates paid by other clients is lower than the fee rates paid by the Funds, the difference reflects the greater level of responsibility and regulatory requirements associated with managing the Funds. The Board also noted that the Manager proposed to continue the expense waivers and reimbursements for certain Funds and Classes that were in place during the last fiscal year. The Board further considered that each sub-advised Fund pays the Manager the amounts due to its subadvisors, and the Manager remits these amounts directly to the applicable subadvisors. The Board considered that the Manager receives service and administrative fees to compensate the Manager for providing administrative services to the Funds and to compensate third-party administrators and broker-dealers for services to Fund shareholders. In addition, the 123 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENT (UNAUDITED) Board considered that the Manager receives management fees for overseeing the securities lending relationships on behalf of various Funds. The Board also noted that the non-Institutional Classes of the Funds maintain higher expense ratios in order to compensate third party distributors but the net fee to the Manager is the same for all Classes. In analyzing the cost of services and profitability of each subadvisor in connection with its investment advisory services to a Fund, the Board considered that, in many cases, the Manager has negotiated the lowest subadvisory fee a subadvisor charges for any comparable client accounts. The Board gave less weight to profitability considerations or did not view this data as imperative to its deliberations given the arm's-length nature of the relationship between the Manager and the subadvisors with respect to the negotiation of subadvisory fees. Based on the foregoing information, the Board concluded that the profitability levels were reasonable in light of the services performed by the Manager and the subadvisors. Economies of Scale. In considering the reasonableness of the management and investment advisory fees, the Board considered whether economies of scale will be realized as the Funds grow and whether fee levels reflect these economies of scale for the benefit of Fund shareholders. In this regard, the Board considered that the Manager has negotiated breakpoints in the subadvisory fee rates. The Board also noted, for purposes of determining the fee rates chargeable to the Funds, many subadvisors have agreed to take into account other assets of AMR Corporation and its pension plans that are managed by the subadvisors. Thus, the Funds are able to receive lower effective fee rates. This fee arrangement also benefits AMR Corporation and its pension plans. The Board also noted that the Funds have experienced substantial recent asset growth. The Board also considered the Manager's representations that its costs have increased due primarily to greater service provider and regulatory costs. The Manager also represented that it anticipates further economies of scale would be largely offset by higher costs of adding and retaining qualified personnel, improving technology and increasing demands on its advisory business. Based on the foregoing information, the Board concluded that the Manager and subadvisor fee schedules provide for a reasonable sharing of benefits from any economies of scale with each Fund. Benefits Derived from the Relationship with the Funds. The Board considered the "fall-out" or ancillary benefits that accrue to the Manager and/or the subadvisors as a result of the advisory relationships with the Funds, including greater exposure in the marketplace with respect to the Manager's or subadvisor's investment process and expanding the level of assets under management by the Manager and the subadvisors. The Board also considered that the money market portfolios permit institutional investors access to such investments at a more favorable cost and that the Manager's relationship with the Funds and, in particular the money market portfolios, continues to be a significant factor in attracting separate account assets for the Manager. In addition, the Board noted that the Manager provides services to the Trust at a relatively low cost and the benefit plans of AMR Corporation have invested a substantial number of assets in the Funds, which helps reduce costs. The Board also considered that certain of the subadvisors reimburse the Manager for certain of its costs relating to distribution activities for the Funds. Based on the foregoing information, the Board concluded that the potential benefits accruing to the Manager and the subadvisors by virtue of their relationships with the Funds appear to be fair and reasonable. ADDITIONAL CONSIDERATIONS AND CONCLUSIONS WITH RESPECT TO EACH FUND Except for the Short-Term Bond Fund, the performance comparisons below were made versus each Fund's Lipper peer universe median. References to the Lipper expense group below are to the group of comparable mutual funds included in the analysis provided to the Trustees by Lipper. All performance comparisons are for periods ended March 31, 2007, unless otherwise noted. 124 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENT (UNAUDITED) Balanced Fund. In considering the renewal of the Management Agreement with respect to the Balanced Fund (the "Fund"), the Trustees considered the following additional factors: (1) the Fund outperformed its peer universe median for the one-, three-, five-, and ten-year periods; (2) the Manager outperformed its market index with respect to its portion of the Fund's fixed income assets for the one- and three-year periods but underperformed for the five-year period; (3) the actual management fees (including administrative fees) and the total expense ratio of the Institutional Class of Fund shares was lower than its Lipper expense group median; and (4) the Manager contractually agreed to continue to waive fees and/or reimburse expenses to the extent necessary to maintain a competitive total expense ratio for the Fund's Service Class of shares. In considering the renewal of the Investment Advisory Agreements with Barrow, Hanley, Mewhinney & Strauss, Inc. ("Barrow"), Brandywine Global Investment Management, LLC ("Brandywine") and Hotchkis and Wiley Capital Management, LLC ("Hotchkis"), the Trustees considered the following additional factors: (1) Barrow and Brandywine outperformed the peer universe median for the one-, three-, five- and ten-year periods; (2) Hotchkis outperformed the peer universe median for the one-, three- and five-year periods; (3) Barrow underperformed its market benchmark index with respect to its allocated portion of the Fund's assets for the one-year period ended December 31, 2006; (4) Brandywine outperformed its market benchmark index with respect to its allocated portion of the Fund's assets for all relevant periods ended December 31, 2006; (5) Hotchkis outperformed its market benchmark index with respect to its allocated portion of the Fund's equity assets for the three-, five- and ten-year periods but underperformed for the one-year period ended December 31, 2006; (6) Hotchkis' explanation that its underperformance was primarily due to negative security selection as well as an underweight position in a few strong sectors in 2006; (7) Barrow, Hotchkis and Brandywine have informed the Manager that they use Fund commissions to obtain proprietary research, the application of which benefits the Fund, and Hotchkis has further informed the Manager that it also uses Fund commissions for third-party research, but there is little or no cost impact to the Fund; (8) the fee schedules of each subadvisor include breakpoints, which reduce fee rates as the assets of the Fund increase; and (9) the Manager's recommendation to continue to retain each subadvisor. Based on the foregoing considerations and those noted above with respect to all Funds, the Trustees (1) concluded that the fees paid to the Manager and the subadvisors under the Management and Investment Advisory Agreements are fair and reasonable, (2) determined that the Fund and its shareholders would benefit from the continued management of the Fund by the Manager and subadvisors and (3) approved the renewal of the Management and Investment Advisory Agreements with respect to the Fund. Emerging Markets Fund. In considering the renewal of the Management Agreement with respect to the Emerging Markets Fund (the "Fund"), the Trustees considered the following additional factors: (1) the Fund underperformed its peer universe median for the one-, three-, and five-year periods; (2) the Manager's explanation as to the Fund's performance; (3) the actual management fee (including administrative fees) and the total expense ratio of the Institutional Class of the Fund was higher than its Lipper expense group median; and (4) the Manager's explanation as to why the Fund has higher expenses. In considering the renewal of the Investment Advisory Agreements with The Boston Company Asset Management, LLC ("TBCAM") and Morgan Stanley Investment Management Inc. ("MSIM"), the Trustees considered the following additional factors: (1) MSIM outperformed the peer universe median for the one-, three-, and five-year periods; (2) TBCAM underperformed the peer universe median for the one-, three- and five-year periods; (3) MSIM outperformed its market benchmark index with respect to its allocated portion of the Fund's assets for all relevant periods ended December 31, 2006; (4) each of the Fund's subadvisors has informed the Manager that it uses Fund commissions to obtain proprietary research, the application of which benefits the Fund and each subadvisor's other clients; (5) the fee schedules of each subadvisor include breakpoints, which reduce fee rates as the assets of the Fund increase; (6) TBCAM also represented that it does not charge a lower advisory fee to any other comparable clients; and (7) the Manager's recommendation to continue to retain each subadvisor. 125 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENT (UNAUDITED) Based on the foregoing considerations and those noted above with respect to all Funds, the Trustees (1) concluded that the fees paid to the Manager and the subadvisors under the Management and Investment Advisory Agreements are fair and reasonable, (2) determined that the Fund and its shareholders would benefit from the continued management of the Fund by the Manager and the subadvisors and (3) approved the renewal of the Management and Investment Advisory Agreements with respect to the Fund. Enhanced Income Fund. In considering the renewal of the Management Agreement with respect to the Enhanced Income Fund (the "Fund"), the Trustees considered the following additional factors: (1) the Fund underperformed its peer universe median for the one-year period but outperformed the peer universe median for the three-year period; (2) the Manager outperformed the peer universe median with respect to its allocated portion of the Fund's assets for the one- and three-year periods; (3) the Manager's explanation regarding the limitations of Lipper's methodology on the selection of a particular peer group for the Fund; (4) the actual management fee (including administrative fees) and the total expense ratio of the Fund was higher than its Lipper expense group median; and (5) the Manager's explanation that the Fund's higher expenses were due to higher subadvisor fee rates for the convertible/equity portion of the Fund. In considering the renewal of the Investment Advisory Agreement with Calamos Advisors LLC ("Calamos"), the Trustees considered the following additional factors: (1) Calamos outperformed the peer universe median with respect to its allocated portion of the Fund's assets for the one- and three-year periods; (2) Calamos underperformed its market benchmark index with respect to its allocated portion of the Fund's assets for the one-year period but outperformed for the three-year and since inception periods; (3) Calamos has informed the Manager that it uses Fund commissions to obtain proprietary research, the application of which benefits the Fund and Calamos' other clients; and (4) the Manager's recommendation to continue to retain Calamos. Based on these considerations and those noted above with respect to all Funds, the Trustees (1) concluded that the fees paid to the Manager and Calamos under the Management and Investment Advisory Agreements are fair and reasonable, (2) determined that the Fund and its shareholders would benefit from the continued management of the Fund by the Manager and Calamos and (3) approved the renewal of the Management and Investment Advisory Agreements with respect to the Fund. High Yield Bond Fund. In considering the renewal of the Management Agreement with respect to the High Yield Bond Fund (the "Fund"), the Trustees considered the following additional factors: (1) the Fund underperformed its peer universe median for the one- and three-year periods but outperformed its peer universe median for the five-year period; and (2) the actual management fee (including administrative fees) and the total expense ratio of the Institutional Class was higher than its Lipper expense group median. In considering the renewal of the Investment Advisory Agreement with Post Advisory Group, LLC ("Post") and Franklin Advisors, Inc. ("Franklin"), the Trustees considered the following additional factors: (1) Post outperformed the peer universe median for the one- and five-year periods but underperformed for the three-year period; (2) Post underperformed its market benchmark index with respect to its allocated portion of the Fund's assets for the one-year period ended December 31, 2006; (3) Franklin has not yet achieved a one-year track record to provide any meaningful comparison; (4) Post's explanation that its underperformance was due primarily as a result of underweight positions in certain securities and certain restrictions placed on low rated securities; (5) Post represented that its fees are among the lowest for the types of services provided to the Fund; (6) Franklin's fee schedule includes breakpoints, which reduce fee rates as the assets of the Fund increases; (7) Franklin represented that it does not charge a lower advisory fee to any other client for comparable services; (8) the Manager's efforts to obtain a lower fee from the subadvisers; and (9) the Manager's recommendation to continue to retain each subadvisor. Based on these considerations and those noted above with respect to all Funds, the Trustees (1) concluded that the fees paid to the Manager and subadvisors under the Management and Investment Advisory 126 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENT (UNAUDITED) Agreements are fair and reasonable, (2) determined that the Fund and its shareholders would benefit from the continued management of the Fund by the Manager and the subadvisors and (3) approved the renewal of the Management and Investment Advisory Agreements with respect to the Fund. Intermediate Bond Fund. In considering the renewal of the Management Agreement with respect to the Intermediate Bond Fund (the "Fund"), the Trustees considered the following additional factors: (1) the Fund outperformed its peer universe median for the one-, three- and five-year periods; (2) the Manager outperformed the peer universe median with respect to its allocated portion of the Fund's assets for the one-, three-, and five-year periods; and (3) the actual management fee (including administrative fees) and the total expense ratio of the Insitutional Class of Fund shares was lower than its Lipper expense group median. In considering the renewal of the Investment Advisory Agreement with Barrow, the Trustees considered the following additional factors: (1) Barrow outperformed the peer universe median with respect to its allocated portion of the Fund's assets for the one-, three-, and five-year periods; (2) Barrow outperformed its market benchmark index with respect to its allocated portion of the Fund's assets for the one-year period ended December 31, 2006; (3) Barrow's fee schedule includes breakpoints, which reduce fee rates as the assets of the Fund increase; and (4) the Manager's recommendation to continue to retain Barrow. Based on these considerations and those noted above with respect to all Funds, the Trustees (1) concluded that the fees paid to the Manager and Barrow under the Management and Investment Advisory Agreements are fair and reasonable, (2) determined that the Fund and its shareholders would benefit from the continued management of the Fund by the Manager and Barrow and (3) approved the renewal of the Management and Investment Advisory Agreements with respect to the Fund. Large Cap Growth Fund. In considering the renewal of the Management Agreement with respect to the Large Cap Growth Fund (the "Fund"), the Trustees considered the following additional factors: (1) the Fund outperformed its peer universe median for the one-, three- and five-year periods; (2) the Manager's explanation that it replaced a subadvisor to the Fund to improve overall performance; (3) the actual management fee (including administrative fees) and the total expense ratio of the Institutional Class of Fund shares was higher than the Lipper expense group median; (4) the Manager's explanation that the Lipper data does not reflect the imposition of a more recent fee waiver for the Fund; (5) the Manager's explanation that the relatively low asset levels of the Fund result in higher non-management fees than other Funds; and (6) the Manager contractually agreed to continue to waive fees and/or reimburse expenses to the extent necessary to maintain a competitive total expense ratio for the Fund's Institutional Class. In considering the renewal of the Investment Advisory Agreements with Goldman Sachs Asset Management, L.P. ("GSAM") and Renaissance Group LLC, dba Renaissance Investment Management ("RIM"), the Trustees considered the following additional factors: (1) GSAM underperformed the peer universe median for the one-year period but outperformed for the three- and five-year periods; (2) RIM has not yet achieved a one-year track record to provide any meaningful comparison; (3) GSAM has informed the Manager that it uses Fund commissions to obtain proprietary research, the application of which benefits the Fund and GSAM's other clients; (4) the fee schedules of each subadvisor include breakpoints, which reduce fee rates as the assets of the Fund increase; and (5) the Manager's recommendation to continue to retain each subadvisor. Based on these considerations and those noted above with respect to all Funds, the Trustees (1) concluded that the fees paid to the Manager and the subadvisors under the Management and Investment Advisory Agreements are fair and reasonable, (2) determined that the Fund and its shareholders would benefit from the continued management of the Fund by the Manager and the subadvisors and (3) approved the renewal of the Management and Investment Advisory Agreements with respect to the Fund. Mid-Cap Value Fund. In considering the renewal of the Management Agreement with respect to the Mid-Cap Value Fund (the "Fund"), the Trustees considered the following additional factors: (1) the Fund 127 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENT (UNAUDITED) outperformed its peer universe median for the one- and two-year periods; (2) the actual management fee (including administrative fees) and the total expense ratio of the Institutional Class of Fund shares was lower than its Lipper expense group median (after consideration of the Manager's waiver); and (3) the Manager contractually agreed to continue to waive fees and/or reimburse expenses to the extent necessary to maintain a competitive total expense ratio for the Fund's Institutional and PlanAhead Classes of shares. In considering the renewal of the Investment Advisory Agreements with Barrow and Pzena Investment Management, LLC ("Pzena"), the Trustees considered the following additional factors: (1) Barrow outperformed the peer universe median for the one-year period ended but underperformed for the two-year period; (2) Pzena underperformed for the one- and two-year periods; (3) Barrow underperformed its market benchmark index with respect to its allocated portion of the Fund's assets for the one-year period ended December 31, 2006 (4) Barrow has informed the Manager that it uses Fund commissions to obtain proprietary research, the application of which benefits the Fund and Barrow's other clients; (5) the fee schedules of each subadvisor include breakpoints, which reduce fee rates as the assets of the Fund increase; (6) Pzena represented that the blended fee charged will not exceed the blended fee charged to new comparable accounts; and (7) the Manager's recommendation to continue to retain each subadvisor. Based on these considerations and those noted above with respect to all Funds, the Trustees (1) concluded that the fees paid to the Manager and the subadvisors under the Management and Investment Advisory Agreements are fair and reasonable, (2) determined that the Mid-Cap Value Fund and its shareholders would benefit from the continued management of the Fund by the Manager and subadvisors and (3) approved the renewal of the Management and Investment Advisory Agreements with respect to the Fund. Short-Term Bond Fund. In considering the renewal of the Management Agreement with respect to the Short-Term Bond Fund (the "Fund"), the Trustees considered the following additional factors: (1) the Fund outperformed its benchmark index for the one-, three- and five-year periods, and only slightly underperformed its benchmark index for the ten-year period; (2) the Fund outperformed the Lipper Index for all reported periods; (3) the actual management fee (including administrative fees) and the total expense ratio of the Institutional Class of Fund shares was the lowest of its Lipper expense group; and (4) the Manager has contractually agreed to waive fees and/or reimburse Fund expenses to the extent necessary to maintain a competitive total expense ratio for the PlanAhead Class of the Fund. Based on these considerations and those noted above with respect to all Funds, the Trustees (1) concluded that the fees paid to the Manager under the Management Agreement are fair and reasonable, (2) determined that the Fund and its shareholders would benefit from the Manager's continued management of the Fund and (3) approved the renewal of the Management Agreement with respect to the Fund. Small Cap Value Opportunity Fund. In considering the renewal of the Management Agreement with respect to the Small Cap Value Opportunity Fund (the "Fund"), the Trustees considered the following additional factors: (1) the Fund outperformed its peer universe median for the one-year period; (2) the actual management fees (including administrative fees) and the total expense ratio of the Institutional Class of Fund shares was lower than its Lipper expense group median; (3) the Manager's explanation that the relatively low asset levels of the Fund result in higher non-management fees that other Funds; and (4) the Manager contractually agreed to continue to waive fees and/or reimburse expenses to the extent necessary to maintain a competitive total expense ratio for the Fund's Institutional and PlanAhead Classes. In considering the renewal of the Investment Advisory Agreement with PanAgora Asset Management ("PanAgora"), the Trustees considered the following additional factors: (1) PanAgora outperformed the peer universe median for the one-year period; (2) PanAgora's small cap composite of similar accounts outperformed its market benchmark index for the three-year and since inception periods ended March 31, 2007 but underperformed for the one-year period; (3) PanAgora's fee schedule includes breakpoints, which reduce fee rates as the assets of the Fund increase; (4) PanAgora also represented that it does not charge a lower advisory 128 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENT (UNAUDITED) fee to other clients for comparable services; and (5) the Manager's recommendation to continue to retain the subadvisor. Based on these considerations and those noted above with respect to all Funds, the Trustees (1) concluded that the fees paid to the Manager and the subadvisor under the Management and Investment Advisory Agreements are fair and reasonable, (2) determined that the Small Cap Value Opportunity Fund and its shareholders would benefit from the continued management of the Fund by the Manager and subadvisor and (3) approved the renewal of the Management and Investment Advisory Agreements with respect to the Fund. 129 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. 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** (59) Trustee Chairman and CEO (2006-Present), President (1986-2006) and since 1987 Director (2003-Present), American Beacon Advisors, Inc.; President from Chairman (1989-2003) and Director (1979-1989, 2003-Present), 1987 to 2007 American Airlines Federal Credit Union; Director, Crescent Executive Vice Real Estate Equities, Inc.(1994-2007); Director, Pritchard, President Hubble & Herr, LLC (investment advisor) (2001-2006); since 2007 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); Chairman (2007-Present) and Vice Chairman (2004-2007), Committee for the Investment of Employee Benefits; 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). Douglas G. Herring** (50) Trustee since 2006 President, American Beacon Advisors, Inc. (2006-Present); Executive Vice President Vice President and Controller, American Airlines, Inc. from 2006 to 2007 (1998-2006); Chairman (2003-Present) and Director President since 2007 (1995-Present), American Airlines Federal Credit Union; Trustee, American Beacon Mileage Funds (2006-Present); Trustee American Beacon Select Funds (2006-Present); Trustee American Beacon Master Trust (2006-Present). Alan D. Feld** (70) Trustee since 1996 Partner, Akin, Gump, Strauss, Hauer & Feld, LLP (law firm) (1960-Present); Director, Clear Channel Communications (1984-Present); Trustee, CenterPoint Properties (1994-2006); Member Board of Trustees, Southern Methodist University; Member, Board of Visitors, The University of Texas M.D. Anderson Cancer Center; Member, Board of Visitors, Zale Lipshy Hospital; 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 (63) 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). TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS (UNAUDITED) 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 (46) 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) (2001-2006); 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 (64) Trustee since 2004 Senior Vice President and General Counsel, Hunt Consolidated, Inc. (holding company engaged in oil and gas exploration and production, refining, 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 (72) 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 (61) Trustee since 2001 President, Southern Methodist University (1995-Present); 225 Perkins Admin. Bldg. Director, ChemFirst (1986-2002); Director, J.C. Penney Southern Methodist Univ. Company, Inc. (1996-Present); Director, California Federal Dallas, Texas 75275 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 (51) Trustee since 1996 Managing Partner, Pharos Capital Group, LLC (a private 100 Crescent Court Chairman since equity firm) (1998-Present); Director, Burger King Suite 1740 2005 Corporation (2004-Present); Director, Gap, Inc. Dallas, Texas 75201 (2006-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). TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS (UNAUDITED) 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 (48) VP, Secretary and Vice President, Legal and Compliance, American Beacon Chief Legal Advisors, Inc. (2006-Present); Assistant General Counsel, Officer since 2006 First Command Financial Planning, Inc. (2004-2006); Enforcement Attorney (2002-2004) and Branch Chief (2000-2002), Securities and Exchange Commission. Brian E. Brett (47) VP since 2004 Vice President, Director of Sales and Marketing, American Beacon Advisors, Inc. (2004-Present); Regional Vice President, Neuberger Berman, LLC (investment advisor) (1996-2004). Wyatt Crumpler (41) VP since 2007 Vice President, Trust Investments, American Beacon Advisors, Inc. (2007-Present); Managing Director of Corporate Accounting (2004-2007), Director of IT Strategy and Finance (2002-2004), American Airlines, Inc. Michael W. Fields (53) VP since 1989 Vice President, Fixed Income Investments, American Beacon Advisors, Inc. (1988-Present). Rebecca L. Harris (40) Treasurer since Vice President, Finance, American Beacon Advisors, Inc. 1995 (1995-Present). Christina E. Sears (36) Chief Compliance Chief Compliance Officer, American Beacon Advisors, Inc. Officer since 2004 (2004-Present); Senior Compliance Analyst, American Beacon and Asst. Advisors, Inc. (1998-2004). Secretary since 1999 * 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, Feld and Herring are deemed to be "interested persons" of the Trust, as defined by the 1940 Act. Mr. Quinn is Chairman and CEO 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. Mr. Herring is President of the Manager. (This page intentionally left blank) (AMERICAN BEACON LOGO) DELIVERY OF DOCUMENTS 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 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. TO OBTAIN MORE INFORMATION ABOUT THE FUND: (GRAPHIC) (GRAPHIC) BY E-MAIL: ON THE INTERNET: american_beacon.funds@ambeacon.com Visit our website at www.americanbeaconfunds.com (GRAPHIC) (GRAPHIC) BY TELEPHONE: BY MAIL: Institutional Class American Beacon Funds Call (800) 658-5811 P.O. Box 219643 AMR ClassSM Kansas City, MO 64121-9643 Call (800) 345-2345 PlanAhead Class(R) and Service Class Call (800) 388-3344 AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULES AVAILABILITY OF PROXY VOTING POLICY AND RECORDS In addition to the Schedule of Investments provided in each A description of the policies and procedures the Fund uses to semi-annual and annual report, the Fund files a complete determine how to vote proxies relating to portfolio securities schedule of its portfolio holdings with the Securities and is available in the Fund's Statement of Additional Information, Exchange Commission ("SEC") on Form N-Q as of the first and is available free of charge on the Fund's website third fiscal quarters. The Fund's Forms N-Q are available (www.americanbeaconfunds.com) and by calling 1-800-967-9009 or on the SEC's website at www.sec.gov. The Forms N-Q may also be by accessing the SEC's website at www.sec.gov. The Fund's proxy reviewed and copied at the SEC's Public Reference Room, 450 Fifth voting record for the most recent year ended June 30 is filed Street, NW, Washington, DC 20549. Information regarding the annually with the SEC on Form N-PX. The Fund's Forms N-PX are operation of the SEC's Public Reference Room may be obtained by available on the SEC's website at www.sec.gov. The FUND SERVICE calling 1-800-SEC-0330. A complete schedule of the Fund's PROVIDERS: Fund's proxy voting record may also be obtained by portfolio holdings is also available on the Funds' website calling 1-800-967-9009. (www.americanbeaconfunds.com) approximately thirty days after the end of each month. FUND SERVICE PROVIDERS: 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 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. GUIDANCE | VISION | EXPERIENCE (AMERICAN BEACON FUNDS(SM) LOGO) Annual Report (GRAPHIC) October 31, 2007 INTERNATIONAL EQUITY 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 President's Message ............................................... 1 Market and Performance Overview ................................... 2 Schedule of Investments ........................................... 7 Additional Information ............................................ Back Cover Any opinions herein, including forecasts, reflect our judgment 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 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, 2007 FELLOW SHAREHOLDERS, (PHOTO OF DOUGLAS G. HERRING) I am pleased to present to you the American Beacon International Equity Fund Annual Report for the twelve months ended October 31, 2007. Please review the enclosed material carefully, as it includes important information about the Fund. During the year ended October 31, 2007, the developed foreign equity markets continued to post very impressive performance. The MSCI EAFE Index reported a 24.91% return, handily beating the S&P 500 Index return of 14.56%. Continued strong global growth and a weak U.S. Dollar drove the extraordinary dollar-denominated performance of these markets. The Fund's Institutional Class reported a total annualized return of 21.54% for the one-year period ended October 31, 2007. True to the Fund's long-term investment approach, the Fund's five- and ten-year performance exceeded the MSCI EAFE Index's performance. Toward the end of the fiscal year, volatility returned to international equity markets after a number of years of steady returns. The change in the investment environment was led by a crisis in the U.S. housing and financial sectors that began to impact foreign markets during the summer months. The increased volatility continued after the close of the Fund's fiscal year and is likely to continue over the shorter term. However, we believe the Fund's fundamental value investment philosophy and lower than average expense ratio will continue to serve the Fund well over the longer term. As always, we appreciate 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/ Douglas G. Herring Douglas G. Herring President American Beacon Funds 1 INTERNATIONAL EQUITY MARKET OVERVIEW OCTOBER 31, 2007 (UNAUDITED) In spite of elevated energy prices and a deteriorating U.S. housing sector that negatively affected U.S. economic growth, the global economy remained resilient throughout the 12-month reporting period. The strength of consumer and corporate demand, reasonably low inflation, generally favorable labor markets, and moderate, though higher, global interest rates have supported the economic recovery which began in 2002. These factors also contributed to the strength of global equity markets during the 12 months under review. In addition, narrow corporate credit spreads and strong cash flows from the corporate sector in the world's capital markets contributed to very strong global merger and acquisition activity during most of the reporting period. In particular, the private equity industry, which has grown substantially in recent years, played a pivotal role in a number of large and high-profile acquisitions. However, concerns about slower growth and declining asset quality surfaced during the first quarter of 2007. These were initially centered on the U.S. subprime mortgage market but spread in August 2007 to global capital markets. In particular, the difficulties of assessing risk and the value of collateral in the structured finance industry contributed to a decline in risk appetite among both lenders and investors. The private equity industry, which is reliant on the availability of cheap credit, was particularly affected and deal activity slowed toward the end of the period. Accommodative actions by several central banks, including a larger-than-expected target interest rate cut of half of a percent (0.5%) by the U.S. Federal Reserve Board, helped restore investor confidence after a sharp, but short-lived, sell-off in the summer. Most global equity markets ended the 12-month period with double-digit total returns. Many stock market indexes in the U.S. and most European countries reached six-year highs and certain markets in Asia reached all-time highs. Currency diversification benefited investors during the period as the U.S. dollar declined versus the currencies of many major trading partners, and equity returns for U.S.-based investors that invested in stocks denominated in other currencies generally became stronger when translated into the weaker greenback. 2 PERFORMANCE OVERVIEW AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) OCTOBER 31, 2007 (UNAUDITED) The Institutional Class of the International Equity Fund returned 21.54% for the twelve months ended October 31, 2007. The Fund underperformed the MSCI EAFE Index (the "Index") return of 24.91% and the Lipper International Funds Index return of 29.19% for the period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 10/31/97 THROUGH 10/31/07 (PERFORMANCE GRAPH) ANNUALIZED TOTAL RETURNS VALUE OF PERIODS ENDED 10/31/07 $10,000 --------------------------- 10/31/97- 1 YEAR 5 YEARS 10 YEARS 10/31/07 ------ ------- -------- ---------- Institutional Class(1,4)....... 21.54% 23.51% 10.63% $27,460 PlanAhead Class(1,4)........... 21.23% 23.25% 10.39% 26,877 Service Class(1,2,4)........... 20.85% 22.93% 10.25% 26,531 AMR Class(1,4)................. 21.86% 23.81% 10.91% 28,167 Lipper Int'l. Funds Index(3)... 29.19% 23.59% 10.10% 26,158 MSCI EAFE Index (3)............ 24.91% 23.21% 9.26% 24,236 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 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 through these periods or for the entirety of those periods.. A portion of the fees changed 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. 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. One cannot directly invest in an index. 4. The total annual Fund operating expense ratio set forth in the most recent Fund prospectus for the Institutional, PlanAhead, Service and AMR Class shares was 0.72%, 0.97%, 1.20% and 0.46%, respectively. The expense ratios above may vary from the expense ratios presented in other sections of this report that are based on expenses incurred during the period covered by this report. The Fund underperformed the Index by 3.37% over the twelve-month period due to stock selection, as the Fund added value from country allocation. Stock selections in Japan, South Korea, and Germany significantly impacted the Fund's relative performance. Financials in Japan and South Korea detracted from performance, including Sumitomo Mitsui Financial Group (down 24.9%), Mitsubishi UFJ Financial Group (down 20.4%), Chuo Mitsui Trust Holdings (down 32.2%), and Sumitomo Trust & Banking Co. (down 30.0%) in Japan, and Kookmin Bank (up 2.9%) in South Korea. Samsung Electronics (down 5.1%) also hurt performance in South Korea, while in Germany, Deutsche Post (up 12.6%), Bayerische Motoren Werke (up 18.1%), and Celesio (up 11.4%) detracted from returns versus the strongly performing German market. Country allocation benefited the Fund, primarily through an underweight position in Japan. The Japanese market gained only 4.8% and was the second worst-performing market in the Index for the period. Value was also added by the Fund's allocation to South Korea and overweighting Germany (up 55.8% and 46.7%, respectively). Although economic and market conditions vary from period to period, the Fund's primary strategy of investing in undervalued companies with above-average earnings growth expectations remains consistent. 3 PERFORMANCE OVERVIEW AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) OCTOBER 31, 2007 (UNAUDITED) TOP TEN HOLDINGS % OF NET ASSETS ---------- Siemens AG 2.4% Sanofi-Aventis 2.4% Vodafone Group plc 2.3% BP plc 2.3% BAE Systems plc 2.1% Deutsche Post AG 2.0% Telefonica S.A. 1.9% GlaxoSmithKline plc 1.8% E.ON AG 1.8% France Telecom S.A. 1.7% SECTOR ALLOCATION % OF EQUITIES ---------- Financials 25.4% Consumer Discretionary 15.0% Industrials 12.4% Telecommunications Services 9.6% Energy 8.4% Consumer Staples 7.9% Health Care 7.6% Materials 4.9% Information Technology 4.6% Utilities 4.2% REGIONAL ALLOCATION* (PIE CHART) Europe 77.2% Pacific Rim 21.2% North America 1.6% * shown as a percentage of equities 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 FUND EXPENSES AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) OCTOBER 31, 2007 (UNAUDITED) 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, 2007 through October 31, 2007. 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, 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. Beginning Ending Account Account Expenses Paid During Value Value Period* 5/1/07 10/31/07 5/1/07-10/31/07 --------- --------- -------------------- INSTITUTIONAL CLASS Actual $1,000.00 $1,069.28 $3.49 Hypothetical $1,000.00 $1,021.83 $3.41 (5% return before expenses) PLANAHEAD CLASS Actual $1,000.00 $1,067.64 $4.85 Hypothetical $1,000.00 $1,020.52 $4.74 (5% return before expenses) SERVICE CLASS Actual $1,000.00 $1,065.96 $5.62 Hypothetical $1,000.00 $1,019.76 $5.50 (5% return before expenses) AMR CLASS Actual $1,000.00 $1,070.34 $2.14 Hypothetical $1,000.00 $1,023.14 $2.09 (5% return before expenses) * Expenses are equal to the Fund's annualized expense ratios for the six-month period of 0.67%, 0.93%, 1.16% 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(SM) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders of American Beacon International Equity Fund and the Board of Trustees of American Beacon Funds: 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, 2007, 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, 2007, 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, 2007, 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 21, 2007 6 AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS October 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) AUSTRALIA - 1.41% COMMON STOCKS - 1.41% Commonwealth Bank of Australia ................. 208,440 $ 12,028 National Australia Bank Ltd. ................... 342,730 13,869 News Corp. ..................................... 182,280 3,950 Suncorp-Metway Ltd. ............................ 860,170 16,342 ---------- TOTAL AUSTRALIA ................................... 46,189 ---------- AUSTRIA - 0.19% COMMON STOCKS - 0.19% Telekom Austria AG ............................. 214,770 6,175 ---------- CANADA - 1.37% COMMON STOCKS - 1.37% Celestica, Inc. ## ............................. 556,300 3,710 Husky Energy, Inc. + ........................... 138,160 6,440 Jean Coutu Group, Inc. + ....................... 371,200 5,485 Manulife Financial Corp. + ..................... 436,196 20,405 Precision Drilling Trust ....................... 486,852 8,875 ---------- TOTAL CANADA ...................................... 44,915 ---------- DENMARK - 0.39% COMMON STOCKS - 0.39% Vestas Wind Systems ## ......................... 141,526 12,748 ---------- FINLAND - 1.51% COMMON STOCKS - 1.51% Nokia Oyj ...................................... 452,300 17,964 Stora Enso Oyj ................................. 213,542 3,928 Stora Enso Oyj, A Shares ....................... 68,102 1,247 Stora Enso Oyj, R Shares ....................... 232,400 4,279 UPM-Kymmene Oyj ................................ 980,364 22,009 ---------- TOTAL FINLAND ..................................... 49,427 ---------- FRANCE - 12.10% COMMON STOCKS - 12.10% Accor S.A. ..................................... 170,000 16,279 AXA S.A. ....................................... 901,838 40,490 BNP Paribas .................................... 228,008 25,257 Compagnie Generale des Etablissements Michelin .................................... 116,670 15,697 Credit Agricole S.A. ........................... 400,100 15,873 France Telecom S.A. ............................ 1,546,504 57,203 Groupe Danone .................................. 81,700 7,018 Lafarge S.A. ................................... 41,762 6,819 Publicis Groupe S.A. ........................... 364,719 14,857 Sanofi-Aventis ................................. 875,355 77,017 Suez S.A. ...................................... 177,280 11,568 Technip ........................................ 261,046 23,487 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Thomson S.A. ................................... 361,550 $ 6,325 Total S.A. ..................................... 661,376 53,376 VINCI S.A. ..................................... 300,902 24,774 ---------- TOTAL FRANCE ...................................... 396,040 ---------- GERMANY - 11.36% COMMON STOCKS - 10.92% adidas AG ...................................... 339,800 22,731 Allianz AG ..................................... 43,702 9,859 BASF AG ........................................ 39,970 5,534 Bayer AG ....................................... 223,812 18,739 Bayerische Motoren Werke AG .................... 263,681 17,695 Celesio AG ..................................... 260,090 14,757 Continental AG ................................. 78,700 11,923 DaimlerChrysler AG ............................. 208,900 23,097 Deutsche Post AG ............................... 2,162,731 65,654 Deutsche Telekom ............................... 616,040 12,649 E.ON AG ........................................ 303,284 59,300 Infineon Technologies AG ## .................... 527,250 7,763 Muenchener Rueckversicherung-Gesellschaft AG ... 47,997 9,233 Siemens AG ..................................... 576,121 78,496 ---------- TOTAL COMMON STOCKS ............................... 357,430 ---------- PREFERRED STOCKS - 0.44% Henkel KGaA .................................... 282,010 14,440 ---------- TOTAL GERMANY ..................................... 371,870 ---------- GREECE - 0.68% COMMON STOCKS - 0.68% National Bank of Greece S.A. ................... 107,500 7,507 Public Power Corp. S.A. ........................ 359,480 14,613 ---------- TOTAL GREECE ...................................... 22,120 ---------- HONG KONG/CHINA - 1.68% COMMON STOCKS - 1.68% Cheung Kong Holdings Ltd. ...................... 835,500 16,447 Hang Lung Group Ltd. ........................... 2,451,000 14,590 Hutchison Whampoa Ltd. ......................... 199,000 2,509 Swire Pacific Ltd. ............................. 957,100 13,594 Yue Yuen Industrial (Holdings) Ltd. ............ 2,551,167 7,932 ---------- TOTAL HONG KONG/CHINA ............................. 55,072 ---------- IRELAND - 1.83% COMMON STOCKS - 1.83% Allied Irish Banks ............................. 548,932 13,820 Bank of Ireland ................................ 613,930 11,392 CRH plc ........................................ 437,423 16,820 CRH plc, ADR ................................... 171,625 6,582 See accompanying notes 7 AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS October 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Smurfit Kappa Group plc ## ...................... 564,913 $ 11,405 ---------- TOTAL IRELAND ..................................... 60,019 ---------- ITALY - 2.98% COMMON STOCKS - 2.98% Eni S.p.A. + ................................... 626,391 22,891 Mediaset S.p.A. ................................ 1,786,680 18,529 Telecom Italia S.p.A. .......................... 1,392,689 4,374 UniCredito Italiano S.p.A. ..................... 6,008,908 51,669 ---------- TOTAL ITALY ....................................... 97,463 ---------- JAPAN - 12.68% COMMON STOCKS - 12.68% Aeon Co. Ltd. .................................. 1,017,600 15,949 Astellas Pharma, Inc. .......................... 319,400 14,117 Canon, Inc. .................................... 110,600 5,588 Chuo Mitsui Trust Holdings, Inc. ............... 1,138,400 9,093 Daito Trust Construction Co. Ltd. .............. 228,800 10,598 East Japan Railway Co. ......................... 992 8,166 FUJIFILM Holdings Corp. ........................ 114,400 5,466 Haseko Corp. ## ................................ 4,812,407 11,560 Hitachi Ltd. ................................... 685,500 4,651 Honda Motor Co. Ltd. ........................... 580,000 21,735 HOYA Corp. ..................................... 193,900 7,047 Japan Tobacco, Inc. ............................ 1,868 10,872 JS Group Corp. ................................. 366,100 5,915 JSR Corp. ...................................... 256,300 6,633 Konica Minolta Holdings, Inc. .................. 499,500 8,808 Mitsubishi UFJ Financial Group, Inc. ........... 2,338,000 23,290 NEC Corp. ...................................... 417,300 2,074 Nidec Corp. .................................... 110,700 8,336 Nintendo Co. Ltd. .............................. 20,500 12,918 Nippon Express Co. Ltd. ## ..................... 1,933,700 9,673 Nippon Paper Group, Inc. ....................... 2,312 6,941 Nissan Motor Co. Ltd. .......................... 1,817,400 20,940 NOK Corp. ...................................... 615,600 13,691 Nomura Holdings, Inc. .......................... 573,900 10,225 ROHM Co. Ltd. .................................. 155,400 13,583 Sankyo Co. Ltd. + .............................. 190,600 8,124 Sekisui House Ltd. ............................. 899,600 11,501 Sompo Japan Insurance, Inc. .................... 376,900 4,399 Sony Corp. ..................................... 108,402 5,356 Sony Financial Holdings, Inc. ## ............... 1,770 6,367 Sumitomo Mitsui Financial Group, Inc. .......... 3,196 26,079 Sumitomo Trust and Banking Co. Ltd. ............ 914,400 6,791 Takeda Pharmaceutical Co. Ltd. ................. 388,700 24,261 THK Co. Ltd. ................................... 919,400 20,221 Tokyo Gas Co. Ltd. ............................. 2,260,200 10,102 Yamada Denki Co. Ltd. .......................... 73,900 7,606 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Yamaha Motor Co. Ltd. .......................... 574,300 $ 16,347 ---------- TOTAL JAPAN ....................................... 415,023 ---------- MEXICO - 0.24% COMMON STOCKS - 0.24% Telefonos de Mexico, S.A. de C.V., ADR ......... 214,800 7,855 ---------- NETHERLANDS - 5.75% COMMON STOCKS - 5.75% Akzo Nobel N.V. ................................ 159,597 12,874 Heineken N.V. .................................. 111,300 7,805 ING Groep N.V. ................................. 865,429 39,061 Koninklijke (Royal) Philips Electronics N.V. ... 848,316 35,222 Reed Elsevier N.V. ............................. 729,708 14,163 SBM Offshore N.V. .............................. 273,650 10,555 TNT N.V. ....................................... 748,231 30,763 Unilever N.V. .................................. 1,018,547 33,174 Vedior N.V. .................................... 209,690 4,794 ---------- TOTAL NETHERLANDS ................................. 188,411 ---------- NEW ZEALAND - 0.18% COMMON STOCKS - 0.18% Telecom Corporation of New Zealand Ltd. + ...... 1,766,323 5,937 ---------- NORWAY - 1.55% COMMON STOCKS - 1.55% Aker Kvaener ASA ............................... 408,650 14,331 Stolt-Nielsen S.A. ............................. 273,134 8,059 Telenor ASA .................................... 1,202,289 28,363 ---------- TOTAL NORWAY ...................................... 50,753 ---------- PORTUGAL - 0.37% COMMON STOCKS - 0.37% Portugal Telecom, SGPS, S.A. ................... 792,250 10,641 PT Multimedia .................................. 111,591 1,519 ---------- TOTAL PORTUGAL .................................... 12,160 ---------- SINGAPORE - 2.28% COMMON STOCKS - 2.28% Development Bank of Singapore Group Holdings Ltd. ............................... 2,490,455 38,909 Flextronics International Ltd. ## .............. 899,000 11,067 Singapore Telecommunications Ltd. .............. 8,645,000 24,558 ---------- TOTAL SINGAPORE ................................... 74,534 ---------- SOUTH KOREA - 2.46% COMMON STOCKS - 2.46% Kookmin Bank, ADR ## ........................... 200,810 16,404 Korea Electric Power Corp. ..................... 86,860 3,873 See accompanying notes 8 AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS October 31, 2007 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) LG Electronics, Inc. ........................... 76,760 $ 8,073 LG Telecom Ltd. ## ............................. 868,507 9,473 Samsung Electronics Co. Ltd. ................... 40,044 24,862 Samsung Electronics Co. Ltd., GDR ## ++ ........ 16,800 5,124 Shinhan Financial Group Co. Ltd. ............... 193,352 12,606 ---------- TOTAL SOUTH KOREA ................................. 80,415 ---------- SPAIN - 3.61% COMMON STOCKS - 3.61% Banco Popular Espanol S.A. ..................... 506,100 8,873 Banco Santander Central Hispano S.A. ........... 749,550 16,384 Banco Santander Central Hispano S.A., GDR ...... 560,544 12,151 Enagas S.A. .................................... 293,628 8,358 Repsol YPF S.A. ................................ 273,340 10,847 Telefonica S.A. ................................ 1,864,332 61,729 ---------- TOTAL SPAIN ....................................... 118,342 ---------- SWEDEN - 2.06% COMMON STOCKS - 2.06% Atlas Copco AB ................................. 683,640 11,456 Nordea Bank AB ................................. 617,020 11,060 Securitas AB ................................... 381,930 4,831 Securitas Direct AB ## ......................... 381,930 1,143 Securitas Systems AB ........................... 381,930 1,536 Swedbank AB .................................... 139,000 4,367 Telefonaktiebolaget LM Ericsson ................ 10,995,500 33,033 ---------- TOTAL SWEDEN ...................................... 67,426 ---------- SWITZERLAND - 6.31% COMMON STOCKS - 6.31% Adecco S.A. .................................... 138,320 8,347 Ciba Specialty Chemicals Holding, Inc. ......... 228,630 11,388 Credit Suisse Group ............................ 387,632 26,170 Lonza Group AG ................................. 67,200 7,849 Nestle S.A. .................................... 81,004 37,445 Novartis AG .................................... 929,991 49,546 Swiss Reinsurance .............................. 301,328 28,376 UBS AG ......................................... 160,280 8,602 Zurich Financial Services AG ................... 95,218 28,774 ---------- TOTAL SWITZERLAND ................................. 206,497 ---------- UNITED KINGDOM - 24.17% COMMON STOCKS - 24.17% Anglo American plc ............................. 94,610 6,532 Aviva plc ...................................... 1,797,707 28,345 BAE Systems plc ................................ 6,741,946 70,047 BP plc ......................................... 5,674,229 73,781 British American Tobacco Industries plc ........ 1,230,564 46,900 British Sky Broadcasting Group plc ............. 914,390 12,960 SHARES VALUE ---------- ---------- (DOLLARS IN THOUSANDS) Cadbury Schweppes plc .......................... 827,350 $ 10,977 Centrica plc ................................... 1,556,990 11,972 Compass Group plc .............................. 3,587,135 25,900 Debenhams plc .................................. 5,038,636 11,908 Diageo plc ..................................... 580,243 13,302 GlaxoSmithKline plc ............................ 2,336,748 60,270 HBOS plc ....................................... 814,124 14,842 HSBC Holdings plc .............................. 2,454,909 48,525 Imperial Tobacco Group plc ..................... 216,240 10,966 Invesco plc .................................... 339,930 5,232 Kingfisher plc ................................. 2,981,685 12,266 Lloyds TSB Group plc ........................... 852,100 9,695 National Grid plc .............................. 886,578 14,811 Old Mutual plc ................................. 3,130,299 12,018 Pearson plc .................................... 566,810 9,423 Prudential plc ................................. 659,300 10,766 Reckitt Benckiser Group plc .................... 170,400 9,902 Rolls-Royce Group plc ## ....................... 44,900,370 12,273 Royal Bank of Scotland Group plc ............... 3,860,902 41,657 Royal Dutch Shell plc, ADR ..................... 31,660 2,771 Royal Dutch Shell plc, A Shares ................ 529,148 23,164 Royal Dutch Shell plc, B Shares ................ 672,912 29,339 Smiths Group plc ............................... 292,020 6,887 Standard Chartered plc ......................... 177,350 6,913 Tate & Lyle plc ................................ 1,249,325 11,348 Unilever plc ................................... 1,257,315 42,595 Vodafone Group plc ............................. 19,096,530 75,324 Yell Group plc ................................. 811,330 7,701 ---------- TOTAL UNITED KINGDOM .............................. 791,312 ---------- SHORT TERM INVESTMENTS - 2.19% American Beacon Money Market Select Fund # ..... 71,709,522 71,709 ---------- SECURITIES LENDING COLLATERAL - 1.45% American Beacon Cash Plus Trust # .............. 31,000,000 31,000 American Beacon Money Market Select Fund # ..... 16,392,990 16,393 ---------- TOTAL SECURITIES LENDING COLLATERAL ............... 47,393 ---------- TOTAL INVESTMENTS 100.80% - (COST $2,378,845) ........ 3,299,805 LIABILITIES, NET OF OTHER ASSETS - (0.80%) ........... (26,140) ---------- TOTAL NET ASSETS - 100.00% ........................... $3,273,665 ========== See accompanying notes 9 AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS October 31, 2007 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, 2007. ++ 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 $5,124 or 0.16% 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. FUTURES CONTRACTS (DOLLARS IN THOUSANDS) UNREALIZED NUMBER OF EXPIRATION MARKET APPRECIATION/ CONTRACTS DATE VALUE (DEPRECIATION) --------- ---------- ------- -------------- Australia SPI Index ............................................ 42 Dec 2007 $ 6,611 $ 246 Canada S&PCDA 60 Index ......................................... 45 Dec 2007 8,078 341 France CAC 40 Index ............................................ 115 Dec 2007 9,757 301 Germany DAX Index .............................................. 28 Dec 2007 8,162 243 Hang Seng Index ................................................ 11 Nov 2007 2,219 83 Italy MIB 30 Index ............................................. 12 Dec 2007 3,531 81 Netherlands 200 AEX Index ...................................... 17 Nov 2007 2,696 (4) Spain IBEX 35 Index ............................................ 17 Nov 2007 3,901 144 Sweden OMX Index ............................................... 123 Nov 2007 2,292 11 Tokyo FE TOPIX Index ........................................... 134 Dec 2007 18,789 355 UK FTSE 100 Index .............................................. 155 Dec 2007 21,729 857 ------- ------ $87,765 $2,658 ======= ====== See accompanying notes 10 AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS October 31, 2007 FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS (DOLLARS IN THOUSANDS) SETTLEMENT MARKET UNREALIZED DATE VALUE GAIN/(LOSS) ---------- -------- ----------- CONTRACTS TO DELIVER 4,375 Australian Dollar .................................. 12/14/2007 $ 4,065 $ (193) 4,896 Canadian Dollar .................................... 12/14/2007 5,184 (249) 14,720 Euro Currency ...................................... 12/14/2007 21,336 (473) 1,624,913 Japanese Yen ....................................... 12/14/2007 14,158 (65) 7,458 Pound Sterling ..................................... 12/14/2007 15,486 (403) 9,918 Swedish Krona ...................................... 12/14/2007 1,563 (31) 4,237 Swiss Franc ........................................ 12/14/2007 3,668 (50) -------- ------- TOTAL CONTRACTS TO DELIVER (RECEIVABLE AMOUNT $63,996) ................................. $ 65,460 $(1,464) -------- ------- CONTRACTS TO RECEIVE 11,002 Australian Dollar .................................. 12/14/2007 $ 10,222 $ 924 12,129 Canadian Dollar .................................... 12/14/2007 12,842 1,085 32,763 Euro Currency ...................................... 12/14/2007 47,488 1,922 1,129,302 Japanese Yen ....................................... 12/14/2007 32,581 (551) 17,386 Pound Sterling ..................................... 12/14/2007 36,100 831 24,518 Swedish Krona ...................................... 12/14/2007 3,863 204 11,221 Swiss Franc ........................................ 12/14/2007 9,715 190 -------- ------- TOTAL CONTRACTS TO RECEIVE (PAYABLE AMOUNT $148,206) ................................... $152,811 $ 4,605 -------- ------- NET CURRENCY FLUCTUATION ....................................... $ 3,141 ======= SECTOR DIVERSIFICATION Percent of Net Assets ---------- Consumer Discretionary ......................................... 14.57% Consumer Staples ............................................... 7.71% Energy ......................................................... 8.11% Financials ..................................................... 24.69% Health Care .................................................... 7.33% Industrials .................................................... 12.04% Information Technology ......................................... 4.51% Materials ...................................................... 4.75% Telecommunication Services ..................................... 9.34% Utilities ...................................................... 4.11% Short Term Investments ......................................... 3.64% Liabilities, Net of Other Assets ............................... (0.80)% ------ 100.00% ====== See accompanying notes 11 AMERICAN BEACON INTERNATIONAL EQUITY FUND STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2007 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS: Investments in unaffiliated securities, at value (A,C) ...... $ 3,180,703 Investments in affiliated securities, at value (B) .......... 119,102 Foreign currency, at value (D) .............................. 6,769 Deposit with brokers for futures contracts .................. 8,015 Receivable for investments sold ............................. 7,044 Dividends and interest receivable ........................... 8,257 Receivable for fund shares sold ............................. 1,350 Receivable for tax reclaims ................................. 265 Receivable for variation margin on open futures contracts ... 608 Net unrealized appreciation on foreign currency contracts ... 3,141 Prepaid expenses ............................................ 39 ----------- TOTAL ASSETS ............................................. 3,335,293 ----------- LIABILITIES: Payable for investments purchased ........................... 6,442 Payable upon return of securities loaned .................... 47,393 Payable for fund shares redeemed ............................ 3,769 Management and investment advisory fees payable (Note 2) .... 2,825 Administrative service and service fees payable ............. 731 Other liabilities ........................................... 468 ----------- TOTAL LIABILITIES ........................................ 61,628 ----------- NET ASSETS ..................................................... $ 3,273,665 =========== ANALYSIS OF NET ASSETS: Paid-in-capital ............................................. 1,971,293 Undistributed net investment income ......................... 81,197 Accumulated net realized gain ............................... 294,190 Unrealized appreciation of investments, futures contracts, and foreign currency ..................................... 926,985 ----------- NET ASSETS ..................................................... $ 3,273,665 =========== SHARES OUTSTANDING (NO PAR VALUE): Institutional Class ......................................... 61,734,598 =========== PlanAhead Class ............................................. 33,693,070 =========== Service Class ............................................... 183,814 =========== AMR Class ................................................... 24,425,060 =========== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE: Institutional Class ......................................... $ 27.32 =========== PlanAhead Class ............................................. $ 26.99 =========== Service Class ............................................... $ 26.83 =========== AMR Class ................................................... $ 27.54 =========== - ----------- (A) Cost of investments in unaffiliated securities ............ $ 2,259,743 (B) Cost of investments in affiliated securities .............. $ 119,102 (C) Market value of securities on loan ........................ $ 45,112 (D) Cost of foreign currency .................................. $ 6,693 SEE ACCOMPANYING NOTES 12 AMERICAN BEACON INTERNATIONAL EQUITY FUND STATEMENT OF OPERATIONS Year Ended October 31, 2007 (in thousands) INVESTMENT INCOME: Dividend income from unaffiliated securities (net of foreign taxes)* .................................. $ 91,145 Dividend income from affiliated securities .................. 5,477 Interest income ............................................. 343 Income derived from securities lending, net ................. 3,001 --------- TOTAL INVESTMENT INCOME .................................. 99,966 --------- EXPENSES: Management and investment advisory fees (Note 2) ............ 10,688 Administrative service fees (Note 2): Institutional Class ...................................... 4,099 PlanAhead Class .......................................... 2,215 Service Class ............................................ 12 Transfer agent fees: Institutional Class ....................................... 175 PlanAhead Class .......................................... 126 AMR Class ................................................ 38 Custody and fund accounting fees ............................ 1,651 Professional fees ........................................... 114 Registration fees and expenses .............................. 78 Service fees: PlanAhead Class (Note 2) ................................. 2,214 Service Class (Note 2) ................................... 12 Distribution fees - Service Class (Note 2) .................. 12 Prospectus and shareholder reports .......................... 171 Other expenses .............................................. 302 --------- TOTAL EXPENSES ........................................... 21,907 --------- Net fees waived and expenses reimbursed by Manager (Note 2) ................................................. (1) --------- NET EXPENSES ............................................. 21,906 --------- NET INVESTMENT INCOME .......................................... 78,060 --------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from: Investments .............................................. 248,300 Commission recapture (Note 1) ............................ 121 Foreign currency transactions ............................ 50,621 Futures contracts ........................................ 15,231 Change in net unrealized appreciation or depreciation of: Investments .............................................. 39,879 Foreign currency translations ............................ 177,264 Futures contracts ........................................ 647 --------- NET GAIN ON INVESTMENTS ............................... 532,063 --------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... $ 610,123 ========= * Foreign taxes ............................................. $ 7,342 SEE ACCOMPANYING NOTES 13 AMERICAN BEACON INTERNATIONAL EQUITY FUND STATEMENT OF CHANGES OF NET ASSETS (IN THOUSANDS) Year Ended Year Ended October 31, October 31, 2007 2006 ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income ....................................... $ 78,060 $ 66,358 Net realized gain on investments, futures contracts, and foreign currency transactions ............................ 314,273 206,379 Change in net unrealized appreciation or (depreciation) of investments, futures contracts, and foreign currency translations ............................................. 217,790 358,875 ---------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ..... 610,123 631,612 ---------- ---------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class ...................................... (31,129) (25,841) PlanAhead Class .......................................... (14,581) (10,419) Service Class ............................................ (64) (39) AMR Class ................................................ (12,610) (10,085) Net realized gain on investments: Institutional Class ...................................... (114,385) (80,744) PlanAhead Class .......................................... (59,491) (36,241) Service Class ............................................ (327) (195) AMR Class ................................................ (41,178) (28,011) ---------- ---------- NET DISTRIBUTIONS TO SHAREHOLDERS ........................ (273,765) (191,575) ---------- ---------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares ............................... 572,603 548,466 Reinvestment of dividends and distributions ................. 259,288 176,178 Cost of shares redeemed ..................................... (783,879) (574,493) Redemption fees ............................................. 505 308 ---------- ---------- NET INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS .......................................... 48,517 150,459 ---------- ---------- NET INCREASE IN NET ASSETS ..................................... 384,875 590,496 ---------- ---------- NET ASSETS: Beginning of period ......................................... 2,888,790 2,298,294 ---------- ---------- END OF PERIOD * ............................................. $3,273,665 $2,888,790 ========== ========== *Includes undistributed net investment income of ............... $ 81,197 $ 49,187 ========== ========== SEE ACCOMPANYING NOTES 14 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS October 31, 2007 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, as amended (the "Act"), 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 (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. Reorganization Prior to March 1, 2006, the Fund invested all of its investable assets in the International Equity Portfolio (the "Portfolio") of the American Beacon Master Trust. 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. 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 Administrative Service Fee - 0.25% of $2 million PLANAHEAD CLASS General public and investors investing Administrative Service Fee - 0.25% through an intermediary Service Fee - 0.25% SERVICE CLASS Investors investing through an Administrative Service Fee - 0.25% intermediary Service Fee - 0.25% Distribution Fee - 0.25% AMR CLASS Investors in the tax-exempt retirement and benefit plans of AMR Corporation and its affiliates N/A 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. 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 15 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS October 31, 2007 provided by the pricing service is deemed not to represent fair value, the prices of debt securities may be determined using quotes obtained from independent 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 Trust's 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 reflected in the accompanying financial statements. The Fund also bears the credit risk if the counterparty fails to perform under the contract. 16 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS October 31, 2007 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 initial margin amount is reflected 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 Fund normally will be declared and paid at least annually. Distributions, if any, of net realized capital gains are generally paid at least 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. 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 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. 17 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS October 31, 2007 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, the Manager does not anticipate the adoption of FIN 48 to have a material impact on the financial statements. 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, 2007, the Manager does not believe the adoption of FAS 157 will materially 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. 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 that 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 year ended October 31, 2007 were as follows (dollars in thousands): AMOUNTS PAID TO NET AMOUNTS INVESTMENT RETAINED BY MANAGEMENT FEE RATE MANAGEMENT FEE ADVISORS MANAGER - ------------------- -------------- --------------- ----------- 0.25%-0.60% $10,688 $7,514 $3,174 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 18 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS October 31, 2007 netted against securities lending income in the Statement of Operations. During the year ended October 31, 2007, securities lending fees paid to the Manager were $399,537. Administrative Services Agreement The Manager and the Trust entered into an Administrative Services Agreement which obligates the Manager to provide or oversee administrative 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 Fund, 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 and administrative service fees received by the Manager and the investment advisors hired by the Manager to be used for distribution purposes. Under this Plan, the Fund does not intend to compensate the Manager or any other party, either directly or indirectly, for the distribution of Fund 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 issued 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")(collectively, the "Affiliated Funds"). The Fund and 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, 2007, the Manager earned fees from the Affiliated Funds totaling $104,029 on the Fund's direct investment in the Affiliated Funds and $147,297 from the Fund's securities lending collateral invested in the Affiliated Funds. Interfund Lending Program Pursuant to an exemptive order issued 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. The Fund did not utilize the credit facility during the year ended October 31, 2007. 19 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS October 31, 2007 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's average net assets have grown or expenses have declined sufficiently to allow reimbursement without causing its expense ratio to exceed the previously agreed upon contractual expense limit. During the year ended October 31, 2007, there were no additional waived fees or reimbursed expenses for the Service Class. The activity related to repayment of prior year fee waivers and expense reimbursements during the year ended October 31, 2007 was as follows: Expiration Liability at Liability at Year 10/31/06 Accrued Expired Recouped 10/31/07 - ---------- ------------ ------- ------- -------- ------------ 2007 2,934 $-- $1,116 $1,818 $-- 2008 9 -- -- 9 -- 2009 1,956 -- -- 1,956 -- ------ --- ------ ------ --- $4,899 $-- $1,116 $3,783 $-- ====== === ====== ====== === Other At October 31, 2007, AMR Corporation and subsidiary companies and employee benefit trusts thereof owned 20% 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 fiscal years ended October 31, 2007 and October 31, 2006 were as follows (in thousands): YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, 2007 2006 ----------- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME* Institutional Class .. $ 55,466 $ 42,005 PlanAhead Class ...... 27,239 17,674 Service Class ........ 133 78 AMR Class ............ 21,371 15,693 LONG-TERM CAPITAL GAIN Institutional Class .. 90,048 64,579 PlanAhead Class ...... 46,834 28,986 Service Class ........ 257 156 AMR Class ............ 32,417 22,404 -------- -------- TOTAL DISTRIBUTIONS PAID ... $273,765 $191,575 ======== ======== * For tax purposes, short-term capital gains are considered ordinary income distributions As of October 31, 2007, the components of distributable earnings on a tax basis were as follows (in thousands): 20 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS October 31, 2007 Cost basis of investments for federal income tax purposes .. $2,397,843 Unrealized appreciation .................................... 968,138 Unrealized depreciation .................................... (66,176) ---------- Net unrealized appreciation/(depreciation) ................. 901,962 Undistributed ordinary income .............................. 140,108 Undistributed long-term gain/(loss) ........................ 248,510 ---------- Distributable earnings ..................................... $1,290,580 ========== 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 gain/(losses) on certain derivative instruments, the realization for tax purposes of unrealized gain/(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. 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, 2007 (in thousands): Paid-in-capital ............................ $(11,027) Undistributed net investment income ........ 12,334 Accumulated net realized loss .............. (1,308) Unrealized depreciation of investments, futures contracts and foreign currency .. 1 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, 2007 were (in thousands) $1,157,710 and $1,263,769, respectively. A summary of the Fund's direct transactions in Affiliated Funds for the year ended October 31, 2007 is set forth below (in thousands): OCTOBER 31, 2006 OCTOBER 31, 2007 AFFILIATE SHARES/MARKET VALUE PURCHASES SALES SHARES/MARKET VALUE - --------- ------------------- ---------- ---------- ------------------- Select Fund $87,487 $1,079,041 $1,094,819 $71,709 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 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. 21 AMERICAN BEACON INTERNATIONAL EQUITY FUND NOTES TO FINANCIAL STATEMENTS October 31, 2007 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 borrowers 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, 2007, securities with a market value of approximately $45,112,000 were loaned by the Fund. Cash collateral held by the custodian for the Fund in an investment in the Affiliated Funds totaled $47,393,000. 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, 2007 INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS ------------------- ------------------- ---------------- ------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------- --------- ------- --------- ------ ------- ------ --------- Shares sold ................ 9,309 $ 233,941 10,042 $ 248,361 22 $ 548 3,615 $ 89,753 Reinvestment of dividends .. 5,632 133,085 3,079 72,025 17 390 2,264 53,788 Shares redeemed ............ (15,989) (400,672)* (11,014) (276,108)* (51) (1,254)* (4,109) (105,340)* ------- --------- ------- --------- --- ------- ------ --------- Net increase (decrease) in shares outstanding ...... (1,048) $ (33,646) 2,107 $ 44,278 (12) $ (316) 1,770 $ 38,201 ======= ========= ======= ========= === ======= ====== ========= Year Ended October 31, 2006 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 22 AMERICAN BEACON INTERNATIONAL EQUITY FUND FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Institutional Class ------------------------------------------------------------ Year Ended October 31 ------------------------------------------------------------ 2007 2006 2005 2004(A) 2003(B) ---------- ---------- ---------- ---------- -------- Net asset value, beginning of period .... $ 24.68 $ 20.98 $ 18.47 $ 15.46 $ 12.10 ---------- ---------- ---------- ---------- -------- Income from investment operations: Net investment income(C,D) ........... 0.65 0.60 0.44 0.30 0.25 Net gains (losses) on securities (both realized and unrealized)(C) ....... 4.31 4.86 2.31 3.12 3.47 ---------- ---------- ---------- ---------- -------- Total income (loss) from investment operations ........................... 4.96 5.46 2.75 3.42 3.72 ---------- ---------- ---------- ---------- -------- Less distributions: Dividends from net investment income ............................ (0.50) (0.43) (0.24) (0.41) (0.36) Distributions from net realized gains on securities ............... (1.82) (1.33) -- -- -- ---------- ---------- ---------- ---------- -------- Total distributions ..................... (2.32) (1.76) (0.24) (0.41) (0.36) ---------- ---------- ---------- ---------- -------- Redemption fees added to beneficial interest(E) .......................... 0.00 0.00 0.00 0.00 0.00 ---------- ---------- ---------- ---------- -------- Net asset value, end of period .......... $ 27.32 $ 24.68 $ 20.98 $ 18.47 $ 15.46 ========== ========== ========== ========== ======== Total return ............................ 21.54% 27.49% 15.04% 22.49% 31.61% ========== ========== ========== ========== ======== Ratios and supplemental data: Net assets, end of period (in thousands) ........................ $1,686,668 $1,549,521 $1,286,441 $1,029,272 $722,333 Ratios to average net assets (annualized): Expenses, net of waivers(C) ....... 0.67% 0.71% 0.70% 0.76% 0.79% Expenses, before waivers(C) ....... 0.67% 0.71% 0.70% 0.76% 0.79% Net investment income, net of waivers(C) ..................... 2.46% 2.52% 2.17% 1.69% 1.97% Net investment income (loss), before waivers(C) .............. 2.46% 2.52% 2.17% 1.69% 1.97% Portfolio turnover rate(F) ........... 38% 40% 37% 36% 44% - ---------- (A) The Boston Company Asset Management, LLC was added as an investment advisor to the International Equity Fund on September 27, 2004. (B) Independence Investment LLC was removed as an investment advisor to the International Equity Fund on October 24, 2003. (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 American Beacon International Equity Portfolio through February 28, 2006. (D) 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. (E) Amounts represent less than $0.01 per share. (F) The International Equity Fund invested all of its investable assets in the American Beacon International Equity Portfolio through February 28, 2006. Portfolio turnover rate through February 28, 2006 is that of the Portfolio. 23 AMERICAN BEACON INTERNATIONAL EQUITY FUND FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) PlanAhead Class ---------------------------------------------------- Year Ended October 31 ---------------------------------------------------- 2007 2006 2005 2004(A) 2003(B) -------- -------- -------- -------- -------- Net asset value, beginning of period .................................... $ 24.42 $ 20.79 $ 18.31 $ 15.34 $ 11.95 -------- -------- -------- -------- -------- Income from investment operations: Net investment income(C,D) .......................................... 0.58 0.50 0.41 0.26 0.22 Net gains (losses) on securities (both realized and unrealized)(C) ... 4.26 4.84 2.29 3.08 3.46 -------- -------- -------- -------- -------- Total income (loss) from investment operations .......................... 4.84 5.34 2.70 3.34 3.68 -------- -------- -------- -------- -------- Less distributions: Dividends from net investment income ................................. (0.45) (0.38) (0.22) (0.37) (0.29) Distributions from net realized gains on securities .................. (1.82) (1.33) -- -- -- -------- -------- -------- -------- -------- Total distributions ..................................................... (2.27) (1.71) (0.22) (0.37) (0.29) -------- -------- -------- -------- -------- Redemption fees added to beneficial interest(E) ......................... 0.00 0.00 0.00 0.00 0.00 -------- -------- -------- -------- -------- Net asset value, end of period .......................................... $ 26.99 $ 24.42 $ 20.79 $ 18.31 $ 15.34 ======== ======== ======== ======== ======== Total return ............................................................ 21.22% 27.20% 14.73% 22.16% 31.62% ======== ======== ======== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands) ............................. $909,385 $771,298 $560,770 $310,540 $177,425 Ratios to average net assets (annualized): Expenses, net of waivers(C) ....................................... 0.93% 0.96% 0.95% 1.02% 1.10% Expenses, before waivers(C) ....................................... 0.93% 0.96% 0.95% 1.02% 1.10% Net investment income, net of waivers(C) .......................... 2.26% 2.25% 1.96% 1.46% 1.68% Net investment income (loss), before waivers(C) ................... 2.26% 2.25% 1.96% 1.46% 1.68% Portfolio turnover rate(F) ........................................... 38% 40% 37% 36% 44% - ---------- (A) The Boston Company Asset Management, LLC was added as an investment advisor to the International Equity Fund on September 27, 2004. (B) Independence Investment LLC was removed as an investment advisor to the International Equity Fund on October 24, 2003. (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 American Beacon International Equity Portfolio through February 28, 2006. (D) 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. (E) Amounts represent less than $0.01 per share. (F) The International Equity Fund invested all of its investable assets in the American Beacon International Equity Portfolio through February 28, 2006. Portfolio turnover rate through February 28, 2006 is that of the Portfolio. 24 AMERICAN BEACON INTERNATIONAL EQUITY FUND FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Service Class --------------------------------------------------- Year Ended October 31 May 1 to ------------------------------------- October 31, 2007 2006 2005 2004(B) 2003(A) ------- ------- ------- ------- ----------- Net asset value, beginning of period .................................... $ 24.24 $ 20.61 $ 18.24 $ 15.31 $ 12.18 ------- ------- ------- ------- ---------- Income from investment operations: Net investment income(C,D) .......................................... 0.56 0.46 0.37 0.30 0.09 Net gains (losses) on securities (both realized and unrealized)(C) ... 4.20 4.76 2.26 2.99 3.04 ------- ------- ------- ------- ---------- Total income (loss) from investment operations .......................... 4.76 5.22 2.63 3.29 3.13 ------- ------- ------- ------- ---------- Less distributions: Dividends from net investment income ................................. (0.35) (0.26) (0.26) (0.36) -- Distributions from net realized gains on securities .................. (1.82) (1.33) -- -- -- ------- ------- ------- ------- ---------- Total distributions ..................................................... (2.17) (1.59) (0.26) (0.36) -- ------- ------- ------- ------- ---------- Redemption fees added to beneficial interest(E) ......................... 0.00 0.00 0.00 0.00 0.00 ------- ------- ------- ------- ---------- Net asset value, end of period .......................................... $ 26.83 $ 24.24 $ 20.61 $ 18.24 $ 15.31 ======= ======= ======= ======= ========== Total return ............................................................ 20.85% 26.89% 14.45% 21.88% 25.70% ======= ======= ======= ======= ========== Ratios and supplemental data: Net assets, end of period (in thousands) ............................. $ 4,932 $ 4,740 $ 2,987 $ 739 $ 1 Ratios to average net assets (annualized): Expenses, net of waivers(C) ....................................... 1.12% 1.16% 1.21% 1.27% 1.50% Expenses, before waivers(C) ....................................... 1.15% 1.19% 1.21% 6.26% 1,139.08% Net investment income, net of waivers(C) .......................... 2.04% 2.09% 1.70% 0.81% 1.33% Net investment income (loss), before waivers(C) ................... 2.01% 2.05% 1.70% (4.18)% (1,136.25)% Portfolio turnover rate(F) ........................................... 38% 40% 37% 36% 44%(G) - ---------- (A) Independence Investment LLC was removed as an investment advisor to the International Equity Fund on October 24, 2003. (B) The Boston Company Asset Management, LLC was added as an investment advisor to the International Equity Fund on September 27, 2004. (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 American Beacon International Equity Portfolio through February 28, 2006. (D) 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. (E) Amounts represent less than $0.01 per share. (F) The International Equity Fund invested all of its investable assets in the American Beacon International Equity Portfolio through February 28, 2006. Portfolio turnover rate through February 28, 2006 is that of the Portfolio. (G) Portfolio turnover rate is for the period from November 1, 2002 through October 31, 2003. 25 AMERICAN BEACON INTERNATIONAL EQUITY FUND FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) AMR Class ---------------------------------------------------- Year Ended October 31 ---------------------------------------------------- 2007 2006 2005 2004(A) 2003(B) -------- -------- -------- -------- -------- Net asset value, beginning of period .................................... $ 24.86 $ 21.12 $ 18.58 $ 15.54 $ 12.18 -------- -------- -------- -------- -------- Income from investment operations: Net investment income(C,D) .......................................... 0.73 0.63 0.50 0.34 0.29 Net gains (losses) on securities (both realized and unrealized)(C) ... 4.33 4.92 2.33 3.14 3.46 -------- -------- -------- -------- -------- Total income (loss) from investment operations .......................... 5.06 5.55 2.83 3.48 3.75 -------- -------- -------- -------- -------- Less distributions: Dividends from net investment income ................................. (0.56) (0.48) (0.29) (0.44) (0.39) Distributions from net realized gains on securities .................. (1.82) (1.33) -- -- -- -------- -------- -------- -------- -------- Total distributions ..................................................... (2.38) (1.81) (0.29) (0.44) (0.39) -------- -------- -------- -------- -------- Redemption fees added to beneficial interest(E) ......................... 0.00 0.00 0.00 0.00 0.00 -------- -------- -------- -------- -------- Net asset value, end of period .......................................... $ 27.54 $ 24.86 $ 21.12 $ 18.58 $ 15.54 ======== ======== ======== ======== ======== Total return ............................................................ 21.86% 27.88% 15.32% 22.84% 31.77% ======== ======== ======== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands) ............................. $672,680 $563,231 $448,096 $460,114 $322,801 Ratios to average net assets (annualized): Expenses, net of waivers(C) ....................................... 0.42% 0.45% 0.44% 0.49% 0.52% Expenses, before waivers(C) ....................................... 0.42% 0.45% 0.44% 0.49% 0.52% Net investment income, net of waivers(C) .......................... 2.77% 2.76% 2.49% 1.97% 2.22% Net investment income (loss), before waivers(C) ................... 2.77% 2.76% 2.49% 1.97% 2.22% Portfolio turnover rate(F) ........................................... 38% 40% 37% 36% 44% - ---------- (A) The Boston Company Asset Management, LLC was added as an investment advisor to the International Equity Fund on September 27, 2004. (B) Independence Investment LLC was removed as an investment advisor to the International Equity Fund on October 24, 2003. (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 American Beacon International Equity Portfolio through February 28, 2006. (D) 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. (E) Amounts represent less than $0.01 per share. (F) The International Equity Fund invested all of its investable assets in the American Beacon International Equity Portfolio through February 28, 2006. Portfolio turnover rate through February 28, 2006 is that of the Portfolio. 26 AMERICAN BEACON FUNDS PRIVACY POLICY & FEDERAL TAX INFORMATION OCTOBER 31, 2007 (UNAUDITED) PRIVACY POLICY 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. FEDERAL TAX INFORMATION For corporate shareholders in the Fund, the percentage of ordinary dividend income distributed for the year ended October 31, 2007, which is designated as qualifying for the dividends-received deduction, was 0.31%. For shareholders in the Fund, the percentage of dividend income distributed for the year ended October 31, 2007, which is designated as qualified dividend income under the Jobs Growth Tax Relief Act of 2003, was 55.54%. Shareholders will receive notification in January 2008 of the percentage applicable to the preparation of their 2007 income tax returns. The Fund designated a foreign tax credit of $7,109,738 and recognized foreign source income of $98,206,194. Pursuant to Section 852 of the Internal Revenue Code, the Fund designated $169,555,431 as long-term capital gain dividends for the tax year ended October 31, 2007. 27 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) At its May 25, 2007 meeting, the Board of Trustees ("Board" or "Trustees") considered the renewal of the existing Management Agreement between the Manager and the American Beacon Funds on behalf of its International Equity Fund (the "Fund") and each Investment Advisory Agreement between the Manager and a subadvisor. In preparation for the Board's consideration to renew these Agreements, the Board and its Investment Committee undertook steps to gather and consider information furnished by the Manager, the subadvisors and Lipper, Inc. ("Lipper"). The Board, with the assistance of independent legal counsel, requested and received certain relevant information from the Manager and each subadvisor. In addition, the Board's Investment Committee worked with Lipper to obtain relevant comparative information regarding the performance, fees and expenses of the Fund. The Investment Committee held a separate meeting on May 4, 2007 to consider the information provided by Lipper. Further, the Board took into consideration information furnished for the Board's review and consideration throughout the year at regular Board and Investment Committee meetings, as well as information specifically prepared in connection with the renewal process. The Trustees considered, among other materials, responses by the Manager and the subadvisors to inquiries requesting: - a description of any significant changes (actual or anticipated) to principal activities, personnel, services provided to the Fund, or any other area, including how these changes might affect the Fund; - a copy of the firm's most recent audited or unaudited financial statements as well as its SEC Form ADV registration statement; - a summary of any material past, pending or anticipated litigation or regulatory proceedings involving the firm or its personnel, including the results of any recent regulatory examination or independent audit; - a comparison of the performance of that portion of Fund assets managed by each firm with performance of other similar accounts managed by the firm, including a discussion of relative performance versus a peer group average and any remedial measures if the firm's performance was materially below that of the peer group; - a profit/loss analysis of the firm and any actual or anticipated economies of scale in relation to the services it provides to the Fund; - a description of any payments by the firm to support the Fund's marketing efforts; - an analysis of compensation, including a comparison with fees charged to other clients for which similar services are provided, any proposed changes to the fee schedule and the effect of any fee waivers; - an evaluation of other benefits to the firm or the Fund as a result of their relationship, if any; - confirmation that the firm's financial condition does not raise concerns that the firm would be unable to continue providing the same scope and quality of services to the Fund; - a description of the scope of portfolio management services provided to the Fund and the firm's other clients, including other registered investment companies, whether such services differ, and any advantages or disadvantages that might accrue to the Fund due to the firm's involvement in other activities; - a description of the personnel who are assigned primary responsibility for managing the Fund, including any changes during the past year, and a discussion of the adequacy of current and projected staffing levels to service the Fund; - a description of the basis upon which portfolio managers are compensated, including any "incentive" arrangements; - a discussion regarding the firm's participation in "soft dollar" arrangements, if any, or other brokerage allocation policies with respect to Fund transactions, including the firm's methodology for obtaining the most favorable execution and the use of any affiliated broker-dealers; - a discussion of whether the firm receives, with respect to the Fund, other compensation, including any payment for order flow or ECN liquidity rebates; - a description of any actual or potential conflicts of interest anticipated in managing Fund assets; 28 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) - a description of trade allocation procedures among accounts managed by the firm; - a summary of any material changes to the firm's compliance program with regard to federal, state, corporate and Fund requirements and a certification regarding the reasonable design of the compliance program; - a discussion of any material compliance problems and remedial actions; - information regarding the firm's code of ethics, insider trading policy and disaster recovery plan, including a description of any material changes thereto; - a description of the firm's affiliation with any broker-dealer; - a discussion of any anticipated change in the firm's controlling persons; and - verification of the firm's insurance coverage with regards to the services provided to the Fund. In addition to the foregoing, the Manager provided the following information specific to the renewal of the Management Agreement: - a comparison of the performance of the Fund to comparable investment companies and appropriate indices, including comments on the relative performance of each subadvisor and the Fund versus its peer group average; - a discussion, if applicable, of any underperformance by a subadvisor relative to its peer group and what, if any, remedial measures the Manager has or intends to take; - a comparison of advisory fees and expense ratios for comparable mutual funds; - an analysis of any material complaints received from Fund shareholders; - a description of the Manager's securities lending practices and the fees received from such practices; - a description of any revenue sharing activities with respect to the Fund; - a discussion of any rebate arrangements between the Manager and a service provider to the Fund pursuant to which the Manager receives direct or indirect benefits from the service provider; - a description of the portfolio turnover rate and average execution costs for the Fund and each subadvisor to the Fund; and - a description of how expenses that are not readily identifiable to the Fund are allocated. The Board also obtained an analysis provided by Lipper that compared: (i) investment performance of the Fund versus comparable investment companies and appropriate indices; (ii) total Fund expenses of the Fund versus comparable mutual funds, and (iii) the Fund's investment advisory fees versus comparable mutual funds. The class used for comparative purposes was the class with the longest performance history, which in most cases is the Institutional Class. References below to the Fund's Lipper peer group are to the group of comparable mutual funds included in the analysis provided by Lipper. The Trustees also received a memorandum from their legal counsel detailing the Board's responsibilities pertaining to the renewal of the Management and Investment Advisory Agreements. This memorandum explained the regulatory requirements surrounding the Trustees' process for evaluating investment advisors and the terms of the contracts. Provided below is an overview of the primary factors the Board considered at its May 25, 2007 meeting. The Board did not identify any particular information that was most relevant to its consideration to renew the Management and Investment Advisory Agreements, and each Trustee may have afforded different weight to the various factors. In determining whether to approve the continuance of the Management Agreement and the Investment Advisory Agreement, the Trustees considered the best interests of the Fund. In addition, while the Management and Investment Advisory Agreements for all of the Funds were considered at the same Board meeting, the Board considered each Fund's investment management and subadvisory relationships separately. The Board considered, among other things, the following factors: (1) the nature and quality of the services provided; (2) the investment performance of the Fund and the investment advisor; (3) the Manager's or 29 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) subadvisor's cost for providing the services and the profitability of the advisory business to the Manager or subadvisor; (4) the extent to which economies of scale have been taken into account in setting the fee schedule; (5) whether fee levels reflect these economies of scale for the benefit of Fund investors; (6) comparisons of services and fees with contracts entered into by the Manager or a subadvisor or their affiliates with other clients (such as pension funds and other institutional funds); and (7) any other benefits derived or anticipated to be derived by the Manager or a subadvisor from their relationship with the Fund. The Trustees posed questions to various management personnel of the Manager regarding certain key aspects of the material submitted in support of the renewal. Nature, Extent and Quality of Services. With respect to the renewal of the Management Agreement, the Board considered: the background and experience of key investment personnel and the Manager's ability to retain them; the Manager's disciplined investment approach and goal to provide consistent above average long-term performance at a low cost; the Manager's continuing efforts to add new series and share classes to enhance the Fund's product line; the Manager's record in building improved compliance, control and credit functions that reduce risks to the Fund; the addition of personnel to manage the Fund, promote sales and improve services, including the addition of a separate new information technology (IT) department at the Manager; the high rankings received by the Fund in service surveys; and the active role played by the Manager in monitoring and, as appropriate, recommending replacements for the investment subadvisors and master portfolios. With respect to the renewal of the Investment Advisory Agreements, the Trustees considered the background and experience of each subadvisor's investment personnel responsible for managing the Fund, the size of the subadvisor and their ability to continue to attract and retain qualified investment personnel. Based on the foregoing information, the Board concluded that the nature, extent and quality of the management and advisory services provided by the Manager and each subadvisor were appropriate for the Fund and, thus, supported a decision to renew the Management and each Investment Advisory Agreement. Investment Performance. The Board evaluated the comparative information provided by Lipper and the Manager regarding the Fund's investment performance relative to its benchmark index and peer group. With respect to Lipper data, the Board considered the information provided by Lipper regarding its independent peer selection methodology to select all peer groups and universes. The Board also considered the performance reports and discussions with management at Board and Committee meetings throughout the year. The Manager also noted that it generally was satisfied with the performance of the subadvisors. Cost of Services and Profits Realized. In analyzing the cost of services and profitability of the Manager and a subadvisor, the Board considered the revenues earned and the expenses incurred by the Manager and those subadvisors that provided such data. The profitability levels were noted at both an individual Fund level and at an aggregate level for all Funds in the complex. The Board also considered that the Management Agreements for the American Beacon Funds stipulate that to the extent that the Fund invests all of its investable assets in another registered investment company, the Fund will not pay the Manager a management fee. The Board further considered that the Fund pays the Manager the amounts due to its subadvisors, and the Manager remits these amounts directly to the applicable subadvisors. The Board considered that the Manager receives service and administrative fees to compensate the Manager for providing administrative services to the Fund and to compensate third-party administrators and broker-dealers for services to Fund shareholders. In addition, the Board considered that the Manager receives management fees for overseeing the securities lending relationships on behalf of the Fund. The Board also noted that the non-Institutional Classes of the Fund maintains higher expense ratios in order to compensate third party distributors but the net fee to the Manager is the same for all Classes. 30 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) In analyzing the cost of services and profitability of each subadvisor in connection with its investment advisory services to the Fund, the Board considered that, in many cases, the Manager has negotiated the lowest subadvisory fee a subadvisor charges for any comparable client accounts. The Board gave less weight to profitability considerations or did not view this data as imperative to its deliberations given the arm's-length nature of the relationship between the Manager and the subadvisors with respect to the negotiation of subadvisory fees. Based on the foregoing information, the Board concluded that the profitability levels were reasonable in light of the services performed by the Manager and the subadvisors. Economies of Scale. In considering the reasonableness of the management and investment advisory fees, the Board considered whether economies of scale will be realized as the Fund grows and whether fee levels reflect these economies of scale for the benefit of Fund shareholders. In this regard, the Board considered that the Manager has negotiated breakpoints in the subadvisory fee rates. The Board also noted, for purposes of determining the fee rates chargeable to the Fund, many subadvisors have agreed to take into account other assets of AMR Corporation and its pension plans that are managed by the subadvisors. Thus, the Fund is able to receive lower effective fee rates. This fee arrangement also benefits AMR Corporation and its pension plans. The Board also noted that the Fund has experienced substantial recent asset growth. The Board also considered the Manager's representations that its costs have increased due primarily to greater service provider and regulatory costs. The Manager also represented that it anticipates further economies of scale would be largely offset by higher costs of adding and retaining qualified personnel, improving technology and increasing demands on its advisory business. Based on the foregoing information, the Board concluded that the Manager and subadvisor fee schedules provide for a reasonable sharing of benefits from any economies of scale with the Fund. Benefits Derived from the Relationship with the Funds. The Board considered the "fall-out" or ancillary benefits that accrue to the Manager and/or the subadvisors as a result of the advisory relationships with the Fund, including greater exposure in the marketplace with respect to the Manager's or subadvisor's investment process and expanding the level of assets under management by the Manager and the subadvisors. The Board also considered that the money market portfolios permit institutional investors access to such investments at a more favorable cost and that the Manager's relationship with the Fund and, in particular the money market portfolios, continues to be a significant factor in attracting separate account assets for the Manager. In addition, the Board noted that the Manager provides services to the Trust at a relatively low cost and the benefit plans of AMR Corporation have invested a substantial number of assets in the Fund, which helps reduce costs. The Board also considered that certain of the subadvisors reimburse the Manager for certain of its costs relating to distribution activities for the Fund. Based on the foregoing information, the Board concluded that the potential benefits accruing to the Manager and the subadvisors by virtue of their relationship with the Fund appears to be fair and reasonable. ADDITIONAL CONSIDERATIONS AND CONCLUSIONS The performance comparisons below were made versus the Fund's Lipper peer universe median. References to the Lipper expense group below are to the group of comparable mutual funds included in the analysis provided to the Trustees by Lipper. All performance comparisons are for periods ended March 31, 2007, unless otherwise noted. In considering the renewal of the Management Agreement with respect to the Fund, the Trustees considered the following additional factors: (1) the Fund underperformed its peer universe median for the one-, three-, five- and ten-year periods; (2) the Manager's explanation that some of the underperformance of the Fund is due in part to that fact that the Fund does not invest in emerging market country issuers (except South 31 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) Korea), whereas many peer funds do invest in such issuers, which has resulted in peer fund over performance in recent years; and (3) the actual management fee (including administrative fees) and the total expense ratio of the Institutional Class of Fund shares was lower than its Lipper expense group median. In considering the renewal of the Investment Advisory Agreements with Causeway Capital Management LLC ("Causeway"), Lazard Asset Management LLC ("Lazard"), Templeton Investment Counsel, LLC ("Templeton"), and The Boston Company Asset Management, LLC ("TBCAM"), the Trustees considered the following additional factors: (1) Templeton outperformed the peer universe median for the one-, three-, five-, and ten-year periods; (2) Causeway outperformed the peer universe median for the one-, five-, and ten-year periods but underperformed for the three-year period; (3) Lazard underperformed the peer universe median for the one-, three- and five-year periods; (4) TBCAM underperformed the peer universe median for the one-year period; (5) Lazard underperformed its market benchmark index with respect to its allocated portion of the Fund's assets for all relevant periods ended December 31, 2006; (6) Templeton outperformed its market benchmark index with respect to its allocated portion of the Fund's assets for all relevant periods; (7) the Manager's remedial actions with respect to Lazard due to its underperformance; (8) each of the Fund's subadvisors has informed the Manager that it uses Fund commissions to obtain proprietary research, the application of which benefits the Fund and each subadvisor's other clients; (9) the fee schedules of each subadvisor include breakpoints, which reduce fee rates as the assets of the Fund increase; (10) TBCAM also represented that it does not charge a lower advisory fee to any other comparable clients; (11) Templeton also represented that the fees charged are substantially less than the fees currently charged to new relationships; and (12) the Manager's recommendation to continue to retain each subadvisor. Based on these considerations and those noted above with respect to all Funds, the Trustees (1) concluded that the fees paid to the Manager and the subadvisors under the Management and Investment Advisory Agreements are fair and reasonable, (2) determined that the International Equity Fund and its shareholders would benefit from the continued management of the Fund by the Manager and subadvisors and (3) approved the renewal of the Management and Investment Advisory Agreements with respect to the Fund. 32 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. POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED NAME, AGE AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS AND CURRENT DIRECTORSHIPS - --------------------- -------------------- ----------------------------------------------------------------------------- INTERESTED TRUSTEES Term Lifetime of Trust until removal, resignation or retirement* William F. Quinn** (59) Trustee Chairman and CEO (2006-Present), President (1986-2006) and Director (2003- since 1987 Present), American Beacon Advisors, Inc.; Chairman (1989-2003) and Director President from (1979-1989, 2003-Present), American Airlines Federal Credit Union; Director, 1987 to 2007 Crescent Real Estate Equities, Inc.(1994-2007); Director, Pritchard, Hubble & Executive Vice Herr, LLC (investment advisor) (2001-2006); Director of Investment Committee, President Southern Methodist University Endowment Fund (1996-Present); Member, since 2007 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); Chairman (2007-Present) and Vice Chairman (2004-2007), Committee for the Investment of Employee Benefits; 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). Douglas G. Herring** (50) Trustee since 2006 President, American Beacon Advisors, Inc. (2006-Present); Vice President and Executive Vice Controller, American Airlines, Inc. (1998-2006); Chairman (2003-Present) and President from 2006 Director (1995-Present), American Airlines Federal Credit Union; Trustee, to 2007 American Beacon Mileage Funds (2006-Present); Trustee American Beacon President since 2007 Select Funds (2006-Present); Trustee American Beacon Master Trust (2006- Present). Alan D. Feld** (70) Trustee since 1996 Partner, Akin, Gump, Strauss, Hauer & Feld, LLP (law firm) (1960-Present); Director, Clear Channel Communications (1984-Present); Trustee, CenterPoint Properties (1994-2006); Member Board of Trustees, Southern Methodist University; Member, Board of Visitors, The University of Texas M.D. Anderson Cancer Center; Member, Board of Visitors, Zale Lipshy Hospital; 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 (63) 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). 33 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS (UNAUDITED) POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED NAME, AGE AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS AND CURRENT DIRECTORSHIPS - --------------------- -------------------- ----------------------------------------------------------------------------- NON-INTERESTED TRUSTEES (CONT.) Brenda A. Cline (46) 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) (2001-2006); 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 (64) Trustee since 2004 Senior Vice President and General Counsel, Hunt Consolidated, Inc. (holding company engaged in oil and gas exploration and production, refining, 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 Mileage Funds (1995- (72) Present); Trustee, American Beacon Select Funds (1999-Present); Trustee, American Beacon Master Trust (1995-Present). R. Gerald Turner (61) Trustee since 2001 President, Southern Methodist University (1995-Present); Director, ChemFirst 225 Perkins Admin. Bldg. (1986-2002); Director, J.C. Penney Company, Inc. (1996-Present); Director, Southern Methodist Univ. California Federal Preferred Capital Corp. (2001-2003); Director, Kronus Dallas, Texas 75275 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 (51) Trustee since 1996 Managing Partner, Pharos Capital Group, LLC (a private equity firm) (1998- 100 Crescent Court Chairman since Present); Director, Burger King Corporation (2004-Present); Director, Gap, Inc. Suite 1740 2005 (2006-Present); Trustee, City of Dallas, Texas Employee Retirement Fund (2004- Dallas, Texas 75201 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). 34 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS (UNAUDITED) POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED NAME, AGE AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS AND CURRENT DIRECTORSHIPS - --------------------- -------------------- ----------------------------------------------------------------------------- OFFICERS Term One Year Rosemary K. Behan (48) VP, Secretary and Vice President, Legal and Compliance, American Beacon Advisors, Inc. (2006- Chief Legal Officer Present); Assistant General Counsel, First Command Financial Planning, Inc. since 2006 (2004-2006); Enforcement Attorney (2002-2004) and Branch Chief (2000-2002), Securities and Exchange Commission. Brian E. Brett (47) VP since 2004 Vice President, Director of Sales and Marketing, American Beacon Advisors, Inc. (2004-Present); Regional Vice President, Neuberger Berman, LLC (investment advisor) (1996-2004). Wyatt Crumpler (41) VP since 2007 Vice President, Trust Investments, American Beacon Advisors, Inc. (2007- Present); Managing Director of Corporate Accounting (2004-2007), Director of IT Strategy and Finance (2002-2004), American Airlines, Inc. Michael W. Fields (53) VP since 1989 Vice President, Fixed Income Investments, American Beacon Advisors, Inc. (1988-Present). Rebecca L. Harris (40) Treasurer since Vice President, Finance, American Beacon Advisors, Inc. (1995-Present). 1995 Christina E. Sears (36) Chief Compliance Chief Compliance Officer, American Beacon Advisors, Inc. (2004-Present); Officer since 2004 Senior Compliance Analyst, American Beacon Advisors, Inc. (1998-2004). and Asst. Secretary since 1999 * 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, Feld and Herring are deemed to be "interested persons" of the Trust, as defined by the 1940 Act. Mr. Quinn is Chairman and CEO 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. Mr. Herring is President of the Manager. 35 (This page intentionally left blank) (This page intentionally left blank) (AMERICAN BEACON FUNDS(SM) 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: (GRAPHIC) (GRAPHIC) BY E-MAIL: ON THE INTERNET: american_beacon.funds@ambeacon.com Visit our website at www.americanbeaconfunds.com (GRAPHIC) (GRAPHIC) BY TELEPHONE: BY MAIL: Institutional Class American Beacon Funds Call (800) 658-5811 P.O. Box 219643 AMR Class(SM) Kansas City, MO 64121-9643 Call (800) 345-2345 PlanAhead Class(R) and Service Class Call (800) 388-3344 AVAILABILITY OF AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULES PROXY VOTING POLICY AND RECORDS In addition to the Schedule of A description of the policies and Investments provided in each procedures the Fund uses to determine semi-annual and annual report, the how to vote proxies relating to Fund files a complete schedule of its portfolio securities is available in the portfolio holdings with the Fund's Statement of Additional Securities and Exchange Commission Information, is available free of charge ("SEC") on Form N-Q as of the first on the Fund's website and third fiscal quarters. The Fund's (www.americanbeaconfunds.com) and by Forms N-Q are available on the SEC's calling 1-800-967-9009 or by accessing website at www.sec.gov. The Forms N-Q the SEC's website at www.sec.gov. The may also be reviewed and copied at Fund's proxy voting record for the most the SEC's Public Reference Room, 450 recent year ended June 30 is filed Fifth Street, NW, Washington, DC annually with the SEC on Form N-PX. The 20549. Information regarding the Fund's Forms N-PX are available on the operation of the SEC's Public SEC's website at www.sec.gov. The Fund's Reference Room may be obtained by proxy voting record may also be obtained calling 1-800-SEC-0330. A complete by calling 1-800-967- 9009. schedule of the Fund's portfolio holdings is also available on the Funds' website (www.americanbeaconfunds.com) approximately thirty days after the end of each month. FUND SERVICE PROVIDERS: CUSTODIAN TRANSFER AGENT INDEPENDENT REGISTERED DISTRIBUTOR STATE STREET BANK AND BOSTON FINANCIAL DATA PUBLIC ACCOUNTING FORESIDE FUND SERVICES TRUST SERVICES FIRM Portland, Maine Boston, Massachusetts Kansas City, Missouri ERNST & YOUNG LLP Dallas, Texas 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//07 541120 GUIDANCE | VISION | EXPERIENCE (AMERICAN BEACON FUNDS(SM) LOGO) ANNUAL REPORT (GRAPHIC) October 31, 2007 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 President's Message................................................ 1 Market and Performance Overview.................................... 2 Schedule of Investments............................................ 7 Additional Information............................................. Back Cover Any opinions herein, including forecasts, reflect our judgment 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, 2007 (PHOTO OF DOUGLAS G. HERRING) FELLOW SHAREHOLDERS, I am pleased to present to you the American Beacon Large Cap Value Fund Annual Report for the twelve months ended October 31, 2007. Please review the enclosed material carefully, as it includes important information about the Fund. After a number of years of steady returns, volatility returned to the U.S. equity markets toward the end of the fiscal year. The change in the investment environment was led by a crisis in the housing sector, due to several years of lax lending standards, and then began to spill over into the financial sector during the summer months. Despite the increased volatility, U.S. large cap stocks continued to perform well for the period, with the S&P 500 Index and Dow Jones Industrial Average reporting one-year returns of 14.56% and 17.96%, respectively, as of October 31, 2007. The Fund's Institutional Class reported an impressive annualized return of 13.76% for the one-year period ended October 31, 2007. The Fund's performance continued to exceed that of the Lipper Large-Cap Value Funds Index. The turmoil in the U.S. equity markets continued after the close of the Fund's fiscal year and is likely to continue over the shorter term. However, we believe the Fund's fundamental value investment philosophy and lower than average expense ratio will continue to serve the Fund well over the longer term. As always, we appreciate 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/ Douglas G. Herring Douglas G. Herring President American Beacon Funds 1 DOMESTIC EQUITY MARKET OVERVIEW OCTOBER 31, 2007 (UNAUDITED) After increasing short-term rates 17 times from 1.00% in June 2004 to 5.25% in June 2006, the Federal Reserve (the "Fed"), led by new chairman Ben Bernanke, left rates unchanged over the remainder of 2006. This "inaction," combined with a sharp decline in oil prices, and further declines in long-term interest rates, led to a strong stock market rally that carried through the end of 2006. This was followed by a brief mid-quarter correction in the first quarter of 2007, ignited by subprime mortgage concerns and a sharp fall in the global markets. However, equity prices rallied near the end of the quarter as the Fed voiced some concerns over economic growth while continuing to emphasize inflation risk, leading to a positive-shaped yield curve for the first time in seven months. As measured by the various Russell indices, value and growth stocks performed in line with each other in the first quarter, with larger companies underperforming both mid-cap and smaller companies. Seven of the ten sectors in the broad-market S&P 500 Index advanced in the quarter with Utilities and Materials leading the way. The worst performing sector, Financials, declined as the market reacted to the subprime mortgage news. During the second quarter of 2007, U.S. equity markets absorbed the news of a slowing housing market, higher energy prices, rising long-term interest rates, and diminished expectations for a cut in short-term rates. Equity prices were fueled by private investors' attraction to strong corporate cash flows, liquid balance sheets, and the low cost of buyout financing. All of the major stock indices gained during the quarter, with the S&P 500 Index finally reaching a new high, breaking the one set in March 2000. Reversing the trend of the prior 18 months, growth stocks outperformed their value counterparts while large cap stocks outperformed mid-cap and small cap equities. With the exception of the Utilities sector, each of the remaining nine sectors in the broad-market S&P 500 Index advanced during the quarter. The performance disparity between the sectors was pronounced, reinforcing the importance of portfolio diversification. Investors favored the Energy and Information Technology sectors, both of which gained more than 10% during the quarter. Consumer Staples and Financials, along with the aforementioned Utilities sector, were the laggards. The economic events of the third quarter made for jittery financial markets. However, even in the face of a slowing housing industry, the subprime mortgage spillover, a falling dollar, and a world-wide credit squeeze, most equity markets in the U.S. maintained their solid performance through the third quarter of 2007. After continuing to drive down stock prices in July, investors returned to the stock market in force in late August. The rally continued in September, spurred by the Fed's decision to cut interest rates for the first time in more than four years. The lower cost of borrowed funds, a strong worldwide economy and solid corporate performance were significant drivers of the market upturn. The quarter was characterized by high variability, market capitalization, and investment style, as the Russell 1000(R) Value Index declined while the NASDAQ Composite Index advanced. During the third quarter, growth stocks continued to outperform their value counterparts in the Russell indices and remained ahead. Large companies clearly were in favor during the quarter, with the Russell 1000 Index showing positive returns while mid-cap and small cap issues declined. As was the case in the previous quarter, the Energy, Information Technology and Industrials sectors led the way in performance during the third quarter. Reflecting the unease in the housing and credit markets, both the Financials and Consumer Discretionary sectors declined during the quarter. The month of October lived up to its volatile history. While worries over housing weakness, the credit crunch, and decreases in earnings expectations provided powerful ammunition for the "bears," monetary policy and continued economic gains enabled the "bulls" to propel markets higher. Market gains were broad based with all of the major markets advancing during the month. Even with the U.S. economy continuing to display very impressive resilience, "to forestall some of the adverse effects on the broader economy," the Fed cut interest rates by 25 basis points (0.25%) to 4.50% at its October 31st meeting. 2 PERFORMANCE OVERVIEW AMERICAN BEACON LARGE CAP VALUE FUND(SM) OCTOBER 31, 2007 (UNAUDITED) The Institutional Class of the Large Cap Value Fund returned 13.76% for the twelve months ended October 31, 2007. The Fund outperformed the S&P 500/Citigroup Value Index (the "Index") return of 13.55% and the Lipper Large-Cap Value Funds Index return of 12.58%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 10/31/97 THROUGH 10/31/07 (PERFORMANCE GRAPH) ANNUALIZED TOTAL RETURNS VALUE OF PERIODS ENDED 10/31/07 $10,000 --------------------------- 10/31/97- 1 YEAR 5 YEARS 10 YEARS 10/31/07 ------ ------- -------- --------- Institutional Class(1,4) ............ 13.76% 18.91% 8.92% $23,492 PlanAhead Class(1,4) ................ 13.46% 18.61% 8.62% 22,587 Service Class(1,2,4) ............... 13.16% 18.46% 8.55% 22,713 AMR Class(1,4)....................... 14.03% 19.23% 9.20% 24,107 Lipper Large-Cap Value Funds Index(3)........................... 12.58% 14.59% 7.17% 19,996 Linked S&P 500/Citigroup Value Index(3)........................... 13.55% 16.67% 8.03% 21,659 Russell 1000 Value Index (3).......... 10.83% 16.39% 9.11% 23,920 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 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 through the periods for the entirety of the periods. 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. Russell 1000 Value Index is a registered trademark of the Frank Russell Company. The Russell 1000 Value Index is an unmanaged index of those stocks in the Russell 1000 Index with lower price-to-book ratios and lower forecasted growth values. 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. Effective November 1, 2007, the Fund's benchmark will change from the Linked S&P 500/Citigroup Value Index to the Russell 1000 Value Index, as it is a more widely accepted benchmark for large cap value stocks. 4. The total annual Fund operating expense ratio set forth in the most recent Fund prospectus for the Institutional, PlanAhead, Service and AMR Class shares was 0.62%, 0.87%, 1.11% and 0.36%, respectively. The expense ratios above may vary from the expense ratios presented in other sections of this report that are based on expenses incurred during the period covered by this report. The Fund outperformed the Index primarily through sector allocation, and to a lesser extent through stock selection. During the course of the year the Fund was, on average, underweight in the Financials sector, which was the worst performing sector in the Index. This underweight was responsible for most of the Fund's excess performance. From a stock selection standpoint, the Fund had good stock selection in the Information Technology, Industrials, and Telecommunication Services sectors. The companies with the greatest impact in the Information Technology sector were Apple Computer (up 134.3%) and Nokia (up 103.0%). In the Industrials sector, Deere (up 84.8%), Honeywell International (up 46.2%), and Textron 3 PERFORMANCE OVERVIEW AMERICAN BEACON LARGE CAP VALUE FUND(SM) OCTOBER 31, 2007 (UNAUDITED) (up 54.7%) were the largest contributors. In the Telecommunication Services sector, Verizon Communications (up 34.7%) and Vodafone (up 58.8%) were responsible for most of the excess performance. Positive stock selection in the Utilities, Materials, and Energy sectors also added value to the Fund's relative performance. Poor stock selection in the Health Care sector, mostly in Pfizer (down 3.7% for the period the Fund owned the security) and Astrazeneca (down 13.7%), and in the Consumer Discretionary sector, primarily in Warner Music (down 59.4%), JC Penney (down 24.5%), and Centex (down 51.9% for the period the Fund owned the security), detracted value relative to the Index but not enough to offset the positive impact from the afore-mentioned sectors. 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 longer term. TOP TEN HOLDINGS % OF NET ASSETS ---------- ConocoPhillips 3.3% AT&T, Inc. 2.9% International Business Machines Corp. 2.5% Bank of America Corp. 2.3% JPMorgan Chase & Co. 2.2% Citigroup, Inc. 2.0% American International Group, Inc. 1.8% Verizon Communications, Inc. 1.8% Baxter International, Inc. 1.6% Imperial Tobacco Group plc 1.6% SECTOR ALLOCATION % OF EQUITIES -------- Financials 23.9% Industrials 13.3% Health Care 10.8% Consumer Staples 10.8% Information Technology 10.4% Consumer Discretionary 8.9% Energy 8.8% Telecommunication Services 5.6% Utilities 4.7% Materials 2.8% 4 FUND EXPENSES AMERICAN BEACON LARGE CAP VALUE FUND(SM) OCTOBER 31, 2007 (UNAUDITED) 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, 2007 through October 31, 2007. 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. Beginning Ending Account Account Expenses Paid Value Value During Period* 5/1/07 10/31/07 5/1/07-10/31/07 --------- --------- --------------- INSTITUTIONAL CLASS Actual $1,000.00 $1,033.34 $3.08 Hypothetical $1,000.00 $1,022.18 $3.06 (5% return before expenses) PLANAHEAD CLASS Actual $1,000.00 $1,032.01 $4.30 Hypothetical $1,000.00 $1,020.97 $4.28 (5% return before expenses) SERVICE CLASS Actual $1,000.00 $1,030.46 $5.58 Hypothetical $1,000.00 $1,019.71 $5.55 (5% return before expenses) AMR CLASS Actual $1,000.00 $1,034.89 $1.69 Hypothetical $1,000.00 $1,023.54 $1.68 (5% return before expenses) * Expenses are equal to the Fund's annualized expense ratios for the six-month period of 0.60%, 0.84%, 1.09% and 0.33% 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(SM) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders of American Beacon Large Cap Value Fund and the Board of Trustees of American Beacon Funds: 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, 2007, 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, 2007, 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, 2007, 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 21, 2007 6 AMERICAN BEACON LARGE CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2007 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 95.05% CONSUMER DISCRETIONARY - 8.43% HOTELS, RESTAURANTS & LEISURE - 1.49% Carnival Corp. .................................. 1,727,900 $ 82,904 Wyndham Worldwide Corp. ......................... 1,454,580 47,754 ---------- 130,658 ---------- HOUSEHOLD DURABLES - 1.52% Centex Corp. + .................................. 603,300 15,119 Fortune Brands, Inc. ............................ 431,800 36,172 Koninklijke (Royal) Philips Electronics NV ...... 75,366 3,116 Lennar Corp. + .................................. 382,300 8,735 Matsushita Electric Industrial Co. Ltd., ADR .... 2,579,000 49,388 Newell Rubbermaid, Inc. ......................... 227,800 6,643 Pulte Homes, Inc. + ............................. 915,000 13,578 ---------- 132,751 ---------- MEDIA - 1.99% CBS Corp. + ..................................... 819,800 23,528 Idearc, Inc. + .................................. 191,500 5,167 Interpublic Group of Cos., Inc. ## + ............ 1,340,900 13,878 R.H. Donnelley Corp. ## + ....................... 186,400 10,224 Time Warner, Inc. + ............................. 3,502,000 63,947 Walt Disney Co. Ltd. ............................ 978,600 33,889 Warner Music Group Corp. + ...................... 2,322,000 23,638 ---------- 174,271 ---------- MULTILINE RETAIL - 1.98% J.C. Penney Company, Inc. + ..................... 1,261,000 70,919 Macy's, Inc. .................................... 1,118,012 35,810 Target Corp. .................................... 632,200 38,792 Wal-Mart Stores, Inc. ........................... 614,900 27,799 ---------- 173,320 ---------- SPECIALTY RETAIL - 1.45% Gap, Inc. ....................................... 731,500 13,825 Home Depot, Inc. + .............................. 3,330,867 104,956 Liz Claiborne, Inc. + ........................... 302,500 8,612 ---------- 127,393 ---------- TOTAL CONSUMER DISCRETIONARY ....................... 738,393 ---------- CONSUMER STAPLES - 10.28% BEVERAGES - 1.56% Diageo plc, ADR ................................. 1,490,500 136,753 ---------- FOOD & DRUG RETAILING - 1.65% Safeway, Inc. + ................................. 2,267,400 77,091 Sysco Corp. + ................................... 1,968,000 67,483 ---------- 144,574 ---------- SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) FOOD PRODUCTS - 2.25% Archer-Daniels-Midland Co. ...................... 1,918,000 $ 68,626 General Mills, Inc. ............................. 136,400 7,874 Kellogg Co. + ................................... 1,129,000 59,600 Kraft Foods, Inc. ............................... 1,822,013 60,874 ---------- 196,974 ---------- PERSONAL PRODUCTS - 0.75% L'Oreal SA ...................................... 2,520,000 65,923 ---------- TOBACCO - 4.07% Altria Group, Inc. .............................. 1,470,400 107,236 Imperial Tobacco Group plc, ADR ................. 1,374,000 139,654 UST, Inc. + ..................................... 2,062,000 109,946 ---------- 356,836 ---------- TOTAL CONSUMER STAPLES ............................. 901,060 ---------- ENERGY - 8.37% ENERGY EQUIPMENT & SERVICES - 0.94% Weatherford International Ltd. ## + ............. 1,265,000 82,111 ---------- OIL & GAS - 7.43% Chevron Corp. ................................... 943,062 86,300 ConocoPhillips .................................. 3,452,396 293,315 Devon Energy Corp. .............................. 1,070,500 99,985 Duke Energy Corp. ............................... 2,365,600 45,348 Occidental Petroleum Corp. ...................... 1,527,400 105,467 Royal Dutch Shell plc, ADR ...................... 169,500 14,789 Sunoco, Inc. .................................... 85,800 6,315 ---------- 651,519 ---------- TOTAL ENERGY ....................................... 733,630 ---------- FINANCIALS - 22.68% BANKS - 5.88% Bank of America Corp. ........................... 4,252,078 205,290 Comerica, Inc. + ................................ 120,500 5,625 First Horizon National Corp. + .................. 254,600 6,640 KeyCorp ......................................... 105,700 3,007 National City Corp. + ........................... 272,200 6,601 SunTrust Banks, Inc. ............................ 231,500 16,807 U.S. Bancorp .................................... 1,405,160 46,595 UnionBanCal Corp. ............................... 56,100 3,030 Wachovia Corp. .................................. 1,218,700 55,731 Washington Mutual, Inc. + ....................... 2,073,400 57,806 Wells Fargo & Co. + ............................. 3,182,550 108,239 ---------- 515,371 ---------- See accompanying notes 7 AMERICAN BEACON LARGE CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2007 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) DIVERSIFIED FINANCIALS - 10.54% Bear Stearns Cos., Inc. + ....................... 862,450 $ 97,974 Capital One Financial Corp. ..................... 260,500 17,086 Charles Schwab Corp. ............................ 3,426,000 79,620 Citigroup, Inc. ................................. 4,168,338 174,653 Discover Financial Services + ................... 642,150 12,394 Federal Home Loan Mortgage Corp. ................ 324,300 16,938 Federal National Mortgage Association ........... 378,700 21,601 Goldman Sachs Group, Inc. ....................... 190,100 47,130 JP Morgan Chase & Co. ........................... 4,023,998 189,128 Merrill Lynch & Co., Inc. ....................... 473,300 31,247 Mitsubishi UFJ Financial Group, Inc., ADR ....... 5,000,000 49,800 Morgan Stanley Dean Witter & Co. ................ 1,539,200 103,527 SLM Corp. ....................................... 1,751,600 82,606 ---------- 923,704 ---------- INSURANCE - 6.17% ACE Ltd. ........................................ 960,100 58,192 Aflac, Inc. + ................................... 1,189,000 74,645 Allstate Corp. .................................. 332,128 17,403 American International Group, Inc. .............. 2,553,300 161,164 Conseco, Inc. ## + .............................. 364,800 5,760 Genworth Financial, Inc. ........................ 644,000 17,581 Hartford Financial Services Group, Inc. ......... 189,350 18,373 MetLife, Inc. ................................... 768,900 52,939 Travelers Companies, Inc. ....................... 914,300 47,736 UnumProvident Corp. ............................. 384,600 8,977 XL Capital Ltd. ................................. 1,086,900 78,202 ---------- 540,972 ---------- REAL ESTATE - 0.09% St. Joe Co. + ................................... 229,400 7,768 ---------- TOTAL FINANCIALS ................................... 1,987,815 ---------- HEALTH CARE - 10.32% HEALTH CARE EQUIPMENT & SUPPLIES - 1.76% Baxter International, Inc. ...................... 2,393,000 143,604 Covidien Ltd. ................................... 258,600 10,758 ---------- 154,362 ---------- HEALTH CARE PROVIDERS & SERVICES - 2.21% Cigna Corp. ..................................... 1,092,200 57,330 Omnicare, Inc. + ................................ 57,600 1,699 UnitedHealth Group, Inc. ........................ 526,400 25,872 Universal Health Services, Inc. ................. 961,000 46,849 WellPoint, Inc. ## .............................. 777,500 61,601 ---------- 193,351 ---------- PHARMACEUTICALS - 6.35% Amgen, Inc. ## .................................. 296,500 17,230 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) AstraZeneca plc, ADR + .......................... 869,900 $ 42,712 Bristol-Myers Squibb Co. ........................ 3,332,800 99,951 Eli Lilly & Co. ................................. 1,669,700 90,414 Hospira, Inc. ## ................................ 1,078,000 44,554 Johnson & Johnson ............................... 418,400 27,267 Merck & Co., Inc. ............................... 268,300 15,631 Pfizer, Inc. .................................... 5,447,000 134,051 Wyeth Corp. ..................................... 1,751,400 85,170 ---------- 556,980 ---------- TOTAL HEALTH CARE .................................. 904,693 ---------- INDUSTRIALS - 12.63% AEROSPACE & DEFENSE - 3.71% Boeing Co. ...................................... 1,413,300 139,337 Northrop Grumman Corp. + ........................ 1,014,700 84,849 Raytheon Co. .................................... 915,100 58,210 United Technologies Corp. ....................... 561,500 43,005 ---------- 325,401 ---------- AIR FREIGHT & COURIERS - 0.32% FedEx Corp. ..................................... 267,900 27,685 ---------- ELECTRICAL EQUIPMENT - 0.65% Thomas & Betts Corp. ## + ....................... 1,013,000 56,738 ---------- INDUSTRIAL CONGLOMERATES - 3.80% 3M Co. .......................................... 517,700 44,709 General Electric Co. ............................ 2,214,900 91,165 Honeywell International, Inc. ................... 2,279,725 137,718 Textron, Inc. ................................... 635,900 44,011 Tyco International Ltd. ......................... 376,200 15,488 ---------- 333,091 ---------- MACHINERY - 3.39% Caterpillar, Inc. ............................... 718,300 53,592 Deere & Co. ..................................... 624,000 96,658 Flowserve Corp. ................................. 63,500 5,014 Illinois Tool Works, Inc. + ..................... 1,517,600 86,898 ITT Industries, Inc. ............................ 824,300 55,162 ---------- 297,324 ---------- TRANSPORTATION INFRASTRUCTURE - 0.76% Burlington Northern Santa Fe Corp. .............. 759,900 66,225 ---------- TOTAL INDUSTRIALS .................................. 1,106,464 ---------- INFORMATION TECHNOLOGY - 9.85% COMMUNICATIONS EQUIPMENT - 0.48% Nokia Corp., ADR + .............................. 1,064,300 42,274 ---------- See accompanying notes 8 AMERICAN BEACON LARGE CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2007 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) COMPUTERS & PERIPHERALS - 5.41% Apple Computer, Inc. ## ......................... 700,000 $ 132,965 Hewlett-Packard Co. ............................. 2,332,400 120,538 International Business Machines Corp. ........... 1,899,000 220,512 ---------- 474,015 ---------- ELECTRICAL EQUIPMENT - 0.57% Molex, Inc. + ................................... 1,827,000 50,052 ---------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.57% Intel Corp. ..................................... 1,172,900 31,551 Tyco Electronics Ltd. ........................... 512,100 18,267 ---------- 49,818 ---------- IT CONSULTING & SERVICES - 0.34% Electronic Data Systems Corp. ................... 1,366,900 29,511 ---------- SEMICONDUCTOR EQUIPMENT & PRODUCTS - 0.63% Texas Instruments, Inc. ......................... 1,690,000 55,094 ---------- SOFTWARE - 1.85% CA, Inc. + ...................................... 1,341,303 35,478 Microsoft Corp. ................................. 852,400 31,377 Oracle Corp. ## ................................. 4,308,400 95,517 ---------- 162,372 ---------- TOTAL INFORMATION TECHNOLOGY ....................... 863,136 ---------- MATERIALS - 2.67% CHEMICALS - 2.67% Air Products & Chemicals, Inc. + ................ 1,128,700 110,443 Dow Chemical Co. + .............................. 501,000 22,565 E. I. du Pont de Nemours & Co. + ................ 1,557,100 77,092 PPG Industries, Inc. ............................ 319,900 23,910 ---------- 234,010 ---------- PAPER & FOREST PRODUCTS - 0.00% Sappi Ltd., ADR + ............................... 25,500 390 ---------- TOTAL MATERIALS .................................... 234,400 ---------- TELECOMMUNICATION SERVICES - 5.35% DIVERSIFIED TELECOMMUNICATION - 5.35% AT&T, Inc. ...................................... 6,010,152 251,164 Verizon Communications, Inc. .................... 3,433,146 158,165 Vodafone Group plc, ADR ......................... 1,509,949 59,296 ---------- TOTAL TELECOMMUNICATION SERVICES ................... 468,625 ---------- SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) UTILITIES - 4.47% ELECTRIC UTILITIES - 3.70% CenterPoint Energy, Inc. + ...................... 1,230,300 $ 20,620 Dominion Resources, Inc. + ...................... 1,432,600 131,269 Entergy Corp. ................................... 597,700 71,646 Exelon Corp. .................................... 960,900 79,544 FPL Group, Inc. ................................. 114,400 7,827 Public Service Enterprise Group, Inc. ........... 146,400 13,996 ---------- 324,902 ---------- GAS UTILITIES - 0.77% Spectra Energy Corp. ............................ 2,587,700 67,228 ---------- TOTAL UTILITIES .................................... 392,130 ---------- TOTAL COMMON STOCKS ................................ 8,330,346 ---------- SHORT TERM INVESTMENTS - 4.81% American Beacon Money Market Select Fund ++ ..... 389,577,626 389,578 PAR AMOUNT ------------ United States Treasury Bill, 3.873%, Due 12/6/2007 # ...................... $ 32,145 32,014 ---------- TOTAL SHORT TERM INVESTMENTS ....................... 421,592 ---------- SHARES ------------ SECURITIES LENDING COLLATERAL - 4.92% American Beacon Cash Plus Trust ++ .............. 310,862,713 310,863 American Beacon Money Market Select Fund ++ ..... 120,142,850 120,143 ---------- TOTAL SECURITIES LENDING COLLATERAL ................ 431,006 ---------- TOTAL INVESTMENTS 104.78% - (COST $8,178,249) ...... 9,182,944 LIABILITIES, NET OF OTHER ASSETS - (4.78%) ......... (418,544) ---------- TOTAL NET ASSETS - 100.00% ......................... $8,764,400 ========== See accompanying notes 9 AMERICAN BEACON LARGE CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2007 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, 2007. ++ The Fund/Trust is affiliated by having the same investment advisor. # At October 31, 2007, 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 ........ 5,498 Dec 2007 $427,442 $4,378 ======== ====== See accompanying notes 10 AMERICAN BEACON LARGE CAP VALUE FUND STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2007 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS: Investments in unaffiliated securities, at value (A,C) ............................ $ 8,362,361 Investments in affiliated securities, at value (B) ................................ 820,583 Receivable for investments sold ................................................... 2,881 Dividends and interest receivable ................................................. 11,900 Receivable for fund shares sold ................................................... 9,339 Receivable for tax reclaims ....................................................... 75 Receivable for variation margin on open futures contracts ......................... 5,119 Prepaid expenses .................................................................. 69 ------------ TOTAL ASSETS ................................................................... 9,212,327 ------------ LIABILITIES: Payable for investments purchased ................................................. 2,438 Payable upon return of securities loaned .......................................... 431,005 Payable for fund shares redeemed .................................................. 4,814 Management and investment advisory fees payable (Note 2) .......................... 5,883 Administrative service and service fees payable ................................... 2,768 Other liabilities ................................................................. 1,019 ------------ TOTAL LIABILITIES .............................................................. 447,927 ------------ NET ASSETS ........................................................................... $ 8,764,400 ============ ANALYSIS OF NET ASSETS: Paid-in-capital ...................................................................... 7,422,137 Undistributed net investment income ............................................... 98,502 Accumulated net realized gain ..................................................... 234,688 Unrealized appreciation of investments, futures contracts, and foreign currency ... 1,009,073 ------------ NET ASSETS ........................................................................... $ 8,764,400 ============ SHARES OUTSTANDING (NO PAR VALUE): Institutional Class ............................................................... 95,795,067 ============ PlanAhead Class ................................................................... 209,354,868 ============ Service Class ..................................................................... 4,042,239 ============ AMR Class ......................................................................... 37,689,968 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE: Institutional Class ............................................................... $ 26.03 ============ PlanAhead Class ................................................................... $ 24.83 ============ Service Class ..................................................................... $ 24.70 ============ AMR Class ......................................................................... $ 25.80 ============ - ---------- (A) Cost of investments in unaffiliated securities .................................. $ 7,357,665 (B) Cost of investments in affiliated securities .................................... $ 820,583 (C) Market value of securities on loan .............................................. $ 521,220 See accompanying notes 11 AMERICAN BEACON LARGE CAP VALUE FUND STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 2007 (IN THOUSANDS) INVESTMENT INCOME: Dividend income from unaffiliated securities (net of foreign taxes)* .. $ 145,941 Dividend income from affiliated securities ............................ 21,288 Interest income ....................................................... 1,275 Income derived from securities lending, net ........................... 969 --------- TOTAL INVESTMENT INCOME ......................................... 169,473 --------- EXPENSES: Management and investment advisory fees (Note 2) ...................... 19,983 Administrative service fees (Note 2): Institutional Class ................................................ 4,348 PlanAhead Class .................................................... 10,497 Service Class ...................................................... 179 Transfer agent fees: Institutional Class ................................................ 234 PlanAhead Class .................................................... 237 Service Class ...................................................... 5 AMR Class ............................................................. 52 Custody and fund accounting fees ...................................... 583 Professional fees ..................................................... 151 Registration fees and expenses ........................................ 298 Service fees: PlanAhead Class (Note 2) ........................................... 10,497 Service Class (Note 2) ............................................. 179 Distribution fees - Service Class (Note 2) ............................ 179 Prospectus and shareholder reports .................................... 920 Other expenses ........................................................ 628 --------- TOTAL EXPENSES .................................................. 48,970 --------- Net fees recouped by Manager (Note 2) ................................. 2 --------- NET EXPENSES .................................................... 48,972 --------- NET INVESTMENT INCOME .................................................... 120,501 --------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from: Investments ........................................................ 216,206 Commission recapture (Note 1) ...................................... 570 Futures contracts .................................................. 38,056 Change in net unrealized appreciation or depreciation of: Investments ........................................................ 460,106 Futures contracts .................................................. (1,240) --------- NET GAIN ON INVESTMENTS ......................................... 713,698 --------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ..................... $ 834,199 ========= * Foreign taxes ....................................................... $ 358 See accompanying notes 12 AMERICAN BEACON LARGE CAP VALUE FUND STATEMENT OF CHANGES OF NET ASSETS (IN THOUSANDS) Year Ended Year Ended October 31, October 31, 2007 2006 ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income .............................................. $ 120,501 $ 52,939 Net realized gain on investments, futures contracts, and foreign currency transactions ........................................... 254,832 121,664 Change in net unrealized appreciation or (depreciation) of investments, futures contracts, and foreign currency translations .................................................... 458,866 339,128 ----------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .................. 834,199 513,731 ----------- ---------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class ............................................. (14,678) (2,811) PlanAhead Class ................................................. (35,816) (9,026) Service Class ................................................... (422) (183) AMR Class ....................................................... (13,818) (12,219) Net realized gain on investments: Institutional Class ............................................. (28,455) (8,282) PlanAhead Class ................................................. (78,015) (28,149) Service Class ................................................... (1,093) (544) AMR Class ....................................................... (23,934) (32,018) ----------- ---------- NET DISTRIBUTIONS TO SHAREHOLDERS ............................ (196,231) (93,232) ----------- ---------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares ...................................... 4,667,772 3,041,055 Reinvestment of dividends and distributions ........................ 185,535 88,860 Cost of shares redeemed ............................................ (1,336,091) (528,489) ----------- ---------- NET INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS ... 3,517,216 2,601,426 ----------- ---------- NET INCREASE IN NET ASSETS ............................................ 4,155,184 3,021,925 ----------- ---------- NET ASSETS: Beginning of period ................................................ 4,609,216 1,587,291 ----------- ---------- END OF PERIOD * .................................................... $ 8,764,400 $4,609,216 =========== ========== *Includes undistributed net investment income of ...................... $ 98,502 $ 42,693 =========== ========== See accompanying notes 13 AMERICAN BEACON LARGE CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 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, as amended (the "Act"), as a no load, diversified, 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 DISTRIBUTIONS 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 intermediary Administrative Service Fee - 0.25% 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 plans of AMR Corporation and its affiliates N/A 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. 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 independent 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 Trust's Board of Trustees (the "Board"). 14 AMERICAN BEACON LARGE CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 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. 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 at least annually. Distributions, if any, of net realized capital gains are generally paid at least 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 OCTOBER 31, 2007 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, the Manager does not anticipate the adoption of FIN 48 to have a material impact on the financial statements. 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, 2007, the Manager does not believe the adoption of FAS 157 will materially 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. 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 that 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, 2007 were as follows (dollars in thousands): AMOUNTS PAID TO NET AMOUNTS MANAGEMENT MANAGEMENT INVESTMENT RETAINED BY FEE RATE FEE ADVISORS MANAGER - ------------ ---------- --------------- ----------- 0.225%-0.70% $19,983 $12,958 $7,025 16 AMERICAN BEACON LARGE CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 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, 2007, securities lending fees paid to the Manager were $159,036. Administrative Services Agreement The Manager and the Trust entered into an Administrative Services Agreement which obligates the Manager to provide or oversee administrative 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 Fund, 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 and administrative service fees received by the Manager and the investment advisors hired by the Manager to be used for distribution purposes. Under this Plan, the Fund does not intend to compensate the Manager or any other party, either directly or indirectly, for the distribution of Fund 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 issued 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") (collectively, the "Affiliated Funds"). The Fund and 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, 2007, the Manager earned fees from the Affiliated Funds totaling $407,791 on the Fund's direct investment in the Affiliated Funds and $380,346 from the Fund's securities lending collateral invested in the Affiliated Funds. 17 AMERICAN BEACON LARGE CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 Interfund Lending Program Pursuant to an exemptive order issued 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. For the year ended October 31, 2007, the Fund did not utilize the credit facility. 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's average net assets have grown or expenses have declined sufficiently to allow reimbursement without causing its expense ratio to exceed the previously agreed upon contractual expense limit. During the year ended October 31, 2007, the Manager recouped prior fee waivers totaling $1,617. There are no further fee waivers or reimbursed expenses with respect to the Fund that are subject to potential recovery. Other At October 31, 2007, AMR Corporation and subsidiary companies and employee benefit trusts thereof owned 11% 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 fiscal years ended October 31, 2007 and October 31, 2006 were as follows (in thousands): YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, 2007 2006 ----------- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME* Institutional Class ..... $ 20,725 $ 3,517 PlanAhead Class ......... 52,395 11,427 Service Class ........... 18,904 229 AMR Class ............... 654 14,949 LONG-TERM CAPITAL GAIN Institutional Class ..... 22,407 7,576 PlanAhead Class ......... 61,436 25,749 Service Class ........... 18,849 497 AMR Class ............... 861 29,288 -------- ------- TOTAL DISTRIBUTIONS PAID ...... $196,231 $93,232 ======== ======= * For tax purposes, short-term capital gains are considered ordinary income distributions 18 AMERICAN BEACON LARGE CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 As of October 31, 2007, the components of distributable earnings on a tax basis were as follows (in thousands): Cost basis of investments for federal income tax purposes ... $8,194,174 Unrealized appreciation ..................................... 1,258,619 Unrealized depreciation ..................................... (269,849) ---------- Net unrealized appreciation/(depreciation) .................. 988,770 Undistributed ordinary income ............................... 184,979 Undistributed long-term gain/(loss) ......................... 168,442 ---------- Distributable earnings ...................................... $1,342,191 ========== 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, 2007 (in thousands): Paid-in-capital ................................................................................ $ (7) Undistributed net investment income ............................................................ 42 Accumulated net realized gain (loss) ........................................................... (35) Unrealized appreciation (depreciation) of investments, futures contracts and foreign currency .. -- 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, 2007 were (in thousands) $4,638,671 and $1,304,003, respectively. A summary of the Fund's direct ownership and transactions in Affiliated Funds for the year ended October 31, 2007 is set forth below (in thousands): OCTOBER 31, 2006 OCTOBER 31, 2007 AFFILIATE SHARES/MARKET VALUE PURCHASES SALES SHARES/MARKET VALUE - --------- ------------------- ---------- ---------- ------------------- Select Fund $293,666 $7,029,256 $6,933,344 $389,578 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. 19 AMERICAN BEACON LARGE CAP VALUE FUND NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 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 borrowers and transaction costs. To the extent that a loan is secured by non-cash collateral, borrowers 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, 2007, the value of outstanding securities on loan and the value of collateral was as follows (in thousands): MARKET VALUE OF SECURITIES ON LOAN NON-CASH COLLATERAL CASH COLLATERAL - ------------------ ------------------- --------------- $521,220 $101,628 $431,006 Cash collateral is invested in a joint investment account, which is comprised of an investment in the Affiliated Funds. 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, 2007 INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS -------------------- --------------------- ----------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------ ----------- ------- ----------- ------ -------- ------- --------- Shares sold ................. 63,236 $ 1,576,896 121,583 $ 2,853,467 3,247 $ 76,601 6,477 $ 160,808 Reinvestment of dividends ... 1,548 36,661 4,843 109,645 65 1,477 1,612 37,752 Shares redeemed ............. (9,321) (233,002) (30,797) (739,817) (996) (23,714) (13,926) (339,558) ------ ----------- ------- ----------- ----- -------- ------- --------- Net increase (decrease) in shares outstanding ....... 55,463 $ 1,380,555 95,629 $ 2,223,295 2,316 $ 54,364 (5,837) $(140,998) ====== =========== ======= =========== ===== ======== ======= ========= Year Ended October 31, 2006 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 ====== ========== ======= =========== ===== ======= ====== ========= 20 (This page intentionally left blank) 21 AMERICAN BEACON LARGE CAP VALUE FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class PlanAhead Class Year Ended October 31 Year Ended October 31 ----------------------------------------------- -------------------------------------------------- 2007 2006 2005 2004 2003 2007 2006 2005 2004 2003 --------- -------- -------- ------- ------- --------- ---------- -------- ------- ------- Net asset value, beginning of period .............. $ 23.77 $ 21.00 $ 18.23 $ 15.62 $ 12.55 $ 22.74 $ 20.16 $ 17.54 $ 15.05 $ 12.09 --------- -------- -------- ------- ------- --------- ---------- -------- -------- ------- Income from investment operations: Net investment income(A) ........... 0.40 0.31 0.28 0.26 0.25(B) 0.35 0.28 0.27 0.23 0.22(B) Net gains (losses) on securities (both realized and unrealized) ......... 2.78 3.48 2.74 2.62 3.11(B) 2.63 3.31 2.58 2.49 2.99(B) --------- -------- -------- ------- ------- --------- ---------- -------- -------- ------- Total income (loss) from investment operations .. 3.18 3.79 3.02 2.88 3.36 2.98 3.59 2.85 2.72 3.21 --------- -------- -------- ------- ------- --------- ---------- -------- -------- ------- Less distributions: Dividends from net investment income ... (0.31) (0.26) (0.25) (0.27) (0.29) (0.28) (0.25) (0.23) (0.23) (0.25) Distributions from net realized gains on securities .......... (0.61) (0.76) -- -- -- (0.61) (0.76) -- -- -- --------- -------- -------- ------- ------- --------- ---------- -------- -------- ------- Total distributions ....... (0.92) (1.02) (0.25) (0.27) (0.29) (0.89) (1.01) (0.23) (0.23) (0.25) --------- -------- -------- ------- ------- --------- ---------- -------- -------- ------- Net asset value, end of period ................. $ 26.03 $ 23.77 $ 21.00 $ 18.23 $ 15.62 $ 24.83 $ 22.74 $ 20.16 $ 17.54 $ 15.05 ========= ======== ======== ======= ======= ========= ========== ======== ======== ======= Total return .............. 13.76% 18.69% 16.64% 18.59% 27.30% 13.46% 18.44% 16.33% 18.26% 26.99% ========= ======== ======== ======= ======= ========= ========== ======== ======== ======= Ratios and supplemental data: Net assets, end of period (in thousands) ...... $2,493,451 $958,830 $201,111 $48,451 $23,512 $5,198,835 $2,586,410 $526,357 $51,489 $21,331 Ratios to average net assets (annualized): Expenses, net of waivers .......... 0.59% 0.60% 0.60% 0.66% 0.66% 0.83% 0.85% 0.86% 0.94% 0.95% Expenses, before waivers .......... 0.59% 0.60% 0.60% 0.66% 0.66% 0.83% 0.85% 0.86% 0.94% 0.95% Net investment income, net of waivers .......... 1.82% 1.86% 1.58% 1.49% 1.88% 1.59% 1.61% 1.30% 1.21% 1.57% Net investment income (loss), before waivers ........... 1.82% 1.86% 1.58% 1.49% 1.88% 1.59% 1.61% 1.30% 1.21% 1.57% Portfolio turnover rate ................ 20% 26% 25% 29% 27% 20% 26% 25% 29% 27% (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) 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. (C) Not annualized. (D) Annualized. (E) Portfolio turnover rate is for the period from November 1, 2004 through October 31, 2005. 22 Service Class AMR Class ----------------------------- ------------------------------------------------- Year Ended May October 31 31 to Year Ended October 31 ---------------- October 31, ------------------------------------------------- 2007 2006 2005 2007 2006 2005 2004 2003 ------- ------- ------- -------- --------- -------- -------- -------- Net asset value, beginning of period .............. $ 22.64 $ 20.13 $ 19.33 $ 23.55 $ 20.78 $ 18.02 $ 15.44 $ 12.40 ------- ------- ------- -------- --------- -------- -------- -------- Income from investment operations: Net investment income(A) ........... 0.28 0.26 0.01 0.45 0.35 0.31 0.30 0.29 Net gains (losses) on securities (both realized and unrealized) ......... 2.62 3.27 0.79 2.76 3.47 2.73 2.58 3.06 ------- ------- ------- -------- --------- -------- -------- -------- Total income (loss) from investment operations .. 2.90 3.53 0.80 3.21 3.82 3.04 2.88 3.35 ------- ------- ------- -------- --------- -------- -------- -------- Less distributions: Dividends from net investment income ... (0.23) (0.26) -- (0.35) (0.29) (0.28) (0.30) (0.31) Distributions from net realized gains on securities .......... (0.61) (0.76) -- (0.61) (0.76) -- -- -- ------- ------- ------- -------- --------- -------- -------- -------- Total distributions ....... (0.84) (1.02) -- (0.96) (1.05) (0.28) (0.30) (0.31) ------- ------- ------- -------- --------- -------- -------- -------- Net asset value, end of period ................. $ 24.70 $ 22.64 $ 20.13 $ 25.80 $ 23.55 $ 20.78 $ 18.02 $ 15.44 ======= ======= ======= ======== ========= ======== ======== ======== Total return .............. 13.16% 18.18% 4.14%(C) 14.03% 19.08% 16.95% 18.89% 27.64% ======= ======= ======= ======== ========= ======== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands) ...... $99,854 $39,077 $11,604 $972,260 $1,024,899 $848,219 $696,206 $598,869 Ratios to average net assets (annualized): Expenses, net of waivers .......... 1.08% 1.09% 1.14%(D) 0.32% 0.34% 0.35% 0.39% 0.36% Expenses, before waivers .......... 1.08% 1.09% 1.77%(D) 0.32% 0.34% 0.35% 0.39% 0.36% Net investment income, net of waivers .......... 1.32% 1.39% 1.72%(D) 2.13% 2.18% 1.87% 1.79% 2.13% Net investment income (loss), before waivers ........... 1.32% 1.39% 1.09%(D) 2.13% 2.18% 1.87% 1.79% 2.13% Portfolio turnover rate ................ 20% 26% 25%(E) 20% 26% 25% 29% 27% 23 AMERICAN BEACON LARGE CAP VALUE FUND PRIVACY POLICY & FEDERAL TAX INFORMATION OCTOBER 31, 2007 (UNAUDITED) PRIVACY POLICY 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. FEDERAL TAX INFORMATION For corporate shareholders in the Fund, the percentage of ordinary dividend income distributed for the year ended October 31, 2007, which is designated as qualifying for the dividends-received deduction, was 46.1%. For shareholders in the Fund, the percentage of dividend income distributed for the year ended October 31, 2007, which is designated as qualified dividend income under the Jobs Growth Tax Relief Act of 2003 was 66.73%. Shareholders will receive notification in January 2008 of the percentage applicable to the preparation of their 2007 income tax returns. Pursuant to Section 852 of the Internal Revenue Code, the Fund designated $103,553,763 as long-term capital gain dividends for the tax year ended October 31, 2007. 24 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS (UNAUDITED) At its May 25, 2007 meeting, the Board of Trustees ("Board" or "Trustees") considered the renewal of the existing Management Agreement between the Manager and the American Beacon Funds on behalf of its Large Cap Value Fund (the "Fund") and each Investment Advisory Agreement between the Manager and a subadvisor. In preparation for the Board's consideration to renew these Agreements, the Board and its Investment Committee undertook steps to gather and consider information furnished by the Manager, the subadvisors and Lipper, Inc. ("Lipper"). The Board, with the assistance of independent legal counsel, requested and received certain relevant information from the Manager and each subadvisor. In addition, the Board's Investment Committee worked with Lipper to obtain relevant comparative information regarding the performance, fees and expenses of the Fund. The Investment Committee held a separate meeting on May 4, 2007 to consider the information provided by Lipper. Further, the Board took into consideration information furnished for the Board's review and consideration throughout the year at regular Board and Investment Committee meetings, as well as information specifically prepared in connection with the renewal process. THE TRUSTEES CONSIDERED, AMONG OTHER MATERIALS, RESPONSES BY THE MANAGER AND THE SUBADVISORS TO INQUIRIES REQUESTING: - a description of any significant changes (actual or anticipated) to principal activities, personnel, services provided to the Fund, or any other area, including how these changes might affect the Fund; - a copy of the firm's most recent audited or unaudited financial statements as well as its SEC Form ADV registration statement; - a summary of any material past, pending or anticipated litigation or regulatory proceedings involving the firm or its personnel, including the results of any recent regulatory examination or independent audit; - a comparison of the performance of that portion of Fund assets managed by each firm with performance of other similar accounts managed by the firm, including a discussion of relative performance versus a peer group average and any remedial measures if the firm's performance was materially below that of the peer group; - a profit/loss analysis of the firm and any actual or anticipated economies of scale in relation to the services it provides to the Fund; - a description of any payments by the firm to support the Fund's marketing efforts; - an analysis of compensation, including a comparison with fees charged to other clients for which similar services are provided, any proposed changes to the fee schedule and the effect of any fee waivers; - an evaluation of other benefits to the firm or the Fund as a result of their relationship, if any; - confirmation that the firm's financial condition does not raise concerns that the firm would be unable to continue providing the same scope and quality of services to the Fund; - a description of the scope of portfolio management services provided to the Fund and the firm's other clients, including other registered investment companies, whether such services differ, and any advantages or disadvantages that might accrue to the Fund due to the firm's involvement in other activities; - a description of the personnel who are assigned primary responsibility for managing the Fund, including any changes during the past year, and a discussion of the adequacy of current and projected staffing levels to service the Fund; - a description of the basis upon which portfolio managers are compensated, including any "incentive" arrangements; - a discussion regarding the firm's participation in "soft dollar" arrangements, if any, or other brokerage allocation policies with respect to Fund transactions, including the firm's methodology for obtaining the most favorable execution and the use of any affiliated broker-dealers; - a discussion of whether the firm receives, with respect to the Fund, other compensation, including any payment for order flow or ECN liquidity rebates; - a description of any actual or potential conflicts of interest anticipated in managing Fund assets; - a description of trade allocation procedures among accounts managed by the firm; - a summary of any material changes to the firm's compliance program with regard to federal, state, corporate and Fund requirements and a certification regarding the reasonable design of the compliance program; 25 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS (UNAUDITED) - a discussion of any material compliance problems and remedial actions; - information regarding the firm's code of ethics, insider trading policy and disaster recovery plan, including a description of any material changes thereto; - a description of the firm's affiliation with any broker-dealer; - a discussion of any anticipated change in the firm's controlling persons; and - verification of the firm's insurance coverage with regards to the services provided to the Fund. In addition to the foregoing, the Manager provided the following information specific to the renewal of the Management Agreement: - a comparison of the performance of the Fund to comparable investment companies and appropriate indices, including comments on the relative performance of each subadvisor and the Fund versus its peer group average; - a discussion, if applicable, of any underperformance by a subadvisor relative to its peer group and what, if any, remedial measures the Manager has or intends to take; - a comparison of advisory fees and expense ratios for comparable mutual funds; - an analysis of any material complaints received from Fund shareholders; - a description of the Manager's securities lending practices and the fees received from such practices; - a description of any revenue sharing activities with respect to the Fund; - a discussion of any rebate arrangements between the Manager and a service provider to the Fund pursuant to which the Manager receives direct or indirect benefits from the service provider; - a description of the portfolio turnover rate and average execution costs for the Fund and each subadvisor to the Fund; and - a description of how expenses that are not readily identifiable to the Fund are allocated. The Board also obtained an analysis provided by Lipper that compared: (i) investment performance of the Fund versus comparable investment companies and appropriate indices; (ii) total Fund expenses of the Fund versus comparable mutual funds, and (iii) the Fund's investment advisory fees versus comparable mutual funds. The class used for comparative purposes was the class with the longest performance history, which in most cases is the Institutional Class. References below to the Fund's Lipper peer group are to the group of comparable mutual funds included in the analysis provided by Lipper. The Trustees also received a memorandum from their legal counsel detailing the Board's responsibilities pertaining to the renewal of the Management and Investment Advisory Agreements. This memorandum explained the regulatory requirements surrounding the Trustees' process for evaluating investment advisors and the terms of the contracts. Provided below is an overview of the primary factors the Board considered at its May 25, 2007 meeting. The Board did not identify any particular information that was most relevant to its consideration to renew the Management and Investment Advisory Agreements, and each Trustee may have afforded different weight to the various factors. In determining whether to approve the continuance of the Management Agreement and the Investment Advisory Agreement, the Trustees considered the best interests of the Fund. In addition, while the Management and Investment Advisory Agreements for all of the Funds were considered at the same Board meeting, the Board considered each Fund's investment management and subadvisory relationships separately. The Board considered, among other things, the following factors: (1) the nature and quality of the services provided; (2) the investment performance of the Fund and the investment advisor; (3) the Manager's or subadvisor's cost for providing the services and the profitability of the advisory business to the Manager or subadvisor; (4) the extent to which economies of scale have been taken into account in setting the fee schedule; (5) whether fee levels reflect these economies of scale for the benefit of Fund investors; (6) comparisons of services and fees with contracts entered into by the Manager or a 26 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS (UNAUDITED) subadvisor or their affiliates with other clients (such as pension funds and other institutional funds); and (7) any other benefits derived or anticipated to be derived by the Manager or a subadvisor from their relationship with the Fund. The Trustees posed questions to various management personnel of the Manager regarding certain key aspects of the material submitted in support of the renewal. Nature, Extent and Quality of Services. With respect to the renewal of the Management Agreement, the Board considered: the background and experience of key investment personnel and the Manager's ability to retain them; the Manager's disciplined investment approach and goal to provide consistent above average long-term performance at a low cost; the Manager's continuing efforts to add new series and share classes to enhance the Fund's product line; the Manager's record in building improved compliance, control and credit functions that reduce risks to the Fund; the addition of personnel to manage the Fund, promote sales and improve services, including the addition of a separate new information technology (IT) department at the Manager; the high rankings received by the Fund in service surveys; and the active role played by the Manager in monitoring and, as appropriate, recommending replacements for the investment subadvisors and master portfolios. With respect to the renewal of the Investment Advisory Agreements, the Trustees considered the background and experience of each subadvisor's investment personnel responsible for managing the Fund, the size of the subadvisor and their ability to continue to attract and retain qualified investment personnel. Based on the foregoing information, the Board concluded that the nature, extent and quality of the management and advisory services provided by the Manager and each subadvisor were appropriate for the Fund and, thus, supported a decision to renew the Management and each Investment Advisory Agreement. Investment Performance. The Board evaluated the comparative information provided by Lipper and the Manager regarding the Fund's investment performance relative to its benchmark indices and peer group. With respect to Lipper data, the Board considered the information provided by Lipper regarding its independent peer selection methodology to select all peer groups and universes. The Board also considered the performance reports and discussions with management at Board and Committee meetings throughout the year. The Manager also noted that it generally was satisfied with the performance of the subadvisors. Cost of Services and Profits Realized. In analyzing the cost of services and profitability of the Manager and a subadvisor, the Board considered the revenues earned and the expenses incurred by the Manager and those subadvisors that provided such data. The profitability levels were noted at both an individual Fund level and at an aggregate level for all Funds in the complex. The Board also considered that the Management Agreements for the American Beacon Funds stipulate that to the extent that the Fund invests all of its investable assets in another registered investment company, the Fund will not pay the Manager a management fee. The Board further considered that the Fund pays the Manager the amounts due to its subadvisors, and the Manager remits these amounts directly to the applicable subadvisors. The Board considered that the Manager receives service and administrative fees to compensate the Manager for providing administrative services to the Fund and to compensate third-party administrators and broker-dealers for services to Fund shareholders. In addition, the Board considered that the Manager receives management fees for overseeing the securities lending relationships on behalf of the Fund. The Board also noted that the non-Institutional Classes of the Fund maintains higher expense ratios in order to compensate third party distributors but the net fee to the Manager is the same for all Classes. In analyzing the cost of services and profitability of each subadvisor in connection with its investment advisory services to the Fund, the Board considered that, in many cases, the Manager has negotiated the lowest subadvisory fee a subadvisor charges for any comparable client accounts. The Board gave less weight to profitability considerations or 27 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS (UNAUDITED) did not view this data as imperative to its deliberations given the arm's-length nature of the relationship between the Manager and the subadvisors with respect to the negotiation of subadvisory fees. Based on the foregoing information, the Board concluded that the profitability levels were reasonable in light of the services performed by the Manager and the subadvisors. Economies of Scale. In considering the reasonableness of the management and investment advisory fees, the Board considered whether economies of scale will be realized as the Fund grows and whether fee levels reflect these economies of scale for the benefit of Fund shareholders. In this regard, the Board considered that the Manager has negotiated breakpoints in the subadvisory fee rates. The Board also noted, for purposes of determining the fee rates chargeable to the Fund, many subadvisors have agreed to take into account other assets of AMR Corporation and its pension plans that are managed by the subadvisors. Thus, the Fund is able to receive lower effective fee rates. This fee arrangement also benefits AMR Corporation and its pension plans. The Board also noted that the Fund has experienced substantial recent asset growth. The Board also considered the Manager's representations that its costs have increased due primarily to greater service provider and regulatory costs. The Manager also represented that it anticipates further economies of scale would be largely offset by higher costs of adding and retaining qualified personnel, improving technology and increasing demands on its advisory business. Based on the foregoing information, the Board concluded that the Manager and subadvisor fee schedules provide for a reasonable sharing of benefits from any economies of scale with the Fund. Benefits Derived from the Relationship with the Funds. The Board considered the "fall-out" or ancillary benefits that accrue to the Manager and/or the subadvisors as a result of the advisory relationships with the Fund, including greater exposure in the marketplace with respect to the Manager's or subadvisor's investment process and expanding the level of assets under management by the Manager and the subadvisors. The Board also considered that the money market portfolios permit institutional investors access to such investments at a more favorable cost and that the Manager's relationship with the Fund and, in particular the money market portfolios, continues to be a significant factor in attracting separate account assets for the Manager. In addition, the Board noted that the Manager provides services to the Trust at a relatively low cost and the benefit plans of AMR Corporation have invested a substantial number of assets in the Fund, which helps reduce costs. The Board also considered that certain of the subadvisors reimburse the Manager for certain of its costs relating to distribution activities for the Fund. Based on the foregoing information, the Board concluded that the potential benefits accruing to the Manager and the subadvisors by virtue of their relationship with the Fund appears to be fair and reasonable. ADDITIONAL CONSIDERATIONS AND CONCLUSIONS The performance comparisons below were made versus the Fund's Lipper peer universe median. References to the Lipper expense group below are to the group of comparable mutual funds included in the analysis provided to the Trustees by Lipper. All performance comparisons are for periods ended March 31, 2007, unless otherwise noted. In considering the renewal of the Management Agreement with respect to the Fund, the Trustees considered the following additional factors: (1) the Fund outperformed its peer universe median for the one-, three-, five-, and ten-year periods; and (2) the actual management fee (including administrative fees) and the total expense ratio of the Institutional Class of Fund shares was lower than its Lipper expense group median. In considering the renewal of the Investment Advisory Agreements with Barrow, Hanley, Mewhinney and Strauss, Inc. ("Barrow"), Brandywine Global Investment Management, LLC ("Brandywine"), Hotchkis and Wiley Capital Management, LLC ("Hotchkis") and Metropolitan West Capital Management, LLC ("MetWest"), the Trustees considered 28 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS (UNAUDITED) the following additional factors: (1) each subadvisor outperformed the peer universe median for the one-, three- and five year periods; (2) Barrow, Brandywine and Hotchkis outperformed the peer universe median for the ten-year period; (3) Barrow underperformed one of its market benchmark indexes and outperformed the other index with respect to its allocated portion of the Fund's assets for the one-year period ended December 31, 2006; (4) Brandywine outperformed its market benchmark indexes with respect to its allocated portion of the Fund's assets for all relevant periods ended December 31, 2006; (5) Hotchkis underperformed one of its market benchmark indexes with respect to its allocated portion of the Fund's assets for the one-year period ended December 31, 2006 but outperformed both indexes for the three-, five- and since-inception periods; (6) MetWest outperformed its primary benchmark index with respect to its allocated portion of the Fund's assets for the one-year period; (7) Hotchkis' explanation that its underperformance was primarily due to negative security selection as well as an underweight position in a few strong sectors in 2006; (8) each of the Fund's subadvisors has informed the Manager that it uses Fund commissions to obtain proprietary research, the application of which benefits the Fund and each of the subadvisor's clients, and Hotchkis has further informed the Manager that it uses Fund commissions to obtain third-party research, but there is little or no impact to the Fund; (9) the fee schedules of each subadvisor include breakpoints, which reduce fee rates as the assets of the Fund increase; (10) MetWest also represented that it does not charge a lower advisory fee to any other comparable clients; and (11) the Manager's recommendation to continue to retain each subadvisor. Based on these considerations and those noted above with respect to all Funds, the Trustees (1) concluded that the fees paid to the Manager and the subadvisors under the Management and Investment Advisory Agreements are fair and reasonable, (2) determined that the Fund and its shareholders would benefit from the continued management of the Fund by the Manager and subadvisors and (3) approved the renewal of the Management and Investment Advisory Agreements with respect to the Fund. 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. POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED NAME, AGE AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS AND CURRENT DIRECTORSHIPS - --------------------- -------------------- -------------------------------------------------------------------------- INTERESTED TRUSTEES Term Lifetime of Trust until removal, resignation or retirement* William F. Quinn** (59) Trustee Chairman and CEO (2006-Present), President (1986-2006) and Director since 1987 (2003-Present), American Beacon Advisors, Inc.; Chairman (1989-2003) and President from Director (1979-1989, 2003- Present), American Airlines Federal Credit 1987 to 2007 Union; Director, Crescent Real Estate Equities, Inc.(1994-2007); Director, Executive Vice Pritchard, Hubble & Herr, LLC (investment advisor) (2001-2006); Director President of Investment Committee, Southern Methodist University Endowment Fund since 2007 (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); Chairman (2007-Present) and Vice Chairman (2004-2007), Committee for the Investment of Employee Benefits; 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). Douglas G. Herring** (50) Trustee since 2006 President, American Beacon Advisors, Inc. (2006-Present); Vice President Executive Vice and Controller, American Airlines, Inc. (1998-2006); Chairman President from 2006 (2003-Present) and Director (1995-Present), American Airlines Federal to 2007 Credit Union; Trustee, American Beacon Mileage Funds (2006-Present); President since 2007 Trustee American Beacon Select Funds (2006-Present); Trustee American Beacon Master Trust (2006-Present). Alan D. Feld** (70) Trustee since 1996 Partner, Akin, Gump, Strauss, Hauer & Feld, LLP (law firm) (1960-Present); Director, Clear Channel Communications (1984-Present); Trustee, CenterPoint Properties (1994- 2006); Member Board of Trustees, Southern Methodist University; Member, Board of Visitors, The University of Texas M.D. Anderson Cancer Center; Member, Board of Visitors, Zale Lipshy Hospital; 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 (63) 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). 30 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS (UNAUDITED) POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED NAME, AGE AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS AND CURRENT DIRECTORSHIPS - --------------------- -------------------- -------------------------------------------------------------------------- NON-INTERESTED TRUSTEES (CONT.) Brenda A. Cline (46) 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- 2006); 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 (64) Trustee since 2004 Senior Vice President and General Counsel, Hunt Consolidated, Inc. (holding company engaged in oil and gas exploration and production, refining, 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 (72) 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 (61) Trustee since 2001 President, Southern Methodist University (1995-Present); Director, 225 Perkins Admin. Bldg. ChemFirst (1986- 2002); Director, J.C. Penney Company, Inc. Southern Methodist Univ. (1996-Present); Director, California Federal Preferred Capital Corp. Dallas, Texas 75275 (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 (51) Trustee since 1996 Managing Partner, Pharos Capital Group, LLC (a private equity firm) 100 Crescent Court Chairman since (1998-Present); Director, Burger King Corporation (2004-Present); Suite 1740 2005 Director, Gap, Inc. (2006-Present); Trustee, City of Dallas, Texas Dallas, Texas 75201 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). 31 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS (UNAUDITED) POSITION, TERM OF OFFICE AND LENGTH OF TIME SERVED NAME, AGE AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS AND CURRENT DIRECTORSHIPS - --------------------- -------------------- -------------------------------------------------------------------------- OFFICERS Term One Year Rosemary K. Behan (48) VP, Secretary and Vice President, Legal and Compliance, American Beacon Advisors, Inc. Chief Legal Officer (2006- Present); Assistant General Counsel, First Command Financial since 2006 Planning, Inc. (2004-2006); Enforcement Attorney (2002-2004) and Branch Chief (2000-2002), Securities and Exchange Commission. Brian E. Brett (47) VP since 2004 Vice President, Director of Sales and Marketing, American Beacon Advisors, Inc. (2004-Present); Regional Vice President, Neuberger Berman, LLC (investment advisor) (1996-2004). Wyatt Crumpler (41) VP since 2007 Vice President, Trust Investments, American Beacon Advisors, Inc. (2007- Present); Managing Director of Corporate Accounting (2004-2007), Director of IT Strategy and Finance (2002-2004), American Airlines, Inc. Michael W. Fields (53) VP since 1989 Vice President, Fixed Income Investments, American Beacon Advisors, Inc. (1988-Present). Rebecca L. Harris (40) Treasurer since 1995 Vice President, Finance, American Beacon Advisors, Inc. (1995-Present). Christina E. Sears (36) Chief Compliance Chief Compliance Officer, American Beacon Advisors, Inc. (2004-Present); Officer since 2004 Senior Compliance Analyst, American Beacon Advisors, Inc. (1998-2004). and Asst. Secretary since 1999 * 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, Feld and Herring are deemed to be "interested persons" of the Trust, as defined by the 1940 Act. Mr. Quinn is Chairman and CEO 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. Mr. Herring is President of the Manager. 32 (This page intentionally left blank) 33 (AMERICAN BEACON FUNDS(SM) 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: (GRAPHIC) (GRAPHIC) BY E-MAIL: ON THE INTERNET: american_beacon.funds@ambeacon.com Visit our website at www.americanbeaconfunds.com (GRAPHIC) (GRAPHIC) BY TELEPHONE: BY MAIL: Institutional Class American Beacon Funds Call (800) 658-5811 P.O. Box 219643 AMR Class(SM) Kansas City, MO 64121-9643 Call (800) 345-2345 PlanAhead Class(R) and Service Class Call (800) 388-3344 AVAILABILITY OF AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULES PROXY VOTING POLICY AND RECORDS In addition to the Schedule of A description of the policies and Investments provided in each procedures the Fund uses to determine semi-annual and annual report, the how to vote proxies relating to Fund files a complete schedule of its portfolio securities is available in the portfolio holdings with the Fund's Statement of Additional Securities and Exchange Commission Information, is available free of charge ("SEC") on Form N-Q as of the first on the Fund's website and third fiscal quarters. The Fund's (www.americanbeaconfunds.com) and by Forms N-Q are available on the SEC's calling 1-800-967-9009 or by accessing website at www.sec.gov. The Forms N-Q the SEC's website at www.sec.gov. The may also be reviewed and copied at Fund's proxy voting record for the most the SEC's Public Reference Room, 450 recent year ended June 30 is filed Fifth Street, NW, Washington, DC annually with the SEC on Form N-PX. The 20549. Information regarding the Fund's Forms N-PX are available on the operation of the SEC's Public SEC's website at www.sec.gov. The Fund's Reference Room may be obtained by proxy voting record may also be obtained calling 1-800-SEC-0330. A complete by calling 1-800-967-9009. schedule of the Fund's portfolio holdings is also available on the Funds' website (www.americanbeaconfunds.com) approximately thirty days after the end of each month. FUND SERVICE PROVIDERS: CUSTODIAN TRANSFER AGENT INDEPENDENT REGISTERED DISTRIBUTOR STATE STREET BANK AND BOSTON FINANCIAL DATA PUBLIC ACCOUNTING FORESIDE FUND SERVICES TRUST SERVICES FIRM Portland, Maine Boston, Massachusetts Kansas City, Missouri ERNST & YOUNG LLP Dallas, Texas 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 10/07 541121 GUIDANCE | VISION | EXPERIENCE (AMERICAN BEACON FUNDS(SM) LOGO) Annual Report (GRAPHIC) October 31, 2007 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 President's Message................................................ 1 Market and Performance Overview.................................... 2 Schedule of Investments............................................ 7 Additional Information............................................. Back Cover Any opinions herein, including forecasts, reflect our judgment 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, 2007 (PHOTO OF DOUGLAS G. HERRING) 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, 2007. Please review the enclosed material carefully, as it includes important information about the Fund. After a number of years of steady returns, volatility returned to the U.S. equity markets toward the end of the fiscal year. The change in the investment environment was led by a crisis in the housing sector, due to several years of lax lending standards, and then began to spill over into the financial sector during the summer months. Despite the increased volatility, the U.S. equity markets continued to perform well for the period with the S&P 500 and the Russell 2000 Indices reporting one-year returns of 14.56% and 9.28%, respectively, as of October 31, 2007. The Fund's Institutional Class reported a total annualized return of 6.10% for the one-year period ended October 31, 2007. For the five-year period, the Fund's performance exceeded the Lipper Small-Cap Value Funds Index. The turmoil in the U.S. equity markets continued after the close of the Fund's fiscal year and is likely to continue over the shorter term. However, we believe the Fund's fundamental value investment philosophy and lower than average expense ratio will continue to serve the Fund well over the longer term. As always, we appreciate 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 Small Cap Value Fund. Sincerely, /s/ Douglas G. Herring ---------------------------------------- Douglas G. Herring President American Beacon Funds 1 DOMESTIC EQUITY MARKET OVERVIEW OCTOBER 31, 2007 (UNAUDITED) After increasing short-term rates 17 times from 1.00% in June 2004 to 5.25% in June 2006, the Federal Reserve (the "Fed"), led by new chairman Ben Bernanke, left rates unchanged over the remainder of 2006. This "inaction," combined with a sharp decline in oil prices, and further declines in long-term interest rates, led to a strong stock market rally that carried through the end of 2006. This was followed by a brief mid-quarter correction in the first quarter of 2007, ignited by subprime mortgage concerns and a sharp fall in the global markets. However, equity prices rallied near the end of the quarter as the Fed voiced some concerns over economic growth while continuing to emphasize inflation risk, leading to a positive-shaped yield curve for the first time in seven months. As measured by the various Russell indices, value and growth stocks performed in line with each other in the first quarter, with larger companies underperforming both mid-cap and smaller companies. Seven of the ten sectors in the broad-market S&P 500 Index advanced in the quarter with Utilities and Materials leading the way. The worst performing sector, Financials, declined as the market reacted to the subprime mortgage news. During the second quarter of 2007, U.S. equity markets absorbed the news of a slowing housing market, higher energy prices, rising long-term interest rates, and diminished expectations for a cut in short-term rates. Equity prices were fueled by private investors' attraction to strong corporate cash flows, liquid balance sheets, and the low cost of buyout financing. All of the major stock indices gained during the quarter, with the S&P 500 Index finally reaching a new high, breaking the one set in March 2000. Reversing the trend of the prior 18 months, growth stocks outperformed their value counterparts while large cap stocks outperformed mid-cap and small cap equities. With the exception of the Utilities sector, each of the remaining nine sectors in the broad-market S&P 500 Index advanced during the quarter. The performance disparity between the sectors was pronounced, reinforcing the importance of portfolio diversification. Investors favored the Energy and Information Technology sectors, both of which gained more than 10% during the quarter. Consumer Staples and Financials, along with the aforementioned Utilities sector, were the laggards. The economic events of the third quarter made for jittery financial markets. However, even in the face of a slowing housing industry, the subprime mortgage spillover, a falling dollar, and a world-wide credit squeeze, most equity markets in the U.S. maintained their solid performance through the third quarter of 2007. After continuing to drive down stock prices in July, investors returned to the stock market in force in late August. The rally continued in September, spurred by the Fed's decision to cut interest rates for the first time in more than four years. The lower cost of borrowed funds, a strong worldwide economy and solid corporate performance were significant drivers of the market upturn. The quarter was characterized by high variability, market capitalization, and investment style, as the Russell 1000(R) Value Index declined while the NASDAQ Composite Index advanced. During the third quarter, growth stocks continued to outperform their value counterparts in the Russell indices and remained ahead. Large companies clearly were in favor during the quarter, with the Russell 1000 Index showing positive returns while mid-cap and small cap issues declined. As was the case in the previous quarter, the Energy, Information Technology and Industrials sectors led the way in performance during the third quarter. Reflecting the unease in the housing and credit markets, both the Financials and Consumer Discretionary sectors declined during the quarter. The month of October lived up to its volatile history. While worries over housing weakness, the credit crunch, and decreases in earnings expectations provided powerful ammunition for the "bears," monetary policy and continued economic gains enabled the "bulls" to propel markets higher. Market gains were broad based with all of the major markets advancing during the month. Even with the U.S. economy continuing to display very impressive resilience, "to forestall some of the adverse effects on the broader economy," the Fed cut interest rates by 25 basis points (0.25%) to 4.50% at its October 31st meeting. 2 PERFORMANCE OVERVIEW AMERICAN BEACON SMALL CAP VALUE FUND(SM) OCTOBER 31, 2007 (UNAUDITED) The Institutional Class of the Small Cap Value Fund returned 6.10% for the twelve months ended October 31, 2007, outperforming the Russell 2000(R) Value Index (the "Index") return of 2.05%, but lagging the Lipper Small-Cap Value Funds Index return of 7.17% for the same period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 12/31/98* THROUGH 10/31/07 (PERFORMANCE GRAPH) * Inception of Fund ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/07 VALUE OF $10,000 SINCE 12/31/98- 1 YEAR 5 YEARS INCEPTION 10/31/07 ------ ------- --------- --------- Institutional Class(1,5).................... 6.10% 19.64% 13.83% $31,402 PlanAhead Class(1,2,5)...................... 5.83% 19.36% 13.55% 30,718 Service Class(1,3,5)........................ 5.55% 19.06% 13.39% 30,331 AMR Class(1,2,5)............................ 6.39% 19.97% 14.14% 32,160 Lipper Small-Cap Value Funds Index(4)....... 7.17% 19.14% 12.51% 28,328 Russell 2000 Value Index(4)................. 2.05% 18.60% 12.25% 27,741 (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 11/1/02 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 was waived through 2004. Performance prior to waiving fees was lower than the actual returns shown for periods through 2004. (4). Russell 2000 Value Index is a registered trademark of Frank Russell Company. The Russell 2000 Value Index is an unmanaged index of those stocks in the Russell 2000 Index with lower price-to-book ratios and lower 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. (5). The total annual Fund operating expense ratio set forth in the most recent Fund prospectus for the Institutional, PlanAhead, Service and AMR Class shares was 0.85%, 1.09%, 1.37% and 0.58%, respectively. The expense ratios above may vary from the expense ratios presented in other sections of this report that are based on expenses incurred during the period covered by this report. The Fund outperformed the Index in eight of the ten sectors, generating excess performance through both stock selection and sector allocation. Stock selection excess performance resulted primarily from its holdings in the Financials, Information Technology, Consumer Discretionary, and Industrials sectors. Individual holdings that had the largest positive impact on performance in the Financials sector were StanCorp Financial (up 22.4%), Ohio Casualty (up 62.0%), and Highland Hospitality (up 45.0%). Avnet (up 52.6%) and Maximus (up 73.7%) were the largest contributors in the Information Technology sector, while Warnaco (up 91.6%), American Axle & Manufacturing (up 50.3%), and Tupperware (up 76.0%) helped performance most in the Consumer Discretionary sector. In the Industrials sector, Shaw (up 180.9%), AGCO (up 89.8%), and Graftech International (up 212.4%) added the most value. Poor stock selection in the Materials sector detracted from 3 PERFORMANCE OVERVIEW AMERICAN BEACON SMALL CAP VALUE FUND(SM) OCTOBER 31, 2007 (UNAUDITED) performance, where Georgia Gulf (down 42.4%) and Polyone (down 2.6%) were the largest detractors. The Fund's underweighting in the Financials sector, the worst performing sector in the Index, and an overweighting in the Industrials sector were positive contributors to the Fund's performance relative to the Index. However, this was somewhat offset by the Fund's large overweighting in the Consumer Discretionary sector, which was a poor performing sector in the Index. The sub-advisors continue to focus on uncovering investment opportunities through stock selection that should benefit the Fund's performance over the longer term. TOP TEN HOLDINGS % OF NET ASSETS ---------- Ingram Micro, Inc. 1.0% Regal-Beloit Corp. 0.9% FMC Corp. 0.8% Flowserve Corp. 0.8% Hanover Insurance Group, Inc. 0.8% StanCorp Financial Group, Inc. 0.8% Men's Wearhouse, Inc. 0.7% Plexus Corp. 0.7% LifePoint Hospitals, Inc. 0.6% Brunswick Corp. 0.6% SECTOR ALLOCATION % OF EQUITIES -------- Financials 25.1% Consumer Discretionary 18.8% Industrials 17.4% Information Technology 12.7% Utilities 6.5% Energy 5.6% Materials 5.5% Health Care 5.1% Consumer Staples 2.6% Telecommunication Services 0.7% 4 AMERICAN BEACON SMALL CAP VALUE FUND(SM) FUND EXPENSES OCTOBER 31, 2007 (UNAUDITED) 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, 2007 through October 31, 2007. ACTUAL EXPENSE 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. Ending Beginning Account Expenses Paid Account Value Value During Period* 5/1/07 10/31/07 5/1/07-10/31/07 ------------- --------- --------------- INSTITUTIONAL CLASS Actual $1,000.00 $ 961.70 $4.01 Hypothetical $1,000.00 $1,021.12 $4.13 (5% return before expenses) PLANAHEAD CLASS Actual $1,000.00 $ 960.47 $5.19 Hypothetical $1,000.00 $1,019.91 $5.35 (5% return before expenses) SERVICE CLASS Actual $1,000.00 $ 959.33 $6.57 Hypothetical $1,000.00 $1,018.50 $6.77 (5% return before expenses) AMR CLASS Actual $1,000.00 $ 962.88 $2.67 Hypothetical $1,000.00 $1,022.48 $2.75 (5% return before expenses) * Expenses are equal to the Fund's annualized expense ratios for the six-month period of 0.80%, 1.05%, 1.32% and 0.54% 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(SM) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders of American Beacon Small Cap Value Fund and the Board of Trustees of American Beacon Funds: 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, 2007, 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, 2007, 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, 2007, 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 21, 2007 6 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2007 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 96.53% COMMUNICATIONS - 0.16% MEDIA - 0.16% Entravision Communications Corp. ## ................. 387,870 $ 3,530 McClatchy Co. + ..................................... 97,800 1,622 ---------- TOTAL COMMUNICATIONS ................................ 5,152 ---------- CONSUMER DISCRETIONARY - 18.10% AUTO COMPONENTS - 2.15% Aftermarket Technology Corp. ## ..................... 25,000 863 American Axle & Manufacturing Holdings, Inc. +....... 712,200 19,557 ArvinMeritor, Inc. + ................................ 181,000 2,684 Gentex Corp. ........................................ 386,750 8,037 Lear Corp. ## ....................................... 563,300 20,014 Modine Manufacturing Co. ............................ 27,100 630 Tenneco, Inc. ## .................................... 242,640 7,427 TRW Automotive Holdings Corp. ## .................... 327,300 9,718 ---------- 68,930 ---------- HOTELS, RESTAURANTS & LEISURE - 1.42% CBRL Group, Inc. + .................................. 126,511 5,048 CEC Entertainment, Inc. ## .......................... 88,500 2,637 JAKKS Pacific, Inc. ## + ............................ 150,600 3,991 Landry's Restaurants, Inc. + ........................ 59,200 1,700 Live Nation, Inc. ## + .............................. 534,790 10,931 Lodgian, Inc. ## .................................... 495,000 6,024 Morton's Restaurant Group, Inc. ## + ................ 150,710 2,089 Panera Bread Co. ## ................................. 29,600 1,213 Ruby Tuesday, Inc. + ................................ 467,900 7,472 Speedway Motorsports, Inc. + ........................ 121,500 4,411 ---------- 45,516 ---------- HOUSEHOLD DURABLES - 2.83% Beazer Homes USA, Inc. + ............................ 482,500 5,418 Blyth, Inc. ......................................... 118,500 2,262 Cavco Industries, Inc. ## ........................... 56,660 2,227 Champion Enterprises, Inc. ## + ..................... 1,306,340 15,493 Ethan Allen Interiors, Inc. + ....................... 283,970 8,763 Furniture Brands International, Inc. + .............. 494,300 5,956 Helen of Troy Ltd. ## + ............................. 346,700 6,241 Knoll, Inc. ......................................... 137,500 2,611 Leggett & Platt, Inc. ............................... 51,700 1,005 M.D.C. Holdings, Inc. + ............................. 491,693 19,919 Russ Berrie and Company, Inc. ## + .................. 94,500 1,654 Ryland Group, Inc. + ................................ 52,200 1,484 Standard Pacific Corp. + ............................ 19,100 92 Tempur-Pedic International, Inc. + .................. 100,400 3,614 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) Tupperware Corp. + .................................. 316,200 $ 11,415 WCI Communities, Inc. ## + .......................... 526,300 2,874 ---------- 91,028 ---------- INTERNET & CATALOG RETAIL - 0.23% Insight Enterprises, Inc. ## + ...................... 180,499 4,989 School Specialty, Inc. ## + ......................... 69,970 2,362 ---------- 7,351 ---------- LEISURE EQUIPMENT & PRODUCTS - 0.71% Brunswick Corp. + ................................... 921,000 20,547 Polaris Industries, Inc. + .......................... 47,800 2,351 ---------- 22,898 ---------- MEDIA - 1.72% Belo Corp. .......................................... 621,600 11,500 Brocade Communications Systems, Inc. ## ............. 221,500 2,106 Courier Corp. + ..................................... 84,159 3,180 Cox Radio, Inc. ## + ................................ 265,100 3,202 Getty Images, Inc. ## ............................... 162,800 4,599 Hearst-Argyle Television, Inc. ...................... 23,800 531 Journal Communications, Inc. ........................ 257,943 2,298 Media General, Inc. ................................. 15,700 439 Meredith Corp. ...................................... 144,270 8,981 New York Times Co. + ................................ 113,400 2,218 Scholastic Corp. ## + ............................... 312,320 12,362 Westwood One, Inc. + ................................ 1,742,300 3,729 ---------- 55,145 ---------- MULTILINE RETAIL - 0.63% BJ's Wholesale Club, Inc. ## ........................ 386,280 13,859 Fred's, Inc. + ...................................... 452,900 4,801 Tuesday Morning Corp. + ............................. 221,100 1,685 ---------- 20,345 ---------- SPECIALTY RETAIL - 6.36% Aaron Rents, Inc. ................................... 46,900 993 Aeropostale, Inc. ## ................................ 212,000 4,855 American Greetings Corp. + .......................... 106,800 2,813 AnnTaylor Stores Corp. ## ........................... 249,360 7,728 Asbury Automotive Group, Inc. + ..................... 408,600 7,490 Big 5 Sporting Goods Corp. + ........................ 321,509 5,739 Buckle, Inc. + ...................................... 45,700 1,970 Cabela's, Inc. ## + ................................. 320,500 6,256 Cache, Inc. ## + .................................... 177,820 2,785 Cato Corp. .......................................... 164,500 3,303 Charlotte Russe Holding, Inc. ## + .................. 294,600 4,269 Charming Shoppes, Inc. ## + ......................... 962,960 7,145 The Childrens Place Retail Stores, Inc. ## + ........ 59,800 1,531 Collective Brands, Inc. ## + ........................ 180,100 3,330 Conn's, Inc. ## + ................................... 86,500 2,212 See accompanying notes 7 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2007 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) Dress Barn, Inc. ## + ............................... 693,800 $ 11,371 Foot Locker, Inc. ................................... 222,700 3,316 Genesco, Inc. ## + .................................. 75,000 3,465 Group 1 Automotive, Inc. + .......................... 401,000 12,451 Gymboree Corp. ## ................................... 187,750 6,389 Jos. A. Bank Clothiers, Inc. ## + ................... 192,810 5,632 Lithia Motors, Inc. + ............................... 67,400 1,144 Liz Claiborne, Inc. + ............................... 16,700 475 MarineMax, Inc. ## + ................................ 378,800 5,394 Men's Wearhouse, Inc. + ............................. 560,500 23,687 OfficeMax, Inc. ..................................... 67,800 2,146 Pacific Sunwear of California ## + .................. 428,200 7,160 Penske Auto Group, Inc. + ........................... 491,650 10,954 Regis Corp. ......................................... 239,600 8,051 Rent-A-Center, Inc. ## + ............................ 601,050 9,617 Sonic Automotive, Inc., A Shares + .................. 543,800 13,736 Stage Stores, Inc. + ................................ 96,320 1,807 Williams-Sonoma, Inc. + ............................. 84,200 2,647 Zale Corp. ## + ..................................... 578,900 12,203 ---------- 204,064 ---------- TEXTILES & APPAREL - 2.05% Brown Shoe Company, Inc. ............................ 154,700 3,156 Columbia Sportswear Co. + ........................... 32,456 1,582 Jones Apparel Group, Inc. + ......................... 583,200 12,212 Kenneth Cole Productions, Inc. + .................... 177,230 3,309 K-Swiss, Inc. + ..................................... 142,539 3,336 New York & Co., Inc. ## + ........................... 519,562 3,673 Skechers U.S.A., Inc. ## ............................ 90,200 2,218 Steven Madden Ltd. .................................. 68,000 1,516 Timberland Co. ## + ................................. 482,960 9,423 Warnaco Group, Inc. ## .............................. 280,200 11,401 Wolverine World Wide, Inc. .......................... 546,500 14,012 ---------- 65,838 ---------- TOTAL CONSUMER DISCRETIONARY ........................... 581,115 ---------- CONSUMER STAPLES - 2.56% FOOD & DRUG RETAILING - 1.35% Casey's General Stores, Inc. ........................ 239,660 6,831 Longs Drug Stores Corp. ............................. 285,640 14,999 Pathmark Stores, Inc. ## + .......................... 349,400 4,577 Performance Food Group Co. ## ....................... 98,650 2,663 Spartan Stores, Inc. + .............................. 455,700 10,130 Winn-Dixie Stores, Inc. ## + ........................ 168,200 3,976 ---------- 43,176 ---------- FOOD PRODUCTS - 1.07% Del Monte Foods Co. ................................. 1,081,300 11,181 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) JM Smucker Co. ...................................... 39,410 $ 2,106 Lance, Inc. ......................................... 147,880 3,132 Ralcorp Holdings, Inc. ## ........................... 263,130 14,814 Sensient Technologies Corp. ......................... 95,850 2,865 Smithfield Foods, Inc. ## ........................... 5,200 149 ---------- 34,247 ---------- HOUSEHOLD PRODUCTS - 0.03% Central Garden and Pet Co. ## + ..................... 114,700 954 ---------- TOBACCO - 0.11% Universal Corp. + ................................... 75,300 3,670 ---------- TOTAL CONSUMER STAPLES ................................. 82,047 ---------- ENERGY - 5.42% ENERGY EQUIPMENT & SERVICES - 2.26% Basic Energy Services, Inc. ## + .................... 112,400 2,224 CARBO Ceramics, Inc. + .............................. 160,480 7,209 Dril-Quip, Inc. ## .................................. 72,260 3,854 Grey Wolf, Inc. ## .................................. 511,200 2,878 Gulfmark Offshore, Inc. ## + ........................ 62,900 2,930 Helmerich & Payne, Inc. + ........................... 313,500 9,913 Oil States International, Inc. ## + ................. 356,770 15,409 Patterson-UTI Energy, Inc. ## ....................... 43,200 861 Superior Well Services, Inc. ## + ................... 242,620 4,949 Tetra Technologies, Inc. ## + ....................... 155,600 3,064 Tidewater, Inc. + ................................... 185,700 10,152 Unit Corp. ## ....................................... 193,950 9,265 ---------- 72,708 ---------- OIL & GAS - 3.16% Alon USA Energy, Inc. + ............................. 70,766 2,602 Berry Petroleum Co. + ............................... 98,000 4,775 Cabot Oil & Gas Corp. ............................... 37,120 1,473 Cimarex Energy Co. + ................................ 411,300 16,662 Edge Petroleum Corp. ## + ........................... 360,300 3,271 Encore Acquisition Co. ## + ......................... 342,800 12,581 EXCO Resources, Inc. ## + ........................... 948,800 16,016 Penn Virginia Corp. ................................. 207,640 10,050 Pioneer Drilling Co. ## + ........................... 514,900 6,271 St Mary Land & Exploration Co. ...................... 238,900 10,120 Stone Energy Corp. ## ............................... 149,500 6,665 W&T Offshore, Inc. + ................................ 406,900 10,913 ---------- 101,399 ---------- TOTAL ENERGY ........................................... 174,107 ---------- See accompanying notes 8 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2007 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) FINANCIALS - 24.25% BANKS - 7.38% 1st Source Corp. + .................................. 20,300 $ 391 Alabama National Bancorp + .......................... 14,680 1,157 Anchor BanCorp Wisconsin, Inc. + .................... 49,838 1,226 Astoria Financial Corp. ............................. 368,200 9,570 BancorpSouth, Inc. .................................. 184,900 4,486 Bank of Hawaii Corp. + .............................. 193,600 10,292 BankAtlantic Bancorp, Inc. + ........................ 335,070 1,377 Cathay General Bancorp + ............................ 179,200 5,550 Chemical Financial Corp. + .......................... 129,731 3,243 Citizens Republic Bancorp, Inc. + ................... 540,460 8,226 City National Corp. ................................. 65,980 4,460 The Colonial BancGroup, Inc. + ...................... 49,700 953 Columbia Banking System, Inc. ....................... 91,100 2,830 Community Bank System, Inc. + ....................... 159,100 3,327 Community Trust Bancorp, Inc. + ..................... 30,400 886 Corus Bankshares, Inc. + ............................ 279,874 3,084 Cullen/Frost Bankers, Inc. + ........................ 162,524 8,643 CVB Financial Corp. + ............................... 450,147 5,276 Downey Financial Corp. + ............................ 135,800 5,531 F.N.B. Corp. + ...................................... 323,100 5,370 First Commonwealth Financial Corp. + ................ 203,500 2,338 First Horizon National Corp. + ...................... 39,800 1,038 First Indiana Corp. + ............................... 90,910 2,891 First Midwest Bancorp, Inc. + ....................... 99,400 3,348 FirstFed Financial Corp. ## + ....................... 12,700 543 FirstMerit Corp. + .................................. 286,940 6,083 Flagstar Bancorp, Inc. + ............................ 322,000 2,605 Flushing Financial Corp. + .......................... 112,840 1,918 Fulton Financial Corp. + ............................ 791,478 10,376 Hancock Holding Co. + ............................... 72,900 2,772 Harleysville National Corp. + ....................... 18,677 281 IBERIABANK Corp. + .................................. 64,200 3,182 International Bancshares Corp. + .................... 346,250 7,569 Intervest Bancshares Corp. .......................... 95,340 1,992 National Penn Bancshares, Inc. + .................... 210,525 3,549 NBT Bancorp, Inc. + ................................. 169,106 4,172 Old National Bancorp + .............................. 254,500 4,253 Pacific Capital Bancorp NA + ........................ 438,320 9,086 Park National Corp. + ............................... 72,700 5,762 PFF Bancorp, Inc. + ................................. 74,800 797 Provident Bankshares Corp. + ........................ 198,300 4,892 S&T Bancorp, Inc. + ................................. 9,164 304 Southwest Bancorp, Inc. ............................. 101,970 1,930 Sterling Bancshares, Inc. + ......................... 936,230 11,422 Susquehanna Bancshares, Inc. + ...................... 278,700 5,621 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) TierOne Corp. + ..................................... 23,900 $ 546 TrustCo Bank Corp N.Y. + ............................ 50,900 537 Trustmark Corp. + ................................... 305,960 8,258 Umpqua Holdings Corp. + ............................. 56,700 960 United Bankshares, Inc. + ........................... 152,571 4,623 Washington Federal, Inc. ............................ 690,744 16,688 Washington Trust Bancorp, Inc. + .................... 24,370 608 Webster Financial Corp. ............................. 291,000 10,546 WesBanco, Inc. + .................................... 65,100 1,502 Whitney Holding Corp. + ............................. 236,545 6,070 Wilmington Trust Corp. .............................. 53,080 1,931 ---------- 236,871 ---------- DIVERSIFIED FINANCIALS - 3.29% AmeriCredit Corp. ## + .............................. 306,275 4,321 Apollo Investment Corp. + ........................... 450,900 9,379 Ares Capital Corp. + ................................ 457,800 7,618 Asta Funding, Inc. + ................................ 183,800 6,532 CompuCredit Corp. ## + .............................. 261,300 5,208 Credit Acceptance Corp. ## + ........................ 47,734 1,069 Ezcorp, Inc. ## + ................................... 525,550 6,916 Financial Federal Corp. + ........................... 256,100 6,920 IndyMac Bancorp, Inc. + ............................. 268,006 3,597 Investment Technology Group, Inc. ## + .............. 269,000 11,271 Jackson Hewitt Tax Service, Inc. .................... 64,600 2,019 Knight Capital Group, Inc. ## ....................... 489,600 6,565 MCG Capital Corp. + ................................. 744,300 10,428 Nelnet, Inc. + ...................................... 202,900 3,770 Piper Jaffray Co. ## + .............................. 162,213 8,338 Raymond James Financial, Inc. ....................... 58,200 2,168 Texas Capital Bancshares, Inc. ## + ................. 99,430 2,200 World Acceptance Corp. ## + ......................... 229,850 7,415 ---------- 105,734 ---------- INSURANCE - 10.08% Alfa Corp. + ........................................ 186,067 3,386 American Equity Investment Life Holding Co. + .. .... 303,800 2,968 American Financial Group, Inc. ...................... 160,900 4,811 American National Insurance Co. ..................... 11,600 1,500 Argo Group International Holdings Ltd. ## ........... 160,607 6,844 Aspen Insurance Holdings Ltd. ....................... 594,920 16,277 Assured Guaranty Ltd. ............................... 544,360 12,558 CNA Surety Corp. ## ................................. 194,700 3,853 Commerce Group, Inc. + .............................. 337,000 12,297 Conseco, Inc. ## .................................... 1,012,999 15,995 Delphi Financial Group, Inc. + ...................... 446,850 17,315 Employers Holdings, Inc. + .......................... 455,600 8,729 FBL Financial Group, Inc. ........................... 153,748 6,224 See accompanying notes 9 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2007 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) Hanover Insurance Group, Inc. ....................... 563,800 $ 25,974 Harleysville Group, Inc. ............................ 162,904 5,078 HCC Insurance Holdings, Inc. ........................ 265,750 7,943 Horace Mann Educators Corp. ......................... 373,000 7,717 Infinity Property and Casualty Corp. ................ 103,098 4,147 KMG America Corp. ## ................................ 360,000 2,185 LandAmerica Financial Group, Inc. + ................. 70,700 1,965 Mercury General Corp. ............................... 273,200 14,018 Midland Co. + ....................................... 96,165 6,118 National Western Life Insurance Co. + ............... 2,400 522 Navigators Group, Inc. ## ........................... 222,900 13,441 Odyssey Re Holdings Corp. + ......................... 384,000 14,277 Philadelphia Consolidated Holding Co. ## ............ 160,410 6,545 Phoenix Cos., Inc. .................................. 365,400 5,035 PMA Capital Corp. ## + .............................. 224,300 2,221 Presidential Life Corp. ............................. 153,800 2,708 Protective Life Corp. ............................... 289,980 12,431 Reinsurance Group of America, Inc. + ................ 253,300 14,471 RLI Corp. + ......................................... 46,400 2,699 Safety Insurance Group, Inc. ........................ 86,500 3,111 Security Capital Assurance Ltd. + ................... 285,450 3,745 Selective Insurance Group, Inc. ..................... 199,200 4,843 StanCorp Financial Group, Inc. ...................... 450,250 24,822 State Auto Financial Corp. .......................... 117,400 3,231 Stewart Information Services Corp. .................. 279,600 8,108 United America Indemnity Ltd. ## .................... 281,297 6,203 United Fire & Casualty, Co. ......................... 81,700 2,618 Unitrin, Inc. ....................................... 103,300 4,784 ---------- 323,717 ---------- REAL ESTATE - 3.50% Alexandria Real Estate Equities, Inc. ............... 19,570 2,018 American Financial Realty Trust ..................... 285,750 1,926 Anthracite Capital, Inc. ............................ 327,500 2,725 Bluegreen Corp. ## + ................................ 359,900 2,710 Brookfield Homes Corp. + ............................ 76,870 1,155 California Coastal Communities, Inc. ## + ........... 198,500 1,921 CapLease, Inc. + .................................... 912,900 8,545 Care Investment Trust, Inc. ## + .................... 203,940 2,345 Corrections Corp of America ## ...................... 86,460 2,446 DiamondRock Hospitality Co. ......................... 612,600 11,737 Education Realty Trust, Inc. + ...................... 261,580 3,385 Entertainment Properties Trust ...................... 89,950 4,936 First Potomac Realty Trust + ........................ 141,610 2,960 Health Care Real Estate Investment Trust, Inc. ...... 52,520 2,326 LaSalle Hotel Properties + .......................... 251,780 10,404 Lexington Realty Trust .............................. 638,920 12,644 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) MI Developments, Inc. ............................... 425,100 $ 13,633 Mission West Properties, Inc. + ..................... 179,380 2,151 Redwood Trust, Inc. + ............................... 199,140 5,247 St. Joe Co. + ....................................... 42,100 1,425 Strategic Hotel Capital, Inc. + ..................... 199,750 4,363 Sunstone Hotel Investors, Inc. ...................... 407,250 11,326 ---------- 112,328 ---------- TOTAL FINANCIALS ....................................... 778,650 ---------- HEALTH CARE - 4.96% BIOTECHNOLOGY - 0.29% Charles River Laboratories International, Inc. ## ... 65,430 3,795 Invitrogen Corp. ## ................................. 58,810 5,344 ---------- 9,139 ---------- HEALTH CARE EQUIPMENT & SUPPLIES - 0.18% Hillenbrand Industries, Inc. ........................ 20,300 1,121 Kensey Nash Corp. ## ................................ 63,950 1,750 Medical Action Industries, Inc. ## .................. 135,440 2,784 ---------- 5,655 ---------- HEALTH CARE PROVIDERS & SERVICES - 3.15% Air Methods Corp. ## + .............................. 104,810 5,657 Amedisys, Inc. ## + ................................. 89,250 3,789 AMERIGROUP Corp. ## ................................. 182,200 6,377 Apria Healthcare Group, Inc. ## ..................... 185,700 4,488 Gentiva Health Services, Inc. ## .................... 119,450 2,267 HealthSouth Corp. ## + .............................. 165,480 3,318 Healthspring, Inc. ## ............................... 157,500 3,308 LifePoint Hospitals, Inc. ## + ...................... 682,740 20,837 Lincare Holdings, Inc. ## + ......................... 27,500 956 Magellan Health Services, Inc. ## ................... 188,700 7,944 MAXIMUS, Inc. ....................................... 376,900 18,061 MDS, Inc. ........................................... 88,700 1,995 Odyssey HealthCare, Inc. ## ......................... 311,980 3,198 Pediatrix Medical Group, Inc. ## .................... 163,350 10,699 Res-Care, Inc. ## ................................... 225,960 5,550 Universal Health Services, Inc. ..................... 56,400 2,749 ---------- 101,193 ---------- PHARMACEUTICALS - 1.34% Aspreva Pharmaceuticals Corp. ## + .................. 350,300 8,926 Endo Pharmaceuticals Holdings, Inc. ## .............. 30,800 902 King Pharmaceuticals, Inc. ## ....................... 396,900 4,207 KV Pharmaceutical Co. ## + .......................... 119,290 3,739 Medicines Co. ## + .................................. 178,770 3,423 NBTY, Inc. ## ....................................... 337,600 12,019 See accompanying notes 10 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2007 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) Sciele Pharma, Inc. ## + ............................ 389,000 $ 9,896 ---------- 43,112 ---------- TOTAL HEALTH CARE ...................................... 159,099 ---------- INDUSTRIALS - 16.80% AEROSPACE & DEFENSE - 0.97% Alliant Techsystems, Inc. ## + ...................... 19,810 2,187 BE Aerospace, Inc. ## ............................... 190,900 9,490 Curtiss-Wright Corp. ................................ 126,690 7,131 Esterline Technologies Corp. ## ..................... 119,610 6,552 Moog, Inc. ## + ..................................... 122,230 5,641 ---------- 31,001 ---------- BUILDING PRODUCTS - 1.32% Builders FirstSource, Inc. ## + ..................... 166,300 1,206 Crane Co. ........................................... 128,300 6,087 Drew Industries, Inc. ## + .......................... 86,610 3,428 Griffon Corp. ## + .................................. 159,700 2,464 Insituform Technologies, Inc. ## + .................. 503,570 7,080 Lennox International, Inc. .......................... 283,300 10,114 NCI Building Systems, Inc. ## + ..................... 106,800 4,184 Simpson Manufacturing Co., Inc. + ................... 171,100 5,131 Universal Forest Products, Inc. + ................... 75,392 2,700 ---------- 42,394 ---------- COMMERCIAL SERVICES & SUPPLIES - 5.84% American Ecology Corp. + ............................ 158,050 3,784 Bowne & Co., Inc. + ................................. 294,680 5,122 Brink's Co. + ....................................... 40,220 2,520 Casella Waste Systems, Inc. ## ...................... 327,930 4,830 Clean Harbors, Inc. ## + ............................ 198,850 9,789 Consolidated Graphics, Inc. ## ...................... 102,150 6,536 Con-way, Inc. ....................................... 428,600 18,263 Deluxe Corp. ........................................ 278,700 11,243 Ennis, Inc. + ....................................... 137,200 2,804 Headwaters, Inc. ## + ............................... 226,400 3,249 Heidrick & Struggles International, Inc. ............ 50,000 2,161 Herman Miller, Inc. ................................. 146,400 3,985 Hewitt Associates, Inc. ## .......................... 50,200 1,771 Hudson Highland Group, Inc. ## ...................... 510,400 5,859 Kelly Services, Inc. ................................ 488,800 10,279 Kforce, Inc. ## ..................................... 427,700 5,150 Korn/Ferry International ## ......................... 133,100 2,550 Labor Ready, Inc. ## + .............................. 246,700 4,337 LECG Corp. ## + ..................................... 609,710 10,676 McGrath Rentcorp + .................................. 130,488 4,473 Mobile Mini, Inc. ## + .............................. 335,450 6,015 Navigant Consulting, Inc. ## + ...................... 317,300 4,182 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) PHH Corp. ## + ...................................... 318,600 $ 7,124 Pre-Paid Legal Services, Inc. ## .................... 89,370 5,326 Providence Service Corp. ## + ....................... 171,360 5,448 Spherion Corp. ## ................................... 371,900 3,243 Steelcase, Inc., A Shares ........................... 136,270 2,435 TAL International Group, Inc. ## + .................. 33,900 800 Tetra Tech, Inc. ## ................................. 137,040 3,200 United Stationers, Inc. ## .......................... 81,050 4,694 Valassis Communications, Inc. ## + .................. 1,831,200 18,037 Waste Connections, Inc. ## + ........................ 228,050 7,710 ---------- 187,595 ---------- CONSTRUCTION & ENGINEERING - 0.14% Comfort Systems USA, Inc. ........................... 124,892 1,826 Granite Construction, Inc. .......................... 29,210 1,251 Quanta Services, Inc. ## + .......................... 42,400 1,399 ---------- 4,476 ---------- DIVERSIFIED MANUFACTURING - 0.62% Barnes Group, Inc. + ................................ 143,050 5,254 Kennametal, Inc. .................................... 160,450 14,635 ---------- 19,889 ---------- ELECTRICAL EQUIPMENT - 1.43% A.O. Smith Corp. + .................................. 120,200 4,494 Anixter International, Inc. ## + .................... 63,959 4,596 Brady Corp. + ....................................... 203,200 7,498 Regal-Beloit Corp. + ................................ 570,000 27,953 Thomas & Betts Corp. ## ............................. 26,090 1,461 ---------- 46,002 ---------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.47% Diebold, Inc. ....................................... 310,000 12,970 PerkinElmer, Inc. ................................... 76,640 2,109 ---------- 15,079 ---------- FREIGHT TRANSPORTATION - 0.56% Pacer International, Inc. + ......................... 191,300 2,820 Ryder System, Inc. .................................. 319,200 15,273 ---------- 18,093 ---------- INDUSTRIAL CONGLOMERATES - 0.23% Carlisle Cos., Inc. ................................. 184,150 7,265 ---------- MACHINERY - 3.04% Actuant Corp. + ..................................... 27,400 1,890 Blount International, Inc. ## ....................... 35,700 437 Flowserve Corp. ..................................... 338,200 26,704 Harsco Corp. ........................................ 255,000 15,458 Kaydon Corp. + ...................................... 326,400 17,557 Lincoln Electric Holdings, Inc. ..................... 10,700 773 Miller Industries, Inc. ## .......................... 231,100 3,353 See accompanying notes 11 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2007 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) Mueller Industries, Inc. ............................ 223,810 $ 8,048 NACCO Industries, Inc. ## ........................... 9,200 953 Reliance Steel & Aluminum Co. + ..................... 42,200 2,463 Timken Co. .......................................... 604,400 20,102 ---------- 97,738 ---------- MARINE - 0.65% Alexander & Baldwin, Inc. + ......................... 34,100 1,786 Hornbeck Offshore Services, Inc. ## + ............... 42,700 1,670 Kirby Corp. ## ...................................... 293,400 13,402 Overseas Shipholding Group, Inc. + .................. 54,000 4,018 ---------- 20,876 ---------- RENTAL AUTO/EQUIPMENT - 0.46% Avis Budget Group, Inc. ## .......................... 134,400 2,805 United Rentals, Inc. ## ............................. 347,200 11,871 ---------- 14,676 ---------- ROAD & RAIL - 0.80% Arkansas Best Corp. + ............................... 134,000 3,678 Covenant Transport Group, Inc. ## + ................. 170,500 1,292 GATX Corp. .......................................... 17,000 697 Werner Enterprises, Inc. + .......................... 378,500 7,199 YRC Worldwide, Inc. ## + ............................ 525,400 12,914 ---------- 25,780 ---------- TRADING COMPANIES & DISTRIBUTORS - 0.07% MSC Industrial Direct Co., Inc. ..................... 42,570 2,074 ---------- TRANSPORT-SERVICES - 0.20% Bristow Group, Inc. ## + ............................ 126,600 6,316 ---------- TOTAL INDUSTRIALS ...................................... 539,254 ---------- INFORMATION TECHNOLOGY - 12.27% COMMUNICATIONS EQUIPMENT - 1.15% ADC Telecommunications, Inc. ## ..................... 23,300 436 Avocent Corp. ## + .................................. 245,600 6,638 Comtech Telecommunications Corp. ## + ............... 134,120 7,276 Emulex Corp. ## ..................................... 364,260 7,890 Foundry Networks, Inc. ## ........................... 321,030 6,786 Plantronics, Inc. + ................................. 100,900 2,760 Powerwave Technologies, Inc. ## + ................... 926,780 5,153 ---------- 36,939 ---------- COMPUTERS & PERIPHERALS - 1.91% Avid Technology, Inc. ## + .......................... 177,910 5,229 Cray, Inc. ## + ..................................... 312,960 1,900 Electronics for Imaging, Inc. ## .................... 372,050 8,483 Hutchinson Technology, Inc. ## + .................... 99,970 2,372 Ingram Micro, Inc. ## ............................... 1,566,450 33,271 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) Mercury Computer Systems, Inc. ## + .................... 631,650 $ 9,879 ---------- 61,134 ---------- ELECTRONIC COMPONENTS - 0.79% II-VI, Inc. ## + .................................... 117,730 4,090 Plexus Corp. ## + ................................... 829,500 21,401 ---------- 25,491 ---------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 2.75% Benchmark Electronics, Inc. ## ...................... 892,350 18,302 IKON Office Solutions, Inc. ......................... 874,600 11,545 Littelfuse, Inc. ## ................................. 337,200 10,733 Methode Electronics, Inc. + ......................... 746,000 9,355 MTS Systems Corp. ................................... 108,630 4,833 Rogers Corp. ## + ................................... 85,920 4,213 TTM Technologies, Inc. ## ........................... 858,970 11,020 Vishay Intertechnology, Inc. ## ..................... 1,447,900 18,229 ---------- 88,230 ---------- INTERNET SOFTWARE & SERVICES - 0.53% Netgear, Inc. ## + .................................. 214,875 7,594 NIC, Inc. + ......................................... 426,380 3,104 United Online, Inc. + ............................... 360,480 6,344 ---------- 17,042 ---------- IT CONSULTING & SERVICES - 1.09% BearingPoint, Inc. ## + ............................. 429,000 2,055 ManTech International Corp. ## ...................... 177,250 7,047 MPS Group, Inc. ## .................................. 587,900 7,178 Perot Systems Corp. ## .............................. 191,480 2,796 Phase Forward, Inc. ## .............................. 229,480 5,459 SRA International, Inc. ## .......................... 224,720 6,171 SYNNEX Corp. ## + ................................... 168,200 3,763 Unisys Corp. ## + ................................... 83,100 505 ---------- 34,974 ---------- SEMICONDUCTOR EQUIPMENT & PRODUCTS - 2.32% Advanced Energy Industries, Inc. ## ................. 167,216 2,676 Brooks Automation, Inc. ## + ........................ 832,100 10,801 Cirrus Logic, Inc. ## ............................... 490,770 3,018 Cymer, Inc. ## + .................................... 93,630 3,979 FEI Co. ## + ........................................ 215,020 6,238 Integrated Device Technology, Inc. ## ............... 125,250 1,682 Micrel, Inc. ........................................ 396,730 3,590 Microsemi Corp. ## + ................................ 310,150 8,253 MKS Instruments, Inc. ## ............................ 840,360 16,874 Novellus Systems, Inc. ## ........................... 34,000 966 Photronics, Inc. ## ................................. 121,200 1,326 RF Micro Devices, Inc. ## + ......................... 730,500 4,544 Rudolph Technologies, Inc. ## + ..................... 173,120 2,256 Semtech Corp. ## .................................... 291,990 4,996 See accompanying notes 12 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2007 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) Teradyne, Inc. ## ................................... 271,960 $ 3,356 ---------- 74,555 ---------- SOFTWARE - 1.73% Aspen Technology, Inc. ## ........................... 316,480 5,520 Computer Programs and Systems, Inc. + ............... 67,460 1,671 Epicor Software Corp. ## + .......................... 252,380 2,948 EPIQ Systems, Inc. ## + ............................. 164,019 3,180 Fair Isaac Corp. + .................................. 130,830 4,961 Mentor Graphics Corp. ## + .......................... 1,185,500 18,992 Novell, Inc. ## ..................................... 618,000 4,672 Parametric Technology Corp. ## ...................... 319,050 6,094 Sybase, Inc. ## ..................................... 264,340 7,560 ---------- 55,598 ---------- TOTAL INFORMATION TECHNOLOGY ........................... 393,963 ---------- MATERIALS - 5.28% CHEMICALS - 2.59% Cytec Industries, Inc. .............................. 28,700 1,914 FMC Corp. ........................................... 467,840 26,901 Georgia Gulf Corp. + ................................ 599,400 7,253 H.B. Fuller Co. ..................................... 213,000 6,269 Hercules, Inc. ...................................... 126,900 2,387 International Flavors & Fragrances, Inc. ............ 21,700 1,133 Olin Corp. + ........................................ 395,200 9,003 PolyOne Corp. ## .................................... 1,502,200 12,003 RPM International, Inc. ............................. 116,700 2,501 Spartech Corp. ...................................... 53,700 825 Tronox, Inc. + ...................................... 397,900 3,321 UAP Holding Corp. ................................... 37,800 1,203 Westlake Chemical Corp. + ........................... 349,800 8,584 ---------- 83,297 ---------- CONSTRUCTION MATERIALS - 0.24% Ameron International Corp. + ........................ 48,600 5,243 U.S. Concrete, Inc. ## + ............................ 467,000 2,316 ---------- 7,559 ---------- CONTAINERS & PACKAGING - 0.06% Silgan Holdings, Inc. ............................... 37,958 2,071 ---------- METALS & MINING - 2.13% AMCOL International Corp. + ......................... 95,610 3,857 Century Aluminum Co. ## + ........................... 245,500 14,286 Compass Minerals International, Inc. + .............. 100,990 3,728 Foundation Coal Holdings, Inc. ...................... 177,300 7,574 Gibraltar Industries, Inc. + ........................ 511,150 9,211 GrafTech Int'l Ltd. ## .............................. 557,000 10,527 Metal Management, Inc. .............................. 124,580 6,549 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) Quanex Corp. + ...................................... 7,475 $ 308 USEC, Inc. ## + ..................................... 329,000 2,895 Worthington Industries, Inc. + ...................... 379,300 9,482 ---------- 68,417 ---------- PAPER & FOREST PRODUCTS - 0.26% Glatfelter + ........................................ 194,440 3,125 Neenah Paper, Inc. + ................................ 97,370 3,311 Wausau Paper Corp. + ................................ 185,730 1,859 ---------- 8,295 ---------- TOTAL MATERIALS ........................................ 169,639 ---------- TELECOMMUNICATION SERVICES - 0.48% DIVERSIFIED TELECOMMUNICATION - 0.48% Cincinnati Bell, Inc. ## ............................ 2,028,510 10,994 EMS Technologies, Inc. ## ........................... 31,320 878 Harris Stratex Networks, Inc. ## + .................. 185,440 3,546 ---------- TOTAL TELECOMMUNICATION SERVICES ....................... 15,418 ---------- UTILITIES - 6.25% ELECTRIC UTILITIES - 4.18% ALLETE, Inc. ........................................ 84,400 3,687 Black Hills Corp. + ................................. 286,160 12,711 El Paso Electric Co. ## ............................. 160,890 3,918 Great Plains Energy, Inc. + ......................... 666,400 19,885 Hawaiian Electric Industries, Inc. + ................ 71,070 1,649 Idacorp, Inc. + ..................................... 235,800 8,227 NSTAR ............................................... 444,300 15,622 OGE Energy Corp. .................................... 389,200 14,906 PNM Resources, Inc. ................................. 547,010 13,681 Portland General Electric Co. ....................... 489,870 13,790 Puget Energy, Inc. .................................. 402,800 11,379 TECO Energy, Inc. ................................... 97,600 1,643 Westar Energy, Inc. + ............................... 488,600 13,006 ---------- 134,104 ---------- GAS UTILITIES - 2.05% AGL Resources, Inc. ................................. 477,640 18,881 Atmos Energy Corp. .................................. 454,330 12,744 Integrys Energy Group, Inc. + ....................... 166,800 8,976 Laclede Group, Inc. + ............................... 115,300 4,011 New Jersey Resources Corp. + ........................ 41,600 2,049 Nicor, Inc. + ....................................... 135,300 5,854 Southwest Gas Corp. ................................. 56,100 1,670 UGI Corp. ........................................... 46,330 1,233 Vectren Corp. + ..................................... 111,500 3,127 WGL Holdings, Inc. .................................. 212,500 7,208 ---------- 65,753 ---------- See accompanying notes 13 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2007 SHARES VALUE ------------ ---------- (DOLLARS IN THOUSANDS) WATER UTILITIES - 0.02% SJW Corp. + ......................................... 18,900 $ 660 ---------- TOTAL UTILITIES ..................................... 200,517 ---------- TOTAL COMMON STOCKS ................................. 3,098,961 ---------- SHORT TERM INVESTMENTS - 2.90% American Beacon Money Market Select Fund ++ ......... 87,216,028 87,216 PAR AMOUNT ------------ United States Treasury Bill, 3.873%, Due 12/6/2007 # .................................. $ 6,055 6,030 ---------- TOTAL SHORT TERM INVESTMENTS 93,246 ---------- SHARES ------------ SECURITIES LENDING COLLATERAL - 24.47% American Beacon Cash Plus Trust ++ .................. 566,652,604 566,653 American Beacon Money Market Select Fund ++ ......... 219,001,045 219,001 ---------- TOTAL SECURITIES LENDING COLLATERAL 785,654 ---------- TOTAL INVESTMENTS 123.90% - (COST $3,769,167) 3,977,861 LIABILITIES, NET OF OTHER ASSETS - (23.90%) (767,421) ---------- TOTAL NET ASSETS - 100.00% $3,210,440 ========== 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, 2007. ++ The Fund/Trust is affiliated by having the same investment advisor. # At October 31, 2007, security pledged as collateral for open futures contracts. FUTURES CONTRACTS (DOLLARS IN THOUSANDS) UNREALIZED NUMBER OF EXPIRATION MARKET APPRECIATION/ CONTRACTS DATE VALUE (DEPRECIATION) --------- ---------- ------- -------------- Emini Mini Russell ......... 1,139 Dec 2007 $93,250 $ 1,694 ======= ============== See accompanying notes 14 AMERICAN BEACON SMALL CAP VALUE FUND(SM) STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2007 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS: Investments in unaffiliated securities, at value (A C) ........ $ 3,104,991 Investments in affiliated securities, at value (B) ............ 872,870 Cash .......................................................... 25 Receivable for investments sold ............................... 25,746 Dividends and interest receivable ............................. 2,194 Receivable for fund shares sold ............................... 3,177 Receivable for variation margin on open futures contracts ..... 1,569 Prepaid expenses .............................................. 28 ----------- TOTAL ASSETS ............................................... 4,010,600 ----------- LIABILITIES: Payable for investments purchased ............................. 1,582 Payable upon return of securities loaned ...................... 785,678 Payable for fund shares redeemed .............................. 6,631 Management and investment advisory fees payable (Note 2) ...... 4,889 Administrative service and service fees payable ............... 920 Other liabilities ............................................. 460 ----------- TOTAL LIABILITIES .......................................... 800,160 ----------- NET ASSETS ....................................................... $ 3,210,440 =========== ANALYSIS OF NET ASSETS: Paid-in-capital ............................................... 2,645,713 Undistributed net investment income ........................... 20,863 Accumulated net realized gain ................................. 333,477 Unrealized appreciation of investments, futures contracts, and foreign currency ....................................... 210,387 ----------- NET ASSETS ....................................................... $ 3,210,440 =========== SHARES OUTSTANDING (NO PAR VALUE): Institutional Class ........................................... 63,963,406 =========== PlanAhead Class ............................................... 60,884,412 =========== Service Class ................................................. 3,221,051 =========== AMR Class ..................................................... 18,661,122 =========== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE: Institutional Class ........................................... $ 22.10 =========== PlanAhead Class ............................................... $ 21.62 =========== Service Class ................................................. $ 21.46 =========== AMR Class ..................................................... $ 22.05 =========== - ---------- A Cost of investments in unaffiliated securities ................. $ 2,896,297 B Cost of investments in affiliated securities ................... $ 872,870 C Market value of securities on loan ............................. $ 785,719 See accompanying notes 15 AMERICAN BEACON SMALL CAP VALUE FUND(SM) STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 2007 (IN THOUSANDS) INVESTMENT INCOME: Dividend income from unaffiliated securities (net of foreign taxes)* ..................................................... $ 47,945 Dividend income from affiliated securities ..................... 8,530 Interest income ................................................ 652 Income derived from securities lending, net .................... 2,449 --------- TOTAL INVESTMENT INCOME ..................................... 59,576 --------- EXPENSES: Management and investment advisory fees (Note 2) ............... 17,225 Administrative service fees (Note 2): Institutional Class ......................................... 3,665 PlanAhead Class ............................................. 3,533 Service Class ............................................... 186 Transfer agent fees: Institutional Class ......................................... 199 PlanAhead Class ............................................. 110 Service Class ............................................... 23 AMR Class ................................................... 15 Custody and fund accounting fees ............................... 290 Professional fees .............................................. 84 Registration fees and expenses ................................. 79 Service fees: PlanAhead Class (Note 2) .................................... 3,533 Service Class (Note 2) ...................................... 186 Distribution fees - Service Class (Note 2) ..................... 186 Prospectus and shareholder reports ............................. 383 Other expenses ................................................. 327 --------- TOTAL EXPENSES .............................................. 30,024 --------- Net fees recouped by Manager (Note 2) .......................... 2 --------- NET EXPENSES ................................................ 30,026 --------- NET INVESTMENT INCOME ............................................. 29,550 --------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from: Investments ................................................. 335,707 Commission recapture (Note 1) ............................... 215 Futures contracts ........................................... 8,773 Change in net unrealized appreciation or depreciation of: Investments ................................................. (180,299) Futures contracts ........................................... (2,575) --------- NET GAIN ON INVESTMENTS .................................. 161,821 --------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............. $ 191,371 ========= * Foreign taxes ................................................ $ 40 See accompanying notes 16 AMERICAN BEACON SMALL CAP VALUE FUND(SM) STATEMENT OF CHANGES OF NET ASSETS (IN THOUSANDS) Year Ended Year Ended October 31, October 31, 2007 2006 ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income .......................................... $ 29,550 $ 23,105 Net realized gain on investments, futures contracts, and foreign currency transactions ....................................... 344,695 202,671 Change in net unrealized appreciation or (depreciation) of investments, futures contracts, and foreign currency translations ................................................ (182,874) 212,133 ---------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........ 191,371 437,909 ---------- ---------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class ......................................... (10,903) (7,101) PlanAhead Class ............................................. (8,142) (6,167) Service Class ............................................... (295) (139) AMR Class ................................................... (4,490) (3,772) Net realized gain on investments: Institutional Class ......................................... (90,742) (46,081) PlanAhead Class ............................................. (94,401) (59,088) Service Class ............................................... (5,063) (2,120) AMR Class ................................................... (28,623) (17,954) ---------- ---------- NET DISTRIBUTIONS TO SHAREHOLDERS ........................ (242,659) (142,422) ---------- ---------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares .................................. 808,393 721,048 Reinvestment of dividends and distributions .................... 237,930 138,617 Cost of shares redeemed ........................................ (920,892) (886,291) ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS .......................................... 125,431 (26,626) ---------- ---------- NET INCREASE IN NET ASSETS ........................................ 74,143 268,861 ---------- ---------- NET ASSETS: Beginning of period ............................................ 3,136,297 2,867,436 ---------- ---------- END OF PERIOD * ................................................ $3,210,440 $3,136,297 ========== ========== * Includes undistributed net investment income of ................. $ 20,863 $ 17,578 ========== ========== See accompanying notes 17 AMERICAN BEACON SMALL CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 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, as amended (the "Act"), as a no load, diversified, 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 Administrative Service Fee - 0.25% investment of $2 million PLANAHEAD CLASS General public and investors Administrative Service Fee - 0.25% investing through an 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 N/A benefit 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. 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 independent 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 Trust's Board of Trustees (the "Board"). 18 AMERICAN BEACON SMALL CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 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. 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 at least annually. Distributions, if any, of net realized capital gains are generally paid at least 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. 19 AMERICAN BEACON SMALL CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 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, the Manager does not anticipate the adoption of FIN 48 to have a material impact on the financial statements. 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, 2007, the Manager does not believe the adoption of FAS 157 will materially 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. 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 that 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, 2007 were as follows (dollars in thousands): AMOUNTS PAID TO NET AMOUNTS MANAGEMENT FEE RATE MANAGEMENT FEE INVESTMENT ADVISORS RETAINED BY MANAGER - ------------------- -------------- ------------------- ------------------- 0.35%-0.60% $17,225 $13,810 $3,415 20 AMERICAN BEACON SMALL CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 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, 2007, securities lending fees paid to the Manager were $421,111. Administrative Services Agreement The Manager and the Trust entered into an Administrative Services Agreement which obligates the Manager to provide or oversee administrative 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 Fund, 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 and administrative service fees received by the Manager and the investment advisors hired by the Manager to be used for distribution purposes. Under this Plan, the Fund does not intend to compensate the Manager or any other party, either directly or indirectly, for the distribution of Fund 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 issued 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") (collectively, the "Affiliated Funds"). The Fund and 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, 2007, the Manager earned fees from the Affiliated Funds totaling $161,994 on the Fund's direct investment in the Affiliated Funds and $821,430 from the Fund's securities lending collateral invested in the Affiliated Funds. 21 AMERICAN BEACON SMALL CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 Interfund Lending Program Pursuant to an exemptive order issued 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. For the year ended October 31, 2007, the Fund did not utilize the credit facility. 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's average net assets have grown or expenses have declined sufficiently to allow reimbursement without causing its expense ratio to exceed the previously agreed upon contractual expense limit. During the year ended October 31, 2007, the Manager recouped prior fee waivers totaling $1,801. There are no further fee waivers or reimbursed expenses with respect to the Fund that are subject to potential recovery. Other At October 31, 2007, AMR Corporation and subsidiary companies and employee benefit trusts thereof owned 13% 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 fiscal years ended October 31, 2007 and October 31, 2006 were as follows (in thousands): YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, 2007 2006 ----------- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME* Institutional Class .......................... $ 36,981 $ 20,806 PlanAhead Class .............................. 35,272 23,742 Service Class ................................ 1,750 770 AMR Class .................................... 12,717 9,112 LONG-TERM CAPITAL GAIN Institutional Class .......................... 64,664 32,376 PlanAhead Class .............................. 67,270 41,513 Service Class ................................ 3,608 1,489 AMR Class .................................... 20,397 12,614 -------- -------- TOTAL DISTRIBUTIONS PAID ........................... $242,659 $142,422 ======== ======== * For tax purposes, short-term capital gains are considered ordinary income distributions. 22 AMERICAN BEACON SMALL CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 As of October 31, 2007, the components of distributable earnings on a tax basis were as follows (in thousands): Cost basis of investments for federal income tax purposes ......... $3,781,909 Unrealized appreciation ........................................... 484,995 Unrealized depreciation ........................................... (289,043) ---------- Net unrealized appreciation/(depreciation) ........................ 195,952 Undistributed ordinary income ..................................... 74,954 Undistributed long-term gain/(loss) ............................... 293,822 ---------- Distributable earnings ............................................ $ 564,728 ========== 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, 2007 (in thousands): Paid-in-capital ...................................................... $ -- Undistributed net investment income .................................. (2,435) Accumulated net realized gain (loss) ................................. 2,434 Unrealized appreciation (depreciation) of investments, futures contracts and foreign currency ............................ 1 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, 2007 were (in thousands) $1,679,480 and $1,731,448, respectively. A summary of the Fund's direct transactions in Affiliated Funds for the year ended October 31, 2007 is set forth below (in thousands): OCTOBER 31, 2006 OCTOBER 31, 2007 AFFILIATE SHARES/MARKET VALUE PURCHASES SALES SHARES/MARKET VALUE - --------- ------------------- ---------- ---------- ------------------- Select Fund $114,617 $1,335,450 $1,362,851 $87,216 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 borrowers and transaction costs. To 23 AMERICAN BEACON SMALL CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2007 the extent that a loan is secured by non-cash collateral, borrowers 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, 2007, the value of outstanding securities on loan and the value of collateral was as follows (in thousands): MARKET VALUE OF SECURITIES ON LOAN NON-CASH COLLATERAL CASH COLLATERAL - ------------------ ------------------- --------------- $785,719 $10,375 $785,678 Cash collateral is invested in a joint investment account, which is comprised of an investment in the Affiliated Funds. 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, 2007 INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS ------------------- ------------------- ----------------- ------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------- --------- ------- --------- ------ -------- ------ --------- Shares sold ................. 16,091 $ 361,583 12,210 $ 271,462 1,200 $ 26,348 6,699 $ 149,000 Reinvestment of dividends ... 4,613 98,950 4,782 100,509 256 5,358 1,551 33,113 Shares redeemed ............. (15,274) (343,946) (16,524) (363,461) (1,453) (31,825) (7,953) (181,660) ------- --------- ------- --------- ------ -------- ------ --------- Net increase (decrease) in shares outstanding ....... 5,430 $ 116,587 468 $ 8,510 3 $ (119) 297 $ 453 ======= ========= ======= ========= ====== ======== ====== ========= Year Ended October 31, 2006 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) ======= ========= ======= ========= ====== ======== ====== ======== 24 (This page intentionally left blank) 25 AMERICAN BEACON SMALL CAP VALUE FUND(SM) FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class --------------------------------------------------------- Year Ended October 31 --------------------------------------------------------- 2007 2006 2005(B) 2004(C) 2003(A) ---------- ---------- ---------- -------- ------- Net asset value, beginning of period .................... $ 22.53 $ 20.43 $ 18.85 $ 16.21 $ 11.28 ---------- ---------- ---------- -------- ------- Income from investment operations: Net investment income (loss) ......................... 0.22 0.19 0.11 0.07 (0.01) Net gains (losses) on securities (both realized and unrealized) .................... 1.10 2.94 2.31 3.09 5.24 ---------- ---------- ---------- -------- ------- Total income (loss) from investment operations .......... 1.32 3.13 2.42 3.16 5.23 ---------- ---------- ---------- -------- ------- Less distributions: Dividends from net investment income ................. (0.19) (0.14) (0.07) (0.08) (0.02) Distributions from net realized gains on Securities .. (1.56) (0.89) (0.77) (0.44) (0.28) ---------- ---------- ---------- -------- ------- Total distributions ..................................... (1.75) (1.03) (0.84) (0.52) (0.30) ---------- ---------- ---------- -------- ------- Net asset value, end of period .......................... $ 22.10 $ 22.53 $ 20.43 $ 18.85 $ 16.21 ========== ========== ========== ======== ======= Total return ............................................ 6.10% 15.80% 12.90% 19.86% 47.45% ========== ========== ========== ======== ======= Ratios and supplemental data: Net assets, end of period (in thousands) ............. $1,413,734 $1,319,024 $1,076,909 $429,540 $89,579 Ratios to average net assets (annualized): Expenses, net of waivers .......................... 0.80% 0.82% 0.87% 0.89% 0.89% Expenses before waivers ........................... 0.80% 0.82% 0.87% 0.89% 0.89% Net investment income, net of waivers ............. 0.94% 0.83% 0.66% 0.57% 0.60% Net investment income (loss), before Waivers ...... 0.94% 0.83% 0.66% 0.57% 0.60% Portfolio turnover rate .............................. 52% 48% 47% 35% 75% PlanAhead Class --------------------------------------------------------- Year Ended October 31 --------------------------------------------------------- 2007 2006 2005(B) 2004(C) 2003(A) ---------- ---------- ---------- -------- ------- Net asset value, beginning of period .................... $ 22.08 $ 20.04 $ 18.54 $ 15.95 $ 11.22 ---------- ---------- ---------- -------- ------- Income from investment operations: Net investment income (loss) ......................... 0.16 0.13 0.09 0.08 0.05 Net gains (losses) on securities (both realized and unrealized) .................... 1.07 2.89 2.24 2.98 5.08 ---------- ---------- ---------- -------- ------- Total income (loss) from investment operations .......... 1.23 3.02 2.33 3.06 5.13 ---------- ---------- ---------- -------- ------- Less distributions: Dividends from net investment income ................. (0.13) (0.09) (0.06) (0.03) (0.12) Distributions from net realized gains on Securities .. (1.56) (0.89) (0.77) (0.44) (0.28) ---------- ---------- ---------- -------- ------- Total distributions ..................................... (1.69) (0.98) (0.83) (0.47) (0.40) ---------- ---------- ---------- -------- ------- Net asset value, end of period .......................... $ 21.62 $ 22.08 $ 20.04 $ 18.54 $ 15.95 ========== ========== ========== ======== ======= Total return ............................................ 5.83% 15.56% 12.63% 19.56% 47.12% ========== ========== ========== ======== ======= Ratios and supplemental data: Net assets, end of period (in thousands) ............. $1,316,188 $1,333,814 $1,320,853 $466,364 $66,906 Ratios to average net assets (annualized): Expenses, net of waivers .......................... 1.05% 1.06% 1.10% 1.15% 1.16% Expenses before waivers ........................... 1.05% 1.06% 1.10% 1.15% 1.16% Net investment income, net of waivers ............. 0.70% 0.59% 0.42% 0.33% 0.39% Net investment income (loss), before Waivers ...... 0.70% 0.59% 0.42% 0.33% 0.39% Portfolio turnover rate .............................. 52% 48% 47% 35% 75% (A) Barrow, Hanley, Mewhinney & Strauss, Inc. was added as an investment advisor to the Small Cap Value Fund on September 18, 2003. (B) 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. (C) The Boston Company Asset Management, LLC was added as an investment advisor to the Small Cap Value Fund on September 27, 2004. (D) Not annualized. (E) Annualized. (F) Portfolio turnover rate is for the period from November 1, 2002 through October 31, 2003. 26 Service Class ------------------------------------- Year Ended October 31 May 1 to ------------------------------------- October 31, 2007 2006 2005(B) 2004(C) 2003(A) ------- ------- ------- ------- ----------- Net asset value, beginning of period .................... $ 21.94 $ 19.94 $ 18.49 $ 15.92 $ 11.88 ------- ------- ------- ------- --------- Income from investment operations: Net investment income (loss) ......................... 0.10 0.07 0.04 0.01 -- Net gains (losses) on securities (both realized and unrealized) .................... 1.07 2.88 2.23 3.00 4.04 ------- ------- ------- ------- --------- Total income (loss) from investment operations .......... 1.17 2.95 2.27 3.01 4.04 ------- ------- ------- ------- --------- Less distributions: Dividends from net investment income ................. (0.09) (0.06) (0.05) -- -- Distributions from net realized gains on Securities .. (1.56) (0.89) (0.77) (0.44) -- ------- ------- ------- ------- --------- Total distributions ..................................... (1.65) (0.95) (0.82) (0.44) -- ------- ------- ------- ------- --------- Net asset value, end of period .......................... $ 21.46 $ 21.94 $ 19.94 $ 18.49 $ 15.92 ======= ======= ======= ======= ========= Total return ............................................ 5.55% 15.23% 12.32% 19.24% 34.01%(D) ======= ======= ======= ======= ========= Ratios and supplemental data: Net assets, end of period (in thousands) ............. $69,112 $70,602 $44,709 $11,828 $ 1 Ratios to average net assets (annualized): Expenses, net of waivers .......................... 1.32% 1.34% 1.40% 1.38% 1.49%(E) Expenses before waivers ........................... 1.32% 1.34% 1.40% 1.69% 1089.04% Net investment income, net of waivers ............. 0.43% 0.31% 0.12% 0.17% (0.05)% Net investment income (loss), before Waivers ...... 0.43% 0.31% 0.12% (0.14)% (1087.60)% Portfolio turnover rate .............................. 52% 48% 47% 35% 75%(F) AMR Class ---------------------------------------------------- Year Ended October 31 ---------------------------------------------------- 2007 2006 2005(B) 2004(C) 2003(A) -------- -------- -------- -------- -------- Net asset value, beginning of period .................... $ 22.48 $ 20.38 $ 18.78 $ 16.13 $ 11.30 -------- -------- -------- -------- -------- Income from investment operations: Net investment income (loss) ......................... 0.30 0.27 0.21 0.14 0.10 Net gains (losses) on securities (both realized and unrealized) .................... 1.08 2.91 2.26 3.04 5.15 -------- -------- -------- -------- -------- Total income (loss) from investment operations .......... 1.38 3.18 2.47 3.18 5.25 -------- -------- -------- -------- -------- Less distributions: Dividends from net investment income ................. (0.25) (0.19) (0.10) (0.09) (0.14) Distributions from net realized gains on Securities .. (1.56) (0.89) (0.77) (0.44) (0.28) -------- -------- -------- -------- -------- Total distributions ..................................... (1.81) (1.08) (0.87) (0.53) (0.42) -------- -------- -------- -------- -------- Net asset value, end of period .......................... $ 22.05 $ 22.48 $ 20.38 $ 18.78 $ 16.13 ======== ======== ======== ======== ======== Total return ............................................ 6.39% 16.12% 13.23% 20.12% 47.93% ======== ======== ======== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands) ............. $411,406 $412,857 $424,965 $438,353 $327,542 Ratios to average net assets (annualized): Expenses, net of waivers .......................... 0.54% 0.55% 0.58% 0.60% 0.61% Expenses before waivers ........................... 0.54% 0.55% 0.58% 0.60% 0.61% Net investment income, net of waivers ............. 1.21% 1.10% 0.94% 0.84% 0.95% Net investment income (loss), before Waivers ...... 1.21% 1.10% 0.94% 0.84% 0.95% Portfolio turnover rate .............................. 52% 48% 47% 35% 75% 27 AMERICAN BEACON FUNDS PRIVACY POLICY & FEDERAL TAX INFORMATION (UNAUDITED) PRIVACY POLICY 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. FEDERAL TAX INFORMATION For corporate shareholders in the Fund, the percentage of ordinary dividend income distributed for the year ended October 31, 2007, which is designated as qualifying for the dividends-received deduction, was 16.70%. For shareholders in the Fund, the percentage of dividend income distributed for the year ended October 31, 2007, which is designated as qualified dividend income under the Jobs Growth Tax Relief Act of 2003, was 22.55%. Shareholders will receive notification in January 2008 of the percentage applicable to the preparation of their 2007 income tax returns. Pursuant to Section 852 of the Internal Revenue Code, the Fund designated $155,938,753 as long-term capital gain dividends for the tax year ended October 31, 2007. 28 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) At its May 25, 2007 meeting, the Board of Trustees ("Board" or "Trustees") considered the renewal of the existing Management Agreement between the Manager and the American Beacon Funds on behalf of its Small Cap Value Fund (the "Fund") and each Investment Advisory Agreement between the Manager and a subadvisor. In preparation for the Board's consideration to renew these Agreements, the Board and its Investment Committee undertook steps to gather and consider information furnished by the Manager, the subadvisors and Lipper, Inc. ("Lipper"). The Board, with the assistance of independent legal counsel, requested and received certain relevant information from the Manager and each subadvisor. In addition, the Board's Investment Committee worked with Lipper to obtain relevant comparative information regarding the performance, fees and expenses of the Fund. The Investment Committee held a separate meeting on May 4, 2007 to consider the information provided by Lipper. Further, the Board took into consideration information furnished for the Board's review and consideration throughout the year at regular Board and Investment Committee meetings, as well as information specifically prepared in connection with the renewal process. The Trustees considered, among other materials, responses by the Manager and the subadvisors to inquiries requesting: - a description of any significant changes (actual or anticipated) to principal activities, personnel, services provided to the Fund, or any other area, including how these changes might affect the Fund; - a copy of the firm's most recent audited or unaudited financial statements as well as its SEC Form ADV registration statement; - a summary of any material past, pending or anticipated litigation or regulatory proceedings involving the firm or its personnel, including the results of any recent regulatory examination or independent audit; - a comparison of the performance of that portion of Fund assets managed by each firm with performance of other similar accounts managed by the firm, including a discussion of relative performance versus a peer group average and any remedial measures if the firm's performance was materially below that of the peer group; - a profit/loss analysis of the firm and any actual or anticipated economies of scale in relation to the services it provides to the Fund; - a description of any payments by the firm to support the Fund's marketing efforts; - an analysis of compensation, including a comparison with fees charged to other clients for which similar services are provided, any proposed changes to the fee schedule and the effect of any fee waivers; - an evaluation of other benefits to the firm or the Fund as a result of their relationship, if any; - confirmation that the firm's financial condition does not raise concerns that the firm would be unable to continue providing the same scope and quality of services to the Fund; - a description of the scope of portfolio management services provided to the Fund and the firm's other clients, including other registered investment companies, whether such services differ, and any advantages or disadvantages that might accrue to the Fund due to the firm's involvement in other activities; - a description of the personnel who are assigned primary responsibility for managing the Fund, including any changes during the past year, and a discussion of the adequacy of current and projected staffing levels to service the Fund; - a description of the basis upon which portfolio managers are compensated, including any "incentive" arrangements; - a discussion regarding the firm's participation in "soft dollar" arrangements, if any, or other brokerage allocation policies with respect to Fund transactions, including the firm's methodology for obtaining the most favorable execution and the use of any affiliated broker-dealers; - a discussion of whether the firm receives, with respect to the Fund, other compensation, including any payment for order flow or ECN liquidity rebates; - a description of any actual or potential conflicts of interest anticipated in managing Fund assets; - a description of trade allocation procedures among accounts managed by the firm; 29 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) - a summary of any material changes to the firm's compliance program with regard to federal, state, corporate and Fund requirements and a certification regarding the reasonable design of the compliance program; - a discussion of any material compliance problems and remedial actions; - information regarding the firm's code of ethics, insider trading policy and disaster recovery plan, including a description of any material changes thereto; - a description of the firm's affiliation with any broker-dealer; - a discussion of any anticipated change in the firm's controlling persons; and - verification of the firm's insurance coverage with regards to the services provided to the Fund. In addition to the foregoing, the Manager provided the following information specific to the renewal of the Management Agreement: - a comparison of the performance of the Fund to comparable investment companies and appropriate indices, including comments on the relative performance of each subadvisor and the Fund versus its peer group average; - a discussion, if applicable, of any underperformance by a subadvisor relative to its peer group and what, if any, remedial measures the Manager has or intends to take; - a comparison of advisory fees and expense ratios for comparable mutual funds; - an analysis of any material complaints received from Fund shareholders; - a description of the Manager's securities lending practices and the fees received from such practices; - a description of any revenue sharing activities with respect to the Fund; - a discussion of any rebate arrangements between the Manager and a service provider to the Fund pursuant to which the Manager receives direct or indirect benefits from the service provider; - a description of the portfolio turnover rate and average execution costs for the Fund and each subadvisor to the Fund; and - a description of how expenses that are not readily identifiable to the Fund are allocated. The Board also obtained an analysis provided by Lipper that compared: (i) investment performance of the Fund versus comparable investment companies and appropriate indices; (ii) total Fund expenses of the Fund versus comparable mutual funds, and (iii) the Fund's investment advisory fees versus comparable mutual funds. The class used for comparative purposes was the class with the longest performance history, which in most cases is the Institutional Class. References below to the Fund's Lipper peer group are to the group of comparable mutual funds included in the analysis provided by Lipper. The Trustees also received a memorandum from their legal counsel detailing the Board's responsibilities pertaining to the renewal of the Management and Investment Advisory Agreements. This memorandum explained the regulatory requirements surrounding the Trustees' process for evaluating investment advisors and the terms of the contracts. Provided below is an overview of the primary factors the Board considered at its May 25, 2007 meeting. The Board did not identify any particular information that was most relevant to its consideration to renew the Management and Investment Advisory Agreements, and each Trustee may have afforded different weight to the various factors. In determining whether to approve the continuance of the Management Agreement and the Investment Advisory Agreement, the Trustees considered the best interests of the Fund. In addition, while the Management and Investment Advisory Agreements for all of the Funds were considered at the same Board meeting, the Board considered each Fund's investment management and subadvisory relationships separately. The Board considered, among other things, the following factors: (1) the nature and quality of the services provided; (2) the investment performance of the Fund and the investment advisor; (3) the Manager's or subadvisor's cost for providing the services and the profitability of the advisory business to the Manager or subadvisor; (4) the extent to which economies of scale have been taken into account in setting the fee schedule; (5) whether fee levels 30 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) reflect these economies of scale for the benefit of Fund investors; (6) comparisons of services and fees with contracts entered into by the Manager or a subadvisor or their affiliates with other clients (such as pension funds and other institutional funds); and (7) any other benefits derived or anticipated to be derived by the Manager or a subadvisor from their relationship with the Fund. The Trustees posed questions to various management personnel of the Manager regarding certain key aspects of the material submitted in support of the renewal. Nature, Extent and Quality of Services. With respect to the renewal of the Management Agreement, the Board considered: the background and experience of key investment personnel and the Manager's ability to retain them; the Manager's disciplined investment approach and goal to provide consistent above average long-term performance at a low cost; the Manager's continuing efforts to add new series and share classes to enhance the Fund's product line; the Manager's record in building improved compliance, control and credit functions that reduce risks to the Fund; the addition of personnel to manage the Fund, promote sales and improve services, including the addition of a separate new information technology (IT) department at the Manager; the high rankings received by the Fund in service surveys; and the active role played by the Manager in monitoring and, as appropriate, recommending replacements for the investment subadvisors and master portfolios. With respect to the renewal of the Investment Advisory Agreements, the Trustees considered the background and experience of each subadvisor's investment personnel responsible for managing the Fund, the size of the subadvisor and their ability to continue to attract and retain qualified investment personnel. Based on the foregoing information, the Board concluded that the nature, extent and quality of the management and advisory services provided by the Manager and each subadvisor were appropriate for the Fund and, thus, supported a decision to renew the Management and each Investment Advisory Agreement. Investment Performance. The Board evaluated the comparative information provided by Lipper and the Manager regarding the Fund's investment performance relative to its benchmark index and peer group. With respect to Lipper data, the Board considered the information provided by Lipper regarding its independent peer selection methodology to select all peer groups and universes. The Board also considered the performance reports and discussions with management at Board and Committee meetings throughout the year. The Manager also noted that it generally was satisfied with the performance of the subadvisors. Cost of Services and Profits Realized. In analyzing the cost of services and profitability of the Manager and a subadvisor, the Board considered the revenues earned and the expenses incurred by the Manager and those subadvisors that provided such data. The profitability levels were noted at both an individual Fund level and at an aggregate level for all Funds in the complex. The Board also considered that the Management Agreements for the American Beacon Funds stipulate that to the extent that the Fund invests all of its investable assets in another registered investment company, the Fund will not pay the Manager a management fee. The Board further considered that the Fund pays the Manager the amounts due to its subadvisors, and the Manager remits these amounts directly to the applicable subadvisors. The Board considered that the Manager receives service and administrative fees to compensate the Manager for providing administrative services to the Fund and to compensate third-party administrators and broker-dealers for services to Fund shareholders. In addition, the Board considered that the Manager receives management fees for overseeing the securities lending relationships on behalf of the Fund. The Board also noted that the non-Institutional Classes of the Fund maintains higher expense ratios in order to compensate third party distributors but the net fee to the Manager is the same for all Classes. In analyzing the cost of services and profitability of each subadvisor in connection with its investment advisory services to the Fund, the Board considered that, in many cases, the Manager has negotiated the lowest subadvisory fee a subadvisor charges for any comparable client accounts. The Board gave less weight to profitability considerations or did not view this data as imperative to its deliberations given the arm's-length nature of the relationship between the Manager and the subadvisors with respect to the negotiation of subadvisory fees. 31 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) Based on the foregoing information, the Board concluded that the profitability levels were reasonable in light of the services performed by the Manager and the subadvisors. Economies of Scale. In considering the reasonableness of the management and investment advisory fees, the Board considered whether economies of scale will be realized as the Fund grows and whether fee levels reflect these economies of scale for the benefit of Fund shareholders. In this regard, the Board considered that the Manager has negotiated breakpoints in the subadvisory fee rates. The Board also noted, for purposes of determining the fee rates chargeable to the Fund, many subadvisors have agreed to take into account other assets of AMR Corporation and its pension plans that are managed by the subadvisors. Thus, the Fund is able to receive lower effective fee rates. This fee arrangement also benefits AMR Corporation and its pension plans. The Board also noted that the Fund has experienced substantial recent asset growth. The Board also considered the Manager's representations that its costs have increased due primarily to greater service provider and regulatory costs. The Manager also represented that it anticipates further economies of scale would be largely offset by higher costs of adding and retaining qualified personnel, improving technology and increasing demands on its advisory business. Based on the foregoing information, the Board concluded that the Manager and subadvisor fee schedules provide for a reasonable sharing of benefits from any economies of scale with the Fund. Benefits Derived from the Relationship with the Funds. The Board considered the "fall-out" or ancillary benefits that accrue to the Manager and/or the subadvisors as a result of the advisory relationships with the Fund, including greater exposure in the marketplace with respect to the Manager's or subadvisor's investment process and expanding the level of assets under management by the Manager and the subadvisors. The Board also considered that the money market portfolios permit institutional investors access to such investments at a more favorable cost and that the Manager's relationship with the Fund and, in particular the money market portfolios, continues to be a significant factor in attracting separate account assets for the Manager. In addition, the Board noted that the Manager provides services to the Trust at a relatively low cost and the benefit plans of AMR Corporation have invested a substantial number of assets in the Fund, which helps reduce costs. The Board also considered that certain of the subadvisors reimburse the Manager for certain of its costs relating to distribution activities for the Fund. Based on the foregoing information, the Board concluded that the potential benefits accruing to the Manager and the subadvisors by virtue of their relationship with the Fund appears to be fair and reasonable. ADDITIONAL CONSIDERATIONS AND CONCLUSIONS The performance comparisons below were made versus the Fund's Lipper peer universe median. References to the Lipper expense group below are to the group of comparable mutual funds included in the analysis provided to the Trustees by Lipper. All performance comparisons are for periods ended March 31, 2007, unless otherwise noted. In considering the renewal of the Management Agreement with respect to the Fund, the Trustees considered the following additional factors: (1) the Fund outperformed its peer universe median for the one- and five-year periods but underperformed for the three-year period; and (2) the actual management fees (including administrative fees) and the total expense ratio of the Institutional Class of Fund shares was lower than its Lipper expense group median. In considering the renewal of the Investment Advisory Agreements with Barrow, Hanley, Mewhinney and Strauss, Inc. ("Barrow"), Brandywine Global Investment Management, LLC ("Brandywine"), Dreman Value Management, LLC ("Dreman"), Hotchkis and Wiley Capital Management, LLC ("Hotchkis"), Metropolitan West Capital Management, LLC ("MetWest"), SSgA Funds Management, Inc. ("SSgA"), The Boston Company Asset Management, LLC ("TBCAM"), and Opus Capital Group, LLC ("Opus"), the Trustees considered the following 32 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) additional factors: (1) Hotchkis outperformed the peer universe median for the five-year period but underperformed for the one- and three-year periods; (2) Brandywine outperformed the peer universe median for the one-year period but underperformed for the three- and five-year periods; (3) Barrow outperformed the peer universe median for the one- and three-year period; (4) TBCAM outperformed the peer universe median for the one-year period; (5) Opus underperformed the peer universe median for the one-year period; (6) Dreman, MetWest and SSgA have not been allocated a portion of Fund assets to date; (7) Barrow underperformed its market benchmark index with respect to its allocated portion of the Fund's assets for the one-year period ended December 31, 2006; (8) Brandywine underperformed its market benchmark index with respect to its allocated portion of the Fund's assets for all relevant periods except the since inception period ended December 31, 2006; (9) Hotchkis underperformed its market benchmark index with respect to its allocated portion of the Fund's assets for the one- and three-year periods but outperformed for the five-year and since inception periods ended December 31, 2006; (10) Opus underperformed its market benchmark index with respect to its allocated portion of the Fund's assets for all relevant periods ended December 31, 2006; (11) the Manager's explanation that some subadvisors had over weighted their portion of the Fund's assets in the homebuilder sector that caused the Fund to underperform its benchmark; (12) Barrow, Brandywine, Hotchkis, and MetWest informed the Manager that they use Fund commissions to obtain proprietary research, the application of which benefits the Fund and each of those subadvisors' clients, and Hotchkis further informed the Manager that it uses Fund commissions to obtain third-party research, but that there is little or no impact to the Fund; (13) the fee schedules of each subadvisor include breakpoints, which reduce fee rates as the assets of the Fund increase; (14) TBCAM represented that it does not charge a lower advisory fee to any other comparable clients; and (15) the Manager's recommendation to continue to retain each subadvisor. Based on these considerations and those noted above with respect to all Funds, the Trustees (1) concluded that the fees paid to the Manager and the subadvisors under the Management and Investment Advisory Agreements are fair and reasonable, (2) determined that the Small Cap Value Fund and its shareholders would benefit from the continued management of the Fund by the Manager and subadvisors and (3) approved the renewal of the Management and Investment Advisory Agreements with respect to the Fund. 33 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. 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** (59) Trustee Chairman and CEO (2006-Present), President (1986-2006) and since 1987 Director (2003-Present), American Beacon Advisors, Inc.; President from Chairman (1989-2003) and Director (1979-1989, 2003-Present), 1987 to 2007 American Airlines Federal Credit Union; Director, Crescent Executive Vice Real Estate Equities, Inc.(1994-2007); Director, Pritchard, President Hubble & Herr, LLC (investment advisor) (2001-2006); since 2007 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); Chairman (2007-Present) and Vice Chairman (2004-2007), Committee for the Investment of Employee Benefits; 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). Douglas G. Herring** (50) Trustee since 2006 President, American Beacon Advisors, Inc. (2006-Present); Executive Vice President Vice President and Controller, American Airlines, Inc. from 2006 to 2007 (1998-2006); Chairman (2003-Present) and Director President since 2007 (1995-Present), American Airlines Federal Credit Union; Trustee, American Beacon Mileage Funds (2006-Present); Trustee American Beacon Select Funds (2006-Present); Trustee American Beacon Master Trust (2006-Present). Alan D. Feld** (70) Trustee since 1996 Partner, Akin, Gump, Strauss, Hauer & Feld, LLP (law firm) (1960-Present); Director, Clear Channel Communications (1984-Present); Trustee, CenterPoint Properties (1994-2006); Member Board of Trustees, Southern Methodist University; Member, Board of Visitors, The University of Texas M.D. Anderson Cancer Center; Member, Board of Visitors, Zale Lipshy Hospital; 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 (63) 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). 34 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS (UNAUDITED) 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 (46) 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) (2001-2006); 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 (64) Trustee since 2004 Senior Vice President and General Counsel, Hunt Consolidated, Inc. (holding company engaged in oil and gas exploration and production, refining, 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 (72) 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 (61) Trustee since 2001 President, Southern Methodist University (1995-Present); 225 Perkins Admin. Bldg. Director, ChemFirst (1986-2002); Director, J.C. Penney Southern Methodist Univ. Company, Inc. (1996-Present); Director, California Federal Dallas, Texas 75275 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 (51) Trustee since 1996 Managing Partner, Pharos Capital Group, LLC (a private 100 Crescent Court Chairman since equity firm) (1998-Present); Director, Burger King Suite 1740 2005 Corporation (2004-Present); Director, Gap, Inc. Dallas, Texas 75201 (2006-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). 35 TRUSTEES AND OFFICERS OF THE AMERICAN BEACON FUNDS (UNAUDITED) 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 (48) VP, Secretary and Vice President, Legal and Compliance, American Beacon Chief Legal Advisors, Inc. (2006-Present); Assistant General Counsel, Officer since 2006 First Command Financial Planning, Inc. (2004-2006); Enforcement Attorney (2002-2004) and Branch Chief (2000-2002), Securities and Exchange Commission. Brian E. Brett (47) VP since 2004 Vice President, Director of Sales and Marketing, American Beacon Advisors, Inc. (2004-Present); Regional Vice President, Neuberger Berman, LLC (investment advisor) (1996-2004). Wyatt Crumpler (41) VP since 2007 Vice President, Trust Investments, American Beacon Advisors, Inc. (2007-Present); Managing Director of Corporate Accounting (2004-2007), Director of IT Strategy and Finance (2002-2004), American Airlines, Inc. Michael W. Fields (53) VP since 1989 Vice President, Fixed Income Investments, American Beacon Advisors, Inc. (1988-Present). Rebecca L. Harris (40) Treasurer since Vice President, Finance, American Beacon Advisors, Inc. 1995 (1995-Present). Christina E. Sears (36) Chief Compliance Chief Compliance Officer, American Beacon Advisors, Inc. Officer since 2004 (2004-Present); Senior Compliance Analyst, American Beacon and Asst. Advisors, Inc. (1998-2004). Secretary since 1999 * 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, Feld and Herring are deemed to be "interested persons" of the Trust, as defined by the 1940 Act. Mr. Quinn is Chairman and CEO 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. Mr. Herring is President of the Manager. 36 (This page intentionally left blank) 37 (AMERICAN BEACON FUNDS(SM) 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: (GRAPHIC) (GRAPHIC) BY E-MAIL: ON THE INTERNET: american_beacon.funds@ambeacon.com Visit our website at www.americanbeaconfunds.com (GRAPHIC) (GRAPHIC) BY TELEPHONE: BY MAIL: Institutional Class American Beacon Funds Call (800) 658-5811 P.O. Box 219643 AMR Class(SM) Kansas City, MO 64121-9643 Call (800) 345-2345 PlanAhead Class(R) and Service Class Call (800) 388-3344 AVAILABILITY OF QUARTERLY AVAILABILITY OF PROXY VOTING PORTFOLIO SCHEDULES POLICY AND RECORDS In addition to the Schedule of A description of the policies and Investments provided in each procedures the Fund uses to determine semi-annual and annual report, the how to vote proxies relating to Fund files a complete schedule of its portfolio securities is available in the portfolio holdings with the Fund's Statement of Additional Securities and Exchange Commission Information, is available free of charge ("SEC") on Form N-Q as of the first on the Fund's website and third fiscal quarters. The Fund's (www.americanbeaconfunds.com) and by Forms N-Q are available on the SEC's calling 1-800-967-9009 or by accessing website at www.sec.gov. The Forms N-Q the SEC's website at www.sec.gov. The may also be reviewed and copied at Fund's proxy voting record for the most the SEC's Public Reference Room, 450 recent year ended June 30 is filed Fifth Street, NW, Washington, DC annually with the SEC on Form N-PX. The 20549. Information regarding the Fund's Forms N-PX are available on the operation of the SEC's Public SEC's website at www.sec.gov. The Fund's Reference Room may be obtained by proxy voting record may also be obtained calling 1-800-SEC-0330. A complete by calling 1-800-967-9009. schedule of the Fund's portfolio holdings is also available on the Funds' website (www.americanbeaconfunds.com) approximately thirty days after the end of each month. FUND SERVICE PROVIDERS: CUSTODIAN TRANSFER AGENT INDEPENDENT REGISTERED DISTRIBUTOR STATE STREET BOSTON FINANCIAL PUBLIC ACCOUNTING FIRM FORESIDE FUND BANK AND TRUST DATA SERVICES ERNST & YOUNG LLP SERVICES Boston, Kansas City, Dallas, Texas Portland, Maine Massachusetts Missouri 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 10/07 541122 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 Mrs. Brenda A. Cline, a member of the Trust's Audit and Compliance Committee, is an "audit committee financial expert" as defined in Form N-CSR. Mrs. Brenda A. Cline is "independent" as defined in Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) <Table> <Caption> Audit Fees Fiscal Year Ended - ---------- ----------------- $48,010 12/31/2005 $249,625 10/31/2006 $92,179 12/31/2006 $280,229 10/31/2007 </Table> (b) <Table> <Caption> Audit-Related Fees Fiscal Year Ended - ------------------ ----------------- $0 12/31/2005 $35,164* 10/31/2006 (revised) $0 12/31/2006 $8,750** 10/31/2007 </Table> <FN> * Attestation services related to Interfund Lending Program, review of N-1A and assistance with disclosure related to International Equity Fund reorganization **Review of N-1A filings </FN> (c) <Table> <Caption> Tax Fees Fiscal Year Ended - -------- ----------------- $10,695* 12/31/2005 $0 10/31/2006 $0 12/31/2006 $29,199** 10/31/2007 </Table> <FN> * For review of 2004 tax returns **2005 and 2006 tax compliance and tax advice related to International Equity Fund reorganization </FN> (d) <Table> <Caption> All Other Fees Fiscal Year Ended - -------------- ----------------- $0 12/31/2005 $0 10/31/2006 $0 12/31/2006 $0 10/31/2007 </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 - ---------- ------- ------------------------------ ----------------- $10,695 $0 N/A 12/31/2005 $35,164 $0 N/A 10/31/2006 R $0 $0 N/A 12/31/2006 $37,949 $0 N/A 10/31/2007 </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/ Douglas G. Herring ---------------------- Douglas G. Herring President Date: January 4, 2008 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/ Douglas G. Herring ---------------------- Douglas G. Herring President Date: January 4, 2008 By /s/ Rebecca L. Harris --------------------- Rebecca L. Harris Treasurer Date: January 4, 2008