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, 2008 Date of reporting period: October 31, 2008 ITEM 1. REPORT TO STOCKHOLDERS. GUIDANCE | VISION | EXPERIENCE (AMERICAN BEACON FUNDS(SM) LOGO) Annual Report (GRAPHIC) OCTOBER 31, 2008 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................................................... 26 Large Cap Growth Fund........................................... 35 Mid-Cap Value Fund.............................................. 40 Small Cap Value Opportunity Fund................................ 43 Emerging Markets Fund........................................... 48 High Yield Bond Fund............................................ 53 Enhanced Income Fund............................................ 61 Intermediate Bond Fund.......................................... 67 Short-Term Bond Fund............................................ 76 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 WILLIAM F. QUINN) FELLOW SHAREHOLDERS, Enclosed is the American Beacon Funds Annual Report for the twelve months ended October 31, 2008 for our Balanced, Large Cap Growth, Mid-Cap Value, Small Cap Value Opportunity, Emerging Markets, High Yield Bond, Enhanced Income, Intermediate Bond, and Short-Term Bond Funds. During the past twelve months, we experienced unprecedented market turmoil in all asset classes. Initially, the sub-prime mortgage crisis and rising oil and food prices contributed to an economic slowdown that culminated in a market-wide credit crisis and squeeze on liquidity. The situation reached once-in-a-lifetime crisis proportions in mid-September with the bankruptcy of Lehman Brothers, the resulting losses incurred by investors in money market funds, and the unprecedented government intervention in the financial system. From September 15th to October 31st, the Dow Jones Industrial Average declined almost 20% on the threat of a global recession. During these times, it is important to remember that the American Beacon Funds' investment strategy is based on long-term investing. Short-term pain can lead to long-term gains as we saw when the positive performance by our value-oriented Funds followed the burst of the technology bubble earlier this decade. We believe the Funds' fundamental value investment philosophies and lower than average expense ratios will continue to serve the Funds well over the longer term. Please review the enclosed market overview, portfolio listings, and detailed financial data. As always, we welcome the opportunity to serve your financial needs. To obtain further details about the American Beacon Funds family or to access your account information, please visit our website at www.americanbeaconfunds.com. Thank you for your continued. Sincerely, /s/ William F. Quinn William F. Quinn President American Beacon Funds 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. 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 the securities of mid- and small capitalization companies involves greater risk and the possibility of greater price volatility than investing in larger capitalization and more established companies. 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. 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. 1 DOMESTIC EQUITY MARKET OVERVIEW OCTOBER 31, 2008 (UNAUDITED) The financial crisis that began in August 2007 accelerated into uncharted territory in 2008, punctuated by the sharp decline in equity prices in October. Earlier concerns about rising prices for oil, food and commodities were brushed aside as the credit crisis evolved into a full-blown liquidity crisis. In early 2008, monetary policymakers were very aggressive, ultimately cutting the Fed Funds rate to 1% as deflation concerns began to displace talk of inflation. The Federal Reserve ("Fed") was innovative in contending with the financial crisis by developing (or resurrecting) policy initiatives and lending facilities in attempts to target liquidity without further pressuring the dollar or adding to worries regarding inflation. Nevertheless, in the spring of 2008, market interest rates had once again begun to move against the Fed, this time upward, as global investors anticipated a pause in, if not a completion of, the Fed's easing campaign. Market volatility prevailed in the second and third calendar quarters of 2008. Only a few months back, investors were worried about rising inflation and the potential for higher interest rates; however, events during the past few months changed those discussions. The government takeovers of Fannie Mae and Freddie Mac, the Lehman Brothers bankruptcy, the near demise of insurance giant American International Group (AIG), government-arranged bank mergers and bank failures turned the conversations to de-leveraging, deflation and declining rates. Signs of a recession accelerated as third quarter 2008 Gross Domestic Product contracted despite the massive policy response. Oil prices fell rapidly from a high of approximately $145 per barrel during the twelve-month period to close below $70 per barrel on October 31, 2008, while housing prices saw no signs of a bottom. Worries of global recession were also pervasive throughout commodities markets as major indices sold off considerably while the dollar gained against most currencies. All of this occurred in the midst of a presidential election with its attendant uncertainties. Investors took note, driving prices substantially lower in every major equity market over the past twelve months. In spite of these events, there are many long-term positives in the U.S. economy. The biggest one is the flexibility of our system and its ability to adapt: both policymakers and market participants reacted quickly (and sometimes overreacted) to changing circumstances. Other factors such as the existence of insurance safety nets, a still relatively low (though rising) unemployment rate, technology-driven productivity gains, solid balance sheets for non-financial companies and improving global competitiveness all factor into a potentially positive long-term outlook. Consequently, while households and financial firms have limited borrowing capacity and have received most of the media attention, non-financial companies are not overburdened by debt and are in a better position than in past cycles to manage their businesses in a slowing economy. While the actions taken should help to stem the current crisis, obstacles remain. However, with the full attention of world central banks, governments and regulators, fundamentals have the opportunity to prevail as financial markets make their way through the current uncertainty. 2 PERFORMANCE OVERVIEW AMERICAN BEACON BALANCED FUND(SM) OCTOBER 31, 2008 (UNAUDITED) The Balanced Fund's Institutional Class returned -28.23% for the twelve months ended October 31, 2008, lagging the 60% Russell 1000(R) Value/40% Lehman Brothers Aggregate Index benchmark return of -23.47%, but outperforming the Lipper Mixed-Asset Target Allocation Growth Funds Index return of -29.95%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 10/31/98 THROUGH 10/31/08 (PERFORMANCE GRAPH) ANNUALIZED TOTAL RETURNS VALUE OF PERIODS ENDED 10/31/08 $10,000 --------------------------- 10/31/98- 1 YEAR 5 YEARS 10 YEARS 10/31/08 ------ ------- -------- --------- Institutional Class(1, 5) ............. -28.23% 2.14% 3.34% $13,896 PlanAhead Class(1, 5) ................. -28.39% 1.84% 3.07% 13,535 Service Class(1, 2, 5) ................ -28.58% 1.62% 2.96% 13,390 AMR Class(1, 5) ....................... -28.08% 2.37% 3.62% 14,265 Balanced Composite Index(3) ........... -23.47% 2.74% 3.95% 14,736 Russell 1000 Value Index (4) .......... -36.80% 1.90% 2.79% 13,165 Lehman Bros. Aggregate Index(4) ....... 0.31% 3.48% 5.00% 16,290 Lipper Mixed-Asset Target Allocation Growth Funds Index (4) .. -29.95% 1.36% 2.63% 12,958 (1.) Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1-800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. (2.) Fund performance for the five-year and ten-year periods represents the total returns achieved by the PlanAhead Class from 10/31/98 up to 5/31/05, the inception date of the Service Class, and the returns of the Service Class since its inception. Expenses of the Service Class are higher than those of the PlanAhead Class. Therefore, total returns shown may be higher than they would have been had the Service Class been in existence since 10/31/98. A portion of the fees charged to the Service Class of the Fund was waived in 2005. Performance prior to waiving fees was lower than actual returns shown for 2005. (3.) 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. (4.) 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. Russell 1000 Value Index is a registered trade mark of Frank Russell Company. 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. (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 0.58%, 0.84%, 1.08% and 0.32%, 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. During the twelve-month period, the Fund's assets on average were invested 60% in equities (including equitized cash) and 40% in fixed-income securities, ending the period with 61% in equities/equitized cash and 39% in fixed-income securities. The equity portion of the Fund (excluding equitized cash) returned -41.9%, underperforming the Russell 1000(R) Value Index (the "Index") return of -36.8%. The Fund's equities underperformed the Index due to both stock selection and sector allocation. Poor stock selection in the Financials, Consumer Discretionary, and Health Care sectors detracted the most value relative to the Index. In the Financials sector, Washington Mutual (down 99.8% for the period the Fund owned the security), Wachovia (down 85.2%), and Bear Stearns (down 90.7% for the period the Fund owned the security) hurt performance the most. The Fund's holdings in the Consumer Discretionary sector that had the largest negative impact for the period the Fund owned the securities were R.H. Donnelley (down 98.5%), Idearc (down 93.5%), and Wyndham Worldwide (down 74.9%). Cigna (down 68.9% for the period the Fund owned the security) and Wellpoint (down 50.9%) were the largest detractors in the Health Care sector. The aforementioned underperformance was slightly offset by good stock selection in the Information Technology sector where IBM (down 18.7% for the period the Fund 3 PERFORMANCE OVERVIEW AMERICAN BEACON BALANCED FUND(SM) OCTOBER 31, 2008 (UNAUDITED) owned the security) and EDS (up 16.7%) were the largest contributors. During the twelve-month period, an underweight in Energy, one of the better performing sectors in the Index, and a more than double overweight in Information Technology, the second-worst performing sector in the Index, detracted value from the Fund's relative returns through sector allocation. The negative sector allocation performance was somewhat offset by an underweight in Financials, the worst performing sector in the Index. The fixed-income portion of the Fund returned -2.47% for the period, underperforming the Lehman Brothers Aggregate Index ("Lehman Index") return of 0.31%. Most of the Fund's poor performance was due to an overweight in Corporates, the worst performing sector in the Lehman Index. 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. .................. 1.8% AT&T, Inc. ............................. 1.5% ConocoPhillips ......................... 1.5% International Business Machines Corp. .. 1.4% JPMorgan Chase & Co. ................... 1.3% Philip Morris International, Inc. ...... 1.3% Pfizer, Inc. ........................... 1.3% Hewlett-Packard Co. .................... 1.2% Citigroup, Inc. ........................ 1.1% Verizon Communications, Inc. ........... 1.1% EQUITY SECTOR ALLOCATION % OF EQUITIES -------- Financials ............................. 19.0% Industrials ............................ 14.4% Health Care ............................ 12.6% Energy ................................. 11.2% Information Technology ................. 11.0% Consumer Staples ....................... 9.2% Consumer Discretionary ................. 7.8% Utilities .............................. 5.7% Telecommunication Services ............. 5.2% Materials .............................. 3.9% FIXED-INCOME SECTOR ALLOCATION % OF FIXED INCOME ------------ Corporate Bonds ........................ 34.2% Mortgage-Backed ........................ 33.9% Agency ................................. 22.0% U.S. Treasury .......................... 8.2% Asset-Backed ........................... 1.7% 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. 4 PERFORMANCE OVERVIEW AMERICAN BEACON LARGE CAP GROWTH FUND(SM) OCTOBER 31, 2008 (UNAUDITED) The Institutional Class of the Large Cap Growth Fund returned -39.48% for the twelve months ended October 31, 2008, compared to the Russell 1000(R) Growth Index (the "Index") return of -36.95% and the Lipper Large-Cap Growth Funds Index return of -39.10%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 7/31/00* THROUGH 10/31/08 (PERFORMANCE GRAPH) * Inception of Fund ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/08 ------------------------------ VALUE OF SINCE $10,000 INCEP. 7/31/00- 1 YEAR 5 YEARS (7/31/00) 10/31/08 ------ ------- --------- -------- Institutional Class(1, 3).... -39.48% -2.83% -8.61% $4,759 AMR Class(1, 3)... -39.17% -2.55% -8.40% 4,847 Russell 1000 Growth Index(2)....... -36.95% -1.29% -7.66% 5,184 Lipper Large-Cap Growth Funds Index(2)....... -39.10% -1.73% -8.02% 5,018 (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 actual returns shown for periods since 2004. (2.) 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. Russell 1000 Growth Index and Russell 1000 Index are registered trademarks of Frank Russell Company. The Lipper Large-Cap Growth Funds Index tracks the results of the 30 largest mutual funds in the Lipper Large-Cap Growth Funds category. Lipper is an independent mutual fund research and ranking service. One cannot directly invest in an index. (3.) The total annual Fund operating expense ratio set forth in the most recent Fund prospectus for the Institutional and AMR Class shares was 1.06% and 0.61%, 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 in eight of the ten sectors entirely due to stock selection, as sector allocation added modest value to the Fund's performance. The Fund's poor security selection in the Information Technology, Industrials, Energy, Consumer Staples, and Materials sectors resulted in most of the poor performance. In the Information Technology sector, NVIDIA (down 64.3% for the period the Fund owned the security), Dell (down 60.3%), and Cisco Systems (down 46.2%) detracted the most relative value. The Fund's holdings in the Industrials sector that had the largest negative impact for the period the Fund owned the securities were Terex (down 58.9%), Flowserve (down 45.2%), and Cummins Engine (down 60.9%). Positions in Nabors Industries (down 59.6% for the period the Fund owned the security), Global Industries (down 51.5% for the period the Fund owned the security), and National Oilwell Varco (down 59.2%) detracted most from the Energy sector performance, while Avon (down 34.1% for the period the Fund owned the security) and Bunge Limited (down 65.2%) hurt performance most in the Consumer Staples sector. In the Materials sector, Freeport-McMoRan Copper & Gold (down 74.6% for the period the Fund owned the security) and Southern Copper (down 41.2% for the period the Fund owned the security) were the largest detractors. The aforementioned underperformance was slightly offset by good security selection in the Consumer Discretionary sector where McDonald's (up 1.5%) was the largest contributor. The Fund added relative value through underweighting Financials, the worst performing sector in the Index. Underweightings in the Health Care, Materials, and Utilities sectors also added value, while an underweighting in Consumer Staples detracted from relative performance. 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, 2008 (UNAUDITED) TOP TEN HOLDINGS % OF NET ASSETS ---------- McDonald's Corp. ........ 2.4% Gilead Sciences, Inc. ... 2.2% Microsoft Corp. ......... 2.0% Cisco Systems, Inc. ..... 1.7% Accenture Ltd. .......... 1.6% Monsanto Co. ............ 1.6% Hewlett-Packard Co. ..... 1.5% Emerson Electric Co. .... 1.5% General Dynamics Corp. .. 1.4% Wal-Mart Stores, Inc. ... 1.3% SECTOR ALLOCATION % OF EQUITIES -------- Information Technology ... 22.1% Industrials .............. 17.8% Health Care .............. 17.8% Consumer Discretionary ... 14.1% Energy ................... 10.5% Consumer Staples ......... 9.1% Materials ................ 4.2% Financials ............... 3.5% Utilities ................ 0.5% Telecommunication Services .............. 0.3% Communications ........... 0.1% 6 PERFORMANCE OVERVIEW AMERICAN BEACON MID-CAP VALUE FUND(SM) OCTOBER 31, 2008 (UNAUDITED) The Institutional Class of the Mid-Cap Value Fund returned -40.96% for the twelve months ended October 31, 2008. The Fund trailed the Russell Midcap(R) Value Index (the "Index") return of -38.83% and the Lipper Mid-Cap Value Funds Index return of -39.81%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 6/30/04* THROUGH 10/31/08 (PERFORMANCE GRAPH) * Inception of Fund ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/08 ----------------------------- VALUE OF SINCE $10,000 INCEP. 6/30/04- 1 YEAR 3 YEARS (6/30/04) 10/31/08 ------ ------- -------- -------- Institutional Class(1, 3, 6)... -40.96% -9.69% -3.24% $ 8,670 PlanAhead Class (1, 2, 6)........ -41.14% -9.90% -3.39% 8,611 Service Class (1, 4, 6)........ -41.24% -9.98% -3.45% 8,589 AMR Class (1, 6).... -40.87% -9.50% -3.10% 8,725 Russell Midcap Value Index(5)... -38.83% -6.82% 0.14% 10,062 Lipper Mid-Cap Value Funds Index(5)......... -39.81% -6.98% -1.89% 9,209 (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 AMR Class of the Fund was waived through 2006. Performance 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 from 6/30/04 up to 3/1/06, the inception date of the PlanAhead Class, and the returns of the PlanAhead Class since its inception. Expenses of the PlanAhead Class are higher than those of the AMR Class. As a result, total returns shown may be higher than they would have been had the PlanAhead Class been in existence since 6/30/04. A portion of the fees charged to the PlanAhead Class of the Fund has been waived since 2006. Performance prior to waiving fees was lower than actual returns shown since 2006. (3.) Fund performance represents the total returns achieved by the AMR Class from 6/30/04 up to 11/30/05, the inception date of the Institutional Class, and the returns of the Institutional Class since its inception. Expenses of the Institutional Class are higher than those of the AMR Class. As a result, total returns shown may be higher than they would have been had the Institutional Class been in existence since 6/30/04. A portion of the fees charged to the Institutional Class of the Fund has been waived since 2007. Performance prior to waiving fees was lower than actual returns shown since 2007. (4.) Performance shown prior to the 6/29/07 inception of the Service Class is that of the AMR Class from 6/30/04 to 11/30/05, the Institutional Class from 11/30/05 to 3/1/06 and the PlanAhead Class from 3/1/06 to 6/30/07. The returns have not been adjusted for any difference between the fees and the expenses of the Service Class and the historical fees and expenses of the AMR, Institutional, and PlanAhead Classes. Because the AMR, Institutional, and PlanAhead Clasess had lower expenses, their performance was better than the Service Class would have realized during the same period. A portion of the fees charged to the Service Class of the Fund has been waived since 2007. Performance prior to waiving fees was lower than the actual returns shown since 2007. (5.) 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. Russell Midcap Value Index and Russell 1000 Index are registered trademarks of Frank Russell Company. 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. (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 1.10%, 1.27%, 1.81%, and 0.76%, 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 primarily through sector allocation, as stock selection detracted minimal value. A large overweight in the Consumer Discretionary sector, the worst performing sector in the Index, detracted value through sector allocation. An absence from Materials, the second best performing sector of the Index, and underweights in the Utilities and Energy sectors, also detracted value relative to the Index. An overweight in the Health Care sector contributed to performance, only partially offsetting the impact of the aforementioned sector exposures. 7 PERFORMANCE OVERVIEW AMERICAN BEACON MID-CAP VALUE FUND(SM) OCTOBER 31, 2008 (UNAUDITED) Holdings in the Financials and Health Care sectors detracted the most value relative to the Index through stock selection. In the Financials sector, Freddie Mac (down 97.0%), Protective Life (down 80.1%), and Conseco (down 88.2%) were the largest detractors. Coventry Health Care (down 78.1%) and Cigna (down 59.8% for the period the Fund held the security) hurt performance most in the Health Care sector. Good security selection in the Consumer Discretionary, Industrials, Utilities, and Consumer Staples sectors added value, but this excess performance was not enough to offset the negative impact of the sectors mentioned previously. In the Consumer Discretionary sector, Family Dollar Stores (up 8.6% for the period the Fund held the security) was the largest contributor. L-3 Communications (down 25.2%) added the most value in the Industrials sector. Wisconsin Energy (down 7.1%) contributed the most in the Utilities sector, while UST (up 32.3%) helped performance most in the Consumer Staples sector. 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. .. 2.4% Omnicare, Inc. ..................... 2.0% CA, Inc. ........................... 1.9% People's United Financial, Inc. .... 1.8% Alcatel-Lucent...................... 1.8% Lorillard, Inc. .................... 1.7% Reynolds American, Inc. ............ 1.7% Black & Decker Corp. ............... 1.5% Annaly Capital Management Inc. ..... 1.4% Torchmark Corp. .................... 1.4% SECTOR ALLOCATION % OF EQUITIES -------- Financials....................... 24.6% Consumer Discretionary........... 24.3% Industrials...................... 11.5% Health Care...................... 10.0% Information Technology........... 9.9% Utilities........................ 8.5% Consumer Staples................. 8.1% Energy........................... 3.1% 8 PERFORMANCE OVERVIEW AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND(SM) OCTOBER 31, 2008 (UNAUDITED) The Institutional Class of the Small Cap Value Opportunity Fund returned - -34.49% for the twelve months ended October 31, 2008. The Fund underperformed the Russell 2000(R) Value Index (the "Index") return of -30.54% and the Lipper Small-Cap Value Funds Index return of -34.03% for the same period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 3/31/06* THROUGH 10/31/08 (PERFORMANCE GRAPH) * Inception of Fund ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/08 VALUE OF ---------------------- $10,000 SINCE INCEP. 3/31/06- 1 YEAR (3/31/06) 10/31/08 ------ ------------ -------- Institutional Class(1, 3)... -34.49% -13.88% $6,795 PlanAhead Class(1, 3)....... -34.60% -13.98% 6,774 Russell 2000 Value Index (2)................ -30.54% -10.85% 7,433 Lipper Small-Cap Value Funds Index (2).......... -34.03% -12.16% 7,154 (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.) 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. Russell 2000 Value Index is a registered trademark of Frank Russell Company. The Lipper Small-Cap Value Funds Index tracks the results of the 30 largest mutual funds in the Lipper Small-Cap Value Funds category. Lipper is an independent mutual fund research and ranking service. One cannot directly invest in an index. (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 1.28% and 1.71%, 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 primarily due to sector allocation and to a lesser extent through stock selection. The Fund's holdings in the Industrials sector detracted the most value relative to the Index, followed by the Materials and Financials sectors. In the Industrials sector, the companies that had the largest impact during the period the Fund owned each security were GrafTech International (down 69.8%), Deluxe (down 57.3%), Thermadyne Holdings (down 60.0%) and Barnes Group (down 32.9%). The largest detractors in the Materials sector were Buckeye Technologies (down 67.1%) and OM Group (down 35.3% during the period the Fund owned the security). In the Financials sector, most of the negative impact came from Sunstone Hotel Investors (down 74.4%), DiamondRock Hospitality (down 70.7%), Boston Private Financial (down 68.7%) and FirstFed Financial (down 64.3% during the period the Fund owned the security). Good stock selection in the Consumer Discretionary sector, mostly from Warnaco and Tupperware (up 26.7% and 0.8%, respectively, during the period the Fund owned the securities), added significant value, but not enough to offset the impact of the aforementioned sectors. The Fund's underweight in the Utilities sector, the best performing sector of the Index detracted from performance, as did an underweight in the Energy sector. 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, 2008 (UNAUDITED) TOP TEN HOLDINGS % OF NET ASSETS ---------- Navigators Group, Inc. ........... 1.6% National Penn Bancshares, Inc. ... 1.4% Digi International, Inc. ......... 1.3% Ruddick Corp. .................... 1.3% Community Bank System, Inc. ...... 1.2% El Paso Electric Co. ............. 1.2% Senior Housing Properties Trust... 1.1% Stifel Financial Corp. ........... 1.1% Res-Care, Inc. ................... 1.0% Amerisafe, Inc. .................. 1.0% SECTOR ALLOCATION % OF EQUITIES -------- Financials................... 40.3% Industrials.................. 13.4% Consumer Discretionary....... 13.0% Information Technology....... 11.7% Materials.................... 4.2% Health Care.................. 5.9% Utilities.................... 3.9% Consumer Staples............. 3.5% Energy....................... 2.7% Telecommunication Services... 1.4% 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 EMERGING MARKETS OVERVIEW OCTOBER 31, 2008 (UNAUDITED) The MSCI Emerging Markets Index reached dizzying heights in October 2007, ending the month with a five-year annualized return of 39.86% in U.S. dollars before slumping 56.35% for the twelve-month period ending October 31, 2008. The bull market traced its roots to a solid and sustained period of earnings growth and profit-margin improvement. Valuations eventually expanded, with China and India trading above 20x P/E, and the Index as a whole, priced at a premium to U.S. and developed market equities. The tail-end of that bull market was distinguished by strong price momentum and complex financial engineering that was bolstered by unsustainably high levels of cheap credit. But on March 17th, the Federal Reserve startled the global equity markets with an announced bailout of Bear Stearns, the fifth largest investment bank in the U.S. to avert a bankruptcy. For the balance of the year, market participants witnessed a series of truly historic events: the U.S. government takeover of Fannie Mae and Freddie Mac, the non-takeover and subsequent bankruptcy of Lehman Brothers, the shotgun merger of Merrill Lynch with Bank of America, the bailout of the insurance giant AIG, and the end of the independent investment bank business model as Goldman Sachs and Morgan Stanley decided to reorganize as bank holding companies. Emerging markets followed the U.S. into a freefall, as the profound magnitude of the credit crisis became a painful reality. Iceland essentially went bankrupt, margin-calls hit Russian oligarchs, and the International Monetary Fund stepped in to support Hungary and other Central and Eastern Europe countries. Global growth forecasts were slashed and concern mounted that this will be the worst recession in 30 years. Markets once viewed as comparatively resistant to developed market problems, such as China and Brazil, could not withstand the fear of a prolonged economic contraction. By the end of October 2008, the MSCI EM Index was in line with the worst of the 1997-98 "Asian Crisis," which was marked by Russian and Asian economic crises and a series of currency devaluations and sovereign debt defaults. The theory of decoupling has been silenced for the time being as emerging markets equities continue to react to the devastating global financial crisis that began in the U.S. in the summer of 2007. 11 PERFORMANCE OVERVIEW AMERICAN BEACON EMERGING MARKETS FUND(SM) OCTOBER 31, 2008 (UNAUDITED) The Institutional Class of the Emerging Markets Fund returned -55.59% for the twelve months ended October 31, 2008. The Fund outperformed the MSCI Emerging Markets Index (the "Index") return of -56.35% and the Lipper Emerging Market Funds Index return of -56.42% for the period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 7/31/00* THROUGH 10/31/08 (PERFORMANCE GRAPH) * Inception of Fund ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/08 ---------------------------- VALUE OF SINCE $10,000 INCEP. 7/31/00- 1 YEAR 5 YEARS (7/31/00) 10/31/08 ------ ------- --------- -------- Institutional Class(1, 4) ....... -55.59% 8.38% 6.04% $16,230 PlanAhead Class(1, 2, 4) ........ -55.77% 8.07% 5.80% 15,930 AMR Class(1, 4) ................. -55.48% 8.66% 6.31% 16,570 MSCI Emg Mkts Index(3) .......... -56.35% 9.51% 6.19% 16,408 Lipper Emg Mkt Funds Index(3) ... -56.42% 8.74% 5.78% 15,897 (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 was waived in 2004 and 2005 and recouped in 2006. 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 1.41%, 1.77% and 1.18%, 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 by 0.77% over the twelve-month period due to stock selection, while country allocation detracted value. Stock selection had a significantly postive impact overall, specifically in South Korea, India, and South Africa. In South Korea, the Fund benefited from investment in Samsung Electronics (down 31.2%), and in India, from investment in energy companies Bharat Petroleum (down 32.9%) and Hindustan Petroleum (down 35.8% for the period the Fund owned the security). South African companies Arcelormittal (down 8.7% for the period the Fund owned the security) and MTN Group (down 42.1%) also aided performance. Stock selection in Mexico detracted from performance, mainly because of positions in Controladora Comercial Mexicana (down 90.7%) and Gruma (down 81.3%). Country allocation detracted from relative performance, primarily due to underweighting Israel (down 25.0%), the third-best performing market in the Index over the twelve-month period. The Fund also lost value through underweighting Taiwan (down 49.9%), but benefited from underweighting China (down 64.8% and the worst performing market in the Index for the period). The Fund's basic philosophy remains focused on investing in attractively valued companies with above-average earnings growth expectations. 12 PERFORMANCE OVERVIEW AMERICAN BEACON EMERGING MARKETS FUND(SM) OCTOBER 31, 2008(UNAUDITED) TOP TEN HOLDINGS % OF NET ASSETS ---------- Samsung Electronics Company Ltd. .................................. 3.0% Petroleo Brasileiro S.A. .......................................... 2.6% Gazprom OAO ....................................................... 2.3% China Mobile Ltd. ................................................. 2.1% PetroChina Co. Ltd. ............................................... 1.8% LUKOIL Oil Co. .................................................... 1.6% Companhia Vale do Rio Doce ........................................ 1.5% America Movil, S.A.B. de C.V. ..................................... 1.4% Taiwan Semiconductor Manufacturing Co. Ltd. ....................... 1.2% SK Telecom Co. Ltd. ............................................... 1.0% SECTOR ALLOCATION % OF EQUITIES -------- Financials .......................................................... 22.4% Telecommunication Services .......................................... 15.7% Energy .............................................................. 14.7% Information Technology .............................................. 11.9% Materials ........................................................... 10.9% Consumer Discretionary .............................................. 8.4% Industrials ......................................................... 5.5% Utilities ........................................................... 4.9% Consumer Staples .................................................... 4.5% Health Care ......................................................... 1.1% COUNTRY ALLOCATION* (PIE CHART) * Shown as a percentage of equities. % OF EQUITIES -------- China/Hong Kong ..................................................... 17.6% South Korea ......................................................... 13.7% Brazil .............................................................. 12.6% Taiwan .............................................................. 9.5% India ............................................................... 9.0% Other Europe, Middle East, Africa ................................... 8.7% Other Asia .......................................................... 8.4% South Africa ........................................................ 7.8% Russia .............................................................. 7.1% Mexico .............................................................. 5.2% Other Latin America ................................................. 0.4% 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, 2008 (UNAUDITED) Volatility rose substantially during the period as the year-old crisis emanating from subprime mortgages infected the entire market. Investors staged the most dramatic flight to quality since the early 1930's causing government sector returns to substantially outperform all other asset classes. The Finance sector witnessed unprecedented underperformance as it was the focal point for the subprime meltdown. For most financial institutions, liquidity was scarce and capital was not available. The casualty list of highly-rated, industry leaders was startling. While the Agency sector provided a safe haven from Corporate bonds, investors there could not exactly sleep well either. Freddie Mac and Fannie Mae had to be nationalized to survive. The losses on their mortgage portfolios were rising, but it was the unprecedented leverage on their balance sheets that ultimately did them in. The fact that the housing market cooled and the economy softened was not surprising. Housing prices had a long run up and were destined to decline. What struck the markets was the abrupt freeze in liquidity from the collapse of the short-term funding markets (asset-backed commercial paper, securitized investment vehicles, and auction rate securities). These sectors relied on the purchasing power of money market funds and other short-term investors to distribute liquidity throughout the entire economy. However, since these short-term investors are also the most sensitive to credit issues, they were the first to flee when the clouds darkened. The Finance sector is highly dependent on short-term funding, and even temporary disruptions in liquidity can have devastating ramifications. Even worse, as volatility increased and uncertainty prevailed, fear begot fear, and rumors became reality. The Federal Reserve (the "Fed") cut interest rates aggressively during the period in support of the struggling credit markets. In the summer of 2007, the Fed Funds target rate was 5.25%. At October 31, 2008, only 14 months later, the rate was 1.00%. The myriad of government stimulus programs also added enormous amounts of liquidity to the system and caused short-term Treasury yields to decline rapidly. In fact, the shortest maturity Treasuries even spent several weeks in negative territory. Lingering fears of inflation helped the longer end of the yield curve remain fairly stable, but by period end, the sources of inflationary pressure had demonstrably reversed. Commodity prices were cratering, unemployment was rising, and pricing power was non-existent. Talk of deflation even began to appear in economic analysis. 14 HIGH YIELD BOND MARKET OVERVIEW OCTOBER 31, 2008 (UNAUDITED) The year ending October 31, 2008 was characterized by a general worsening of conditions in the high yield market, punctuated by a sharp deterioration in the final two months as the JPMorgan Global High Yield Index fell 25.77% for the twelve-month period. High yield bonds were battered by both fundamental and technical pressures during the period. Fundamentally, the credit crisis that began in mid-2007 steadily worsened and began to impact the real economy as well as credit markets. High yield spreads began the period having widened significantly from the all-time tight level achieved in June 2007, but were still below the long-term average level. This changed quickly, as spreads reacted to further weakness in house prices, employment, and economic growth and widened to above longer-term averages by the end of November 2007. Technical pressures also weighed on the high yield market, as forced selling of leveraged bank loans by hedge funds and CLOs (collateralized loan obligations), both of which employed significant amounts of leverage, altered the risk/reward relationship between the asset classes and caused the high yield sector to move lower. The high yield market was generally range-bound at weaker levels until mid-September when the unexpected bankruptcy of Lehman, followed by the government bailouts of AIG, Fannie Mae and Freddie Mac, resulted in a near standstill of both the investment grade and non-investment grade credit markets. With the economic outlook extremely troubled and credit markets still largely closed for all but the highest quality issuers, the expectation is for default levels to continue to rise going into 2009. This default expectation was getting priced into the high yield market, as spreads over Treasuries spiked to record high levels of 15% toward the end of October as defaults began to increase and as market risk aversion remained elevated. 15 PERFORMANCE OVERVIEW AMERICAN BEACON HIGH YIELD BOND FUND(SM) OCTOBER 31, 2008 (UNAUDITED) The Institutional Class of the High Yield Bond Fund returned -27.03% for the twelve months ended October 31, 2008. The Fund underperformed the JP Morgan Global High-Yield Index (the "Index") return of -25.77% and the Lipper High Current Yield Funds Index, which fell 26.36% for the period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 12/29/00* THROUGH 10/31/08 (PERFORMANCE GRAPH) * Inception of Fund ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/08 ------------------------------ VALUE OF SINCE $10,000 INCEP. 12/29/00- 1 YEAR 5 YEARS (12/29/00) 10/31/08 ------ -------- ---------- --------- Institutional Class(1, 5) ................... -27.03% -0.76% 3.35% $12,944 PlanAhead Class(1, 2, 5) .................... -27.24% -1.01% 3.10% 12,703 AMR Class (1, 3, 5) ......................... -26.84% -0.69% 3.39% 12,986 JPMorgan Global High-Yield Index (4) ........ -25.77% 0.68% 4.07% 13,671 Lipper High Current Yield Funds Index (4) ... -26.36% -0.07% 2.06% 11,730 (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 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 0.82%, 1.04% and 0.62%, 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 mainly due to issue selection and sector allocation to a lesser extent. Added value from issue selections in the Telecom and Other Corporate sectors was not significant enough to offset selections in the Manufacturing, Service, and Finance sectors, which contributed to the relative underperformance. From a sector allocation perspective, the Fund underperformed the Index primarily due to overweighting the Cable/Media sector (down 36.9%), which was the worst-performing sector in the Index for the period. Underweighting the Utility and Transportation sectors (down 19.4% and 15.9%, respectively) also contributed to the underperformance. The Fund benefited from overweighting the second best performing sector in the Index, Other Corporate (down 16.8%). Each sub-advisor's "bottom-up", research intensive investment process, which focuses on a company's cash flow and fundamental credit strengths, remains in place. 16 PERFORMANCE OVERVIEW AMERICAN BEACON HIGH YIELD BOND FUND(SM) OCTOBER 31, 2008 (UNAUDITED) TOP TEN HOLDINGS % OF NET ASSETS ---------- HCA, Inc., 9.125%, Due 11/15/2014 ................................. 1.5% Texas Competitive Electric Holdings Co. LLC, 10.250%, Due 11/1/2015 ...................................................... 1.4% Ford Motor Credit co. LLC, 9.875%, Due 8/10/2011 .................. 1.3% General Motors Acceptance Corp., 6.875%, Due 9/15/2011 ............ 1.2% AES Corp., 8.000%, Due 10/15/2017 ................................. 1.0% Freeport-McMoRan Copper & Gold, Inc., 8.375%, Due 4/1/2017 ........ 1.0% E*Trade Financial Corp., 12.500%, Due 11/30/2017 .................. 0.9% Quebecor media, Inc., 7.750%, Due 3/15/2016 ....................... 0.9% NRG Energy, Inc., 7.375%, Due 2/1/2016 ............................ 0.9% Freescale Semiconductor, Inc., 8.875%, Due 12/15/2014 ............. 0.8% 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. 17 PERFORMANCE OVERVIEW AMERICAN BEACON ENHANCED INCOME FUND(SM) OCTOBER 31, 2008 (UNAUDITED) The PlanAhead Class of the Enhanced Income Fund returned -10.02% for the twelve months ended October 31, 2008. Its benchmark, a blend of 75% Lehman Brothers Aggregate Index ("Lehman Index") and 25% Merrill Lynch All U.S. Convertibles Index ("ML Index"), returned -10.72%. The Fund's peer group, the Lipper Intermediate Investment Grade Index, returned -6.67% for the same period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 7/1/03* THROUGH 10/31/08 (PERFORMANCE GRAPH) * Inception of Fund ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/08 --------------------------- VALUE OF SINCE $10,000 INCEP. 7/1/03- 1 YEAR 5 YEARS (7/1/03) 10/31/08 ------ ------- -------- -------- PlanAhead Class (1, 4) .................................... -10.02% 1.62% 1.58% $10,872 Enhanced Income Composite Index (3) ....................... -10.72% 1.75% 1.81% 11,003 Linked Lehman Bros Aggregrate Index (2) ................... 0.31% 2.96% 2.59% 11,462 Merrill Lynch All U.S. Convertibles Index (2) ............. -38.50% -2.39% -1.09% 9,433 Lipper Intermediate Investment Grade Index (2) ............ -6.67% 1.83% 1.57% 10,867 (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 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. (3.) 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. (4.) The total annual Fund operating expense ratio set forth in the most recent Fund prospectus for the PlanAhead Class shares was 0.95%. 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 -0.6% before expenses, compared to a 0.3% return for the Lehman Index. This portion of the Fund underperformed largely due to an overweight position in Corporates, the worst performing sector in the Lehman Index. The remaining portion of the Fund, managed by the Fund's sub-advisor, returned -30.2% before expenses. These results outperformed the -38.5% return of the ML Index. This portion of the Fund was helped overall by security selection, along with sector allocation decisions. Issue selection within the Consumer Discretionary and Industrials sectors contributed to performance, while individual selection detracted from returns within the Health Care sector. This portion of the Fund benefited from underweight positions in Financials and Materials, as these were two of the worst performing sectors within the ML Index for the period. The Manager and the Fund's sub-advisor remain focused on the Fund's investment objectives of generating income and capital appreciation. 18 PERFORMANCE OVERVIEW AMERICAN BEACON ENHANCED INCOME FUND(SM) OCTOBER 31, 2008 (UNAUDITED) TOP TEN HOLDINGS % OF NET ASSETS ---------- U.S. Treasury Note, 4.250%, Due 11/15/2017 ........................ 3.7% Federal Home Loan Bank, 4.500%, Due 9/16/2013 ..................... 2.4% Federal Home Loan Mortgage Corporation, Pool#G08079, 5.000%, Due 9/1/2035 ........................................... 2.2% Federal National Mortgage Association, Pool #257043, 6.000%, Due 1/1/2038 ........................................... 2.0% Federal Home Loan Mortgage Corporation, Pool #G08273, 5.500%, Due 6/1/2038 ........................................... 1.9% Federal National Mortgage Association, Pool #889572, 5.500%, Due 6/1/2038 ........................................... 1.9% Federal National Mortgage Association, Pool #889260, 5.000%, Due 4/1/2038 ........................................... 1.8% U.S. Treasury Note, 7.875%, Due 2/15/2021 ......................... 1.8% Federal Home Loan Mortgage Corporation, Pool #G08269, 5.500%, Due 5/1/2038 ........................................... 1.6% Federal Home Loan Mortgage Corporation, Pool #G08255, 5.000%, Due 3/1/2038 ........................................... 1.6% FIXED-INCOME SECTOR ALLOCATION % OF FIXED INCOME ------------ Mortgage-Backed ................................................. 39.2% Corporate Bonds ................................................. 29.4% Convertible Bonds ............................................... 12.2% U.S. Treasury ................................................... 9.9% U.S. Agency ..................................................... 5.1% Asset-Backed .................................................... 4.2% EQUITY SECTOR ALLOCATION % OF EQUITIES -------- Financials .......................................................... 38.5% Information Technology .............................................. 20.2% Health Care ......................................................... 13.0% Consumer Staples .................................................... 8.0% Industrials ......................................................... 7.5% Consumer Discretionary .............................................. 5.7% Energy .............................................................. 5.2% Materials ........................................................... 1.9% 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. 19 PERFORMANCE OVERVIEW AMERICAN BEACON INTERMEDIATE BOND FUND(SM) OCTOBER 31, 2008 (UNAUDITED) The Institutional Class of the Intermediate Bond Fund returned -0.26% for the twelve months ended October 31, 2008, trailing the Lehman Brothers Aggregate Index (the "Index") return of 0.31% but ahead of the Lipper Intermediate Investment Grade Index return of -6.67% for the same period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 10/31/98 THROUGH 10/31/08 (PERFORMANCE GRAPH) ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/08 --------------------------- VALUE OF $10,000 10/31/98- 1 YEAR 5 YEARS 10 YEARS 10/31/08 ------ ------- -------- --------- Institutional Class (1, 3) ........................ -0.26% 3.40% 4.59% $15,665 Lehman Bros. Agg. Index (2) ....................... 0.31% 3.48% 5.00% 16,290 Lipper Intermediate Inv. Grade Index (2) .......... -6.67% 1.83% 3.97% 14,756 (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 0.35%. 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. Prior to the deduction of expenses, the Fund was only slightly behind the Index. However, the Fund did not generate enough excess performance to offset its expenses. The Fund underperformed the Index mostly due to its sector allocation, as individual security selection contributed positively towards performance. The Fund's large overweight in Corporates, the worst performing sector of the Index, accounted for most of the underperformance relative to the Index. The Fund enjoyed good security selection among its Corporate securities, in part due to class action settlement proceeds that the Fund received in March 2008 related to investment activity in 2002. Good selection also was attained in the Commercial Mortgage Backed Securities (CMBS) sector, but not enough to offset the impact of the large position in Corporates. 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 ---------- Federal Home Loan Mortgage Corp., 5.125%, Due 4/18/2011 ........... 3.1% U.S. Treasury Note, 4.000%, Due 8/15/2018 ......................... 2.6% Federal Home Loan Bank, 4.500%, Due 9/16/2013 ..................... 2.3% U.S. Treasury Note, 4.125%, Due 5/15/2015 ......................... 2.1% U.S. Treasury Note, 4.750%, Due 5/15/2014 ......................... 1.7% U.S. Treasury Note, 4.250%, Due 11/15/2017 ........................ 1.7% U.S. Treasury Note, 3.125%, Due 8/31/2013 ......................... 1.6% U.S. Treasury Note, 4.375%, Due 2/15/2038 ......................... 1.6% Federal Home Loan Mortgage Corp., Pool #A73703, 5.000%, Due 3/01/2038 .................................................. 1.4% Federal National Mortgage Association, 5.375%, Due 6/12/2017 ...... 1.4% SECTOR ALLOCATION % OF FIXED INCOME ------------ Mortgage-Backed ................................................. 43.5% Corporates ...................................................... 25.7% U.S. Treasury ................................................... 16.0% U.S. Agency ..................................................... 12.7% Asset-Backed .................................................... 2.1% 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 SHORT-TERM BOND FUND(SM) OCTOBER 31, 2008 (UNAUDITED) The Institutional Class of the Short-Term Bond Fund returned 2.21% for the twelve months ended October 31, 2008, which underperformed the Merrill Lynch 1-3 Year Gov/Corp Index (the "Index") return of 3.97% but substantially outperformed the Lipper Short Investment Grade Bond Funds Index return of -3.58%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 10/31/98 THROUGH 10/31/08 (PERFORMANCE GRAPH) ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/08 --------------------------- VALUE OF $10,000 10/31/98- 1 YEAR 5 YEARS 10 YEARS 10/31/08 ------ ------- -------- --------- Institutional Class(1, 3)................................ 2.21% 3.14% 4.30% $15,238 PlanAhead Class(1, 3).................................... 1.54% 2.57% 3.78% 14,488 Merrill Lynch 1-3 Yr. Gov./Corp .Index(2)................ 3.97% 3.37% 4.52% 15,565 Lipper Short Inv. Grade Index (2)........................ -3.58% 1.66% 3.31% 13,849 (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 0.38% and 0.99%, 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's return during the period reflects its overweight position in the Corporate and Asset-Backed sectors relative to the Index. Both of these sectors underperformed Treasuries and Agencies as credit spreads widened in response to the continuing credit crisis. The Fund generally maintains an overweight position in these sectors to generate incremental yield-to-maturity compared to the Index. However, during periods of significant market disruptions, the holdings in these sectors can underperform. To protect against these events, the Fund's holdings are diversified among investment-grade issuers that we believe are likely to weather such volatility. Duration did not play a significant role during the period. The Fund began and ended the period with a neutral duration, relative to the Index, and made only minor changes throughout. The primary attribute of the Fund's performance was its sector allocation. This period was one of the most challenging in recent history, but we remain confident in the long-term success of the Fund's investment strategy. Market volatility is likely to remain high for several more months, and we will remain conservative in our approach to credit risk as we look to take advantage of opportunities to generate attractive long-term results. 21 PERFORMANCE OVERVIEW AMERICAN BEACON SHORT-TERM BOND FUND(SM) OCTOBER 31, 2008 (UNAUDITED) TOP TEN HOLDINGS % OF NET ASSETS ---------- U.S. Treasury Note, 4.875%, Due 4/30/2011 ......................... 8.2% U.S. Treasury Note, 4.500%, Due 2/28/2011 ......................... 8.2% U.S. Treasury Note, 4.375%, Due 12/15/2010 ........................ 8.1% U.S. Treasury Note, 4.250%, Due 10/15/2010 ........................ 8.1% U.S. Treasury Note, 4.125%, Due 8/15/2010 ......................... 8.0% U.S. Treasury Note, 2.875%, Due 6/30/2010 ......................... 7.8% U.S. Treasury Note, 2.175%, Due 4/30/2010 ......................... 7.7% U.S. Treasury Note, 2.000%, Due 2/28/2010 ......................... 7.7% U.S. Treasury Note, 3.125%, Due 11/30/2009 ........................ 4.0% U.S. Treasury Note, 5.125%, Due 6/30/2011 ......................... 3.7% SECTOR ALLOCATION % OF FIXED INCOME ------------ Treasury ........................................................ 72.9% Corporate ....................................................... 17.0% Asset-Backed .................................................... 5.8% Agency .......................................................... 2.8% Mortgage-Backed ................................................. 1.5% 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. 22 FUND EXPENSES -- ACTUAL OCTOBER 31, 2008 (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, 2008 through October 31, 2008. 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 5/1/08 .... $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 10/31/08 ..... $ 763.65 $ 677.76 $ 661.83 $ 761.69 $ 501.67 $ 734.71 $ 956.52 $ 996.50 Expenses Paid During Period 5/1/08- 10/31/08*....................... $ 2.48 $ 3.75 $ 4.93 $ 4.65 $ 4.91 $ 3.49 $ 1.43 $ 1.46 Annualized Expense Ratio .......... 0.56% 0.89% 1.18% 1.05% 1.30% 0.80% 0.29% 0.29% SMALL CAP VALUE EMERGING ENHANCED BALANCED MID-CAP OPPORTUNITY MARKETS HIGH YIELD INCOME SHORT-TERM PLANAHEAD CLASS FUND VALUE FUND FUND FUND BOND FUND FUND BOND FUND - --------------- --------- ---------- ----------- --------- ---------- --------- ---------- Beginning Account Value 5/1/08 .... $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 Ending Account Value 10/31/08 ..... $ 762.89 $ 661.07 $ 761.74 $ 500.57 $ 732.78 $ 887.37 $ 992.77 Expenses Paid During Period 5/1/08- 10/31/08* ...................... $ 3.59 $ 5.14 $ 5.80 $ 6.64 $ 4.75 $ 4.32 $ 4.16 Annualized Expense Ratio .......... 0.81% 1.23% 1.31% 1.76% 1.09% 0.91% 0.83% BALANCED MID-CAP SERVICE CLASS FUND VALUE FUND - ------------- --------- ---------- Beginning Account Value 5/1/08 ................. $1,000.00 $1,000.00 Ending Account Value 10/31/08 .................. $ 762.27 $ 660.67 Expenses Paid During Period 5/1/08-10/31/08* ... $ 4.78 $ 6.22 Annualized Expense Ratio ....................... 1.08% 1.49% BALANCED LARGE CAP MID-CAP EMERGING HIGH YIELD AMR CLASS FUND GROWTH FUND VALUE FUND MARKETS FUND BOND FUND - --------- --------- ----------- ---------- ------------ ---------- Beginning Account Value 5/1/08 ................. $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 Ending Account Value 10/31/2008 ................ $ 764.44 $ 679.70 $ 662.60 $ 502.22 $ 734.98 Expenses Paid During Period 5/1/08-10/31/08* ... $ 1.37 $ 2.45 $ 3.59 $ 4.04 $ 2.31 Annualized Expense Ratio ....................... 0.31% 0.58% 0.86% 1.07% 0.53% * 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 (366) to reflect the half-year period. See accompanying notes 23 FUND EXPENSES -- HYPOTHETICAL OCTOBER 31, 2008 (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 5/1/08 .... $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 10/31/08 ..... $1,022.32 $1,020.66 $1,019.20 $1,019.86 $1,018.60 $1,021.11 $1,023.68 $1,023.68 Expenses Paid During Period 5/1/08- 10/31/08* ...................... $ 2.85 $ 4.52 $ 5.99 $ 5.33 $ 6.60 $ 4.06 $ 1.48 $ 1.48 Annualized Expense Ratio .......... 0.56% 0.89% 1.18% 1.05% 1.30% 0.80% 0.29% 0.29% SMALL CAP VALUE EMERGING ENHANCED BALANCED MID-CAP OPPORTUNITY MARKETS HIGH YIELD INCOME SHORT-TERM PLANAHEAD CLASS FUND VALUE FUND FUND FUND BOND FUND FUND BOND FUND - --------------- --------- ---------- ----------- --------- ---------- --------- ---------- Beginning Account Value 5/1/08 .... $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 Ending Account Value 10/31/08 ..... $1,021.06 $1,018.95 $1,018.55 $1,016.29 $1,019.66 $1,020.56 $1,020.96 Expenses Paid During Period 5/1/08- 10/31/08* ...................... $ 4.12 $ 6.24 $ 6.65 $ 8.92 $ 5.53 $ 4.62 $ 4.22 Annualized Expense Ratio .......... 0.81% 1.23% 1.31% 1.76% 1.09% 0.91% 0.83% BALANCED MID-CAP SERVICE CLASS FUND VALUE FUND - ------------- --------- ---------- Beginning Account Value 5/1/08 ................. $1,000.00 $1,000.00 Ending Account Value 10/31/08 .................. $1,019.71 $1,017.65 Expenses Paid During Period 5/1/08-10/31/08* ... $ 5.48 $ 7.56 Annualized Expense Ratio ....................... 0.81% 1.23% BALANCED LARGE CAP MID-CAP EMERGING HIGH YIELD AMR CLASS FUND GROWTH FUND VALUE FUND MARKETS FUND BOND FUND - --------- --------- ----------- ---------- ------------ ---------- Beginning Account Value 5/1/08 ................. $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 Ending Account Value 10/31/08 .................. $1,023.58 $1,022.22 $1,020.81 $1,019.76 $1,022.47 Expenses Paid During Period 5/1/08-10/31/08* ... $ 1.58 $ 2.95 $ 4.37 $ 5.43 $ 2.69 Annualized Expense Ratio ....................... 0.31% 0.58% 0.86% 1.07% 0.53% * 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 (366) to reflect the half-year period. See accompanying notes 24 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, and American Beacon Short-Term Bond Fund) (collectively the "Funds"), including the schedules of investments, as of October 31, 2008, 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, 2008, 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 at October 31, 2008, 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 23, 2008 See accompanying notes 25 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 50.42% CONSUMER DISCRETIONARY - 3.96% HOTELS, RESTAURANTS & LEISURE - 0.66% Carnival Corp. + ..................................... 155,300 $ 3,944 Wyndham Worldwide Corp. .............................. 127,200 1,042 --------- 4,986 --------- HOUSEHOLD DURABLES - 0.48% Fortune Brands, Inc. + ............................... 67,600 2,578 Newell Rubbermaid, Inc. .............................. 75,100 1,033 --------- 3,611 --------- INTERNET & CATALOG RETAIL - 0.18% eBay, Inc. ## ........................................ 88,700 1,354 --------- MEDIA - 0.78% CBS Corp. + .......................................... 196,100 1,904 Interpublic Group of Cos., Inc. ## + ................. 256,100 1,329 Walt Disney Co. Ltd. ................................. 103,000 2,668 --------- 5,901 --------- MULTILINE RETAIL - 0.78% J.C. Penney Company, Inc. ............................ 57,800 1,383 Macy's, Inc. + ....................................... 50,854 625 Target Corp. ......................................... 61,200 2,455 Wal-Mart Stores, Inc. ................................ 26,000 1,451 --------- 5,914 --------- SPECIALTY RETAIL - 1.08% Gap, Inc. ............................................ 61,700 798 The Home Depot, Inc. + ............................... 291,250 6,871 Limited Brands, Inc. + ............................... 36,100 433 --------- 8,102 --------- TOTAL CONSUMER DISCRETIONARY 29,868 --------- CONSUMER STAPLES - 4.62% BEVERAGES - 0.77% Coca-Cola Co. ........................................ 35,700 1,573 Diageo plc, ADR ...................................... 68,200 4,241 --------- 5,814 --------- FOOD & DRUG RETAILING - 0.25% Safeway, Inc. ........................................ 87,600 1,863 --------- FOOD PRODUCTS - 0.53% Kraft Foods, Inc. .................................... 120,645 3,516 Unilever plc, ADR ## + ............................... 21,700 489 --------- 4,005 --------- TOBACCO - 3.07% Altria Group, Inc. ................................... 166,800 3,201 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) Imperial Tobacco Group plc, ADR + .................... 121,900 $ 6,497 Philip Morris International, Inc. .................... 223,500 9,716 UST, Inc. ............................................ 54,900 3,711 --------- 23,125 --------- TOTAL CONSUMER STAPLES 34,807 --------- ENERGY - 5.66% OIL & GAS - 5.66% Chevron Corp. ........................................ 101,428 7,566 ConocoPhillips ....................................... 216,276 11,251 Devon Energy Corp. ................................... 87,900 7,108 Duke Energy Corp. .................................... 178,000 2,916 Exxon Mobil Corp. .................................... 17,000 1,260 Occidental Petroleum Corp. ........................... 115,900 6,437 Royal Dutch Shell plc, ADR + ......................... 97,800 5,407 Sunoco, Inc. + ....................................... 23,200 708 --------- TOTAL ENERGY 42,653 --------- FINANCIALS - 9.59% BANKS - 3.43% Bank of America Corp. ................................ 575,196 13,902 Comerica, Inc. + ..................................... 17,100 472 KeyCorp + ............................................ 111,157 1,359 National City Corp. + ................................ 1,175,400 3,174 U.S. Bancorp ......................................... 56,260 1,677 Wachovia Corp. + ..................................... 404,300 2,592 Washington Mutual, Inc. .............................. 468,800 29 Wells Fargo & Co. + .................................. 78,300 2,666 --------- 25,871 --------- DIVERSIFIED FINANCIALS - 3.76% American Express Co. ................................. 152,900 4,205 Capital One Financial Corp. + ........................ 69,700 2,727 Citigroup, Inc. + .................................... 619,142 8,451 JP Morgan Chase & Co. ................................ 240,834 9,934 Merrill Lynch & Co., Inc. ............................ 66,300 1,232 SLM Corp. ## + ....................................... 165,200 1,763 --------- 28,312 --------- INSURANCE - 2.40% ACE Ltd. ............................................. 92,000 5,277 American International Group, Inc. + ................. 88,000 168 Conseco, Inc. ## + ................................... 95,500 178 Genworth Financial, Inc. ............................. 177,400 859 Hartford Financial Services Group, Inc. .............. 29,800 308 Lincoln National Corp. ## ............................ 15,900 274 MetLife, Inc. ........................................ 118,888 3,949 Prudential Financial, Inc. ........................... 9,500 285 See accompanying notes 26 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) Travelers Cos., Inc. ................................. 95,100 $ 4,046 UnumProvident Corp. .................................. 8,100 128 XL Capital Ltd. + .................................... 273,300 2,651 --------- 18,123 --------- TOTAL FINANCIALS 72,306 --------- HEALTH CARE - 6.34% HEALTH CARE EQUIPMENT & SUPPLIES - 0.53% Baxter International, Inc. ........................... 66,100 3,999 --------- HEALTH CARE PROVIDERS & SERVICES - 0.79% Cigna Corp. .......................................... 119,500 1,948 UnitedHealth Group, Inc. ............................. 58,800 1,395 WellPoint, Inc. ## ................................... 68,300 2,655 --------- 5,998 --------- PHARMACEUTICALS - 5.02% Amgen, Inc. ## ....................................... 13,000 779 Bristol-Myers Squibb Co. ............................. 373,100 7,667 Eli Lilly & Co. ...................................... 97,900 3,311 Johnson & Johnson .................................... 45,000 2,760 Merck & Co., Inc. .................................... 114,300 3,538 Pfizer, Inc. ......................................... 534,700 9,469 Schering-Plough Corp. ................................ 228,300 3,308 Wyeth Corp. .......................................... 217,800 7,009 --------- 37,841 --------- TOTAL HEALTH CARE 47,838 --------- INDUSTRIALS - 7.24% AEROSPACE & DEFENSE - 1.88% Boeing Co. ........................................... 72,600 3,795 Northrop Grumman Corp. ............................... 46,700 2,190 Raytheon Co. ......................................... 90,600 4,631 United Technologies Corp. ............................ 64,400 3,539 --------- 14,155 --------- AIR FREIGHT & COURIERS - 0.24% FedEx Corp. .......................................... 28,200 1,843 --------- INDUSTRIAL CONGLOMERATES - 2.49% 3M Co. ............................................... 63,200 4,064 General Electric Co. ................................. 196,200 3,828 Honeywell International, Inc. ........................ 237,400 7,229 Textron, Inc. + ...................................... 82,900 1,467 Tyco International Ltd. .............................. 85,725 2,167 --------- 18,755 --------- MACHINERY - 1.88% Caterpillar, Inc. .................................... 76,100 2,905 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) Eaton Corp. + ........................................ 36,400 $ 1,623 Illinois Tool Works, Inc. ............................ 143,900 4,805 ITT Industries, Inc. ................................. 77,000 3,427 PACCAR, Inc. + ....................................... 49,600 1,450 --------- 14,210 --------- TRANSPORTATION INFRASTRUCTURE - 0.75% Burlington Northern Santa Fe Corp. ................... 63,500 5,655 --------- TOTAL INDUSTRIALS ....................................... 54,618 --------- INFORMATION TECHNOLOGY - 5.54% COMMUNICATIONS EQUIPMENT - 0.36% Alcatel-Lucent, ADR .................................. 402,000 1,033 Nokia Corp., ADR + ................................... 107,700 1,635 --------- 2,668 --------- COMPUTERS & PERIPHERALS - 2.67% Hewlett-Packard Co. .................................. 240,700 9,214 International Business Machines Corp. ................ 117,200 10,896 --------- 20,110 --------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.83% Intel Corp. .......................................... 272,000 4,352 Tyco Electronics Ltd. ................................ 97,825 1,902 --------- 6,254 --------- SEMICONDUCTOR EQUIPMENT & PRODUCTS - 0.14% Texas Instruments, Inc. .............................. 55,400 1,084 --------- SOFTWARE - 1.54% CA, Inc. ............................................. 285,674 5,085 Microsoft Corp. ...................................... 179,500 4,008 Oracle Corp. ## ...................................... 139,000 2,542 --------- 11,635 --------- TOTAL INFORMATION TECHNOLOGY 41,751 --------- MATERIALS - 1.96% CHEMICALS - 1.91% Air Products & Chemicals, Inc. ....................... 35,800 2,081 Dow Chemical Co. ..................................... 172,600 4,603 E. I. du Pont de Nemours & Co. ....................... 116,800 3,738 Eastman Chemical Co. + ............................... 47,300 1,911 PPG Industries, Inc. ................................. 42,100 2,087 --------- 14,420 --------- METALS & MINING - 0.05% Alcoa, Inc. ## ....................................... 28,000 322 --------- TOTAL MATERIALS 14,742 --------- See accompanying notes 27 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) TELECOMMUNICATION SERVICES - 2.64% DIVERSIFIED TELECOMMUNICATION - 2.64% AT&T, Inc. ........................................... 429,477 $ 11,497 Fairpoint Communications, Inc. + ..................... 3,428 14 Verizon Communications, Inc. ......................... 282,628 8,385 --------- TOTAL TELECOMMUNICATION SERVICES 19,896 --------- UTILITIES - 2.87% ELECTRIC UTILITIES - 2.26% CenterPoint Energy, Inc. ............................. 143,000 1,647 Constellation Energy Group, Inc. + ................... 24,000 581 Dominion Resources, Inc. ............................. 105,300 3,820 Entergy Corp. ........................................ 58,200 4,543 Exelon Corp. ......................................... 67,000 3,634 FPL Group, Inc. ...................................... 35,400 1,672 Public Service Enterprise Group, Inc. + .............. 41,200 1,160 --------- 17,057 --------- GAS UTILITIES - 0.61% Spectra Energy Corp. ................................. 236,100 4,564 --------- TOTAL UTILITIES 21,621 --------- TOTAL COMMON STOCKS 380,100 --------- PAR AMOUNT ----------- CORPORATE OBLIGATIONS - 13.15% AEROSPACE & DEFENSE - 0.07% Raytheon Co., 5.375%, Due 4/1/2013 .............................. $ 550 519 --------- BANKS - 1.75% Bank of America Corp., 7.80%, Due 9/15/2016 .............................. 900 844 6.00%, Due 9/1/2017 ............................... 400 350 5.75%, Due 12/1/2017 .............................. 875 754 Bank of New York Mellon Corp., 4.95%, Due 11/1/2012 .............................. 355 343 5.125%, Due 8/27/2013 ............................. 400 381 Bank One Corp., 5.90%, Due 11/15/2011 ............................. 1,225 1,200 4.90%, Due 4/30/2015 + ............................ 550 481 Citigroup, Inc., 5.125%, Due 2/14/2011 + ........................... 2,175 2,061 6.125%, Due 11/21/2017 ............................ 1,055 907 Fifth Third Bancorp, 8.25%, Due 3/1/2038 ............................... 1,500 1,065 ING Bank, NV, 5.125%, Due 5/1/2015 ++ ........................... 450 434 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) JP Morgan Chase & Co., 6.75%, Due 2/1/2011 .............................. $ 1,075 $ 1,067 6.00%, Due 1/15/2018 ............................. 1,090 978 Wachovia Corp., 5.70%, Due 8/1/2013 .............................. 180 162 5.75%, Due 6/15/2017 ............................. 275 237 Washington Mutual Finance Corp., 6.875%, Due 5/15/2011 ............................ 660 628 Wells Fargo & Co., 5.25%, Due 10/23/2012 ............................ 840 804 5.625%, Due 12/11/2017 ........................... 525 463 --------- 13,159 --------- BASIC MATERIALS - 0.10% International Paper Co., 7.40%, Due 6/15/2014 .............................. 515 433 Weyerhaeuser Co., 5.95%, Due 11/1/2008 .............................. 340 340 --------- 773 --------- COMMUNICATIONS - 1.17% Comcast Cable Communications Holdings, Inc., 8.375%, Due 3/15/2013 ............................. 1,050 1,019 Comcast Corp., 5.30%, Due 1/15/2014 .............................. 415 359 5.875%, Due 2/15/2018 ............................. 305 255 6.45%, Due 3/15/2037 .............................. 2,630 2,020 Rogers Communications, Inc., 6.80%, Due 8/15/2018 .............................. 425 372 Time Warner Cable, Inc., 5.85%, Due 5/1/2017 ............................... 1,055 864 7.30%, Due 7/1/2038 ............................... 1,920 1,606 Verizon Communications, Inc., 6.90%, Due 4/15/2038 .............................. 425 356 Viacom, Inc., 6.875%, Due 4/30/2036 ............................. 2,880 2,010 --------- 8,861 --------- CONSUMER DISCRETIONARY - 0.38% Best Buy Co., Inc., 6.75%, Due 7/15/2013 ++ ........................... 415 391 Target Corp., 6.50%, Due 10/15/2037 ............................. 445 320 Wal-Mart Stores, Inc., 7.55%, Due 2/15/2030 .............................. 425 413 6.50%, Due 8/15/2037 .............................. 1,340 1,203 6.20%, Due 4/15/2038 .............................. 656 566 --------- 2,893 --------- See accompanying notes 28 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) CONSUMER STAPLES - 0.45% Archer-Daniels-Midland Co., 6.45%, Due 1/15/2038 .............................. $ 350 $ 280 Coca-Cola Enterprises, Inc., 7.375%, Due 3/3/2014 .............................. 175 178 Diageo Capital plc, 5.75%, Due 10/23/2017 ............................. 240 206 Dr Pepper Snapple Group, Inc., 6.82%, Due 5/1/2018 ++ ............................ 250 219 Kellogg Co., 4.25%, Due 3/6/2013 ............................... 500 462 Kraft Foods, Inc., 6.50%, Due 8/11/2017 .............................. 655 576 7.00%, Due 8/11/2037 .............................. 1,580 1,275 PepsiCo, Inc., 7.90%, Due 11/1/2018 .............................. 225 237 --------- 3,433 --------- ENERGY - 0.85% Cameron International Corp., 6.375%, Due 7/15/2018 ............................. 215 178 Canadian Natural Resources Ltd., 6.70%, Due 7/15/2011 .............................. 410 398 6.25%, Due 3/15/2038 .............................. 425 296 ConocoPhillips, 5.20%, Due 5/15/2018 .............................. 425 356 Consolidated Natural Gas Co., 6.00%, Due 10/15/2010 ............................. 495 495 EOG Resources, Inc., 4.75%, Due 3/15/2014 ++ ........................... 550 578 Marathon Oil Corp., 6.00%, Due 10/1/2017 .............................. 545 434 Suncor Energy, Inc., 6.10%, Due 6/1/2018 ............................... 545 432 Transocean, Inc., 6.00%, Due 3/15/2018 .............................. 500 428 6.80%, Due 3/15/2038 .............................. 3,170 2,462 Weatherford International, Inc., 5.95%, Due 6/15/2012 .............................. 385 347 --------- 6,404 --------- FINANCE - 1.39% American Express Co., 8.15%, Due 3/19/2038 .............................. 325 255 American Express Credit Corp., 5.875%, Due 5/2/2013 .............................. 475 397 American General Finance Corp., 4.875%, Due 5/15/2010 ............................. 500 239 4.00%, Due 3/15/2011 .............................. 1,245 482 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) Ameriprise Financial, Inc., 5.35%, Due 11/15/2010 ............................. $ 975 $ 897 Bear Stearns Cos., Inc., 7.25%, Due 2/1/2018 ............................... 340 320 Capital One Financial Corp., 5.70%, Due 9/15/2011 .............................. 490 431 CIT Group, Inc., 4.75%, Due 12/15/2010 + ........................... 270 165 CME Group, Inc., 5.40%, Due 8/1/2013 ............................... 475 448 Countrywide Home Loans, Inc., 4.00%, Due 3/22/2011 .............................. 140 129 General Electric Capital Corp., 4.375%, Due 3/3/2012 .............................. 700 639 5.65%, Due 6/9/2014 ............................... 1,050 934 5.625%, Due 5/1/2018 + ............................ 500 412 Goldman Sachs Group, Inc., 4.75%, Due 7/15/2013 .............................. 450 380 6.25%, Due 9/1/2017 ............................... 550 460 5.95%, Due 1/18/2018 .............................. 280 228 6.75%, Due 10/1/2037 .............................. 1,402 913 HSBC Finance Corp., 5.25%, Due 1/14/2011 .............................. 1,700 1,564 International Lease Finance Corp., 5.75%, Due 6/15/2011 .............................. 475 326 Merrill Lynch & Co., Inc., 5.45%, Due 2/5/2013 ............................... 340 307 6.875%, Due 4/25/2018 ............................. 330 293 6.11%, Due 1/29/2037 .............................. 425 281 --------- 10,500 --------- HEALTH CARE - 0.43% Covidien International Finance SA, 5.45%, Due 10/15/2012 ............................. 360 347 6.55%, Due 10/15/2037 ............................. 1,000 791 UnitedHealth Group, Inc., 5.25%, Due 3/15/2011 .............................. 735 710 6.625%, Due 11/15/2037 ............................ 2,000 1,381 --------- 3,229 --------- INDUSTRIALS - 1.96% American Honda Finance Corp., 4.625%, Due 4/2/2013 ++ ........................... 425 386 Amgen, Inc., 6.90%, Due 6/1/2038 ............................... 1,480 1,266 ArcelorMittal South Africa Ltd., 6.125%, Due 6/1/2018 ++ ........................... 595 410 Burlington Northern Santa Fe Corp., 5.75%, Due 3/15/2018 .............................. 425 372 See accompanying notes 29 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) Canadian National Railway Co., 5.55%, Due 5/15/2018 .............................. $ 500 $ 435 Caterpillar Financial Services Corp., 4.85%, Due 12/7/2012 .............................. 505 469 4.25%, Due 2/8/2013 ............................... 500 454 Con-way, Inc., 8.875%, Due 5/1/2010 .............................. 1,850 1,859 CRH America, Inc., 6.00%, Due 9/30/2016 .............................. 985 711 Daimler Finance NA LLC, 7.75%, Due 1/18/2011 .............................. 1,000 838 5.875%, Due 3/15/2011 ............................. 450 367 5.75%, Due 9/8/2011 ............................... 550 440 Eaton Corp., 5.60%, Due 5/15/2018 .............................. 340 297 Honeywell International, Inc., 4.25%, Due 3/1/2013 ............................... 500 460 Koninklijke Philips Electronics NV, 5.75%, Due 3/11/2018 .............................. 335 277 Masco Corp., 6.125%, Due 10/3/2016 ............................. 430 304 Nissan Motor Acceptance Corp., 5.625%, Due 3/14/2011 ++ .......................... 500 511 Norfolk Southern Corp., 5.75%, Due 4/1/2018 ++ ............................ 425 366 Tyco Electronics Group SA, 6.55%, Due 10/1/2017 .............................. 1,455 1,211 7.125%, Due 10/1/2037 ............................. 750 544 Unilever Capital Corp., 7.125%, Due 11/1/2010 ............................. 2,000 2,067 Union Pacific Corp., 6.50%, Due 4/15/2012 .............................. 550 535 United Technologies Corp., 6.125%, Due 7/15/2038 ............................. 210 181 --------- 14,760 --------- INSURANCE - 1.08% Aegon Funding Corp., 5.75%, Due 12/15/2020 ............................. 450 334 American International Group, Inc., 5.85%, Due 1/16/2018 .............................. 550 200 6.25%, Due 5/1/2036 ............................... 425 145 Hartford Financial Services Group, Inc., 5.25%, Due 10/15/2011 ............................. 975 826 5.375%, Due 3/15/2017 ............................. 685 479 John Hancock Global Funding II, 7.90%, Due 7/2/2010 ++ ............................ 1,125 1,147 Liberty Mutual Insurance Co., 7.875%, Due 10/15/2026 ++ ......................... 1,500 1,248 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) Lincoln National Corp., 4.75%, Due 2/15/2014 .............................. $ 275 $ 245 MetLife, Inc., 5.375%, Due 12/15/2012 ............................ 660 597 6.817%, Due 8/15/2018 ............................. 625 538 6.375%, Due 6/15/2034 ............................. 450 330 Metropolitan Life Global Funding I, 4.625%, Due 8/19/2010 ++ .......................... 900 848 Prudential Financial, Inc., 4.50%, Due 7/15/2013 .............................. 550 452 5.10%, Due 9/20/2014 .............................. 690 522 Willis North America, Inc., 6.20%, Due 3/28/2017 .............................. 360 262 --------- 8,173 --------- PHARMACEUTICALS - 0.94% Abbott Laboratories, 6.15%, Due 11/30/2037 ............................. 447 384 AstraZeneca plc, 6.45%, Due 9/15/2037 .............................. 1,880 1,610 Biogen Idec, Inc., 6.875%, Due 3/1/2018 .............................. 1,500 1,440 Bristol-Myers Squibb Co., 5.45%, Due 5/1/2018 ............................... 250 218 6.125%, Due 5/1/2038 .............................. 875 727 GlaxoSmithKline Capital, Inc., 5.65%, Due 5/15/2018 .............................. 250 222 6.375%, Due 5/15/2038 ............................. 1,370 1,158 Hospira, Inc., 6.05%, Due 3/30/2017 .............................. 360 302 Schering-Plough Corp., 6.75%, Due 12/1/2033 .............................. 600 497 Wyeth Corp., 5.50%, Due 2/1/2014 ............................... 535 501 --------- 7,059 --------- REAL ESTATE - 0.25% Equity Residential, 5.125%, Due 3/15/2016 ............................. 895 609 ProLogis Trust, 5.50%, Due 4/1/2012 ............................... 450 292 5.625%, Due 11/15/2016 ............................ 550 300 Simon Property Group LP, 5.30%, Due 5/30/2013 .............................. 425 351 5.75%, Due 12/1/2015 .............................. 460 342 --------- 1,894 --------- TECHNOLOGY - 0.49% Cisco Systems, Inc., 5.25%, Due 2/22/2011 .............................. 550 551 See accompanying notes 30 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) Computer Sciences Corp., 5.50%, Due 3/15/2013 + ++ ......................... $ 140 $ 121 6.50%, Due 3/15/2018 ++ ........................... 495 384 Hewlett-Packard Co., 4.50%, Due 3/1/2013 + ............................. 885 823 International Business Machines Corp., 7.625%, Due 10/15/2018 ............................ 770 797 Oracle Corp., 6.50%, Due 4/15/2038 .............................. 970 807 Xerox Corp., 5.65%, Due 5/15/2013 .............................. 250 197 --------- 3,680 --------- TELEPHONE - 0.89% America Movil, S.A.B. de C.V., 6.375%, Due 3/1/2035 .............................. 425 296 AT&T, Inc., 5.10%, Due 9/15/2014 .............................. 1,085 948 5.625%, Due 6/15/2016 ............................. 550 483 5.50%, Due 2/1/2018 ............................... 300 255 6.80%, Due 5/15/2036 .............................. 250 212 6.40%, Due 5/15/2038 .............................. 1,840 1,473 Cingular Wireless Services, Inc., 7.875%, Due 3/1/2011 .............................. 550 549 8.75%, Due 3/1/2031 ............................... 445 414 Deutsche Telekom AG, 8.00%, Due 6/15/2010 .............................. 380 374 Telecom Italia S.p.A., 4.00%, Due 11/15/2008 ............................. 580 579 Telefonica Emisiones SAU, 5.984%, Due 6/20/2011 ............................. 380 363 Verizon Communications, Inc., 5.50%, Due 4/1/2017 ............................... 500 426 Vodafone Group plc, 6.15%, Due 2/27/2037 .............................. 425 318 --------- 6,690 --------- UTILITIES - 0.95% American Water Capital Corp., 6.593%, Due 10/15/2037 ............................ 1,492 988 Columbus Southern Power Co., 5.50%, Due 3/1/2013 ............................... 880 808 Dominion Resources, Inc., Series A, 5.60%, Due 11/15/2016 ................... 500 412 Duke Energy Carolinas LLC, 5.10%, Due 4/15/2018 .............................. 500 436 Duke Energy Indiana, Inc., 6.05%, Due 6/15/2016 .............................. 520 430 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) MidAmerican Energy Holdings Co., 5.875%, Due 10/1/2012 ............................. $ 1,070 $ 1,013 6.125%, Due 4/1/2036 .............................. 425 313 Public Service Enterprise Group, Inc., 6.95%, Due 6/1/2012 ............................... 675 638 Southern Power Co., 6.25%, Due 7/15/2012 .............................. 755 747 Union Electric Co., 6.70%, Due 2/1/2019 ............................... 265 220 Virginia Electric and Power Co., 5.40%, Due 4/30/2018 .............................. 500 409 Xcel Energy, Inc., 5.613%, Due 4/1/2017 .............................. 869 733 --------- 7,147 --------- TOTAL CORPORATE OBLIGATIONS 99,174 --------- NON-AGENCY MORTGAGE-BACKED OBLIGATIONS - 2.42% COMMERCIAL MORTGAGE-BACKED SECURITY - 1.32% Banc of America Commercial Mortgage, Inc., 2005-6 A1, 5.001%, Due 9/10/2047 .................. 593 570 2007-2 A2, 5.634%, Due 4/10/2049 .................. 1,100 958 Bear Stearns Commercial Mortgage Securities, Inc., 2006-T22 A2, 5.464%, Due 4/12/2038 ................ 905 842 2004-PWR5 A4, 4.831%, Due 7/11/2042 ............... 2,010 1,747 2005-T20 A2, 5.127%, Due 10/12/2042 ............... 875 827 Citigroup Commercial Mortgage Trust, 2004-C2 A3, 4.38%, Due 10/15/2041 ................. 995 913 General Electric Capital Commercial Mortgage Corp., 2003-C2 A2, 4.17%, Due 7/10/2037 .................. 146 140 JP Morgan Chase Commercial Mortgage Securities Corp., 2004-CBX A4, 4.529%, Due 1/12/2037 ................ 555 507 2005-LDP3 A1, 4.655%, Due 8/15/2042 ............... 186 180 2005-LDP1 A2, 4.625%, Due 3/15/2046 ............... 1,035 995 2007-CB19 A4, 5.747%, Due 2/12/2049 ............... 800 600 2007-CB20 A2, 5.629%, Due 2/12/2051 ............... 850 747 LB-UBS Commercial Mortgage Trust, 2004-C1 A4, 5.424%, Due 2/15/2040 ................. 650 482 Wachovia Bank Commercial Mortgage Trust, 2007-C32 A2, 5.736%, Due 6/15/2049 ................ 530 462 --------- 9,970 --------- WHOLE LOAN COLLATERALIZED MORTGAGE OBLIGATIONS - 1.10% Banc of America Mortgage Securities, Inc., 2004-8 3A1, 5.25%, Due 10/25/2019 ................. 940 889 See accompanying notes 31 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) Chase Mortgage Finance Corp., 2006-A1 A1, 6.04%, Due 9/25/2036 # ................ $ 1,371 $ 1,113 Citicorp Mortgage Securities, Inc., 2006-3 2A1, 5.50%, Due 6/25/2021 .................. 1,224 1,024 Countrywide Home Loan Mortgage Pass Through Trust, 2007-18 A1, 6.00%, Due 9/25/2037 .................. 1,493 1,164 JP Morgan Mortgage Trust, 7.00%, Due 8/25/2037 .............................. 804 654 Prime Mortgage Trust, 2005-2, 5.25%, Due 7/25/2020 ...................... 1,676 1,596 Wells Fargo Mortgage Backed Securities Trust, 2006-11 A8, 6.00%, Due 9/25/2036 .................. 860 645 2007-7 A1, 6.00%, Due 6/25/2037 ................... 1,477 1,151 --------- 8,236 --------- TOTAL NON-AGENCY MORTGAGE-BACKED OBLIGATIONS 18,206 --------- ASSET-BACKED SECURITIES - 0.63% American Express Credit Account Master Trust, 2006-2 A, 5.35%, Due 1/15/2014 .................... 1,700 1,592 Capital Auto Receivables Asset Trust, 2006-SN1A A4A, 5.32%, Due 3/20/2010 ++ ............ 1,500 1,491 Capital One Multi-Asset Execution Trust, 2006-A10 A10, 5.15%, Due 6/15/2014 ................ 1,250 1,149 Volkswagen Auto Loan Enhanced Trust, 2005-1 A4, 4.86%, Due 4/20/2012 ................... 547 545 --------- TOTAL ASSET-BACKED SECURITIES 4,777 --------- U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS - 10.64% FEDERAL HOME LOAN MORTGAGE CORPORATION - 4.25% 5.50%, Due 8/1/2017 ............................... 59 59 5.50%, Due 9/1/2017 ............................... 260 260 5.50%, Due 6/1/2018 ............................... 120 120 5.50%, Due 10/1/2018 .............................. 1,066 1,068 4.50%, Due 3/1/2019 ............................... 795 761 5.00%, Due 10/1/2020 .............................. 1,093 1,069 5.50%, Due 5/1/2021 ............................... 633 631 5.50%, Due 9/1/2021 ............................... 297 295 5.00%, Due 11/1/2021 .............................. 565 552 5.50%, Due 4/1/2022 ............................... 334 333 5.00%, Due 5/1/2022 ............................... 524 512 5.00%, Due 4/1/2023 ............................... 1,588 1,551 6.50%, Due 5/1/2029 ............................... 54 55 6.50%, Due 6/1/2029 ............................... 9 10 6.50%, Due 7/1/2029 ............................... 166 170 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) 6.00%, Due 8/1/2029 ............................... $ 93 $ 94 5.00%, Due 8/1/2033 ............................... 1,571 1,490 5.50%, Due 2/1/2034 ............................... 1,522 1,487 5.00%, Due 3/1/2034 ............................... 1,228 1,164 6.00%, Due 6/1/2034 ............................... 906 907 6.00%, Due 8/1/2034 ............................... 811 812 5.00%, Due 8/1/2035 ............................... 1,109 1,051 5.00%, Due 9/1/2035 ............................... 1,418 1,343 5.00%, Due 9/1/2035 ............................... 1,575 1,492 6.00%, Due 8/1/2036 ............................... 1,631 1,629 5.50%, Due 11/1/2036 .............................. 1,497 1,461 5.50%, Due 4/1/2037 ............................... 1,691 1,650 5.50%, Due 5/1/2037 ............................... 1,013 989 5.50%, Due 6/1/2037 ............................... 1,404 1,345 6.00%, Due 7/1/2037 ............................... 1,526 1,524 6.50%, Due 8/1/2037 ............................... 489 495 6.00%, Due 9/1/2037 ............................... 555 554 5.00%, Due 3/1/2038 ............................... 1,615 1,529 6.00%, Due 3/1/2038 ............................... 2,232 2,230 6.50%, Due 5/1/2038 ............................... 1,317 1,336 --------- 32,028 --------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 5.70% 5.50%, Due 2/1/2014 ............................... 343 345 6.00%, Due 4/1/2016 ............................... 285 288 5.00%, Due 12/1/2017 .............................. 774 763 5.00%, Due 6/1/2018 ............................... 1,671 1,647 4.50%, Due 9/1/2018 ............................... 1,285 1,235 5.50%, Due 12/1/2018 .............................. 80 80 4.00%, Due 8/1/2020 ............................... 958 889 5.50%, Due 4/1/2021 ............................... 1,022 1,021 6.00%, Due 1/1/2029 ............................... 499 502 5.50%, Due 11/1/2033 .............................. 2,050 2,008 5.00%, Due 3/1/2034 ............................... 1,621 1,540 4.50%, Due 9/1/2034 ............................... 728 662 6.50%, Due 3/1/2035 ............................... 263 267 5.50%, Due 12/1/2035 .............................. 1,286 1,258 5.50%, Due 12/1/2035 .............................. 403 394 5.50%, Due 1/1/2036 ............................... 1,340 1,310 5.50%, Due 2/1/2036 ............................... 923 903 5.00%, Due 2/1/2036 ............................... 801 760 5.00%, Due 3/1/2036 ............................... 1,458 1,383 5.50%, Due 3/1/2036 ............................... 329 322 5.50%, Due 4/1/2036 ............................... 2,287 2,237 6.00%, Due 8/1/2036 ............................... 558 558 6.00%, Due 9/1/2036 ............................... 1,027 1,027 6.50%, Due 9/1/2036 ............................... 2,096 2,126 6.00%, Due 9/1/2036 ............................... 185 185 6.00%, Due 10/1/2036 .............................. 1,192 1,192 See accompanying notes 32 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) 5.50%, Due 12/1/2036 .............................. $ 1,743 $ 1,704 6.50%, Due 12/1/2036 .............................. 1,802 1,828 5.50%, Due 2/1/2037 ............................... 1,679 1,641 6.00%, Due 8/1/2037 ............................... 1,343 1,343 6.50%, Due 8/1/2037 ............................... 818 830 6.50%, Due 9/1/2037 ............................... 523 531 6.00%, Due 11/1/2037 .............................. 706 706 6.50%, Due 11/1/2037 .............................. 912 925 5.00%, Due 3/1/2038 ............................... 7,026 6,658 5.00%, Due 6/1/2038 ............................... 2,021 1,915 --------- 42,983 --------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.69% 7.00%, Due 12/15/2025 ............................. 298 308 4.201%, Due 8/16/2026 ............................. 755 751 6.50%, Due 8/15/2027 .............................. 344 349 6.50%, Due 11/15/2027 ............................. 352 358 7.50%, Due 12/15/2028 ............................. 260 275 5.50%, Due 7/15/2033 .............................. 938 923 6.00%, Due 12/15/2033 ............................. 989 993 5.50%, Due 2/20/2034 .............................. 1,264 1,242 --------- 5,199 --------- TOTAL U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS 80,210 --------- U.S. AGENCY OBLIGATIONS - 8.48% FEDERAL HOME LOAN BANK - 0.18% 5.25%, Due 11/3/2009 + ............................ 1,360 1,360 --------- FEDERAL HOME LOAN MORTGAGE CORPORATION - 5.35% 5.25%, Due 2/24/2011 .............................. 2,360 2,378 4.50%, Due 1/15/2015 + ............................ 34,290 34,153 6.00%, Due 12/15/2031 ............................. 2,195 2,210 6.25%, Due 7/15/2032 + ............................ 1,500 1,628 --------- 40,369 --------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 2.95% 5.125%, Due 1/2/2014 .............................. 645 630 4.625%, Due 10/15/2014 + .......................... 1,000 1,008 5.375%, Due 6/12/2017 + ........................... 2,650 2,679 6.25%, Due 5/15/2029 + ............................ 12,200 13,097 6.00%, Due 4/18/2036 + ............................ 5,065 4,802 --------- 22,216 --------- TOTAL U.S. AGENCY OBLIGATIONS 63,945 --------- U.S. TREASURY OBLIGATIONS - 2.44% 3.125%, Due 8/31/2013 + ........................... 3,200 3,256 4.00%, Due 8/15/2018 + ............................ 5,260 5,267 7.875%, Due 2/15/2021 + ........................... 1,200 1,536 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) 6.25%, Due 8/15/2023 + ............................ $ 1,400 $ 1,603 6.875%, Due 8/15/2025 + ........................... 1,580 1,968 5.25%, Due 11/15/2028 + ........................... 750 798 4.75%, Due 2/15/2037 + ............................ 800 848 4.375%, Due 2/15/2038 + ........................... 3,110 3,119 --------- TOTAL U.S. TREASURY OBLIGATIONS 18,395 --------- SHARES ----------- SHORT TERM INVESTMENTS - 11.47% American Beacon Money Market Select Fund * ........... 34,005,921 34,006 State Street Institutional Treasury Plus Fund ........ 47,057,064 47,057 PAR AMOUNT ----------- U.S. Treasury, 0.41%, Due 12/11/2008 [ ] ......................... $ 5,400 5,393 --------- TOTAL SHORT TERM INVESTMENTS 86,456 --------- SHARES ----------- SECURITIES LENDING COLLATERAL - 13.12% American Beacon Money Market Select Fund * ........... 14,519,607 14,520 Securities Liquidating AB Trust ...................... 49,651,323 48,982 State Street Navigator Securities Lending Prime Portfolio ......................................... 35,421,833 35,422 --------- TOTAL SECURITIES LENDING COLLATERAL 98,924 --------- TOTAL INVESTMENTS 112.77% - (COST $974,580) 850,187 LIABILITIES, NET OF OTHER ASSETS - (12.77%) (96,274) --------- TOTAL NET ASSETS - 100.00% $ 753,913 ========= See accompanying notes 33 AMERICAN BEACON BALANCED FUND SCHEDULE OF INVESTMENTS October 31, 2008 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, 2008. ++ 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 $8,534 or 1.13% 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 is affiliated by having the same investment advisor. [ ] At October 31, 2008, 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 .... 762 Dec 2008 $36,854 $(9,763) ======= ======= See accompanying notes 34 AMERICAN BEACON LARGE CAP GROWTH FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 81.81% COMMUNICATIONS - 0.06% MEDIA - 0.06% Brocade Communications Systems, Inc. ## .............. 9,940 $ 37 --------- CONSUMER DISCRETIONARY - 11.51% HOTELS, RESTAURANTS & LEISURE - 3.48% McDonald's Corp. ..................................... 23,683 1,372 Panera Bread Co. ## + ................................ 1,232 56 Yum! Brands, Inc. + .................................. 19,286 559 --------- 1,987 --------- HOUSEHOLD DURABLES - 0.07% The Toro Co. + ....................................... 1,182 40 --------- INTERNET & CATALOG RETAIL - 0.26% eBay, Inc. ## ........................................ 9,672 148 --------- MEDIA - 1.08% The DIRECTV Group, Inc. ## + ......................... 13,923 305 DISH Network Corp. ## ................................ 700 11 NetFlix, Inc. ## + ................................... 2,848 71 Time Warner, Inc. .................................... 20,739 209 Virgin Media, Inc. ................................... 3,469 20 --------- 616 --------- MULTILINE RETAIL - 2.67% BJ's Wholesale Club, Inc. ## + ....................... 8,664 305 Costco Wholesale Corp. + ............................. 8,442 481 Wal-Mart Stores, Inc. + .............................. 13,245 739 --------- 1,525 --------- SPECIALTY RETAIL - 3.20% Aeropostale, Inc. ## + ............................... 12,775 309 AutoZone, Inc. ## .................................... 3,784 482 Best Buy Company, Inc. + ............................. 14,953 401 Dollar Tree, Inc. ## + ............................... 3,262 124 Nike, Inc. ........................................... 7,568 436 Ross Stores, Inc. + .................................. 1,854 60 Urban Outfitters, Inc. ## + .......................... 447 10 --------- 1,822 --------- TEXTILES & APPAREL - 0.75% Coach, Inc. ## ....................................... 20,766 428 --------- TOTAL CONSUMER DISCRETIONARY 6,566 --------- CONSUMER STAPLES - 7.46% BEVERAGES - 0.68% Anheuser-Busch Companies, Inc. + ..................... 1,370 85 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) Hansen Natural Corp. ## + ............................ 2,061 $ 52 PepsiCo, Inc. ........................................ 4,405 251 --------- 388 --------- FOOD & DRUG RETAILING - 1.11% The Kroger Co. + ..................................... 23,172 636 --------- FOOD PRODUCTS - 1.71% Bunge Ltd. + ......................................... 5,154 198 Corn Products International, Inc. .................... 1,066 26 H.J. Heinz Co. + ..................................... 11,221 492 Herbalife Ltd. + ..................................... 5,728 140 Hormel Foods Corp. + ................................. 600 17 Tyson Foods, Inc. .................................... 11,678 102 --------- 975 --------- HOUSEHOLD PRODUCTS - 1.21% Colgate-Palmolive Co. ................................ 10,313 648 The Procter & Gamble Co. ............................. 700 45 --------- 693 --------- PERSONAL PRODUCTS - 0.91% Avon Products, Inc. .................................. 20,860 518 --------- TOBACCO - 1.84% Altria Group, Inc. ................................... 11,542 222 Lorillard, Inc. ...................................... 5,412 356 Philip Morris International, Inc. .................... 10,815 470 --------- 1,048 --------- TOTAL CONSUMER STAPLES 4,258 --------- ENERGY - 8.55% ENERGY EQUIPMENT & SERVICES - 2.92% Baker Hughes, Inc. ................................... 2,470 86 Cameron International Corp. ## + ..................... 14,159 343 FMC Technologies, Inc. ## + .......................... 3,732 131 Halliburton Co. ...................................... 31,082 615 National Oilwell Varco, Inc. ## ...................... 8,588 257 Schlumberger Ltd. .................................... 3,583 185 SEACOR Holdings, Inc. ## + ........................... 699 47 --------- 1,664 --------- OIL & GAS - 5.63% Apache Corp. ......................................... 7,338 604 Chevron Corp. ........................................ 131 10 Devon Energy Corp. ................................... 1,361 110 Exxon Mobil Corp. .................................... 1,582 117 Hess Corp. ........................................... 2,859 172 Murphy Oil Corp. ..................................... 11,793 597 Occidental Petroleum Corp. ........................... 5,126 285 See accompanying notes 35 AMERICAN BEACON LARGE CAP GROWTH FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) St. Mary Land & Exploration Co. ...................... 425 $ 11 Sunoco, Inc. + ....................................... 816 25 Tesoro Corp. ## + .................................... 9,179 89 Transocean, Inc. + ................................... 5,497 452 Ultra Petroleum Corp. ## + ........................... 1,132 53 Valero Energy Corp. .................................. 10,498 216 W&T Offshore, Inc. + ................................. 2,243 43 XTO Energy, Inc. ..................................... 12,003 431 --------- 3,215 --------- TOTAL ENERGY 4,879 --------- FINANCIALS - 2.83% BANKS - 0.15% Bank of New York Mellon Corp. ........................ 1,882 61 Hudson City Bancorp, Inc. + .......................... 1,302 25 --------- 86 --------- DIVERSIFIED FINANCIALS - 1.88% American Express Co. ................................. 879 24 BlackRock, Inc. + .................................... 481 63 Broadridge Financial Solutions, Inc. ................. 5,227 63 CME Group, Inc. + .................................... 368 104 Eaton Vance Corp. + .................................. 5,136 113 Moody's Corp. + ...................................... 3,500 90 Morgan Stanley Dean Witter & Co. + ................... 1,663 29 SEI Investments Co. + ................................ 1,407 25 State Street Corp. ................................... 8,825 383 T Rowe Price Group, Inc. + ........................... 2,254 89 The Western Union Co. ................................ 6,047 92 --------- 1,075 --------- INSURANCE - 0.14% Fidelity National Financial, Inc. + .................. 2,296 21 First American Corp. ................................. 1,570 32 Reinsurance Group of America, Inc. + ................. 643 24 --------- 77 --------- REAL ESTATE - 0.66% AvalonBay Communities, Inc. + ........................ 298 21 Jones Lang LaSalle, Inc. + ........................... 924 30 Kilroy Realty Corp. + ................................ 480 15 Macerich Co. ......................................... 627 19 Nationwide Health Properties, Inc. + ................. 5,065 151 Simon Property Group, Inc. + ......................... 2,096 141 --------- 377 --------- TOTAL FINANCIALS 1,615 --------- SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) HEALTH CARE - 14.59% BIOTECHNOLOGY - 3.14% Biogen Idec, Inc. ## + ............................... 5,229 $ 223 Celgene Corp. ## + ................................... 2,261 145 Genentech, Inc. ## ................................... 1,561 130 Gilead Sciences, Inc. ## + ........................... 26,650 1,222 Idexx Laboratories, Inc. ## + ........................ 1,006 35 PDL BioPharma, Inc. + ................................ 3,625 35 --------- 1,790 --------- HEALTH CARE EQUIPMENT & SUPPLIES - 4.59% Baxter International, Inc. ........................... 8,176 495 Becton, Dickinson & Co. .............................. 8,887 617 Boston Scientific Corp. ## ........................... 8,754 79 C.R. Bard, Inc. + .................................... 222 20 Covidien Ltd. ........................................ 2,289 101 Dentsply International, Inc. ......................... 2,569 78 Medtronic, Inc. ...................................... 3,607 145 St. Jude Medical, Inc. ## ............................ 13,967 531 Varian Medical Systems, Inc. ## + .................... 12,164 554 --------- 2,620 --------- HEALTH CARE PROVIDERS & SERVICES - 1.00% Cardinal Health, Inc. ## ............................. 315 12 Express Scripts, Inc. ## + ........................... 8,728 529 McKesson Corp. ....................................... 746 27 --------- 568 --------- PHARMACEUTICALS - 5.86% Abbott Laboratories .................................. 9,065 500 Amgen, Inc. ## ....................................... 6,767 405 Bristol-Myers Squibb Co. ............................. 7,600 156 Eli Lilly & Co. + .................................... 21,282 720 Johnson & Johnson .................................... 7,392 453 King Pharmaceuticals, Inc. ## + ...................... 3,102 27 Medco Health Solutions, Inc. ## ...................... 7,032 267 Merck & Co., Inc. + .................................. 9,267 287 Pfizer, Inc. ......................................... 22,313 395 Schering-Plough Corp. + .............................. 3,840 56 Wyeth Corp. .......................................... 2,446 79 --------- 3,345 --------- TOTAL HEALTH CARE 8,323 --------- INDUSTRIALS - 14.57% AEROSPACE & DEFENSE - 5.25% Boeing Co. + ......................................... 9,655 505 General Dynamics Corp. ............................... 13,630 822 Goodrich Corp. ....................................... 11,208 410 Lockheed Martin Corp. ................................ 8,390 713 See accompanying notes 36 AMERICAN BEACON LARGE CAP GROWTH FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) United Technologies Corp. ............................ 9,881 $ 543 --------- 2,993 --------- AIR FREIGHT & COURIERS - 0.89% Expeditors International of Washington, Inc. + ....... 3,455 113 FedEx Corp. + ........................................ 6,040 395 --------- 508 --------- BUILDING PRODUCTS - 0.05% Armstrong World Industries, Inc. + ................... 1,605 32 --------- COMMERCIAL SERVICES & SUPPLIES - 1.31% Apollo Group, Inc. ## + .............................. 8,997 625 CH Robinson Worldwide, Inc. ## ....................... 679 35 Genpact Ltd. ## ...................................... 1,728 14 Global Payments, Inc. + .............................. 226 9 Manpower, Inc. ....................................... 1,331 41 Total System Services, Inc. .......................... 1,503 21 --------- 745 --------- CONSTRUCTION & ENGINEERING - 0.06% Fluor Corp. + ........................................ 800 32 --------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 1.44% Emerson Electric Co. ................................. 25,182 824 --------- INDUSTRIAL CONGLOMERATES - 1.69% 3M Co. + ............................................. 8,668 557 Honeywell International, Inc. ........................ 12,496 381 Tyco International Ltd. .............................. 1,064 27 --------- 965 --------- MACHINERY - 1.70% AGCO Corp. ## + ...................................... 4,976 157 Caterpillar, Inc. + .................................. 2,500 95 Cummins, Inc. + ...................................... 9,852 254 Deere & Co. .......................................... 956 37 Flowserve Corp. ...................................... 5,777 329 Graco, Inc. + ........................................ 1,096 27 Joy Global, Inc. + ................................... 2,511 73 --------- 972 --------- ROAD & RAIL - 2.18% JB Hunt Transport Services, Inc. + ................... 12,435 354 Landstar System, Inc. + .............................. 2,129 82 Norfolk Southern Corp. ............................... 7,930 475 Union Pacific Corp. .................................. 1,693 113 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) Werner Enterprises, Inc. + ........................... 11,312 $ 222 --------- 1,246 --------- TOTAL INDUSTRIALS 8,317 --------- INFORMATION TECHNOLOGY - 18.10% COMMUNICATIONS EQUIPMENT - 2.16% Cisco Systems, Inc. ## ............................... 54,400 966 Qualcomm, Inc. ....................................... 6,920 265 --------- 1,231 --------- COMPUTERS & PERIPHERALS - 5.70% Apple Computer, Inc. ## ++ ........................... 4,929 530 Dell, Inc. ## + ...................................... 36,834 448 EMC Corp. ## + ....................................... 14,565 172 Hewlett-Packard Co. .................................. 22,375 856 Ingram Micro, Inc. ## ................................ 4,790 64 International Business Machines Corp. + .............. 7,377 686 NetApp, Inc. ## + .................................... 6,388 86 Seagate Technology ................................... 39,267 266 Teradata Corp. ## .................................... 5,422 83 Western Digital Corp. ## ............................. 3,609 60 --------- 3,251 --------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.95% Broadcom Corp. ## .................................... 6,506 111 Intel Corp. .......................................... 26,981 432 --------- 543 --------- INTERNET SOFTWARE & SERVICES - 1.17% Google, Inc. ## ...................................... 1,372 493 Sohu.com, Inc. ## .................................... 892 49 VeriSign, Inc. ## + .................................. 3,610 77 Yahoo! Inc. ## ....................................... 3,975 51 --------- 670 --------- IT CONSULTING & SERVICES - 2.49% Accenture Ltd. + ..................................... 27,887 922 Affiliated Computer Services, Inc. ## ................ 10,057 412 MPS Group, Inc. ## + ................................. 1,100 9 SRA International, Inc. ## + ......................... 851 16 Sun Microsystems, Inc. ## + .......................... 3,782 17 Tech Data Corp. ## + ................................. 2,061 44 --------- 1,420 --------- SEMICONDUCTOR EQUIPMENT & PRODUCTS - 0.56% LSI Corp. ## ......................................... 11,111 43 QLogic Corp. ## + .................................... 1,586 19 Texas Instruments, Inc. + ............................ 13,152 257 --------- 319 --------- See accompanying notes 37 AMERICAN BEACON LARGE CAP GROWTH FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) SOFTWARE - 5.07% Activision Blizzard, Inc. ## + ....................... 40,406 $ 503 Adobe Systems, Inc. ## ............................... 12,322 328 Advent Software, Inc. ## + ........................... 936 17 Autodesk, Inc. ## + .................................. 2,847 61 Cadence Design Systems, Inc. ## + .................... 6,965 28 Cerner Corp. ## ...................................... 691 26 Mentor Graphics Corp. ## + ........................... 1,054 8 Microsoft Corp. ...................................... 49,987 1,116 Oracle Corp. ## ...................................... 39,618 725 Salesforce.com, Inc. ## + ............................ 1,670 52 VMware, Inc. ## ...................................... 897 28 --------- 2,892 --------- TOTAL INFORMATION TECHNOLOGY 10,326 --------- MATERIALS - 3.47% CHEMICALS - 2.49% Airgas, Inc. ......................................... 284 11 CF Industries Holdings, Inc. ......................... 142 9 FMC Corp. ............................................ 500 22 Monsanto Co. + ....................................... 9,943 885 Praxair, Inc. ........................................ 7,601 495 --------- 1,422 --------- METALS & MINING - 0.98% Alpha Natural Resources, Inc. ## + ................... 4,061 145 Nucor Corp. + ........................................ 10,215 414 --------- 559 --------- TOTAL MATERIALS 1,981 --------- TELECOMMUNICATION SERVICES - 0.27% DIVERSIFIED TELECOMMUNICATION - 0.27% AT&T, Inc. ++ ........................................ 3,346 89 Sprint Nextel Corp. + ................................ 20,439 64 --------- TOTAL TELECOMMUNICATION SERVICES 153 --------- UTILITIES - 0.40% ELECTRIC UTILITIES - 0.40% Exelon Corp. ......................................... 3,855 209 PPL Corp. ............................................ 559 18 --------- TOTAL UTILITIES 227 --------- TOTAL COMMON STOCKS 46,682 --------- SHORT TERM INVESTMENTS - 18.00% American Beacon Money Market Select Fund # ........... 3,451,349 3,451 State Street Institutional Treasury Plus Fund ........ 6,191,411 6,191 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) U.S. Treasury, 0.28%, Due 12/11/2008 ............................. $ 629 $ 629 --------- TOTAL SHORT TERM INVESTMENTS 10,271 --------- SHARES ----------- SECURITIES LENDING COLLATERAL - 23.45% American Beacon Money Market Select Fund # ........... 1,963,639 1,964 Securities Liquidating AB Trust ...................... 6,714,871 6,624 State Street Navigator Securities Lending Prime Portfolio ................................... 4,790,468 4,791 --------- TOTAL SECURITIES LENDING COLLATERAL ..................... 13,379 --------- TOTAL INVESTMENTS 123.26% - (COST $82,377) 70,332 LIABILITIES, NET OF OTHER ASSETS - (23.26%) (13,273) --------- TOTAL NET ASSETS - 100.00% $ 57,059 ========= See accompanying notes 38 AMERICAN BEACON LARGE CAP GROWTH FUND SCHEDULE OF INVESTMENTS October 31, 2008 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, 2008. ++ At October 31, 2008, security pledged as collateral for open futures contracts. # The Fund is affiliated by having the same investment advisor. FUTURES CONTRACTS (DOLLARS IN THOUSANDS) UNREALIZED NUMBER OF EXPIRATION MARKET APPRECIATION/ CONTRACTS DATE VALUE (DEPRECIATION) --------- ---------- ------ -------------- Emini S&P 500 Index ...... 87 Dec 2008 $4,208 $(774) ====== ===== See accompanying notes 39 AMERICAN BEACON MID-CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 74.18% CONSUMER DISCRETIONARY - 17.99% AUDIO/VIDEO PRODUCTS - 0.72% Harman International Industries, Inc. + .............. 20,750 $ 381 --------- AUTO COMPONENTS - 2.20% Advance Auto Parts, Inc. ............................. 17,200 537 Lear Corp. ## + ...................................... 59,200 119 Magna International, Inc. ............................ 15,175 513 --------- 1,169 --------- HOTELS, RESTAURANTS & LEISURE - 2.03% International Game Technology + ...................... 49,700 696 Royal Caribbean Cruises Ltd. + ....................... 28,300 384 --------- 1,080 --------- HOUSEHOLD DURABLES - 3.57% Black & Decker Corp. + ............................... 15,800 800 Stanley Works ........................................ 20,200 662 Whirlpool Corp. + .................................... 9,225 430 --------- 1,892 --------- MEDIA - 0.38% Omnicom Group, Inc. .................................. 6,775 200 --------- MULTILINE RETAIL - 2.12% J.C. Penney Company, Inc. + .......................... 23,300 557 Kohl's Corp. ## + .................................... 16,200 569 --------- 1,126 --------- SPECIALTY RETAIL - 6.48% Family Dollar Stores, Inc. + ......................... 26,400 710 GameStop Corp. ## .................................... 23,300 638 Hanesbrands, Inc. ## + ............................... 26,700 467 Regis Corp. .......................................... 39,625 490 Rent-A-Center, Inc. ## ............................... 46,300 676 Sherwin-Williams Co. + ............................... 8,000 455 --------- 3,436 --------- TEXTILES & APPAREL - 0.49% Sealy Corp. + ........................................ 80,525 260 --------- TOTAL CONSUMER DISCRETIONARY 9,544 --------- CONSUMER STAPLES - 6.02% FOOD PRODUCTS - 1.93% Del Monte Foods Co. .................................. 102,950 650 Sara Lee Corp. ....................................... 33,675 376 --------- 1,026 --------- TOBACCO - 4.09% Lorillard, Inc. ...................................... 13,700 902 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) Reynolds American, Inc. + ............................ 18,400 $ 901 UST, Inc. ............................................ 5,400 365 --------- 2,168 --------- TOTAL CONSUMER STAPLES 3,194 --------- ENERGY - 2.30% OIL & GAS - 2.30% El Paso Corp. + ...................................... 62,100 602 Murphy Oil Corp. + ................................... 12,200 618 --------- TOTAL ENERGY 1,220 --------- FINANCIALS - 18.28% BANKS - 5.30% Comerica, Inc. + ..................................... 16,900 466 National City Corp. .................................. 199,078 538 New York Community Bancorp, Inc. + ................... 20,300 318 People's United Financial, Inc. ...................... 55,654 974 Popular, Inc. + ...................................... 68,025 517 --------- 2,813 --------- DIVERSIFIED FINANCIALS - 2.18% CIT Group, Inc. + .................................... 48,600 201 Federal Home Loan Mortgage Corp. + ................... 109,625 113 Moody's Corp. + ...................................... 11,275 289 SLM Corp. ## + ....................................... 52,100 556 --------- 1,159 --------- INSURANCE - 9.38% Axis Capital Holdings Ltd. ........................... 18,700 533 Conseco, Inc. ## + ................................... 92,050 171 Delphi Financial Group, Inc. ......................... 39,900 628 First American Corp. + ............................... 16,975 346 IPC Holdings Ltd. + .................................. 15,125 418 Old Republic International Corp. + ................... 46,462 428 Protective Life Corp. + .............................. 39,450 329 RenaissanceRe Holdings Ltd. .......................... 14,975 687 Torchmark Corp. + .................................... 17,975 751 Willis Group Holdings Ltd. + ......................... 25,100 659 XL Capital Ltd. + .................................... 2,600 25 --------- 4,975 --------- REAL ESTATE - 1.42% Annaly Capital Management, Inc. ...................... 54,100 752 --------- TOTAL FINANCIALS 9,699 --------- HEALTH CARE - 7.40% HEALTH CARE EQUIPMENT & SUPPLIES - 1.95% Hill-Rom Holdings, Inc. + ............................ 17,775 405 See accompanying notes 40 AMERICAN BEACON MID-CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) IMS Health, Inc. + ................................... 43,950 $ 630 --------- 1,035 --------- HEALTH CARE PROVIDERS & SERVICES - 5.45% AmerisourceBergen Corp. + ............................ 20,950 655 Cigna Corp. + ........................................ 15,200 248 Coventry Health Care, Inc. ## ........................ 21,500 284 Omnicare, Inc. + ..................................... 38,700 1,067 Quest Diagnostics, Inc. .............................. 13,700 641 --------- 2,895 --------- TOTAL HEALTH CARE ....................................... 3,930 --------- INDUSTRIALS - 8.52% AEROSPACE & DEFENSE - 3.16% Goodrich Corp. ....................................... 11,200 410 L-3 Communications Holdings, Inc. .................... 15,600 1,266 --------- 1,676 --------- COMMERCIAL SERVICES & SUPPLIES - 1.77% Avery Dennison Corp. + ............................... 20,800 729 Pitney Bowes, Inc. ................................... 8,600 213 --------- 942 --------- FREIGHT TRANSPORTATION - 0.92% Ryder System, Inc. ................................... 12,300 487 --------- MACHINERY - 2.67% Brady Corp. .......................................... 13,525 419 Eaton Corp. + ........................................ 11,200 500 ITT Industries, Inc. ................................. 11,200 498 --------- 1,417 --------- TOTAL INDUSTRIALS 4,522 --------- INFORMATION TECHNOLOGY - 7.35% COMMUNICATIONS EQUIPMENT - 2.58% Alcatel-Lucent, ADR .................................. 377,698 970 Motorola, Inc. ....................................... 74,250 399 --------- 1,369 --------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.48% Avnet, Inc. ## ....................................... 7,250 121 Tyco Electronics Ltd. ................................ 6,975 136 --------- 257 --------- IT CONSULTING & SERVICES - 2.44% Affiliated Computer Services, Inc. ## ................ 10,025 411 Computer Sciences Corp. ## ........................... 19,500 588 Tech Data Corp. ## ................................... 13,650 293 --------- 1,292 --------- SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) SOFTWARE - 1.85% CA, Inc. ............................................. 55,150 $ 982 --------- TOTAL INFORMATION TECHNOLOGY ............................ 3,900 --------- UTILITIES - 6.32% ELECTRIC UTILITIES - 4.11% CenterPoint Energy, Inc. ............................. 43,400 500 Pinnacle West Capital Corp. .......................... 19,000 601 Wisconsin Energy Corp. + ............................. 8,550 372 Xcel Energy, Inc. + .................................. 40,600 707 --------- 2,180 --------- GAS UTILITIES - 2.21% MDU Resources Group, Inc. ............................ 23,650 431 Sempra Energy ........................................ 17,450 743 --------- 1,174 --------- TOTAL UTILITIES ......................................... 3,354 --------- TOTAL COMMON STOCKS .................................... 39,363 --------- SHORT TERM INVESTMENTS - 24.90% American Beacon Money Market Select Fund ++ .......... 4,196,401 4,196 State Street Institutional Treasury Plus Fund ........ 8,575,322 8,575 PAR AMOUNT ----------- U.S. Treasury, 0.34%, Due 12/11/2008 # ........................... $ 439 439 --------- TOTAL SHORT TERM INVESTMENTS 13,210 --------- SHARES ----------- SECURITIES LENDING COLLATERAL - 16.14% American Beacon Money Market Select Fund ++ .......... 1,256,883 1,257 Securities Liquidating AB Trust ...................... 4,298,044 4,240 State Street Navigator Securities Lending Prime Portfolio ......................................... 3,066,275 3,066 --------- TOTAL SECURITIES LENDING COLLATERAL 8,563 --------- TOTAL INVESTMENTS 115.22% - (COST $88,777) 61,136 LIABILITIES, NET OF OTHER ASSETS - (15.22%) (8,076) --------- TOTAL NET ASSETS - 100.00% $ 53,060 ========= See accompanying notes 41 AMERICAN BEACON MID-CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 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, 2008. ++ The Fund is affiliated by having the same investment advisor. # At October 31, 2008, 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 ... 77 Dec 2008 $4,377 $(1,389) ====== ======= See accompanying notes 42 AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 91.44% CONSUMER DISCRETIONARY - 11.93% AUTO COMPONENTS - 0.47% ATC Technology Corp. ## .............................. 941 $ 21 --------- HOTELS, RESTAURANTS & LEISURE - 1.70% Einstein Noah Restaurant Group, Inc. ## + ............ 1,790 14 Jack in the Box, Inc. ## + ........................... 1,902 38 Papa John's International, Inc. ## ................... 957 22 --------- 74 --------- INTERNET & CATALOG RETAIL - 0.90% Insight Enterprises, Inc. ## + ....................... 2,809 27 PC Mall, Inc. ## + ................................... 2,684 12 --------- 39 --------- LEISURE EQUIPMENT & PRODUCTS - 1.07% Callaway Golf Co. .................................... 2,157 23 Polaris Industries, Inc. + ........................... 720 24 --------- 47 --------- MULTILINE RETAIL - 0.93% Fred's, Inc. + ....................................... 3,310 41 --------- SPECIALTY RETAIL - 5.25% American Greetings Corp. ............................. 1,035 12 Cache, Inc. ## + ..................................... 2,529 9 Cato Corp. ........................................... 1,750 27 Charlotte Russe Holding, Inc. ## + ................... 1,453 12 Gymboree Corp. ## .................................... 1,028 27 HOT Topic, Inc. ## ................................... 5,735 37 Jo-Ann Stores, Inc. ## + ............................. 1,801 35 Pacific Sunwear of California ## + ................... 2,316 8 PC Connection, Inc. ## ............................... 5,525 33 Rex Stores Corp. ## + ................................ 413 4 Rush Enterprises, Inc. ## ............................ 413 4 Wet Seal, Inc. ## + .................................. 7,454 22 --------- 230 --------- TEXTILES & APPAREL - 1.61% Movado Group, Inc. + ................................. 1,207 18 New York & Co., Inc. ## + ............................ 2,830 8 Perry Ellis International, Inc. ## + ................. 1,616 16 Wolverine World Wide, Inc. + ......................... 1,206 28 --------- 70 --------- TOTAL CONSUMER DISCRETIONARY 522 --------- SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) CONSUMER STAPLES - 3.20% FOOD & DRUG RETAILING - 2.42% Casey's General Stores, Inc. + ....................... 819 $ 25 Flowers Foods, Inc. + ................................ 864 25 Ruddick Corp. + ...................................... 1,947 56 --------- 106 --------- FOOD PRODUCTS - 0.47% Fresh Del Monte Produce, Inc. ## ..................... 717 15 Omega Protein Corp. ## ............................... 718 5 --------- 20 --------- TOBACCO - 0.31% Alliance One International, Inc. ## + ................ 4,064 14 --------- TOTAL CONSUMER STAPLES 140 --------- ENERGY - 2.48% ENERGY EQUIPMENT & SERVICES - 0.70% Oil States International, Inc. ## .................... 1,133 26 Union Drilling, Inc. ## + ............................ 762 4 --------- 30 --------- OIL & GAS - 1.78% Comstock Resources, Inc. ## .......................... 285 14 Petroquest Energy, Inc. ## + ......................... 1,158 12 Rosetta Resources, Inc. ## + ......................... 534 6 Stone Energy Corp. ## ................................ 537 16 Swift Energy Co. ## + ................................ 668 21 Vaalco Energy, Inc. ## ............................... 1,697 9 --------- 78 --------- TOTAL ENERGY 108 --------- FINANCIALS - 36.88% BANKS - 17.93% Abington Bancorp, Inc. + ............................. 982 10 Arrow Financial Corp. + .............................. 463 12 Boston Private Financial Holdings, Inc. + ............ 2,191 19 Brookline Bancorp, Inc. + ............................ 3,151 37 Bryn Mawr Bank Corp. + ............................... 937 20 Cardinal Financial Corp. ............................. 4,575 28 Columbia Banking System, Inc. ........................ 1,298 21 Community Bank System, Inc. .......................... 2,164 54 CVB Financial Corp. + ................................ 2,901 37 Dime Community Bancshares, Inc. + .................... 1,675 28 ESSA Bancorp, Inc. + ................................. 2,351 32 Financial Institutions, Inc. + ....................... 2,049 33 First Bancorp/Troy NC + .............................. 1,068 19 First Niagara Financial Group, Inc. .................. 2,207 35 Lakeland Bancorp, Inc. ............................... 1,956 21 See accompanying notes 43 AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) National Penn Bancshares, Inc. + ..................... 3,565 $ 60 NewAlliance Bancshares, Inc. + ....................... 1,637 23 Pennsylvania Commerce Bancorp, Inc. ## + ............. 397 12 SCBT Financial Corp. + ............................... 1,199 41 Shore Bancshares, Inc. ............................... 905 22 Simmons First National Corp. + ....................... 687 21 Smithtown Bancorp, Inc. + ............................ 809 16 Southwest Bancorp, Inc. .............................. 481 7 Sterling Bancshares, Inc. ............................ 3,331 26 SVB Financial Group ## + ............................. 597 31 United Financial Bancorp, Inc. ....................... 2,334 33 Univest Corp. of Pennsylvania ........................ 587 18 Washington Trust Bancorp, Inc. + ..................... 664 14 Westfield Financial, Inc. + .......................... 1,713 18 Wilshire Bancorp, Inc. + ............................. 3,237 36 --------- 784 --------- DIVERSIFIED FINANCIALS - 2.98% Cash America International, Inc. ..................... 900 32 GAMCO Investors, Inc. + .............................. 656 25 Knight Capital Group, Inc. ## + ...................... 1,424 20 Ocwen Financial Corp. ## + ........................... 812 5 Stifel Financial Corp. ## + .......................... 1,092 48 --------- 130 --------- INSURANCE - 6.08% American Physicians Capital, Inc. .................... 623 25 Amerisafe, Inc. ## ................................... 2,494 43 AmTrust Financial Services, Inc. + ................... 1,298 13 Aspen Insurance Holdings Ltd. ........................ 1,190 27 Delphi Financial Group, Inc. ......................... 380 6 Max Capital Group Ltd. + ............................. 419 7 Navigators Group, Inc. ## + .......................... 1,351 68 Platinum Underwriters Holdings Ltd. .................. 607 19 SeaBright Insurance Holdings, Inc. ## ................ 3,313 35 Universal American Corp. ## + ........................ 1,659 15 Validus Holdings Ltd. ................................ 438 8 --------- 266 --------- REAL ESTATE - 9.89% Agree Realty Corp. ................................... 391 8 Associated Estates Realty Corp. + .................... 2,582 21 DiamondRock Hospitality Co. .......................... 2,718 14 EastGroup Properties, Inc. ........................... 1,144 38 Entertainment Properties Trust + ..................... 671 25 Getty Realty Corp. ................................... 260 5 Home Properties, Inc. + .............................. 965 39 LTC Properties, Inc. + ............................... 1,477 36 Meruelo Maddux Properties, Inc. ## ................... 4,125 4 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) Mid-America Apartment Communities, Inc. .............. 982 $ 35 National Retail Properties, Inc. ..................... 2,410 43 Nationwide Health Properties, Inc. + ................. 768 23 PS Business Parks, Inc. + ............................ 696 32 Saul Centers, Inc. ................................... 821 30 Senior Housing Properties Trust ...................... 2,577 49 Sunstone Hotel Investors, Inc. ....................... 2,320 15 Urstadt Biddle Properties, Inc. ...................... 954 16 --------- 433 --------- TOTAL FINANCIALS 1,613 --------- HEALTH CARE - 5.41% BIOTECHNOLOGY - 0.43% Albany Molecular Research, Inc. ## + ................. 1,481 19 --------- HEALTH CARE EQUIPMENT & SUPPLIES - 1.10% Caliper Life Sciences, Inc. ## + ..................... 1,747 2 Cardiac Science Corp. ## ............................. 2,178 20 STERIS Corp. ......................................... 748 26 --------- 48 --------- HEALTH CARE PROVIDERS & SERVICES - 3.55% AMN Healthcare Services, Inc. ## ..................... 695 6 Assisted Living Concepts, Inc. ## + .................. 2,277 12 Cantel Medical Corp. ## + ............................ 2,923 28 Centene Corp. ## ..................................... 1,820 34 Cross Country Healthcare, Inc. ## + .................. 1,351 15 RehabCare Group, Inc. ## + ........................... 870 15 Res-Care, Inc. ## .................................... 2,931 45 --------- 155 --------- PHARMACEUTICALS - 0.33% Obagi Medical Products, Inc. ## ...................... 1,743 15 --------- TOTAL HEALTH CARE 237 --------- INDUSTRIALS - 12.21% AEROSPACE & DEFENSE - 0.99% Cubic Corp. .......................................... 1,071 24 Ducommun, Inc. ....................................... 973 19 --------- 43 --------- BUILDING PRODUCTS - 1.02% Apogee Enterprises, Inc. + ........................... 943 10 Lennox International, Inc. ........................... 1,180 35 --------- 45 --------- COMMERCIAL SERVICES & SUPPLIES - 2.51% Administaff, Inc. .................................... 705 14 Bowne & Co., Inc. + .................................. 1,903 15 See accompanying notes 44 AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) CSG Systems International, Inc. ## + ................. 638 $ 11 Global Cash Access Holdings, Inc. ## + ............... 4,861 14 Kenexa Corp. ## + .................................... 1,239 11 Kforce, Inc. ## ...................................... 318 2 Korn/Ferry International ## + ........................ 2,178 30 On Assignment, Inc. ## ............................... 1,956 13 --------- 110 --------- CONSTRUCTION & ENGINEERING - 1.25% Comfort Systems USA, Inc. ............................ 2,519 24 EMCOR Group, Inc. ## ................................. 1,755 31 --------- 55 --------- DIVERSIFIED MANUFACTURING - 1.16% Acuity Brands, Inc. + ................................ 727 26 Kennametal, Inc. ..................................... 1,187 25 --------- 51 --------- ELECTRICAL EQUIPMENT - 0.33% Woodward Governor Co. + .............................. 451 14 --------- INDUSTRIAL CONGLOMERATES - 0.50% Chemed Corp. ......................................... 243 11 Lydall, Inc. ......................................... 1,676 11 --------- 22 --------- MACHINERY - 4.19% Actuant Corp. + ...................................... 1,754 31 Applied Industrial Technologies, Inc. + .............. 1,325 27 Cascade Corp. + ...................................... 881 29 CIRCOR International, Inc. ........................... 721 22 Columbus McKinnon Corp. ## ........................... 1,484 21 EnPro Industries, Inc. ## + .......................... 1,077 24 Robbins & Myers, Inc. ................................ 609 12 Thermadyne Holdings Corp. ## + ....................... 1,873 17 --------- 183 --------- ROAD & RAIL - 0.26% Saia, Inc. ## ........................................ 1,055 11 --------- TOTAL INDUSTRIALS 534 --------- INFORMATION TECHNOLOGY - 10.66% COMMUNICATIONS EQUIPMENT - 2.75% Ceva, Inc. ## + ...................................... 1,587 14 Digi International, Inc. ## + ........................ 5,636 58 Emulex Corp. ## ...................................... 2,034 19 Extreme Networks ## .................................. 3,347 6 Opnext, Inc. ## + .................................... 1,348 6 Plantronics, Inc. .................................... 1,262 18 --------- 121 --------- SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.53% Sanmina-SCI Corp. ## ................................. 31,020 $ 23 --------- INTERNET SOFTWARE & SERVICES - 1.58% Perficient, Inc. ## + ................................ 3,366 19 S1 Corp. ## .......................................... 4,985 31 SonicWALL, Inc. ## + ................................. 4,309 19 --------- 69 --------- IT CONSULTING & SERVICES - 1.56% Ciber, Inc. ## + ..................................... 6,176 33 MPS Group, Inc. ## + ................................. 4,462 35 --------- 68 --------- SEMICONDUCTOR EQUIPMENT & PRODUCTS - 1.31% Skyworks Solutions, Inc. ## + ........................ 4,085 29 TriQuint Semiconductor, Inc. ## ...................... 6,326 29 --------- 58 --------- SOFTWARE - 2.93% American Software, Inc. ## + ......................... 1,848 8 JDA Software Group, Inc. ## .......................... 1,933 28 Netscout Systems, Inc. ## ............................ 732 7 Quest Software, Inc. ## .............................. 2,670 35 Sybase, Inc. ## ...................................... 747 20 TIBCO Software, Inc. ## + ............................ 5,804 30 --------- 128 --------- TOTAL INFORMATION TECHNOLOGY 467 --------- MATERIALS - 3.83% CHEMICALS - 1.27% Ferro Corp. ## ....................................... 1,315 20 Innospec, Inc. + ..................................... 1,892 16 Quaker Chemical Corp. ................................ 513 10 Rockwood Holdings, Inc. ## + ......................... 695 9 --------- 55 --------- CONTAINERS & PACKAGING - 1.29% AptarGroup, Inc. ..................................... 1,234 38 Greif, Inc. .......................................... 473 19 --------- 57 --------- METALS & MINING - 0.92% GrafTech Int'l Ltd. ## ............................... 2,610 21 Worthington Industries, Inc. + ....................... 1,582 19 --------- 40 --------- PAPER & FOREST PRODUCTS - 0.35% Buckeye Technologies, Inc. ## + ...................... 2,606 16 --------- TOTAL MATERIALS 168 --------- See accompanying notes 45 AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) TELECOMMUNICATION SERVICES - 1.31% DIVERSIFIED TELECOMMUNICATION - 1.10% Premiere Global Services, Inc. ## .................... 1,595 $ 16 Syniverse Holdings, Inc. ## + ........................ 1,725 32 --------- 48 --------- WIRELESS TELECOMMUNICATION SERVICES - 0.21% Centennial Communications Corp. ## + ................. 2,523 9 --------- TOTAL TELECOMMUNICATION SERVICES 57 --------- UTILITIES - 3.53% ELECTRIC UTILITIES - 1.65% Black Hills Corp. .................................... 765 19 El Paso Electric Co. ## .............................. 2,847 53 --------- 72 --------- GAS UTILITIES - 1.88% Atmos Energy Corp. ................................... 1,077 26 Nicor, Inc. + ........................................ 658 30 Southwest Gas Corp. .................................. 986 26 --------- 82 --------- TOTAL UTILITIES 154 --------- TOTAL COMMON STOCKS 4,000 --------- SHORT TERM INVESTMENTS - 9.36% American Beacon Money Market Select Fund ++ .......... 89,539 90 iShares Russell 2000 Index Fund + .................... 1,436 77 iShares Russell 2000 Value Index Fund + .............. 3,671 193 State Street Institutional Treasury Plus Fund ........ 49,413 49 --------- TOTAL SHORT TERM INVESTMENTS 409 --------- SECURITIES LENDING COLLATERAL - 23.78% American Beacon Money Market Select Fund ++ .......... 152,660 153 Securities Liquidating AB Trust ...................... 522,036 515 State Street Navigator Securities Lending Prime Portfolio ................................... 372,427 372 --------- TOTAL SECURITIES LENDING COLLATERAL 1,040 --------- TOTAL INVESTMENTS 124.58% - (COST $6,865) 5,449 LIABILITIES, NET OF OTHER ASSETS - (24.58%) (1,075) --------- TOTAL NET ASSETS - 100.00% $ 4,374 ========= Percentages are stated as a percent of net assets. ## Non-income producing security. See accompanying notes 46 AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND SCHEDULE OF INVESTMENTS October 31, 2008 + All or a portion of this security is on loan at October 31, 2008. ++ The Fund is affiliated by having the same investment advisor. See accompanying notes 47 AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) AUSTRIA - 0.13% COMMON STOCKS - 0.13% Raiffeisen International Bank-Holding AG + ........... 3,436 $ 109 --------- BRAZIL - 9.54% COMMON STOCKS - 7.00% Banco Bradesco S.A., ADR ............................. 1,700 20 Banco do Brasil S.A. ................................. 33,297 227 Banco Itau Holding Financeira S.A., ADR + ............ 38,762 429 Centrais Eletricas Brasileiras S.A. .................. 22,466 272 Cia de Saneamento Basico do Estado de Sao Paulo ...... 4,270 49 Cia de Saneamento Basico do Estado de Sao Paulo, ADR + ............................................. 1,730 40 Cia de Saneamento de Minas Gerais-COPASA ............. 21,600 135 Cia Energetica de Minas Gerais, ADR + ................ 1,964 30 Cia Vale do Rio Doce, ADR + .......................... 50,100 657 Cyrela Brazil Realty S.A. ............................ 25,424 124 Empresa Brasileira de Aeronautica S.A. (Embraer), ADR + ............................................. 4,780 100 Gafisa S.A. .......................................... 13,953 98 Gafisa S.A., ADR + ................................... 895 13 Grendene S.A. ........................................ 39,700 207 Medial Saude S.A. .................................... 22,100 68 PDG Realty SA Empreendimentos e Participacoes ........ 10,000 52 Perdigao S.A. ........................................ 16,005 233 Petroleo Brasileiro S.A., ADR ........................ 6,210 167 Petroleo Brasileiro S.A., A Shares, ADR .............. 90,669 2,001 Unibanco - Uniao de Bancos Brasileiros S.A. .......... 15,378 98 Unibanco - Uniao de Bancos Brasileiros S.A., GDR ..... 8,890 561 Votorantim Celulose e Papel S.A., ADR + .............. 23,480 237 --------- TOTAL COMMON STOCKS 5,818 --------- PREFERRED STOCKS - 2.54% Braskem S.A. ......................................... 55,100 239 Centrais Eletricas Brasileiras S.A. .................. 5,840 63 Cia de Tecidos Norte de Minas ## ..................... 48,662 79 Cia Energetica de Minas Gerais ....................... 19,200 293 Cia Vale do Rio Doce, ADR + .......................... 39,486 462 Cia Vale do Rio Doce, A Shares ....................... 7,504 88 Net Servicos de Comunicacao S.A. ## .................. 30,556 194 Tele Norte Leste Participacoes S.A., ADR ............. 39,420 535 Telemig Celular Participacoes S.A. ................... 3,973 62 Ultrapar Participacoes S.A. .......................... 5,500 101 --------- TOTAL PREFERRED STOCKS 2,116 --------- TOTAL BRAZIL 7,934 --------- SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) CHILE - 0.03% COMMON STOCKS - 0.03% Banco Santander-Chile, ADR ........................... 790 $ 28 --------- COLOMBIA - 0.27% COMMON STOCKS - 0.27% Bancolombia S.A., ADR ................................ 11,541 225 --------- CZECH REPUBLIC - 0.89% COMMON STOCKS - 0.89% Central European Media Enterprises Ltd. ## + ......... 1,276 34 CEZ .................................................. 9,758 424 Komercni Banka, a.s. ................................. 1,064 159 Telefonica O2 ........................................ 5,682 121 --------- TOTAL CZECH REPUBLIC 738 --------- EGYPT - 0.09% COMMON STOCKS - 0.09% Telecom Egypt ........................................ 29,430 71 --------- HONG KONG/CHINA - 13.29% COMMON STOCKS - 13.29% Aluminum Corp of China Ltd. + ........................ 189,300 71 Anhui Conch Cement Co. Ltd. ## + ..................... 76,000 245 Anhui Expressway Co. Ltd. + .......................... 476,000 180 Bank of China Ltd. + ................................. 1,114,000 331 Bosideng International Holdings Ltd. + ............... 1,456,000 150 Brilliance China Automotive Holdings Ltd. ## + ....... 1,634,000 68 BYD Electronic International Co. Ltd. ................ 152,000 46 China Coal Energy Ltd. ............................... 442,000 260 China Communications Services Corp. Ltd. + ........... 192,000 100 China Construction Bank Corp. + ...................... 866,000 421 China Life Insurance Co. Ltd. + ...................... 193,000 516 China Mobile Ltd. .................................... 167,500 1,470 China Mobile Ltd., ADR + ............................. 6,720 295 China Molybdenum Co. Ltd. + .......................... 214,000 66 China Power International Development Ltd. + ......... 1,903,800 347 China Resources Power Holdings Co. Ltd. + ............ 92,000 180 China Telecom Corp. Ltd. ............................. 387,100 136 China Unicom Hong Kong Ltd. .......................... 338,744 488 CNOOC Ltd. ........................................... 88,000 72 CNOOC Ltd., ADR + .................................... 2,380 194 COSCO Pacific Ltd. ................................... 370,000 267 Datang International Power Generation Co. Ltd. ....... 220,000 82 Denway Motors Ltd. + ................................. 642,700 157 Dongfang Electric Corp. Ltd. + ....................... 92,000 178 Dongfeng Motor Group Co. Ltd. ........................ 740,000 205 See accompanying notes 48 AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) Focus Media Holding Ltd., ADR ## + ................... 14,400 $ 267 Global Bio-chem Technology Group Co. Ltd. + .......... 667,800 91 GOME Electrical Appliances Holdings Ltd. ............. 1,857,000 363 Hopson Development Holdings Ltd. + ................... 182,100 60 Huaneng Power International, Inc. + .................. 585,900 290 Industrial & Commercial Bank of China + .............. 784,000 365 Maanshan Iron & Steel + .............................. 519,000 95 Nine Dragons Paper Holdings Ltd. + ................... 375,000 66 NWS Holdings Ltd. .................................... 59,421 62 PetroChina Co. Ltd. .................................. 1,872,000 1,459 Ping'an Insurance Co. Ltd. + ......................... 55,500 240 Shanghai Industrial Holdings Ltd. .................... 173,000 275 Sinopec Shanghai Petrochemical Co. Ltd. + ............ 732,000 136 Sinotrans Ltd. ....................................... 921,000 203 Texwinca Holdings Ltd. ............................... 196,000 92 TPV Technology Ltd. .................................. 768,000 151 Weiqiao Textile Co. .................................. 583,600 119 Yanzhou Coal Mining Co. Ltd. ......................... 166,000 104 Yanzhou Coal Mining Co. Ltd., ADR + .................. 15,200 94 --------- TOTAL HONG KONG/CHINA 11,057 --------- HUNGARY - 0.56% COMMON STOCKS - 0.56% Gedeon Richter Rt. ................................... 2,889 397 Magyar Telekom Telecommunications plc ................ 22,430 71 --------- TOTAL HUNGARY 468 --------- INDIA - 6.78% COMMON STOCKS - 6.78% Andhra Bank .......................................... 78,060 69 Bharat Heavy Electricals Ltd. ........................ 11,655 316 Bharat Petroleum Corp. Ltd. .......................... 26,943 157 Bharti Airtel Ltd. ## ................................ 18,880 258 Deccan Chronicle Holdings Ltd. ....................... 51,879 46 Glenmark Pharmaceuticals Ltd. ........................ 16,700 98 HDFC Bank Ltd. ....................................... 18,980 405 Hindalco Industries Ltd. ............................. 81,820 102 Hindustan Petroleum Corp. Ltd. ....................... 67,630 262 Hindustan Unilever Ltd. .............................. 60,300 275 Housing Development Finance Corp. .................... 10,240 378 ICICI Bank Ltd., ADR + ............................... 8,930 153 India Cements Ltd. ................................... 158,380 284 Infosys Technologies Ltd. ............................ 14,780 420 Mahanagar Telephone Nigam Ltd. ....................... 136,370 190 Mahindra & Mahindra Ltd. ............................. 27,755 215 Maruti Suzuki India Ltd. ............................. 17,173 200 Oil & Natural Gas Corp. Ltd. ......................... 9,271 129 Reliance Communications Ltd. ......................... 13,160 60 Reliance Industries Ltd. ............................. 19,440 543 Satyam Computer Services Ltd. ........................ 19,100 120 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) State Bank of India Ltd. ............................. 8,800 $ 203 State Bank of India Ltd., GDR ++ ..................... 7,920 364 Steel Authority of India Ltd. ........................ 34,496 62 Sterlite Industries (India) Ltd. ..................... 6,590 39 Sterlite Industries (India) Ltd., ADR ................ 14,020 87 Tata Consultancy Services Ltd. ....................... 12,730 140 Tata Motors Ltd. # ................................... 6,086 21 Television Eighteen India Ltd. ....................... 22,300 39 --------- TOTAL INDIA 5,635 --------- INDONESIA - 1.57% COMMON STOCKS - 1.57% PT Astra International Tbk ........................... 147,900 129 PT Bank Central Asia Tbk ............................. 634,500 160 PT Bank Mandiri (Persero) Tbk ........................ 414,000 61 PT Bank Rakyat Indonesia Tbk ......................... 293,000 95 PT Bumi Resources Tbk # .............................. 551,500 110 PT Gudang Garam Tbk .................................. 327,300 131 PT Kalbe Farma Tbk ................................... 2,903,100 99 PT Perusahaan Gas Negara Persero Tbk ................. 261,500 34 PT Telekomunikasi Indonesia Tbk ...................... 969,800 488 --------- TOTAL INDONESIA 1,307 --------- ISRAEL - 0.36% COMMON STOCKS - 0.36% Bank Hapoalim B.M. ................................... 45,400 103 Israel Discount Bank Ltd. ............................ 199,355 197 --------- TOTAL ISRAEL 300 --------- LUXEMBOURG - 0.24% COMMON STOCKS - 0.24% Millicom International Cellular S.A. + ............... 4,907 196 --------- MALAYSIA - 2.22% COMMON STOCKS - 2.22% AMMB Holdings Bhd .................................... 134,850 82 Digi.Com BHD ......................................... 8,000 42 Gamuda Bhd ........................................... 480,800 204 Genting Bhd .......................................... 63,900 82 Malayan Banking Bhd .................................. 364,000 553 Resorts World Bhd .................................... 139,600 98 Sime Darby Bhd ....................................... 249,200 438 Tenaga Nasional Bhd .................................. 206,700 349 --------- TOTAL MALAYSIA 1,848 --------- MEXICO - 3.93% COMMON STOCKS - 3.93% America Movil, S.A.B. de C.V., ADR ................... 38,147 1,180 Consorcio ARA, S.A.B. de C.V. + ...................... 285,700 118 See accompanying notes 49 AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) Controladora Commercial Mexicana, S.A.B. de C.V. + ... 93,000 $ 26 Corp GEO, S.A.B. de C.V. ## .......................... 38,799 53 Embotelladoras Arca, S.A.B. de C.V.................... 85,630 186 Empresas ICA, S.A.B. de C.V. ## + .................... 43,057 60 Fomento Economico Mexicano, S.A. de C.V., ADR ........ 10,000 253 Gruma, S.A.B. de C.V. ## + # ......................... 110,790 72 Grupo Continential, S.A.B. de C.V..................... 178,750 278 Grupo Financiero Banorte, S.A.B. de C.V............... 115,789 222 Grupo Modelo, S.A.B. de C.V. + ....................... 46,600 141 Grupo Televisa, S.A., ADR + .......................... 16,700 295 Urbi Desarrollos Urbanos, S.A.B. de C.V. ## + ........ 38,084 53 Wal-Mart de Mexico, S.A.B. de C.V. + ................. 122,913 328 --------- TOTAL MEXICO 3,265 --------- PHILIPPINES - 0.41% COMMON STOCKS - 0.41% ABS-CBN Broadcasting Corp. ........................... 104,400 32 Bank of the Philippine Islands ....................... 169,927 140 Manila Electric Co. .................................. 63,120 76 Metropolitan Bank & Trust ............................ 50,700 27 Union Bank of the Philippines ........................ 136,400 67 --------- TOTAL PHILIPPINES 342 --------- POLAND - 1.94% COMMON STOCKS - 1.94% Bank Pekao S.A ....................................... 11,825 538 Bank Zachodni WBK S.A................................. 3,236 142 Budimex S.A. ## ...................................... 1,810 41 KGHM Polska Miedz S.A................................. 2,688 30 PBG S.A. ## .......................................... 1,496 105 Polimex Mostostal S.A................................. 33,411 37 Polski Koncern Naftowy Orlen S.A...................... 18,320 186 Powszechna Kasa Oszczednosci Bank Polski SA .......... 33,027 373 Telekomunikacja Polska S.A............................ 21,742 164 --------- TOTAL POLAND 1,616 --------- QATAR - 0.04% COMMON STOCKS - 0.04% Commercial Bank of Qatar, GDR ## ..................... 11,580 35 --------- RUSSIA - 5.39% COMMON STOCKS - 5.39% Gazprom OAO, ADR ..................................... 30,350 612 Gazprom OAO, ADR + ................................... 63,698 1,266 LUKOIL Oil Co., ADR + ................................ 34,192 1,306 Mobile TeleSystems OJSC, ADR ......................... 3,760 147 OAO Severstal, GDR + ++ .............................. 10,460 36 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) OJSC MMC Norilsk Nickel, ADR + ....................... 34,060 $ 341 OJSC Rosneft Oil Co. ## .............................. 67,056 308 OJSC Surgutneftegaz, ADR + ........................... 13,050 84 TMK OAO, GDR ......................................... 10,717 115 Vimpel-Communications, ADR ........................... 13,354 194 VTB Bank OJSC, GDR ++ ................................ 24,380 77 --------- TOTAL RUSSIA 4,486 --------- SOUTH AFRICA - 5.92% COMMON STOCKS - 5.92% AngloGold Ashanti Ltd. ............................... 5,140 96 AngloGold Ashanti Ltd., ADR + ........................ 29,004 529 FirstRand Ltd. ....................................... 254,230 368 Gold Fields Ltd., ADR + .............................. 24,710 164 Harmony Gold Mining Co. Ltd. ## ...................... 9,800 73 Harmony Gold Mining Co. Ltd., ADR ## + ............... 3,100 23 JD Group Ltd. ........................................ 38,570 111 Massmart Holdings Ltd. ............................... 26,614 238 Mr Price Group Ltd. .................................. 60,200 149 MTN Group Ltd. ....................................... 51,685 583 Murray & Roberts Holdings Ltd. ....................... 11,437 78 Nampak Ltd. .......................................... 177,760 243 Naspers Ltd. ......................................... 18,900 317 Nedbank Group Ltd. ................................... 36,164 350 Raubex Group Ltd. .................................... 34,350 90 SABMiller plc ........................................ 9,972 160 Sanlam Ltd. .......................................... 72,300 119 Sappi Ltd. ........................................... 33,310 204 Sasol Ltd. ........................................... 13,735 411 Standard Bank Group Ltd. ............................. 4,876 39 Steinhoff International Holdings Ltd. ................ 87,509 129 Telkom South Africa Ltd. ............................. 22,780 247 Tiger Brands Ltd. .................................... 14,100 206 --------- TOTAL SOUTH AFRICA 4,927 --------- SOUTH KOREA - 10.41% COMMON STOCKS - 10.21% Amorepacific Corp. ................................... 248 109 Cheil Industries, Inc. ............................... 4,808 155 Cheil Worldwide, Inc. ................................ 871 112 Hana Financial Group, Inc. ........................... 7,120 112 Hanwha Chemical Corp. ................................ 24,811 107 Hyundai Development Co. .............................. 5,020 135 Hyundai Motor Co. .................................... 13,468 619 Kangwon Land, Inc. ................................... 13,580 134 KB Financial Group, Inc. ## .......................... 22,627 561 Korea Electric Power Corp. ........................... 21,495 430 KT Corp. ............................................. 3,640 92 KT Corp., ADR ........................................ 19,290 242 Kumho Tire Co., Inc. ................................. 29,460 105 See accompanying notes 50 AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) LG Chemical Ltd. ..................................... 4,032 $ 243 LG Electronics, Inc. ................................. 3,102 229 LG Telecom Ltd. ...................................... 2,000 14 Lotte Shopping Co. Ltd. .............................. 1,825 252 NHN Corp. ## ......................................... 2,297 243 POSCO ................................................ 1,759 478 Samsung Electronics Co. Ltd. ......................... 5,482 2,291 Samsung Fire & Marine Insurance Co. Ltd. ............. 1,438 191 Shinhan Financial Group Co. Ltd. ..................... 17,670 444 SK Telecom Co. Ltd. .................................. 906 143 SK Telecom Co. Ltd., ADR ............................. 40,230 692 SSCP Co. Ltd. ## ..................................... 6,524 30 STX Pan Ocean Co. Ltd. + ............................. 104,000 56 Woongjin Coway Co. Ltd. .............................. 13,056 270 --------- TOTAL COMMON STOCKS 8,489 --------- PREFERRED STOCKS - 0.20% Samsung Electronics Co. Ltd. ......................... 631 165 --------- TOTAL SOUTH KOREA 8,654 --------- TAIWAN - 7.17% COMMON STOCKS - 7.17% Acer, Inc. ........................................... 145,680 193 Asustek Computer, Inc. ............................... 178,672 262 Cathay Financial Holding Co. Ltd. .................... 151,400 164 China Motor Corp. .................................... 261,245 89 China Steel Corp. .................................... 116,880 86 Chinatrust Financial Holding Co. Ltd. ................ 1,135,795 329 Chunghwa Telecom Co. Ltd. ............................ 75,590 125 Compal Electronics, Inc. ............................. 729,379 525 First Financial Holding Co. Ltd. ..................... 402,873 192 HON HAI Precision Industry Co. Ltd. .................. 233,750 566 HTC Corp. ............................................ 22,400 267 Mega Financial Holding Co. Ltd. ...................... 589,000 166 Nan Ya Printed Circuit Board Corp. ................... 64,480 155 Nien Hsing Textile Co. Ltd. .......................... 155,000 41 Powerchip Semiconductor Corp. ## ..................... 608,444 72 Quanta Computer, Inc. ................................ 387,875 411 SinoPac Financial Holdings Co. Ltd. .................. 1,557,987 334 Taiwan Cement Corp. .................................. 66,010 34 Taiwan Fertilizer Co. Ltd. ........................... 40,000 50 Taiwan Semiconductor Manufacturing Co. Ltd. .......... 690,503 1,022 United Microelectronics Corp. ........................ 1,808,226 511 Yaego Corp. .......................................... 873,000 136 Yang Ming Marine Transport Corp. ..................... 47,700 13 Yuanta Financial Holding Co. Ltd. .................... 561,000 223 --------- TOTAL TAIWAN 5,966 --------- SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) THAILAND - 2.14% COMMON STOCKS - 2.14% Advanced Info Service PCL ............................ 35,000 $ 70 Bangkok Bank PCL ..................................... 94,200 192 Charoen Pokphand Foods PCL ........................... 2,873,800 249 Kasikornbank PCL ..................................... 296,500 432 Krung Thai Bank PCL .................................. 1,840,000 206 PTT Exploration & Production PCL ..................... 26,700 65 PTT PCL .............................................. 28,700 130 Siam Cement PCL ...................................... 72,700 221 Siam Commercial Bank PCL ............................. 53,900 81 Thai Union Frozen Products PCL ....................... 288,300 136 --------- TOTAL THAILAND 1,782 --------- TURKEY - 2.28% COMMON STOCKS - 2.28% Akbank TAS ........................................... 83,486 288 Anadolu Efes Biracilik Ve Malt Sanayii A.S. .......... 18,336 156 Haci Omer Sabanci Holding A.S. ....................... 41,935 102 Tekfen Holding A.S. .................................. 44,475 122 Turkcell Iletisim Hizmetleri A.S. .................... 60,249 296 Turkcell Iletisim Hizmetleri A.S., ADR + ............. 5,550 68 Turkiye Garanti Bankasi A.S. ## ...................... 250,530 418 Turkiye Halk Bankasi A.S ............................. 27,000 75 Turkiye Is Bankasi (Isbank) .......................... 67,159 189 Turkiye Sise ve Cam Fabrikalari A.S. ## .............. 218,617 179 --------- TOTAL TURKEY 1,893 --------- UNITED KINGDOM - 0.09% COMMON STOCKS - 0.09% JKX Oil & Gas plc .................................... 31,160 77 --------- SHORT TERM INVESTMENTS - 22.71% American Beacon Money Market Select Fund * ........... 5,303,912 5,304 State Street Institutional Treasury Plus Fund ........ 12,849,480 12,850 PAR AMOUNT ----------- U.S. Treasury, 0.33%, Due 12/11/2008 [ ]........................... $ 735 734 --------- TOTAL SHORT TERM INVESTMENTS 18,888 --------- SHARES ----------- SECURITIES LENDING COLLATERAL - 13.24% American Beacon Money Market Select Fund * ........... 1,615,761 1,615 Securities Liquidating AB Trust ...................... 5,525,264 5,451 See accompanying notes 51 AMERICAN BEACON EMERGING MARKETS FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) State Street Navigator Securities Lending Prime Portfolio ................................... $ 3,941,788 $ 3,942 --------- TOTAL SECURITIES LENDING COLLATERAL 11,008 --------- TOTAL INVESTMENTS 111.64% - (COST $133,564) 92,855 LIABILITIES, NET OF OTHER ASSETS - (11.64%) (9,678) --------- TOTAL NET ASSETS - 100.00% $ 83,177 ========= 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, 2008. ++ 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 $477 or 0.57% of net assets. The Fund has no right to demand registration of these securities. # Valued at fair value pursuant to procedures approved by the Board of Trustees. * The Fund is affiliated by having the same investment advisor. [ ] At October 31, 2008, 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 .... 119 Dec 2008 $5,755 $(1,315) ====== ======= SECTOR DIVERSIFICATION Percent of Net Assets ---------- Communications ..................... 1.05% Consumer Discretionary ............. 6.37% Consumer Staples ................... 3.40% Energy ............................. 11.12% Financials ......................... 16.98% Health Care ........................ 0.83% Industrials ........................ 4.14% Information Technology ............. 9.00% Materials .......................... 8.28% Telecommunication Services ......... 10.86% Utilities .......................... 3.67% Short Term Investments ............. 35.94% Liabilities, Net of Other Assets ... (11.64)% ------ 100.00% ====== See accompanying notes 52 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) PREFERRED STOCKS - 0.01% PREFERRED STOCK - 0.01% Federal Home Loan Mortgage Corp. ..................... 10,000 $ 15 --------- PAR AMOUNT ----------- CORPORATE OBLIGATIONS - 90.32% AUTO COMPONENTS - 1.12% Allison Transmission, 11.00%, Due 11/1/2015 ++ ....... $ 800 500 Cooper-Standard Automotive, Inc., 8.375%, Due 12/15/2014 ........................................ 920 386 TRW Automotive, Inc., 7.25%, Due 3/15/2017 ++ ........ 800 460 --------- 1,346 --------- AUTO LOAN - 3.34% Ford Motor Credit Co. LLC, 9.75%, Due 9/15/2010 .............................. 1,200 816 9.875%, Due 8/10/2011 ............................. 2,480 1,563 General Motors Acceptance Corp., 6.875%, Due 9/15/2011 ............................. 2,400 1,405 8.00%, Due 11/1/2031 .............................. 500 227 --------- 4,011 --------- AUTOMOBILES - 0.68% Ford Motor Co., 8.875%, Due 1/15/2022 ............................. 200 62 7.45%, Due 7/16/2031 .............................. 1,000 315 General Motors Corp., 7.40%, Due 9/1/2025 ............................... 500 130 8.375%, Due 7/15/2033 ............................. 970 315 --------- 822 --------- CASINO/GAMING - 3.05% Fontainebleau Las Vegas Holdings LLC, 10.25%, Due 6/15/2015 ++ ...................................... 1,700 230 Harrah's Operating Co., Inc., 10.75%, Due 2/1/2016 ... 975 317 Las Vegas Sands Corp., 6.375%, Due 2/15/2015 ......... 750 358 Mandalay Resort Group, 9.375%, Due 2/15/2010 ......... 820 541 MGM Mirage, 6.625%, Due 7/15/2015 .................... 1,400 819 Pinnacle Entertainment, Inc., 8.25%, Due 3/15/2012 .............................. 700 485 8.75%, Due 10/1/2013 .............................. 100 76 Pokagon Gaming Authority, 10.375%, Due 6/15/2014 ++ .. 295 268 Station Casinos, Inc., 6.00%, Due 4/1/2012 ............................... 1,100 404 6.875%, Due 3/1/2016 .............................. 700 63 7.75%, Due 8/15/2016 .............................. 300 100 --------- 3,661 --------- COMMERCIAL SERVICES - 0.59% Iron Mountain, Inc., 8.75%, Due 7/15/2018 ............ 200 171 RSC Equipment Rental, Inc., 9.50%, Due 12/1/2014 ..... 900 540 --------- 711 --------- See accompanying notes 53 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) COMMUNICATIONS - 16.12% American Tower Corp., 7.50%, Due 5/1/2012 ............................... $ 175 $ 164 7.00%, Due 10/15/2017 ++ .......................... 800 696 CanWest Media, Inc., 8.00%, Due 9/15/2012 ............ 900 576 CCH I Holdings LLC, 13.50%, Due 1/15/2014 ............ 1,100 341 Centennial Communications Corp., 9.633%, Due 1/1/2013 # ........................................ 770 585 Charter Communications Holdings LLC, 10.25%, Due 9/15/2010 ............................. 1,000 695 13.50%, Due 1/15/2011 ............................. 1,100 517 11.00%, Due 10/1/2015 ............................. 800 360 Cricket Communications, Inc., 9.375%, Due 11/1/2014 .. 925 752 CSC Holdings, Inc., 8.125%, Due 7/15/2009 ............................. 125 120 7.625%, Due 7/15/2018 ............................. 400 287 Dex Media, Inc., Zero Coupon, Due 11/15/2013 # ....... 1,000 225 Digicel Group Ltd., 8.875%, Due 1/15/2015 ++ ......... 1,200 672 DirecTV Holdings LLC/DirecTV Financing Co., 7.625%, Due 5/15/2016 ++ .................................. 1,100 924 Echostar DBS Corp., 7.125%, Due 2/1/2016 ............. 1,200 963 HSN, Inc., 11.25%, Due 8/1/2016 ...................... 650 539 Idearc, Inc., 8.00%, Due 11/15/2016 .................. 2,300 319 Intelsat Corp., 9.25%, Due 8/15/2014 ................. 535 460 Intelsat Jackson Holdings Ltd., 11.25%, Due 6/15/2016 ++ ...................................... 200 171 Intelsat Subsidiary Holding Co. Ltd., 8.50%, Due 4/15/2013 ......................................... 600 522 iPCS, Inc., 4.926%, Due 5/1/2013 # ................... 315 243 L-3 Communications Corp., 6.125%, Due 7/15/2013 ...... 200 173 Lamar Media Corp., 7.25%, Due 1/1/2013 ............... 800 628 Liberty Media LLC, 5.70%, Due 5/15/2013 .............. 900 626 Mediacom LLC, 9.50%, Due 1/15/2013 ................... 865 681 MetroPCS Wireless, Inc., 9.25%, Due 11/1/2014 ........ 800 666 Nortel Networks Ltd., 10.75%, Due 7/15/2016 .......... 800 422 Quebecor Media, Inc., 7.75%, Due 3/15/2016 ........... 1,550 1,073 Qwest Communications International, Inc., 7.50%, Due 2/15/2014 ......................................... 800 544 Qwest Corp., 6.069%, Due 6/15/2013 # ........................... 750 544 6.875%, Due 9/15/2033 ............................. 590 366 Radio One, Inc., 6.375%, Due 2/15/2013 ............... 700 315 Sprint Capital Corp., 7.625%, Due 1/30/2011 ............................. 250 207 8.75%, Due 3/15/2032 .............................. 1,125 737 Telesat Canada, 12.50%, Due 11/1/2017 ................ 800 496 Tim Hellas Telecommunications, 10.503%, Due 1/15/2015 ++ # .................................... 500 145 Time Warner Telecom Holdings, Inc., 9.25%, Due 2/15/2014 ..................................... 500 405 Univision Communications, Inc., 9.75%, Due 3/15/2015 ++ ...................................... 1,900 389 VIP Finance Ireland Ltd., 9.125%, Due 4/30/2018 ++ ... 185 96 See accompanying notes 54 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) Virgin Media Finance PLC, 9.125%, Due 8/15/2016 ...... $ 1,100 $ 726 --------- 19,370 --------- CONSTRUCTION & ENGINEERING - 0.44% KB Home, 6.25%, Due 6/15/2015 .............................. 700 466 7.25%, Due 6/15/2018 .............................. 100 66 --------- 532 --------- CONSUMER DISCRETIONARY - 2.78% Carrols Corp., 9.00%, Due 1/15/2013 .................. 1,050 677 Easton-Bell Sports, Inc., 8.375%, Due 10/1/2012 ...... 250 181 Education Management LLC, 10.25%, Due 6/1/2016 ....... 1,235 852 Lear Corp., 8.75%, Due 12/1/2016 ..................... 1,050 389 Michaels Stores, Inc., 10.00%, Due 11/1/2014 ......... 1,445 650 Neiman Marcus Group, Inc., 9.00%, Due 10/15/2015 ..... 310 213 Ticketmaster Entertainment, Inc., 10.75%, Due 8/1/2016 .......................................... 445 374 --------- 3,336 --------- CONSUMER STAPLES - 3.41% Biomet, Inc., 10.00%, Due 10/15/2017 ............................ 50 46 11.625%, Due 10/15/2017 ........................... 500 435 CRC Health Corp., 10.75%, Due 2/1/2016 ............... 1,285 655 Dean Foods Co., 7.00%, Due 6/1/2016 .................. 600 456 Jarden Corp., 7.50%, Due 5/1/2017 .................... 800 596 Prestige Brands, Inc., 9.25%, Due 4/15/2012 .......... 280 261 Reable Therapeutics, 11.75%, Due 11/15/2014 .......... 525 373 Reynolds American, Inc., 7.625%, Due 6/1/2016 ........ 900 738 Smithfield Foods, Inc., 7.75%, Due 5/15/2013 ......... 800 536 --------- 4,096 --------- ENERGY - 12.84% Chesapeake Energy Corp., 6.625%, Due 1/15/2016 ....... 1,200 938 Cie Generale de Geophysique-Veritas, 7.50%, Due 5/15/2015 ......................................... 800 536 Compton Petroleum Finance Corp., 7.625%, Due 12/1/2013 ......................................... 750 435 Copano Energy LLC, 8.125%, Due 3/1/2016 .............................. 800 588 7.75%, Due 6/1/2018 ............................... 100 69 Dynegy Holdings, Inc., 8.375%, Due 5/1/2016 .......... 800 592 Energy Partners Ltd., 9.75%, Due 4/15/2014 ........... 515 277 Helix Energy Solutions Group, Inc., 9.50%, Due 1/15/2016 ......................................... 500 320 Intergen NV, 9.00%, Due 6/30/2017 ++ ................. 800 640 International Coal Group, Inc., 10.25%, Due 7/15/2014 ......................................... 430 361 Linn Energy LLC, 9.875%, Due 7/1/2018 ................ 460 311 Mariner Energy, Inc., 7.50%, Due 4/15/2013 ........... 700 483 MarkWest Energy Partners LP, 6.875%, Due 11/1/2014 ............................. 700 506 8.75%, Due 4/15/2018 .............................. 500 360 See accompanying notes 55 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) Mirant Americas Generation LLC, 8.30%, Due 5/1/2011 .. $ 700 $ 642 Mirant North America LLC, 7.375%, Due 12/31/2013 ..... 900 786 NRG Energy, Inc., 7.25%, Due 2/1/2014 ............................... 700 612 7.375%, Due 2/1/2016 .............................. 1,200 1,035 OPTI Canada, Inc., 8.25%, Due 12/15/2014 ............. 750 446 Peabody Energy Corp., 7.375%, Due 11/1/2016 .......... 300 253 PetroHawk Energy Corp., 9.125%, Due 7/15/2013 ........ 1,200 924 Plains Exploration & Production Co., 7.625%, Due 6/1/2018 .......................................... 1,000 655 Quicksilver Resources, Inc., 8.25%, Due 8/1/2015 ..... 900 625 Regency Energy Partners LP, 8.375%, Due 12/15/2013 ... 577 439 SandRidge Energy, Inc., 8.00%, Due 6/1/2018 ++ ....... 500 332 Seitel, Inc., 9.75%, Due 2/15/2014 ................... 750 473 Tesoro Corp., 6.50%, Due 6/1/2017 .................... 1,200 804 Williams Cos., Inc., 7.625%, Due 7/15/2019 ............................. 500 413 7.875%, Due 9/1/2021 .............................. 400 330 8.75%, Due 3/15/2032 .............................. 300 245 --------- 15,430 --------- FINANCE - 9.66% American Real Estate Partners, L.P., 8.125%, Due 6/1/2012 .......................................... 975 663 BF Saul Reit, 7.50%, Due 3/1/2014 .................... 815 497 E*Trade Financial Corp., 12.50%, Due 11/30/2017 ...... 1,250 1,125 FMC Finance III S.A., 6.875%, Due 7/15/2017 .......... 300 238 Forest City Enterprises, Inc., 7.625%, Due 6/1/2015 .. 600 420 Galaxy Entertainment Finance Co. Ltd., 9.875%, Due 12/15/2012 ++ ..................................... 1,000 380 General Motors Acceptance Corp., 7.25%, Due 3/2/2011 .......................................... 625 385 Hexion US Finance Corp., 9.75%, Due 11/15/2014 ....... 460 292 HUB International Holdings, Inc., 10.25%, Due 6/15/2015 ++ ...................................... 1,100 693 Hughes Network Systems LLC, 9.50%, Due 4/15/2014 ..... 900 765 JP Morgan Chase & Co., 7.90%, Due 12/31/2049 ......... 900 729 KAR Holdings, Inc., 10.00%, Due 5/1/2015 ............. 925 523 LaBranche & Co., Inc., 11.00%, Due 5/15/2012 ......... 850 756 Lehman Brothers Holdings, Inc., 6.20%, Due 9/26/2014 ......................................... 900 117 Liberty Mutual Group, Inc., 10.75%, Due 6/15/2058 ++ ...................................... 500 263 Merrill Lynch & Co., Inc., 6.875%, Due 4/25/2018 ..... 500 444 National City Bank, 4.529%, Due 1/21/2010 # .......... 250 230 Nuveen Investments, Inc., 5.00%, Due 9/15/2010 ....... 625 213 Petroplus Finance Ltd., 6.75%, Due 5/1/2014 ++ ....... 1,000 670 Pinnacle Foods Finance LLC, 10.625%, Due 4/1/2017 .... 1,125 698 Realogy Corp., 10.50%, Due 4/15/2014 ................. 900 288 USI Holdings Corp., 9.75%, Due 5/15/2015 ++ .......... 615 387 Wachovia Capital Trust III, 5.80%, Due 3/15/2042 ..... 500 267 Washington Mutual, Inc., 7.25%, Due 11/1/2017 ........ 485 113 See accompanying notes 56 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) Wells Fargo Capital XIII, 7.70%, Due 12/29/2049 ...... $ 200 $ 164 Wells Fargo Capital XV, 9.75%, Due 12/29/2049 ........ 300 291 --------- 11,611 --------- HEALTH CARE - 6.98% Community Health Systems, Inc., 8.875%, Due 7/15/2015 ......................................... 175 147 DaVita, Inc., 7.25%, Due 3/15/2015 ................... 1,150 983 Fresenius Medical Care Capital Trust IV, 7.875%, Due 6/15/2011 ......................................... 700 644 HCA, Inc., 9.125%, Due 11/15/2014 ............................ 2,050 1,763 6.50%, Due 2/15/2016 .............................. 700 411 HealthSouth Corp., 9.133%, Due 6/15/2014 # ........... 735 625 Tenet Healthcare Corp., 9.875%, Due 7/1/2014 ......... 800 654 United Surgical Partners International, Inc., 9.25%, Due 5/1/2017 ...................................... 900 578 Universal Hospital Services, Inc., 6.303%, Due 6/1/2015 # ........................................ 500 340 US Oncology, Inc., 8.334%, Due 3/15/2012 # ........................... 966 676 10.75%, Due 8/15/2014 ............................. 700 546 Vanguard Health Holding Co. I LLC, Zero Coupon, Due 10/1/2015 # ....................................... 550 432 Vanguard Health Holding Co. II LLC, 9.00%, Due 10/1/2014 ......................................... 700 581 --------- 8,380 --------- HOTELS, RESTAURANTS & LEISURE - 2.38% Denny's Holdings, Inc., 10.00%, Due 10/1/2012 ........ 475 361 Gaylord Entertainment Co., 8.00%, Due 11/15/2013 ..... 750 512 Host Hotels & Resorts LP, 6.875%, Due 11/1/2014 ...... 400 298 Host Marriott LP, 7.125%, Due 11/1/2013 .............. 600 471 O'Charley's, Inc., 9.00%, Due 11/1/2013 .............. 600 355 OSI Restaurant Partners, Inc., 10.00%, Due 6/15/2015 ......................................... 400 94 Royal Caribbean Cruises Ltd., 7.25%, Due 3/15/2018 ... 1,200 768 --------- 2,859 --------- INDUSTRIALS - 10.83% Allied Waste North America, Inc., 6.875%, Due 6/1/2017 .......................................... 300 261 Bowater, Inc., 9.00%, Due 8/1/2009 ................... 625 344 Casella Waste Systems, Inc., 9.75%, Due 2/1/2013 ..... 920 810 Celestica, Inc., 7.625%, Due 7/1/2013 ................ 200 162 CEVA Group plc, 10.00%, Due 9/1/2014 ++ .............. 800 576 Crown Americas LLC, 7.75%, Due 11/15/2015 ............ 800 698 DRS Technologies, Inc., 6.875%, Due 11/1/2013 ............................. 200 198 7.625%, Due 2/1/2018 .............................. 100 99 Freescale Semiconductor, Inc., 8.875%, Due 12/15/2014 ........................................ 2,250 1,001 Hovnanian Enterprises, Inc., 11.50%, Due 5/1/2013 .... 500 405 Interface, Inc., 10.375%, Due 2/1/2010 ............... 819 799 Intertape Polymer US, Inc., 8.50%, Due 8/1/2014 ...... 1,100 880 NewPage Corp., 10.00%, Due 5/1/2012 .................. 800 544 Nortek, Inc., 10.00%, Due 12/1/2013 .................. 500 367 See accompanying notes 57 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) Novelis, Inc., 7.25%, Due 2/15/2015 .................. $ 800 $ 536 Owens-Brockway Glass Containers, Inc., 6.75%, Due 12/1/2014 ......................................... 800 692 RBS Global, Inc., 9.50%, Due 8/1/2014 ................ 1,205 831 Sanmina-SCI Corp., 5.569%, Due 6/15/2014 ++ # ........................ 100 77 8.125%, Due 3/1/2016 .............................. 700 441 Service Corp International, 1.00%, Due 6/15/2017 ..... 245 187 Smurfit Kappa Funding plc, 7.75%, Due 4/1/2015 ....... 200 142 Smurfit-Stone Container Enterprises, Inc., 8.375%, Due 7/1/2012 ...................................... 750 382 Solo Cup Co., 8.50%, Due 2/15/2014 ................... 575 385 Stallion Oilfield Services, 9.75%, Due 2/1/2015 ++ ... 500 235 Terex Corp., 8.00%, Due 11/15/2017 ................... 700 518 TFM S.A.B. de C.V., 9.375%, Due 5/1/2012 ............. 500 423 TransDigm, Inc., 7.75%, Due 7/15/2014 ................ 400 320 WCA Waste Corp., 9.25%, Due 6/15/2014 ................ 850 697 --------- 13,010 --------- MATERIALS - 5.89% Freeport-McMoRan Copper & Gold, Inc., 8.375%, Due 4/1/2017 .......................................... 1,495 1,174 Huntsman International LLC, 7.875%, Due 11/15/2014 ... 700 623 Ineos Group Holdings plc, 8.50%, Due 2/15/2016 ++ .... 1,000 370 MacDermid, Inc., 9.50%, Due 4/15/2017 ++ ............. 1,885 999 Momentive Performance Materials, Inc., 9.75%, Due 12/1/2014 ......................................... 620 347 Nalco Co., 8.875%, Due 11/15/2013 .................... 800 688 Newark Group, Inc., 9.75%, Due 3/15/2014 ............. 2,200 638 Norske Skogindustrier ASA, 8.625%, Due 6/15/2011 ............................. 1,100 649 6.125%, Due 10/15/2015 ++ ......................... 750 322 Sappi Papier Holding AG, 7.50%, Due 6/15/2032 ++ ..... 825 480 Steel Dynamics, Inc., 7.75%, Due 4/15/2016 ........... 750 497 Tube City IMS Corp., 9.75%, Due 2/1/2015 ............. 500 290 --------- 7,077 --------- MEDIA - 0.64% R.H. Donnelley Corp., 6.875%, Due 1/15/2013 ............................. 200 46 8.875%, Due 1/15/2016 ............................. 1,400 294 WMG Holdings Corp., Zero Coupon, Due 12/15/2014 # .... 1,000 430 --------- 770 --------- RETAIL - 1.14% Dollar General Corp., 10.625%, Due 7/15/2015 ......... 800 736 Jostens IH Corp., 7.625%, Due 10/1/2012 .............. 800 632 --------- 1,368 --------- SERVICES - 0.74% ARAMARK Corp., 8.50%, Due 2/1/2015 ................... 800 684 Iron Mountain, Inc., 8.00%, Due 6/15/2020 ............ 265 209 --------- 893 --------- See accompanying notes 58 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) TECHNOLOGY - 2.08% Celestica, Inc., 7.875%, Due 7/1/2011 ................ $ 500 $ 450 First Data Corp., 9.875%, Due 9/24/2015 ++ ........... 750 480 Jabil Circuit, Inc., 8.25%, Due 3/15/2018 ............ 650 494 SunGard Data Systems, Inc., 9.125%, Due 8/15/2013 ............................. 200 166 10.25%, Due 8/15/2015 ............................. 1,300 910 --------- 2,500 --------- TELECOMMUNICATION SERVICES - 1.57% Inmarsat Finance plc, Zero Coupon, Due 11/15/2012 # .. 1,200 954 Millicom International Cellular S.A., 10.00%, Due 12/1/2013 ......................................... 400 312 Wind Acquisition Finance S.A., 10.75%, Due 12/1/2015 ++ ...................................... 800 616 --------- 1,882 --------- UTILITIES - 4.04% AES Corp., 8.00%, Due 10/15/2017 ..................... 1,600 1,232 Edison Mission Energy, 7.00%, Due 5/15/2017 .......... 1,100 870 Elwood Energy LLC, 8.159%, Due 7/5/2026 .............. 529 462 Energy Future Holdings Corp., 10.875%, Due 11/1/2017 ......................................... 160 123 Orion Power Holdings, Inc., 12.00%, Due 5/1/2010 ..... 235 227 PNM Resources, Inc., 9.25%, Due 5/15/2015 ............ 300 246 Texas Competitive Electric Holdings Co. LLC, 10.25%, Due 11/1/2015 ..................................... 2,215 1,689 --------- 4,849 --------- TOTAL CORPORATE OBLIGATIONS 108,514 --------- CONVERTIBLE OBLIGATIONS - 0.25% INDUSTRIALS - 0.25% Horizon Lines, Inc., 4.25%, Due 8/15/2012 ............ 550 293 --------- SHARES ----------- SHORT TERM INVESTMENTS - 8.48% American Beacon Money Market Select Fund * ........... 5,761,805 5,762 State Street Institutional Treasury Plus Fund ........ 4,428,790 4,429 --------- TOTAL SHORT TERM INVESTMENTS 10,191 --------- TOTAL INVESTMENTS - 99.06% (COST $170,137) $ 119,013 OTHER ASSETS, NET OF LIABILITIES - 0.94% 1,134 --------- TOTAL NET ASSETS - 100.00% $ 120,147 ========= See accompanying notes 59 AMERICAN BEACON HIGH YIELD BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 Percentages are stated as a percent of net assets. ++ 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 $12,071 or 10.05% 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 is affiliated by having the same investment advisor. See accompanying notes 60 AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 2.60% CONSUMER DISCRETIONARY - 0.22% SPECIALTY RETAIL - 0.22% Nike, Inc. + ......................................... 3,890 $ 224 --------- CONSUMER STAPLES - 0.31% BEVERAGES - 0.31% Coca-Cola Co. + ...................................... 7,060 311 --------- ENERGY - 0.20% ENERGY EQUIPMENT & SERVICES - 0.20% Noble Corp. + ........................................ 6,350 205 --------- FINANCIALS - 0.58% DIVERSIFIED FINANCIALS - 0.34% BlackRock, Inc. + .................................... 625 82 T Rowe Price Group, Inc. + ........................... 6,500 257 --------- 339 --------- INSURANCE - 0.24% AON Corp. + .......................................... 5,675 240 --------- TOTAL FINANCIALS 579 --------- HEALTH CARE - 0.51% HEALTH CARE PROVIDERS & SERVICES - 0.36% Express Scripts, Inc. ## + ........................... 6,000 364 --------- OPTICAL SUPPLIES - 0.15% Alcon, Inc. .......................................... 1,630 143 --------- TOTAL HEALTH CARE 507 --------- INFORMATION TECHNOLOGY - 0.78% COMMUNICATIONS EQUIPMENT - 0.42% Cisco Systems, Inc. ## ............................... 9,280 165 Qualcomm, Inc. ....................................... 6,775 259 --------- 424 --------- IT CONSULTING & SERVICES - 0.36% Accenture Ltd. + ..................................... 10,970 363 --------- TOTAL INFORMATION TECHNOLOGY 787 --------- TOTAL COMMON STOCKS 2,613 --------- CONVERTIBLE PREFERRED STOCKS - 0.72% FINANCIALS - 0.51% DIVERSIFIED FINANCIALS - 0.33% Bank of America Corp. ................................ 475 332 --------- SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) FINANCE - 0.18% SLM Corp. ............................................ 360 $ 184 --------- TOTAL FINANCIALS 516 --------- INDUSTRIALS - 0.13% HOUSEHOLD DURABLES - 0.13% Stanley Works ........................................ 255 135 --------- MATERIALS - 0.08% METALS & MINING - 0.08% Freeport-McMoRan Copper & Gold, Inc. ................. 1,560 76 --------- TOTAL CONVERTIBLE PREFERRED STOCKS 727 --------- PREFERRED STOCKS - 0.56% FINANCIALS - 0.40% DIVERSIFIED FINANCIALS - 0.37% Citigroup, Inc. + .................................... 11,500 370 --------- INSURANCE - 0.03% American International Group, Inc. ................... 8,100 36 --------- TOTAL FINANCIALS 406 --------- INDUSTRIALS - 0.16% CHEMICALS - 0.16% Avery Dennison Corp. + ............................... 4,600 157 --------- TOTAL PREFERRED STOCKS 563 --------- PAR AMOUNT ----------- CORPORATE OBLIGATIONS - 26.53% AEROSPACE & DEFENSE - 0.23% Raytheon Co., 5.375%, Due 4/1/2013 + ............................ $ 250 236 --------- BANKS - 5.40% Bank of America Corp., 7.80%, Due 9/15/2016 .............................. 600 563 6.00%, Due 9/1/2017 ............................... 400 350 Bank of New York Mellon Corp., 5.125%, Due 8/27/2013 ............................. 350 334 Bank One Corp., 4.90%, Due 4/30/2015 .............................. 250 219 Citigroup, Inc., 5.125%, Due 2/14/2011 + ........................... 1,625 1,540 6.125%, Due 11/21/2017 ............................ 275 236 ING Bank, NV, 5.125%, Due 5/1/2015 ++ ........................... 300 289 See accompanying notes 61 AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) JP Morgan Chase & Co., 6.75%, Due 2/1/2011 ............................... $ 800 $ 794 6.00%, Due 1/15/2018 .............................. 250 224 Wells Fargo & Co., 5.25%, Due 10/23/2012 ............................. 660 631 5.625%, Due 12/11/2017 ............................ 275 243 --------- 5,423 --------- BEVERAGES - 0.35% Constellation Brands, Inc., 7.25%, Due 9/1/2016 ............................... 425 353 --------- COMMUNICATIONS - 1.28% Comcast Cable Communications Holdings, Inc., 8.375%, Due 3/15/2013 ............................. 500 485 DirecTV Holdings LLC/DirecTV Financing Co., 8.375%, Due 3/15/2013 ............................. 300 281 Time Warner Cable, Inc., 5.85%, Due 5/1/2017 ............................... 300 246 Verizon Communications, Inc., 6.90%, Due 4/15/2038 + ............................ 325 272 --------- 1,284 --------- CONSUMER DISCRETIONARY - 0.95% Royal Caribbean Cruises Ltd., 7.50%, Due 10/15/2027 ............................. 500 310 Wal-Mart Stores, Inc., 7.55%, Due 2/15/2030 .............................. 325 315 Wesco Distribution, Inc., 7.50%, Due 10/15/2017 ............................. 450 324 --------- 949 --------- CONSUMER STAPLES - 0.68% Coca-Cola Enterprises, Inc., 7.375%, Due 3/3/2014 .............................. 150 152 Hanesbrands, Inc., 6.508%, Due 12/15/2014 # .......................... 440 299 Kellogg Co., 4.25%, Due 3/6/2013 ............................... 250 231 --------- 682 --------- ENERGY - 0.76% Canadian Natural Resources Ltd., 6.25%, Due 3/15/2038 .............................. 325 227 ConocoPhillips, 5.20%, Due 5/15/2018 .............................. 325 272 EOG Resources, Inc., 4.75%, Due 3/15/2014 ++ ........................... 250 263 --------- 762 --------- PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) FINANCE - 2.88% American General Finance Corp., 4.875%, Due 5/15/2010 ............................. $ 300 $ 143 Capital One Financial Corp., 5.70%, Due 9/15/2011 .............................. 310 273 General Electric Capital Corp., 5.65%, Due 6/9/2014 ............................... 500 445 5.625%, Due 5/1/2018 .............................. 250 206 Goldman Sachs Group, Inc., 4.75%, Due 7/15/2013 .............................. 250 211 6.25%, Due 9/1/2017 ............................... 250 209 HSBC Finance Corp., 5.25%, Due 1/14/2011 .............................. 1,300 1,196 Merrill Lynch & Co., Inc., 6.11%, Due 1/29/2037 .............................. 325 215 --------- 2,898 --------- HEALTH CARE - 0.10% Psychiatric Solutions, Inc., 7.75%, Due 7/15/2015 .............................. 125 103 --------- INDUSTRIALS - 4.73% American Honda Finance Corp., 4.625%, Due 4/2/2013 ++ ........................... 325 295 BE Aerospace, Inc., 8.50%, Due 7/1/2018 ............................... 325 279 Burlington Northern Santa Fe Corp., 5.75%, Due 3/15/2018 .............................. 325 285 Canadian National Railway Co., 5.55%, Due 5/15/2018 .............................. 250 217 Caterpillar Financial Services Corp., 4.15%, Due 1/15/2010 .............................. 300 293 4.25%, Due 2/8/2013 ............................... 250 227 Daimler Finance NA LLC, 5.875%, Due 3/15/2011 ............................. 250 204 5.75%, Due 9/8/2011 ............................... 250 200 Gardner Denver, Inc., 8.00%, Due 5/1/2013 ............................... 300 273 Goodyear Tire & Rubber Co., 7.857%, Due 8/15/2011 ............................. 300 257 Honeywell International, Inc., 4.25%, Due 3/1/2013 + ............................. 250 230 John Deere Capital Corp., 4.125%, Due 1/15/2010 + ........................... 825 813 NBTY, Inc., 7.125%, Due 10/1/2015 ............................. 150 112 Nissan Motor Acceptance Corp., 5.625%, Due 3/14/2011 ++ .......................... 300 307 See accompanying notes 62 AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) Norfolk Southern Corp., 5.75%, Due 4/1/2018 ++ ............................ $ 325 $ 280 Terex Corp., 8.00%, Due 11/15/2017 + ........................... 125 93 Union Pacific Corp., 6.50%, Due 4/15/2012 .............................. 250 243 United Technologies Corp., 6.125%, Due 7/15/2038 ............................. 165 142 --------- 4,750 --------- INSURANCE - 3.23% Aegon Funding Corp., 5.75%, Due 12/15/2020 ............................. 350 260 American International Group, Inc., 5.85%, Due 1/16/2018 + ............................ 250 91 6.25%, Due 5/1/2036 + ............................. 325 111 Hartford Financial Services Group, Inc., 5.25%, Due 10/15/2011 ............................. 750 635 John Hancock Global Funding II, 7.90%, Due 7/2/2010 ++ ............................ 900 917 Lincoln National Corp., 4.75%, Due 2/15/2014 .............................. 125 111 MetLife, Inc., 6.375%, Due 6/15/2034 ............................. 350 257 Metropolitan Life Global Funding I, 4.625%, Due 8/19/2010 ++ .......................... 700 660 Prudential Financial, Inc., 4.50%, Due 7/15/2013 .............................. 250 205 --------- 3,247 --------- INTERNET & CATALOG RETAIL - 0.22% Expedia, Inc., 7.456%, Due 8/15/2018 ............................. 300 225 --------- PHARMACEUTICALS - 0.22% Bristol-Myers Squibb Co., 5.45%, Due 5/1/2018 ............................... 125 109 GlaxoSmithKline Capital, Inc., 5.65%, Due 5/15/2018 .............................. 125 111 --------- 220 --------- REAL ESTATE - 0.56% ProLogis Trust, 5.50%, Due 4/1/2012 ............................... 250 162 5.625%, Due 11/15/2016 ............................ 250 137 Simon Property Group LP, 5.30%, Due 5/30/2013 .............................. 325 268 --------- 567 --------- PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) TECHNOLOGY - 2.53% CA, Inc., 1.625%, Due 12/15/2009 ............................ $ 450 $ 454 Cisco Systems, Inc., 5.25%, Due 2/22/2011 .............................. 250 250 Hewlett-Packard Co., 4.50%, Due 3/1/2013 + ............................. 325 302 International Business Machines Corp., 7.625%, Due 10/15/2018 ............................ 150 155 Jabil Circuit, Inc., 8.25%, Due 3/15/2018 .............................. 325 247 Lender Processing Services, Inc., 8.125%, Due 7/1/2016 ++ ........................... 325 278 Seagate Technology, 6.80%, Due 10/1/2016 .............................. 350 245 SunGard Data Systems, Inc., 9.125%, Due 8/15/2013 ............................. 300 249 Syniverse Technologies, Inc., 7.75%, Due 8/15/2013 .............................. 325 260 Xerox Corp., 5.65%, Due 5/15/2013 .............................. 125 99 --------- 2,539 --------- TELEPHONE - 1.75% America Movil, S.A.B. de C.V., 6.375%, Due 3/1/2035 + ............................ 325 227 AT&T, Inc., 5.625%, Due 6/15/2016 ............................. 250 219 5.50%, Due 2/1/2018 ............................... 400 340 6.80%, Due 5/15/2036 .............................. 125 106 6.40%, Due 5/15/2038 .............................. 200 160 Cingular Wireless Services, Inc., 7.875%, Due 3/1/2011 .............................. 250 250 Verizon Communications, Inc., 5.50%, Due 4/1/2017 + ............................. 250 213 Vodafone Group plc, 6.15%, Due 2/27/2037 .............................. 325 243 --------- 1,758 --------- UTILITIES - 0.66% Duke Energy Carolinas LLC, 5.10%, Due 4/15/2018 + ............................ 250 218 MidAmerican Energy Holdings Co., 6.125%, Due 4/1/2036 .............................. 325 239 Virginia Electric and Power Co., 5.40%, Due 4/30/2018 .............................. 250 205 --------- 662 --------- TOTAL CORPORATE OBLIGATIONS 26,658 --------- See accompanying notes 63 AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) CONVERTIBLE OBLIGATIONS - 10.99% COMMUNICATIONS - 1.24% Anixter International, Inc., 1.00%, Due 2/15/2013 + ............................ $ 400 $ 264 Interpublic Group of Cos., Inc., 4.25%, Due 3/15/2023 .............................. 240 165 Liberty Media LLC, 3.125%, Due 3/30/2023 ............................. 320 219 Symantec Corp., 1.00%, Due 6/15/2013 + ............................ 750 599 --------- 1,247 --------- CONSUMER DISCRETIONARY - 1.15% Archer-Daniels-Midland Co., 0.875%, Due 2/15/2014 ............................. 280 213 Best Buy Co., Inc., 2.25%, Due 1/15/2022 .............................. 200 157 Carnival Corp., 2.00%, Due 4/15/2021 .............................. 416 348 GameStop Corp., 8.00%, Due 10/1/2012 .............................. 225 209 RadioShack Corp., 2.50%, Due 8/1/2013 ............................... 328 225 --------- 1,152 --------- CONSUMER STAPLES - 0.59% Amgen, Inc., 0.375%, Due 2/1/2013 .............................. 675 596 --------- ENERGY - 1.28% Chesapeake Energy Corp., 2.25%, Due 12/15/2038 ............................. 315 156 Pioneer Natural Resources Co., 2.875%, Due 1/15/2038 ............................. 485 338 SESI LLC, 1.50%, Due 12/15/2026 ++ .......................... 270 182 Transocean, Inc., 1.625%, Due 12/15/2037 ............................ 690 607 --------- 1,283 --------- FINANCE - 0.76% Affiliated Managers Group, Inc., 3.95%, Due 8/15/2038 ++ ........................... 370 229 SVB Financial Group, 3.875%, Due 4/15/2011 ++ .......................... 525 535 --------- 764 --------- HEALTH CARE - 1.26% Gilead Sciences, Inc., 0.50%, Due 5/1/2011 ++ ............................ 360 436 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) 0.625%, Due 5/1/2013 + ............................ $ 130 $ 161 Medtronic, Inc., 1.50%, Due 4/15/2011 .............................. 280 258 1.625%, Due 4/15/2013 ............................. 475 410 --------- 1,265 --------- INDUSTRIALS - 0.92% Alliant Techsystems, Inc., 2.75%, Due 9/15/2011 ++ ........................... 320 313 Fisher Scientific International, Inc., 3.25%, Due 3/1/2024 + ............................. 230 262 ON Semiconductor Corp., Zero Coupon, Due 4/15/2024 ........................ 300 223 Trinity Industries, Inc., 3.875%, Due 6/1/2036 .............................. 250 127 --------- 925 --------- PHARMACEUTICALS - 1.62% Beckman Coulter, Inc., 2.50%, Due 12/15/2036 + ++ ........................ 413 356 Genzyme Corp., 1.25%, Due 12/1/2023 .............................. 200 209 Invitrogen Corp., 1.50%, Due 2/15/2024 .............................. 486 357 Teva Pharmaceutical Finance LLC, 0.25%, Due 2/1/2026 ............................... 755 707 --------- 1,629 --------- TECHNOLOGY - 2.17% Alliance Data Systems Corp., 1.75%, Due 8/1/2013 ++ ............................ 320 237 DST Systems, Inc., 4.125%, Due 8/15/2023 ............................. 140 132 EMC Corp., 1.75%, Due 12/1/2011 + ............................ 620 590 Intel Corp., 2.95%, Due 12/15/2035 ............................. 535 382 NetApp, Inc., 1.75%, Due 6/1/2013 ++ ............................ 575 379 Sybase, Inc., 1.75%, Due 2/22/2025 .............................. 405 456 --------- 2,176 --------- TOTAL CONVERTIBLE OBLIGATIONS 11,037 --------- NON-AGENCY MORTGAGE-BACKED OBLIGATIONS - 2.58% COMMERCIAL MORTGAGE-BACKED SECURITY - 2.58% Banc of America Commercial Mortgage, Inc., 2005-6 A1, 5.001%, Due 9/10/2047 .................. 475 456 2007-2 A2, 5.634%, Due 4/10/2049 .................. 650 566 See accompanying notes 64 AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) JP Morgan Chase Commercial Mortgage Securities Corp., 2005-LDP3 A1, 4.655%, Due 8/15/2042 ............... $ 144 $ 140 2007-CB19 A4, 5.747%, Due 2/12/2049 ............... 400 300 2007-CB20 A2, 5.629%, Due 2/12/2051 ............... 650 571 LB-UBS Commercial Mortgage Trust, 2004-C1 A4, 5.424%, Due 2/15/2040 ................. 450 333 Wachovia Bank Commercial Mortgage Trust, 2007-C32 A2, 5.736%, Due 6/15/2049 ................ 260 227 --------- TOTAL NON-AGENCY MORTGAGE-BACKED OBLIGATIONS 2,593 --------- ASSET-BACKED SECURITIES - 3.79% American Express Credit Account Master Trust, 2006-2 A, 5.35%, Due 1/15/2014 .................... 1,300 1,218 Capital Auto Receivables Asset Trust, 2006-SN1A A4A, 5.32%, Due 3/20/2010 ++ ............ 900 894 Capital One Multi-Asset Execution Trust, 2006-A10 A10, 5.15%, Due 6/15/2014 ................ 1,000 919 Volkswagen Auto Loan Enhanced Trust, 2005-1 A4, 4.86%, Due 4/20/2012 ................... 781 779 --------- TOTAL ASSET-BACKED SECURITIES 3,810 --------- U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS - 32.76% FEDERAL HOME LOAN MORTGAGE CORPORATION - 13.50% 5.00%, Due 2/1/2021 ............................... 1,146 1,121 4.50%, Due 4/1/2021 ............................... 1,073 1,022 5.00%, Due 5/1/2021 ............................... 1,087 1,064 5.50%, Due 11/1/2021 .............................. 798 796 4.50%, Due 4/1/2023 ............................... 1,428 1,357 5.00%, Due 9/1/2035 ............................... 2,362 2,237 5.50%, Due 4/1/2037 ............................... 846 825 5.00%, Due 3/1/2038 ............................... 1,670 1,581 5.50%, Due 5/1/2038 ............................... 1,675 1,635 5.50%, Due 6/1/2038 ............................... 1,978 1,930 --------- 13,568 --------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 15.88% 6.50%, Due 7/1/2032 ............................... 417 425 5.50%, Due 6/1/2033 ............................... 956 936 4.50%, Due 9/1/2034 ............................... 437 397 5.50%, Due 12/1/2035 .............................. 984 962 5.00%, Due 2/1/2036 ............................... 1,603 1,520 5.50%, Due 4/1/2036 ............................... 1,525 1,491 6.00%, Due 9/1/2036 ............................... 1,277 1,277 6.50%, Due 12/1/2036 .............................. 1,081 1,097 5.50%, Due 2/1/2037 ............................... 1,259 1,231 6.00%, Due 9/1/2037 ............................... 855 855 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) 6.00%, Due 1/1/2038 ............................... $ 2,010 $ 2,010 5.00%, Due 4/1/2038 ............................... 1,956 1,854 5.50%, Due 6/1/2038 ............................... 1,945 1,901 --------- 15,956 --------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 3.38% 4.201%, Due 8/16/2026 ............................. 587 584 6.00%, Due 2/15/2033 .............................. 890 894 5.50%, Due 4/15/2033 .............................. 1,153 1,134 5.00%, Due 5/15/2033 .............................. 811 780 --------- 3,392 --------- TOTAL U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS 32,916 --------- U.S. AGENCY OBLIGATIONS - 4.62% FEDERAL HOME LOAN BANK - 2.40% 4.50%, Due 9/16/2013 + ............................ 2,400 2,410 --------- FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.86% 6.25%, Due 7/15/2032 + ............................ 800 868 --------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 1.36% 5.375%, Due 6/12/2017 + ........................... 1,350 1,365 --------- TOTAL U.S. AGENCY OBLIGATIONS 4,643 --------- U.S. TREASURY OBLIGATIONS - 8.94% 4.25%, Due 11/15/2017 + ........................... 3,600 3,703 7.875%, Due 2/15/2021 + ........................... 1,400 1,792 6.25%, Due 8/15/2023 + ............................ 650 744 6.875%, Due 8/15/2025 + ........................... 1,050 1,308 5.25%, Due 11/15/2028 + ........................... 800 851 4.75%, Due 2/15/2037 + ............................ 550 583 --------- TOTAL U.S. TREASURY OBLIGATIONS 8,981 --------- SHARES ----------- SHORT TERM INVESTMENTS - 5.56% American Beacon Money Market Select Fund * ........... 3,057,483 3,057 State Street Institutional Treasury Plus Fund ........ 2,527,877 2,528 --------- TOTAL SHORT TERM INVESTMENTS 5,585 --------- SECURITIES LENDING COLLATERAL - 18.46% American Beacon Money Market Select Fund * ........... 2,721,619 2,722 Securities Liquidating AB Trust ...................... 9,306,861 9,181 See accompanying notes 65 AMERICAN BEACON ENHANCED INCOME FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- --------- (DOLLARS IN THOUSANDS) State Street Navigator Securities Lending Prime Portfolio ................................... $ 6,639,623 $ 6,640 --------- TOTAL SECURITIES LENDING COLLATERAL 18,543 --------- TOTAL INVESTMENTS 118.11% - (COST $129,446) 118,669 LIABILITIES, NET OF OTHER ASSETS - (18.11%) (18,200) --------- TOTAL NET ASSETS - 100.00% $ 100,469 ========= 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, 2008. ++ Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $6,850 or 6.82% 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 is affiliated by having the same investment advisor. See accompanying notes 66 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) CORPORATE OBLIGATIONS - 23.75% AEROSPACE & DEFENSE - 0.13% Raytheon Co., 5.375%, Due 4/1/2013 ................... $ 200 $ 189 --------- BANKS - 4.17% Bank of America Corp., 7.80%, Due 9/15/2016 .............................. 500 469 6.00%, Due 9/1/2017 ............................... 200 175 5.75%, Due 12/1/2017 .............................. 585 504 Bank of New York Mellon Corp., 4.95%, Due 11/1/2012 .............................. 140 135 5.125%, Due 8/27/2013 ............................. 250 238 Bank One Corp., 5.90%, Due 11/15/2011 ............................. 440 431 4.90%, Due 4/30/2015 + ............................ 200 175 Citigroup, Inc., 5.125%, Due 2/14/2011 ............................. 1,200 1,137 6.125%, Due 11/21/2017 ............................ 455 391 ING Bank, NV, 5.125%, Due 5/1/2015 ++ ................ 250 241 JP Morgan Chase & Co., 6.75%, Due 2/1/2011 ............................... 625 621 6.00%, Due 1/15/2018 .............................. 610 547 Wachovia Corp., 5.70%, Due 8/1/2013 + ............................. 100 90 5.75%, Due 6/15/2017 .............................. 145 125 Washington Mutual Finance Corp., 6.875%, Due 5/15/2011 ......................................... 230 219 Wells Fargo & Co., 5.25%, Due 10/23/2012 ............................. 500 479 5.625%, Due 12/11/2017 ............................ 200 176 --------- 6,153 --------- BASIC MATERIALS - 0.31% International Paper Co., 7.40%, Due 6/15/2014 ........ 290 244 Weyerhaeuser Co., 5.95%, Due 11/1/2008 ............... 210 210 --------- 454 --------- COMMUNICATIONS - 1.07% Comcast Cable Communications Holdings, Inc., 8.375%, Due 3/15/2013 ..................................... 450 436 Comcast Corp., 5.30%, Due 1/15/2014 .............................. 220 190 5.875%, Due 2/15/2018 ............................. 135 113 Rogers Communications, Inc., 6.80%, Due 8/15/2018 .... 250 219 Time Warner Cable, Inc., 5.85%, Due 5/1/2017 ......... 505 414 Verizon Communications, Inc., 6.90%, Due 4/15/2038 + ....................................... 250 209 --------- 1,581 --------- CONSUMER DISCRETIONARY - 0.47% Best Buy Co., Inc., 6.75%, Due 7/15/2013 ++ .......... 240 226 See accompanying notes 67 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) Wal-Mart Stores, Inc., 7.55%, Due 2/15/2030 .............................. $ 250 $ 242 6.20%, Due 4/15/2038 + ............................ 265 229 --------- 697 --------- CONSUMER STAPLES - 0.80% Archer-Daniels-Midland Co., 6.45%, Due 1/15/2038 ..... 140 112 Coca-Cola Enterprises, Inc., 7.375%, Due 3/3/2014 .... 175 178 Diageo Capital plc, 5.75%, Due 10/23/2017 + .......... 145 125 Dr Pepper Snapple Group, Inc., 6.82%, Due 5/1/2018 ++ ....................................... 140 123 Kellogg Co., 4.25%, Due 3/6/2013 ..................... 250 231 Kraft Foods, Inc., 6.50%, Due 8/11/2017 .............. 285 250 PepsiCo, Inc., 7.90%, Due 11/1/2018 .................. 150 158 --------- 1,177 --------- ENERGY - 1.27% Cameron International Corp., 6.375%, Due 7/15/2018 ... 125 104 Canadian Natural Resources Ltd., 6.70%, Due 7/15/2011 .............................. 135 131 6.25%, Due 3/15/2038 .............................. 250 175 ConocoPhillips, 5.20%, Due 5/15/2018 ................. 250 209 Consolidated Natural Gas Co., 6.00%, Due 10/15/2010 .. 175 175 EOG Resources, Inc., 4.75%, Due 3/15/2014 ++ ......... 200 210 Marathon Oil Corp., 6.00%, Due 10/1/2017 ............. 275 219 Suncor Energy, Inc., 6.10%, Due 6/1/2018 ............. 310 246 Transocean, Inc., 6.00%, Due 3/15/2018 ............... 290 248 Weatherford International, Inc., 5.95%, Due 6/15/2012 ......................................... 180 162 --------- 1,879 --------- FINANCE - 3.38% American Express Co., 8.15%, Due 3/19/2038 ........... 165 129 American Express Credit Corp., 5.875%, Due 5/2/2013 .. 270 226 American General Finance Corp., 4.875%, Due 5/15/2010 ............................. 200 96 4.00%, Due 3/15/2011 .............................. 535 207 Ameriprise Financial, Inc., 5.35%, Due 11/15/2010 .... 480 442 Bear Stearns Cos., Inc., 7.25%, Due 2/1/2018 ......... 145 136 Capital One Financial Corp., 5.70%, Due 9/15/2011 .... 200 176 CIT Group, Inc., 4.75%, Due 12/15/2010 + ............. 160 98 CME Group, Inc., 5.40%, Due 8/1/2013 ................. 270 255 Countrywide Home Loans, Inc., 4.00%, Due 3/22/2011 ... 70 65 General Electric Capital Corp., 4.375%, Due 3/3/2012 + ............................ 350 319 5.65%, Due 6/9/2014 ............................... 450 400 5.625%, Due 5/1/2018 + ............................ 250 206 Goldman Sachs Group, Inc., 4.75%, Due 7/15/2013 .............................. 300 254 6.25%, Due 9/1/2017 ............................... 200 167 See accompanying notes 68 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) Goldman Sachs Group, Inc., 5.95%, Due 1/18/2018 .............................. $ 215 $ 175 6.75%, Due 10/1/2037 .............................. 145 94 HSBC Finance Corp., 5.25%, Due 1/14/2011 ............. 1,000 920 International Lease Finance Corp., 5.75%, Due 6/15/2011 ......................................... 240 164 Merrill Lynch & Co., Inc., 5.45%, Due 2/5/2013 ............................... 145 131 6.875%, Due 4/25/2018 ............................. 180 160 6.11%, Due 1/29/2037 .............................. 250 165 --------- 4,985 --------- HEALTH CARE - 0.44% Covidien International Finance SA, 5.45%, Due 10/15/2012 ........................................ 120 116 UnitedHealth Group, Inc., 5.25%, Due 3/15/2011 ....... 560 541 --------- 657 --------- INDUSTRIALS - 2.93% American Honda Finance Corp., 4.625%, Due 4/2/2013 ++ ....................................... 250 227 ArcelorMittal South Africa Ltd., 6.125%, Due 6/1/2018 + ++ ..................................... 340 234 Burlington Northern Santa Fe Corp., 5.75%, Due 3/15/2018 ......................................... 250 219 Canadian National Railway Co., 5.55%, Due 5/15/2018 .. 250 218 Caterpillar Financial Services Corp., 4.15%, Due 1/15/2010 .............................. 200 195 4.85%, Due 12/7/2012 .............................. 185 172 4.25%, Due 2/8/2013 ............................... 250 227 CRH America, Inc., 6.00%, Due 9/30/2016 .............. 315 227 Daimler Finance NA LLC, 5.875%, Due 3/15/2011 ............................. 300 245 5.75%, Due 9/8/2011 ............................... 200 160 Eaton Corp., 5.60%, Due 5/15/2018 + .................. 195 170 Honeywell International, Inc., 4.25%, Due 3/1/2013 ... 250 230 John Deere Capital Corp., 4.125%, Due 1/15/2010 ...... 675 666 Koninklijke Philips Electronics NV, 5.75%, Due 3/11/2018 ......................................... 165 136 Masco Corp., 6.125%, Due 10/3/2016 ................... 135 96 Nissan Motor Acceptance Corp., 5.625%, Due 3/14/2011 ++ ...................................... 200 205 Norfolk Southern Corp., 5.75%, Due 4/1/2018 .......... 250 215 Tyco Electronics Group SA, 6.55%, Due 10/1/2017 ...... 225 187 Union Pacific Corp., 6.50%, Due 4/15/2012 ............ 200 194 United Technologies Corp., 6.125%, Due 7/15/2038 ..... 125 108 --------- 4,331 --------- INSURANCE - 2.34% Aegon Funding Corp., 5.75%, Due 12/15/2020 ........... 200 149 American International Group, Inc., 5.85%, Due 1/16/2018 .............................. 200 73 6.25%, Due 5/1/2036 ............................... 250 85 Hartford Financial Services Group, Inc., 5.25%, Due 10/15/2011 ............................. 575 487 See accompanying notes 69 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) 5.375%, Due 3/15/2017 ............................. $ 345 $ 241 John Hancock Global Funding II, 7.90%, Due 7/2/2010 ++ ....................................... 700 714 Lincoln National Corp., 4.75%, Due 2/15/2014 ......... 100 89 MetLife, Inc., 5.375%, Due 12/15/2012 ............................ 240 217 6.817%, Due 8/15/2018 + ........................... 370 318 6.375%, Due 6/15/2034 ............................. 200 147 Metropolitan Life Global Funding I, 4.625%, Due 8/19/2010 ++ ...................................... 500 471 Prudential Financial, Inc., 4.50%, Due 7/15/2013 .............................. 200 164 5.10%, Due 9/20/2014 .............................. 280 212 Willis North America, Inc., 6.20%, Due 3/28/2017 ..... 130 95 --------- 3,462 --------- PHARMACEUTICALS - 0.70% Bristol-Myers Squibb Co., 5.45%, Due 5/1/2018 ........ 125 109 GlaxoSmithKline Capital, Inc., 5.65%, Due 5/15/2018 .............................. 125 111 6.375%, Due 5/15/2038 ............................. 200 169 Hospira, Inc., 6.05%, Due 3/30/2017 .................. 205 172 Schering-Plough Corp., 6.75%, Due 12/1/2033 .......... 185 153 Wyeth Corp., 5.50%, Due 2/1/2014 ..................... 335 314 --------- 1,028 --------- REAL ESTATE - 0.59% Equity Residential, 5.125%, Due 3/15/2016 ............ 355 242 ProLogis Trust, 5.50%, Due 4/1/2012 ............................... 300 195 5.625%, Due 11/15/2016 ............................ 200 109 Simon Property Group LP, 5.30%, Due 5/30/2013 .............................. 250 206 5.75%, Due 12/1/2015 .............................. 170 126 --------- 878 --------- TECHNOLOGY - 1.10% Cisco Systems, Inc., 5.25%, Due 2/22/2011 ............ 200 200 Computer Sciences Corp., 5.50%, Due 3/15/2013 ++ ........................... 70 61 6.50%, Due 3/15/2018 ++ ........................... 240 186 Hewlett-Packard Co., 4.50%, Due 3/1/2013 + ........... 535 498 International Business Machines Corp., 7.625%, Due 10/15/2018 ........................................ 555 574 Xerox Corp., 5.65%, Due 5/15/2013 .................... 125 99 --------- 1,618 --------- TELEPHONE - 1.80% America Movil, S.A.B. de C.V., 6.375%, Due 3/1/2035 .. 250 174 AT&T, Inc., 5.10%, Due 9/15/2014 .............................. 655 572 5.625%, Due 6/15/2016 ............................. 200 175 See accompanying notes 70 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) AT&T, Inc., 5.50%, Due 2/1/2018 ............................... $ 300 $ 255 6.80%, Due 5/15/2036 .............................. 125 106 6.40%, Due 5/15/2038 .............................. 125 100 Cingular Wireless Services, Inc., 7.875%, Due 3/1/2011 .............................. 200 200 8.75%, Due 3/1/2031 ............................... 170 158 Deutsche Telekom AG, 8.00%, Due 6/15/2010 ............ 150 148 Telecom Italia S.p.A., 4.00%, Due 11/15/2008 ......... 220 220 Telefonica Emisiones SAU, 5.984%, Due 6/20/2011 ...... 160 153 Verizon Communications, Inc., 5.50%, Due 4/1/2017 + .. 250 213 Vodafone Group plc, 6.15%, Due 2/27/2037 ............. 250 187 --------- 2,661 --------- UTILITIES - 2.25% Columbus Southern Power Co., 5.50%, Due 3/1/2013 ..... 495 454 Dominion Resources, Inc., Series A, 5.60%, Due 11/15/2016 + ...................................... 135 111 Duke Energy Carolinas LLC, 5.10%, Due 4/15/2018 + .... 250 218 Duke Energy Indiana, Inc., 6.05%, Due 6/15/2016 + .... 355 293 MidAmerican Energy Holdings Co., 5.875%, Due 10/1/2012 ............................. 405 384 6.125%, Due 4/1/2036 .............................. 250 184 Public Service Enterprise Group, Inc., 6.95%, Due 6/1/2012 .......................................... 430 406 Southern Power Co., 6.25%, Due 7/15/2012 ............. 450 445 Union Electric Co., 6.70%, Due 2/1/2019 .............. 150 125 Virginia Electric and Power Co., 5.40%, Due 4/30/2018 ......................................... 250 205 Xcel Energy, Inc., 5.613%, Due 4/1/2017 .............. 581 490 --------- 3,315 --------- TOTAL CORPORATE OBLIGATIONS ............................. 35,065 --------- NON-AGENCY MORTGAGE-BACKED OBLIGATIONS - 6.57% Banc of America Commercial Mortgage, Inc., 2005-6 A1, 5.001%, Due 9/10/2047 .................. 237 228 2007-2 A2, 5.634%, Due 4/10/2049 .................. 450 392 Banc of America Mortgage Securities, Inc., 2004-8 3A1, 5.25%, Due 10/25/2019 ............................. 633 600 Bear Stearns Commercial Mortgage Securities, Inc., 2006-T22 A2, 5.464%, Due 4/12/2038 ................ 830 772 2004-PWR5 A4, 4.831%, Due 7/11/2042 ............... 835 726 2005-T20 A2, 5.127%, Due 10/12/2042 ............... 430 406 Chase Mortgage Finance Corp., 2006-A1 A1, 6.04%, Due 9/25/2036 # ....................................... 964 782 Citicorp Mortgage Securities, Inc., 2006-3 2A1, 5.50%, Due 6/25/2021 ..................................... 459 385 Citigroup Commercial Mortgage Trust, 2004-C2 A3, 4.38%, Due 10/15/2041 ............................. 770 706 Countrywide Home Loan Mortgage Pass Through Trust, 2007-18 A1, 6.00%, Due 9/25/2037 .................. 809 630 General Electric Capital Commercial Mortgage Corp., 2003-C2 A2, 4.17%, Due 7/10/2037 .................. 159 152 JP Morgan Chase Commercial Mortgage Securities Corp., 2004-CBX A4, 4.529%, Due 1/12/2037 ................ 255 233 See accompanying notes 71 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) JP Morgan Chase Commercial Mortgage Securities Corp., 2005-LDP3 A1, 4.655%, Due 8/15/2042 ............... $ 82 $ 80 2005-LDP1 A2, 4.625%, Due 3/15/2046 ............... 785 755 2007-CB19 A4, 5.747%, Due 2/12/2049 ............... 300 225 2007-CB20 A2, 5.629%, Due 2/12/2051 ............... 500 439 JP Morgan Mortgage Trust, 7.00%, Due 8/25/2037 ....... 470 382 LB-UBS Commercial Mortgage Trust, 2004-C1 A4, 5.424%, Due 2/15/2040 ..................................... 400 296 Prime Mortgage Trust, 2005-2, 5.25%, Due 7/25/2020 ... 573 546 Wachovia Bank Commercial Mortgage Trust, 2007-C32 A2, 5.736%, Due 6/15/2049 ............................. 210 183 Wells Fargo Mortgage Backed Securities Trust, 2006-11 A8, 6.00%, Due 9/25/2036 .................. 544 408 2007-7 A1, 6.00%, Due 6/25/2037 ................... 486 379 --------- TOTAL NON-AGENCY MORTGAGE-BACKED OBLIGATIONS ............ 9,705 --------- ASSET-BACKED SECURITIES - 1.93% American Express Credit Account Master Trust, 2006-2 A, 5.35%, Due 1/15/2014 ........................... 1,000 937 Capital Auto Receivables Asset Trust, 2006-SN1A A4A, 5.32%, Due 3/20/2010 ++ ........................... 600 596 Capital One Multi-Asset Execution Trust, 2006-A10 A10, 5.15%, Due 6/15/2014 .............................. 750 689 Volkswagen Auto Loan Enhanced Trust, 2005-1 A4, 4.86%, Due 4/20/2012 ..................................... 625 623 --------- TOTAL ASSET-BACKED SECURITIES ........................ 2,845 --------- U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS - 33.66% FEDERAL HOME LOAN MORTGAGE CORPORATION - 12.42% 5.50%, Due 9/1/2017 ............................... 173 173 4.50%, Due 3/1/2019 ............................... 530 508 5.00%, Due 10/1/2020 .............................. 514 503 5.50%, Due 11/1/2021 .............................. 333 332 5.00%, Due 11/1/2021 .............................. 78 76 5.50%, Due 4/1/2022 ............................... 36 36 5.00%, Due 5/1/2022 ............................... 540 528 5.50%, Due 12/1/2022 .............................. 185 184 5.00%, Due 4/1/2023 ............................... 458 448 6.50%, Due 9/1/2028 ............................... 76 78 6.00%, Due 8/1/2029 ............................... 266 267 5.00%, Due 8/1/2033 ............................... 714 677 5.50%, Due 2/1/2034 ............................... 1,015 991 6.00%, Due 8/1/2034 ............................... 477 477 6.50%, Due 4/1/2035 ............................... 39 40 5.00%, Due 8/1/2035 ............................... 475 450 5.00%, Due 9/1/2035 ............................... 690 654 5.00%, Due 9/1/2035 ............................... 394 373 6.00%, Due 8/1/2036 ............................... 890 889 5.50%, Due 11/1/2036 .............................. 747 729 5.50%, Due 4/1/2037 ............................... 846 825 5.50%, Due 5/1/2037 ............................... 172 168 See accompanying notes 72 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) 5.50%, Due 6/1/2037 ............................... $ 837 $ 802 6.00%, Due 7/1/2037 ............................... 406 406 6.50%, Due 8/1/2037 ............................... 34 34 6.00%, Due 12/1/2037 .............................. 385 385 5.00%, Due 3/1/2038 ............................... 2,234 2,115 6.00%, Due 3/1/2038 ............................... 827 826 5.00%, Due 3/1/2038 ............................... 1,228 1,162 6.50%, Due 5/1/2038 ............................... 1,024 1,039 5.50%, Due 5/1/2038 ............................... 1,232 1,202 5.50%, Due 6/1/2038 ............................... 989 965 --------- 18,342 --------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 20.04% 6.50%, Due 2/1/2017 ............................... 218 223 5.50%, Due 8/1/2017 ............................... 297 298 5.00%, Due 12/1/2017 .............................. 774 763 4.50%, Due 9/1/2018 ............................... 551 529 5.50%, Due 11/1/2018 .............................. 152 152 5.50%, Due 12/1/2018 .............................. 167 168 5.00%, Due 3/1/2020 ............................... 186 182 4.00%, Due 8/1/2020 ............................... 411 381 5.50%, Due 4/1/2021 ............................... 450 449 5.50%, Due 11/1/2021 .............................. 38 38 5.00%, Due 3/1/2034 ............................... 895 849 5.50%, Due 6/1/2034 ............................... 486 475 4.50%, Due 9/1/2034 ............................... 291 265 5.50%, Due 2/1/2035 ............................... 1,092 1,069 5.00%, Due 11/1/2035 .............................. 1,605 1,522 5.50%, Due 12/1/2035 .............................. 406 398 5.50%, Due 1/1/2036 ............................... 687 672 5.50%, Due 1/1/2036 ............................... 715 700 5.50%, Due 2/1/2036 ............................... 856 837 5.00%, Due 3/1/2036 ............................... 743 705 5.50%, Due 3/1/2036 ............................... 592 579 5.50%, Due 4/1/2036 ............................... 762 746 6.00%, Due 9/1/2036 ............................... 440 440 6.50%, Due 9/1/2036 ............................... 1,564 1,587 6.00%, Due 10/1/2036 .............................. 7 7 5.50%, Due 11/1/2036 .............................. 672 657 6.00%, Due 11/1/2036 .............................. 790 790 6.50%, Due 12/1/2036 .............................. 721 731 6.00%, Due 12/1/2036 .............................. 695 695 5.50%, Due 1/1/2037 ............................... 1,781 1,741 5.50%, Due 2/1/2037 ............................... 1,259 1,231 6.00%, Due 8/1/2037 ............................... 788 788 See accompanying notes 73 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) 6.50%, Due 8/1/2037 ............................... $ 1,081 $ 1,096 6.00%, Due 9/1/2037 ............................... 1,282 1,282 6.00%, Due 11/1/2037 .............................. 1,642 1,642 6.50%, Due 11/1/2037 .............................. 373 379 6.00%, Due 1/1/2038 ............................... 893 893 5.00%, Due 3/1/2038 ............................... 69 66 5.00%, Due 4/1/2038 ............................... 978 927 5.00%, Due 4/1/2038 ............................... 276 262 5.00%, Due 5/1/2038 ............................... 283 268 5.50%, Due 6/1/2038 ............................... 972 951 5.00%, Due 6/1/2038 ............................... 1,212 1,149 --------- 29,582 --------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.20% 4.201%, Due 8/16/2026 ............................. 335 334 6.50%, Due 3/15/2028 .............................. 406 412 6.00%, Due 4/15/2031 .............................. 491 495 5.50%, Due 2/20/2034 .............................. 542 532 --------- 1,773 --------- TOTAL U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS 49,697 --------- U.S. AGENCY OBLIGATIONS - 11.76% FEDERAL HOME LOAN BANK - 2.48% 5.25%, Due 11/3/2009 .............................. 250 250 4.50%, Due 9/16/2013 + ............................ 3,400 3,414 --------- 3,664 --------- FEDERAL HOME LOAN MORTGAGE CORPORATION - 6.25% 5.25%, Due 2/24/2011 .............................. 1,860 1,874 5.125%, Due 4/18/2011 + ........................... 4,400 4,573 6.00%, Due 12/15/2031 ............................. 1,470 1,480 6.25%, Due 7/15/2032 + ............................ 1,200 1,303 --------- 9,230 --------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 3.03% 7.25%, Due 1/15/2010 .............................. 1,500 1,572 5.125%, Due 1/2/2014 .............................. 385 376 4.625%, Due 10/15/2014 + .......................... 500 504 5.375%, Due 6/12/2017 + ........................... 2,000 2,022 --------- 4,474 --------- TOTAL U.S. AGENCY OBLIGATIONS ........................... 17,368 --------- U.S. TREASURY OBLIGATIONS - 14.74% 3.125%, Due 8/31/2013 + ........................... 2,350 2,391 4.75%, Due 5/15/2014 + ............................ 2,345 2,573 4.125%, Due 5/15/2015 + ........................... 3,000 3,126 4.25%, Due 11/15/2017 + ........................... 2,400 2,469 9.125%, Due 5/15/2018 + ........................... 650 887 See accompanying notes 74 AMERICAN BEACON INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) 4.00%, Due 8/15/2018 + ............................ $ 3,885 $ 3,890 7.875%, Due 2/15/2021 + ........................... 1,050 1,344 6.25%, Due 8/15/2023 + ............................ 900 1,030 6.875%, Due 8/15/2025 + ........................... 770 959 5.25%, Due 11/15/2028 + ........................... 750 798 4.375%, Due 2/15/2038 + ........................... 2,285 2,292 --------- TOTAL U.S. TREASURY OBLIGATIONS 21,759 --------- SHARES ----------- SHORT TERM INVESTMENTS - 6.11% American Beacon Money Market Select Fund * ........... 7,367,975 7,368 State Street Institutional Treasury Plus Fund ........ 1,650,784 1,651 --------- TOTAL SHORT TERM INVESTMENTS 9,019 --------- SECURITIES LENDING COLLATERAL - 23.33% American Beacon Money Market Select Fund * ........... 5,054,274 5,054 Securities Liquidating AB Trust ...................... 17,283,620 17,051 State Street Navigator Securities Lending Prime Portfolio ......................................... 12,330,336 12,330 --------- TOTAL SECURITIES LENDING COLLATERAL 34,435 --------- TOTAL INVESTMENTS - 121.85% (COST $188,640) $ 179,893 LIABILITIES, NET OF OTHER ASSETS - (21.85%) (32,259) --------- TOTAL NET ASSETS - 100.00% $ 147,634 ========= Percentages are stated as a percent of net assets. + All or a portion of this security is on loan at October 31, 2008. ++ 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 $3,494 or 2.37% 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 is affiliated by having the same investment advisor. See accompanying notes 75 AMERICAN BEACON SHORT-TERM BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) CORPORATE OBLIGATIONS - 16.57% BANKS - 2.96% Citigroup, Inc., 4.125%, Due 2/22/2010 ............................. $ 1,000 $ 961 4.625%, Due 8/3/2010 .............................. 1,000 963 HSBC Bank USA, 3.875%, Due 9/15/2009 + ............... 2,000 1,958 JP Morgan Chase & Co., 6.75%, Due 2/1/2011 ........... 2,000 1,986 National Westminster Bank plc, 7.375%, Due 10/1/2009 ......................................... 2,000 1,931 --------- 7,799 --------- COMMUNICATIONS - 0.76% Comcast Cable Communications LLC, 6.20%, Due 11/15/2008 ........................................ 2,000 1,999 --------- FINANCE - 4.24% Capital One Financial Corp., 5.70%, Due 9/15/2011 + ....................................... 1,000 880 Credit Suisse USA, Inc., 4.70%, Due 6/1/2009 ......... 2,000 1,981 General Electric Capital Corp., 5.875%, Due 2/15/2012 + ....................................... 3,000 2,857 Goldman Sachs Group, Inc., 6.65%, Due 5/15/2009 ...... 1,000 990 MBNA Corp., 7.50%, Due 3/15/2012 ..................... 2,000 1,981 Merrill Lynch & Co., Inc., 6.00%, Due 2/17/2009 ...... 2,500 2,483 --------- 11,172 --------- INDUSTRIALS - 4.30% Bunge Limited Finance Corp., 4.375%, Due 12/15/2008 .. 1,000 997 Burlington Northern Santa Fe Corp., 6.75%, Due 7/15/2011 ......................................... 1,000 1,002 Caterpillar Financial Services Corp., 4.15%, Due 1/15/2010 ......................................... 2,000 1,952 Daimler Finance NA LLC, 5.75%, Due 9/8/2011 .......... 1,000 801 John Deere Capital Corp., 4.125%, Due 1/15/2010 ...... 2,500 2,465 Lockheed Martin Corp., 8.20%, Due 12/1/2009 .......... 1,000 1,036 Nissan Motor Acceptance Corp., 4.625%, Due 3/8/2010 ++ ....................................... 1,000 1,005 Norfolk Southern Corp., 8.625%, Due 5/15/2010 ........ 1,000 1,060 Northrop Grumman Corp., 7.125%, Due 2/15/2011 ........ 1,000 1,009 --------- 11,327 --------- INSURANCE - 2.85% Hartford Financial Services Group, Inc., 5.25%, Due 10/15/2011 ........................................ 700 593 ING Security Life Institutional Funding, 4.25%, Due 1/15/2010 ++ ...................................... 1,500 1,493 John Hancock Global Funding II, 7.90%, Due 7/2/2010 ++ ....................................... 2,000 2,039 Metropolitan Life Global Funding I, 4.625%, Due 8/19/2010 ++ ...................................... 1,500 1,413 Monumental Global Funding II, 4.625%, Due 3/15/2010 ++ ...................................... 1,000 983 Pricoa Global Funding 1, 4.20%, Due 1/15/2010 ++ ..... 1,000 985 --------- 7,506 --------- REAL ESTATE - 0.34% Simon Property Group LP, 5.375%, Due 6/1/2011 ........ 1,000 896 --------- TELEPHONE - 1.12% AT&T Corp., 6.00%, Due 3/15/2009 + ................... 2,000 2,001 See accompanying notes 76 AMERICAN BEACON SHORT-TERM BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) Vodafone Group plc, 5.50%, Due 6/15/2011 + ........... $ 1,000 $ 955 --------- 2,956 --------- TOTAL CORPORATE OBLIGATIONS 43,655 --------- NON-AGENCY MORTGAGE-BACKED OBLIGATIONS - 0.64% Banc of America Commercial Mortgage, Inc., 2005-6 A1, 5.001%, Due 9/10/2047 .................. 475 456 2007-2 A2, 5.634%, Due 4/10/2049 .................. 800 697 Wachovia Bank Commercial Mortgage Trust, 2006-C23 A1, 5.203%, Due 1/15/2045 ............................. 548 528 --------- TOTAL NON-AGENCY MORTGAGE-BACKED OBLIGATIONS 1,681 --------- ASSET-BACKED SECURITIES - 5.67% Banc of America Securities Auto Trust, 2005-WF1 A4, 4.08%, Due 4/18/2010 .............................. 1,102 1,102 Capital Auto Receivables Asset Trust, 2006-SN1A A4A, 5.32%, Due 3/20/2010 ++ ............ 2,000 1,988 2006-1 A4, 5.04%, Due 5/17/2010 ................... 250 248 CarMax Auto Owner Trust, 2005-3 A4, 4.91%, Due 1/18/2011 ......................................... 1,200 1,197 Chase Manhattan Auto Owner Trust, 2006-A A4, 5.36%, Due 1/15/2013 ..................................... 2,000 1,979 Harley-Davidson Motorcycle Trust, 2007-3 A4, 5.52%, Due 11/15/2013 .................................... 2,000 1,910 Household Automotive Trust, 2005-1 A4, 4.35%, Due 6/18/2012 ......................................... 2,474 2,414 USAA Auto Owner Trust, 2007-1 A4, 5.55%, Due 2/15/2013 ......................................... 3,000 2,929 Volkswagen Auto Loan Enhanced Trust, 2005-1 A4, 4.86%, Due 4/20/2012 ..................................... 1,172 1,168 --------- TOTAL ASSET-BACKED SECURITIES 14,935 --------- U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS - 0.87% GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.87% 4.968%, Due 12/16/2021 ............................ 628 630 4.201%, Due 8/16/2026 ............................. 1,677 1,669 --------- TOTAL U.S. AGENCY MORTGAGE-BACKED OBLIGATIONS 2,299 --------- U.S. AGENCY OBLIGATIONS - 2.73% FEDERAL HOME LOAN MORTGAGE CORPORATION - 1.93% 4.75%, Due 11/3/2009 + ............................ 5,000 5,084 --------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 0.80% 7.25%, Due 1/15/2010 .............................. 2,000 2,096 --------- TOTAL U.S. AGENCY OBLIGATIONS 7,180 --------- U.S. TREASURY OBLIGATIONS - 71.17% 3.125%, Due 11/30/2009 + .......................... 10,400 10,580 2.00%, Due 2/28/2010 + ............................ 20,000 20,131 2.125%, Due 4/30/2010 + ........................... 20,000 20,222 2.875%, Due 6/30/2010 + ........................... 20,000 20,458 4.125%, Due 8/15/2010 + ........................... 20,000 20,967 4.25%, Due 10/15/2010 + ........................... 20,000 21,110 See accompanying notes 77 AMERICAN BEACON SHORT-TERM BOND FUND SCHEDULE OF INVESTMENTS October 31, 2008 PAR AMOUNT VALUE ----------- --------- (DOLLARS IN THOUSANDS) 4.375%, Due 12/15/2010 + ............................. $ 20,000 $ 21,219 4.50%, Due 2/28/2011 + ............................... 20,000 21,409 4.875%, Due 4/30/2011 + .............................. 20,000 21,622 5.125%, Due 6/30/2011 ................................ 9,000 9,799 --------- TOTAL U.S. TREASURY OBLIGATIONS 187,517 --------- SHARES ----------- SHORT TERM INVESTMENTS - 1.38% American Beacon Money Market Select Fund # ........... 1,241,025 1,241 State Street Institutional Treasury Plus Fund ........ 2,385,021 2,385 --------- TOTAL SHORT TERM INVESTMENTS 3,626 --------- SECURITIES LENDING COLLATERAL - 25.14% American Beacon Money Market Select Fund # ........... 9,720,888 9,721 Securities Liquidating AB Trust ...................... 33,241,599 32,794 State Street Navigator Securities Lending Prime Portfolio ......................................... 23,714,944 23,715 --------- TOTAL SECURITIES LENDING COLLATERAL 66,230 --------- TOTAL INVESTMENTS - 124.17% (COST $326,675) $ 327,123 LIABILITIES, NET OF OTHER ASSETS - (24.17%) (63,665) --------- TOTAL NET ASSETS - 100.00% $ 263,458 ========= Percentages are stated as a percent of net assets. + All or a portion of this security is on loan at October 31, 2008. ++ 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 $9,906 or 3.76% of net assets. The Fund has no right to demand registration of these securities. # The Fund is affiliated by having the same investment advisor. See accompanying notes 78 THIS PAGE INTENTIONALLY LEFT BLANK. 79 AMERICAN BEACON FUNDS STATEMENTS OF ASSETS AND LIABILITIES OCTOBER 31, 2008 (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) ..... $ 801,661 $ 64,917 $ 55,683 Investments in affiliated securities, at value (B) .......... 48,526 5,415 5,453 Foreign currency, at value (C) .............................. -- -- -- Cash ........................................................ -- -- -- Receivable for investments sold ............................. 1,352 -- 490 Dividends and interest receivable ........................... 4,307 66 42 Receivable for fund shares sold ............................. 556 256 163 Receivable for tax reclaims ................................. 4 -- -- Receivable for expense reimbursement ........................ -- -- 9 Receivable for variation margin on open futures contracts ... 221 25 66 Prepaid expenses ............................................ 25 1 8 ----------- ----------- ---------- TOTAL ASSETS ............................................. 856,652 70,680 61,914 ----------- ----------- ---------- LIABILITIES: Payable for investments purchased ........................... 2,225 -- -- Payable upon return of securities loaned .................... 99,593 13,469 8,621 Payable for fund shares redeemed ............................ 115 -- 34 Dividends payable ........................................... -- -- -- Management and investment advisory fees payable (Note 2) .... 563 112 153 Administrative service and service fees payable ............. 87 2 9 Other liabilities ........................................... 156 38 37 ----------- ----------- ---------- TOTAL LIABILITIES ........................................ 102,739 13,621 8,854 ----------- ----------- ---------- NET ASSETS ..................................................... $ 753,913 $ 57,059 $ 53,060 =========== =========== ========== ANALYSIS OF NET ASSETS: Paid-in-capital ................................................ 934,568 84,302 93,582 Undistributed net investment income ............................ 27,287 610 937 Accumulated net realized gain (loss) ........................... (73,786) (15,034) (12,429) Unrealized appreciation (depreciation) of investments, futures contracts, and foreign currency ............................. (134,156) (12,819) (29,030) ----------- ----------- ---------- NET ASSETS. .................................................... $ 753,913 $ 57,059 $ 53,060 =========== =========== ========== Shares outstanding (no par value): Institutional Class ......................................... 3,439,883 18,522 379,982 =========== =========== ========== PlanAhead Class ............................................. 10,648,019 N/A 2,799,908 =========== =========== ========== Service Class ............................................... 785,124 N/A 92 =========== =========== ========== AMR Class ................................................... 59,287,606 12,611,199 5,741,395 =========== =========== ========== Net asset value, offering and redemption price per share: Institutional Class ......................................... $ 10.63 $ 4.49 $ 5.94 =========== =========== ========== PlanAhead Class ............................................. $ 9.91 N/A $ 5.91 =========== =========== ========== Service Class ............................................... $ 9.77 N/A $ 5.87 =========== =========== ========== AMR Class ................................................... $ 10.19 $ 4.52 $ 5.97 =========== =========== ========== (A) Cost of investments in unaffiliated securities ............. $ 926,054 $ 76,962 $ 83,324 (B) Cost of investments in affiliated securities ............... $ 48,526 $ 5,415 $ 5,453 (C) Cost of foreign currency ................................... $ -- $ -- $ 0 (D) Market value of securities on loan ......................... $ 97,848 $ 13,436 $ 8,536 See accompanying notes 80 SMALL CAP VALUE EMERGING OPPORTUNITY MARKETS HIGH YIELD ENHANCED INTERMEDIATE SHORT-TERM FUND FUND BOND FUND INCOME FUND BOND FUND BOND FUND ----------- ---------- ---------- ----------- ------------ ----------- ASSETS: Investments in unaffiliated securities, at value (A, D) ........................ $ 5,206 $ 85,935 $ 113,251 $ 112,890 $ 167,471 $ 316,161 Investments in affiliated securities, at value (B) ........................... 243 6,920 5,762 5,779 12,422 10,962 Foreign currency, at value (C) ............ -- 1,166 -- -- -- -- Cash ...................................... -- -- -- -- -- 209 Receivable for investments sold ........... -- 530 -- -- 1,079 -- Dividends and interest receivable ......... 6 173 4,181 899 1,365 2,313 Receivable for fund shares sold ........... 3 157 285 53 195 573 Receivable for tax reclaims ............... -- 20 -- 1 1 -- Receivable for expense reimbursement ...... 11 -- -- -- -- 1 Receivable for variation margin on open futures contracts ...................... -- 35 -- -- -- -- Prepaid expenses .......................... -- 11 17 6 7 16 -------- ---------- ---------- ----------- ----------- ----------- TOTAL ASSETS ........................... 5,469 94,947 123,496 119,628 182,540 330,235 -------- ---------- ---------- ----------- ----------- ----------- LIABILITIES: Payable for investments purchased ......... -- 241 1,461 281 175 -- Payable upon return of securities loaned .. 1,047 11,083 -- 18,668 34,668 66,677 Payable for fund shares redeemed .......... -- 10 1,372 10 2 4 Dividends payable ......................... -- -- 178 1 -- 8 Management and investment advisory fees payable (Note 2) ....................... 12 323 221 109 26 41 Administrative service and service fees payable ................................ 1 7 21 45 6 14 Other liabilities ......................... 35 106 96 45 29 33 -------- ---------- ---------- ----------- ----------- ----------- TOTAL LIABILITIES ...................... 1,095 11,770 3,349 19,159 34,906 66,777 -------- ---------- ---------- ----------- ----------- ----------- NET ASSETS ................................... $ 4,374 $ 83,177 $ 120,147 $ 100,469 $ 147,634 $ 263,458 ======== ========== ========== =========== =========== =========== ANALYSIS OF NET ASSETS: Paid-in-capital .............................. 10,321 122,359 187,390 113,431 157,626 274,756 Undistributed net investment income .......... 65 2,109 503 (96) 501 (563) Accumulated net realized gain (loss). ........ (4,596) 723 (16,622) (2,089) (1,746) (11,183) Unrealized appreciation (depreciation) of investments, futures contracts, and foreign currency .......................... (1,416) (42,014) (51,124) (10,777) (8,747) 448 -------- ---------- ---------- ----------- ----------- ----------- NET ASSETS ................................... $ 4,374 $ 83,177 $ 120,147 $ 100,469 $ 147,634 $ 263,458 ======== ========== ========== =========== =========== =========== Shares outstanding (no par value): Institutional Class ....................... 638,241 608,518 9,177,217 N/A 15,354,658 29,816,006 ======== ========== ========== =========== =========== =========== PlanAhead Class ........................... 15,967 585,719 2,059,161 11,414,600 N/A 900,441 ======== ========== ========== =========== =========== =========== Service Class ............................. N/A N/A N/A N/A N/A N/A ======== ========== ========== =========== =========== =========== AMR Class ................................. N/A 8,006,730 6,506,314 N/A N/A N/A ======== ========== ========== =========== =========== =========== Net asset value, offering and redemption price per share: Institutional Class ....................... $ 6.69 $ 9.00 $ 6.77 N/A $ 9.61 $ 8.58 ======== ========== ========== =========== =========== =========== PlanAhead Class ........................... $ 6.65 $ 8.85 $ 6.77 $ 8.80 N/A $ 8.59 ======== ========== ========== =========== =========== =========== Service Class ............................. N/A N/A N/A N/A N/A N/A ======== ========== ========== =========== =========== =========== AMR Class ................................. N/A $ 9.06 $ 6.77 N/A N/A N/A ======== ========== ========== =========== =========== =========== (A) Cost of investments in unaffiliated securities ................................ $ 6,622 $ 126,644 $ 164,375 $ 123,667 $ 176,218 $ 315,713 (B) Cost of investments in affiliated securities ................................ $ 243 $ 6,920 $ 5,762 $ 5,779 $ 12,422 $ 10,962 (C) Cost of foreign currency ................. $ -- $ 1,161 $ -- $ -- $ -- $ -- (D) Market value of securities on loan ....... $ 1,072 $ 10,569 $ -- $ 18,205 $ 33,921 $ 65,307 See accompanying notes 81 AMERICAN BEACON FUNDS STATEMENTS OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008 (IN THOUSANDS) LARGE CAP BALANCED GROWTH MID-CAP FUND FUND VALUE FUND --------- --------- ---------- INVESTMENT INCOME: Dividend income from unaffiliated securities (net of foreign taxes) (A) ..... $ 16,185 $ 1,105 $ 1,943 Dividend income from affiliated securities ... 1,366 141 172 Interest income .............................. 20,626 5 18 Income derived from securities lending, net .. 1,276 102 113 --------- -------- -------- TOTAL INVESTMENT INCOME ................ 39,453 1,353 2,246 --------- -------- -------- EXPENSES: Management and investment advisory fees (Note 2) .................................. 2,726 439 631 Administrative service fees (Note 2): Institutional Class ....................... 119 -- 12 PlanAhead Class ........................... 408 -- 74 Service Class ............................. 25 -- -- AMR Class ................................. 42 4 2 Transfer agent fees: Institutional Class ....................... 3 -- 5 PlanAhead Class ........................... 15 -- -- Service Class ............................. 1 -- -- AMR Class ................................. 30 -- 2 Custody and fund accounting fees ............. 83 8 8 Professional fees ............................ 43 25 30 Registration fees and expenses ............... 45 -- 45 Service fees (Note 2): PlanAhead Class ........................... 401 -- 72 Service Class ............................. 24 -- -- Distribution fees- Service Class (Note 2) .... 24 -- -- Prospectus and shareholder reports ........... 59 1 6 Other expenses ............................... 69 8 12 --------- -------- -------- TOTAL EXPENSES ......................... 4,117 485 899 --------- -------- -------- Net (fees waived and expenses reimbursed)/ recouped by Manager (Note 2) .............. -- -- (35) --------- -------- -------- NET EXPENSES ........................... 4,117 485 864 --------- -------- -------- NET INVESTMENT INCOME ........................... 35,336 868 1,382 --------- -------- -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from: (B) Investments ............................... (52,659) (11,739) (10,492) Commission recapture (Note 1) ............. 8 4 19 Foreign currency transactions ............. -- -- -- Futures contracts ......................... (15,022) (2,978) (1,570) Change in net unrealized appreciation or depreciation of: Investments ............................... (265,706) (23,530) (29,534) Foreign currency translations ............. -- -- -- Futures contracts ......................... (11,777) (808) (1,490) --------- -------- -------- NET (LOSS) ON INVESTMENTS .............. (345,156) (39,051) (43,067) --------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .................... $(309,820) $(38,183) $(41,685) ========= ======== ======== (A) Foreign taxes ............................... $ 12 $ -- $ 6 (B) Net of foreign withholding taxes on capital gains ........................................ $ -- $ -- $ -- See accompanying notes 82 SMALL CAP VALUE EMERGING ENHANCED OPPORTUNITY MARKETS HIGH YIELD INCOME INTERMEDIATE SHORT-TERM FUND FUND BOND FUND FUND BOND FUND BOND FUND ----------- --------- ---------- --------- ------------ ---------- INVESTMENT INCOME: Dividend income from unaffiliated securities (net of foreign taxes) (A) ..... $ 173 $ 4,700 $ 7 $ 226 $ 1 $ 1 Dividend income from affiliated securities ... 3 352 236 123 258 251 Interest income .............................. -- 18 16,482 4,414 6,974 5,407 Income derived from securities lending, net .. 18 168 45 149 267 169 ------- --------- -------- -------- ------- ------- TOTAL INVESTMENT INCOME ................ 194 5,238 16,770 4,912 7,500 5,828 ------- --------- -------- -------- ------- ------- EXPENSES: Management and investment advisory fees (Note 2) .................................. 48 1,573 872 369 365 342 Administrative service fees (Note 2): Institutional Class ....................... 22 27 236 -- 10 16 PlanAhead Class ........................... -- 26 58 276 -- 14 Service Class ............................. -- -- -- -- -- -- AMR Class ................................. -- 6 3 -- -- -- Transfer agent fees: Institutional Class ....................... 1 1 24 -- 4 -- PlanAhead Class ........................... -- 7 6 4 -- 4 Service Class ............................. -- -- -- -- -- -- AMR Class ................................. -- 7 3 -- -- -- Custody and fund accounting fees ............. 1 644 25 14 17 16 Professional fees ............................ 23 28 34 27 25 27 Registration fees and expenses ............... 32 26 32 14 19 27 Service fees (Note 2): PlanAhead Class ........................... -- 26 57 269 -- 14 Service Class ............................. -- -- -- -- -- -- Distribution fees- Service Class (Note 2) .... -- -- -- -- -- -- Prospectus and shareholder reports ........... -- 8 60 7 3 6 Other expenses ............................... 6 22 17 9 7 9 ------- --------- -------- -------- ------- ------- TOTAL EXPENSES ......................... 133 2,401 1,427 989 450 475 ------- --------- -------- -------- ------- ------- Net (fees waived and expenses reimbursed)/ recouped by Manager (Note 2) .............. (43) -- -- -- -- (2) ------- --------- -------- -------- ------- ------- NET EXPENSES ........................... 90 2,401 1,427 989 450 473 ------- --------- -------- -------- ------- ------- NET INVESTMENT INCOME ........................... 104 2,837 15,343 3,923 7,050 5,355 ------- --------- -------- -------- ------- ------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from: (B) Investments ............................... (4,268) 8,689 (14,708) (1,148) 70 (4,833) Commission recapture (Note 1) ............. 2 -- -- -- -- -- Foreign currency transactions ............. -- (1,639) -- -- -- -- Futures contracts ......................... -- (5,377) -- -- -- -- Change in net unrealized appreciation or depreciation of: Investments ............................... 312 (116,165) (48,374) (14,259) (8,956) 309 Foreign currency translations ............. -- (16,205) -- -- -- -- Futures contracts ......................... -- (1,507) -- -- -- -- ------- --------- -------- -------- ------- ------- NET (LOSS) ON INVESTMENTS .............. (3,954) (132,204) (63,082) (15,407) (8,886) (4,524) ------- --------- -------- -------- ------- ------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .................... $(3,850) $(129,367) $(47,739) $(11,484) $(1,836) $ 831 ======= ========= ======== ======== ======= ======= (A) Foreign taxes ............................... $ -- $ 528 $ -- $ 1 $ -- $ -- (B) Net of foreign withholding taxes on capital gains ........................................ $ -- $ 68 $ -- $ -- $ -- $ -- See accompanying notes 83 AMERICAN BEACON FUNDS STATEMENTS OF CHANGES IN NET ASSETS Large Cap Balanced Fund Growth Fund Mid-Cap Value Fund ----------------------- ------------------- ------------------- Year Year Year Year Year Year Ended Ended Ended Ended Ended Ended October October October October October October 31, 2008 31, 2007 31, 2008 31, 2007 31, 2008 31, 2007 ---------- ---------- -------- -------- -------- -------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income ............ $ 35,336 $ 33,625 $ 868 $ 815 $ 1,382 $ 1,701 Net realized gain (loss) on investments, futures contracts, and foreign currency transactions ......... (67,673) 60,813 (14,713) 6,273 (12,043) 7,903 Change in net unrealized appreciation or depreciation of investments, futures contracts, and foreign currency translations ......... (277,483) 2,006 (24,338) 4,085 (31,024) (3,979) ---------- ---------- -------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .............. (309,820) 96,444 (38,183) 11,173 (41,685) 5,625 ---------- ---------- -------- -------- -------- -------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class ........... (1,424) (762) (1) (1) (84) (22) PlanAhead Class ............... (5,471) (3,106) -- -- (326) (206) Service Class ................. (318) (43) -- -- -- -- AMR Class ..................... (27,782) (23,927) (791) (737) (1,140) (563) Net realized gain on investments: Institutional Class ........... (2,559) (1,300) (3) -- (405) (86) PlanAhead Class ............... (10,490) (5,825) -- -- (2,179) (706) Service Class ................. (602) (77) -- -- -- -- AMR Class ..................... (45,704) (38,430) (2,748) -- (4,985) (1,766) ---------- ---------- -------- -------- -------- -------- NET DISTRIBUTIONS TO SHAREHOLDERS ............ (94,350) (73,470) (3,543) (738) (9,119) (3,349) ---------- ---------- -------- -------- -------- -------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares 83,795 239,343 34,857 44,637 30,505 85,804 Reinvestment of dividends and distributions 93,808 72,959 3,543 738 9,098 3,346 Cost of shares redeemed (181,757) (126,358) (41,432) (36,145) (63,782) (60,513) Redemption fees -- -- -- -- 43 161 ---------- ---------- -------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS ...... (4,154) 185,944 (3,032) 9,230 (24,136) 28,798 ---------- ---------- -------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS ........................... (408,324) 208,918 (44,758) 19,665 (74,940) 31,074 ---------- ---------- -------- -------- -------- -------- NET ASSETS: Beginning of period .............. 1,162,237 953,319 101,817 82,152 128,000 96,926 ---------- ---------- -------- -------- -------- -------- END OF PERIOD * .................. $ 753,913 $1,162,237 $ 57,059 $101,817 $ 53,060 $128,000 ========== ========== ======== ======== ======== ======== * Includes undistributed net investment income (loss) of ...... $ 27,287 $ 26,249 $ 610 $ 552 $ 937 $ 1,243 ========== ========== ======== ======== ======== ======== See accompanying notes 84 Small Cap Value Emerging Enhanced Opportunity Fund Markets Fund High Yield Bond Fund Income Fund ------------------- -------------------- --------------------- ------------------- Year Year Year Year Year Year Year Year Ended Ended Ended Ended Ended Ended Ended Ended October October October October October October October October 31, 2008 31, 2007 31, 2008 31, 2007 31, 2008 31, 2007 31, 2008 31, 2007 -------- -------- --------- -------- --------- --------- -------- -------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income ............ $ 104 $ 148 $ 2,837 $ 2,414 $ 15,343 $ 22,739 $ 3,923 $ 3,774 Net realized gain (loss) on investments, futures contracts, and foreign currency transactions ......... (4,266) (371) 1,673 43,507 (14,708) 1,834 (1,148) 2,870 Change in net unrealized appreciation or depreciation of investments, futures contracts, and foreign currency translations ......... 312 (1,878) (133,877) 55,340 (48,374) (3,549) (14,259) 212 -------- ------- --------- -------- --------- --------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .............. (3,850) (2,101) (129,367) 101,261 (47,739) 21,024 (11,484) 6,856 -------- ------- --------- -------- --------- --------- -------- -------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class ........... (134) (17) (58) (101) (7,731) (16,871) -- -- PlanAhead Class ............... (1) -- (43) (15) (1,837) (4,915) (5,038) (4,171) Service Class ................. -- -- -- -- -- -- -- -- AMR Class ..................... -- -- (2,023) (1,130) (5,774) (949) -- -- Net realized gain on investments: Institutional Class ........... -- (9) (2,019) (2,407) -- -- -- -- PlanAhead Class ............... -- -- (1,876) (922) -- -- (2,097) (74) Service Class ................. -- -- -- -- -- -- -- -- AMR Class ..................... -- -- (39,911) (19,268) -- -- -- -- -------- ------- --------- -------- --------- --------- -------- -------- NET DISTRIBUTIONS TO SHAREHOLDERS ............ (135) (26) (45,930) (23,843) (15,342) (22,735) (7,135) (4,245) -------- ------- --------- -------- --------- --------- -------- -------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares 1,610 29,224 28,155 87,824 72,610 209,900 79,277 15,667 Reinvestment of dividends and distributions 135 26 45,849 23,764 13,364 19,203 7,127 4,245 Cost of shares redeemed (23,073) (2,199) (112,884) (49,405) (128,737) (313,378) (67,105) (48,649) Redemption fees -- -- 161 53 -- -- -- -- -------- ------- --------- -------- --------- --------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS ...... (21,328) 27,051 (38,719) 62,236 (42,763) (84,275) 19,299 (28,737) -------- ------- --------- -------- --------- --------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS ........................... (25,313) 24,924 (214,016) 139,654 (105,844) (85,986) 680 (26,126) -------- ------- --------- -------- --------- --------- -------- -------- NET ASSETS: Beginning of period .............. 29,687 4,763 297,193 157,539 225,991 311,977 99,789 125,915 -------- ------- --------- -------- --------- --------- -------- -------- END OF PERIOD * .................. $ 4,374 $29,687 $ 83,177 $297,193 $ 120,147 $ 225,991 $100,469 $ 99,789 ======== ======= ========= ======== ========= ========= ======== ======== * Includes undistributed net investment income (loss) of ...... $ 65 $ 126 $ 2,109 $ 2,180 $ 503 $ 503 $ (96) $ 575 ======== ======= ========= ======== ========= ========= ======== ======== See accompanying notes 85 AMERICAN BEACON FUNDS STATEMENTS OF CHANGES IN NET ASSETS (in thousands) Intermediate Bond Fund Short-Term Bond Fund ------------------------- ------------------------- Year Ended Year Ended Year Ended Year Ended October 31, October 31, October 31, October 31, 2008 2007 2008 2007 ----------- ----------- ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income ........................................ $ 7,050 $ 4,932 $ 5,355 $ 3,893 Net realized gain (loss) on investments, futures contracts, and foreign currency transactions ......................... 70 280 (4,833) 237 Change in net unrealized appreciation or depreciation of investments, futures contracts, and foreign currency translations .............................................. (8,956) 560 309 624 -------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............................................. (1,836) 5,772 831 4,754 -------- -------- -------- -------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class ....................................... (7,053) (4,946) (6,084) (4,046) PlanAhead Class ........................................... -- (13) (220) (227) Net realized gain on investments: -------- -------- -------- -------- NET DISTRIBUTIONS TO SHAREHOLDERS ......................... (7,053) (4,959) (6,304) (4,273) -------- -------- -------- -------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares 103,092 26,882 200,633 22,984 Reinvestment of dividends and distributions 7,052 4,957 6,236 4,264 Cost of shares redeemed (63,295) (21,223) (30,341) (15,932) -------- -------- -------- -------- NET INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS ........................................... 46,849 10,616 176,528 11,316 -------- -------- -------- -------- NET INCREASE IN NET ASSETS ...................................... 37,960 11,429 171,055 11,797 -------- -------- -------- -------- NET ASSETS: Beginning of period .......................................... 109,674 98,245 92,403 80,606 -------- -------- -------- -------- END OF PERIOD * .............................................. $147,634 $109,674 $263,458 $ 92,403 ======== ======== ======== ======== * Includes undistributed net investment income (loss) of ........ $ 501 $ 502 $ (563) $ 19 ======== ======== ======== ======== See accompanying notes 86 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES American Beacon Funds (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940 (the "Act"), as amended, as a no load, diversified, open-end management investment company. These financial statements and notes to the financial statements relate to the American Beacon Balanced Fund, the American Beacon Large Cap Growth Fund, the American Beacon Mid-Cap Value Fund, the American Beacon Small Cap Value Opportunity Fund, the American Beacon Emerging Markets Fund, the American Beacon High Yield Bond Fund, the American Beacon Enhanced Income Fund, the American Beacon Intermediate Bond Fund and the American Beacon Short-Term Bond Fund (each a "Fund" and collectively, the "Funds"), each a series of the Trust. Effective September 12, 2008 American Beacon Advisors, Inc. (the "Manager") became a wholly-owned subsidiary of Lighthouse Holdings, Inc., which is indirectly owned by investment funds affiliated with Pharos Capital Group, LLC and TPG Capital, L.P., two leading private equity firms. Prior to September 12 the Manager was a wholly-owned subsidiary of AMR Corporation ("AMR"), the parent company of American Airlines, Inc. ("American"). Class Disclosure Each Fund, except the Enhanced Income Fund and Intermediate Bond 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: - ------ -------------------------------------------------------- INSTITUTIONAL CLASS Investors making an initial investment of $2 million PLANAHEAD CLASS General public and investors investing through an intermediary SERVICE CLASS Investors investing through an intermediary AMR CLASS Investors in the tax-exempt retirement and benefit plans of AMR Corporation and its affiliates Administrative service fees, service fees and distribution fees vary amongst the classes as described more fully in footnote 2. 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 brokers. 87 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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 market prices are not readily available or are not reflective of the fair value of the security, as determined by the Manager, will be priced at fair value following procedures approved by the Board of Trustees (the "Board"). Most foreign markets close before the Exchange. Developments that could affect the values of securities that occur between the close of a foreign market and the close of the Exchange normally will not be reflected in security valuations. If such developments are so significant such that they will, in the judgment of the pricing committee of the Funds, clearly and materially affect the value of securities, the previous closing prices may be adjusted to reflect the fair value of the securities as of the close of the Exchange, as determined in good faith and pursuant to procedures approved by the Board. Adjustments to closing prices to reflect fair value on affected foreign securities may be provided by an independent pricing service. Security Transactions and Investment Income Security transactions are recorded on the trade date of the security purchase or sale. The Funds may purchase securities with delivery or payment to occur at a later date. At the time the Funds enter into a commitment to purchase a security, the transaction is recorded, and the value of the security is reflected in the net asset value. The value of the security may vary with market fluctuations. Dividend income, 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 Funds' 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. 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, 88 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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. 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. The fee is allocated to all classes of each Fund pro-rata based on their respective net assets. 89 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 Recently Issued Accounting Pronouncements In September 2006, the Financial Accounting Standards Board ("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, 2008, 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. In March 2008, FASB issued Statement on Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS 161"), which is effective for fiscal years and interim periods beginning after November 15, 2008. FAS 161 requires enhanced disclosures about derivative and hedging activities, including how such activities are accounted for and their effect on financial position, performance and cash flows. The Manager is currently evaluating the impact the adoption of FAS 161 will have on the Funds' financial statements and related disclosures. 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 Balanced, Large Cap Growth, Mid-Cap Value, Small Cap Value Opportunity, Emerging Markets, High Yield Bond, Enhanced Income, and Intermediate Bond Funds are managed by one or more investment advisors which have entered into separate investment advisory agreements with the Manager. As compensation for performing the duties required under the Management Agreement, the Manager received 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 amounts paid by the Manager to the sub-advisors hired by the Manager plus, through September 11, 2008, 0.10% of the Funds' average daily net assets, and from September 12, 2008, 0.05% of the Funds' average daily net assets. The Manager received an annualized fee from the Intermediate Bond Fund of, through September 11, 2008, 0.25% of the average daily net assets, and from September 12, 2008, 0.20% of the average daily net assets. The Manager pays a portion of its fee from the Intermediate Bond Fund to a sub-advisor hired by the Manager to direct investment activities of a portion of the Fund. The Manager is one of the investment advisors of the Balanced and Enhanced Income Funds and receives an annualized fee of 0.15% on the portion of assets managed by the Manager. The Manager serves as the sole investment advisor to the Short-Term Bond Fund, and through September 11, 2008, the Manager received an annualized fee equal to 0.25% of the average daily net assets of the Fund, and from September 12, 2008, the Manager received an annualized fee equal to 0.20% of average daily net assets. Management fees paid during the year ended October 31, 2008 were as follows (dollars in thousands): 90 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 AMOUNTS PAID NET AMOUNTS MANAGEMENT MANAGEMENT TO INVESTMENT RETAINED BY FEE RATE FEE ADVISORS MANAGER ----------- ---------- ------------- ----------- Balanced ...................... 0.175%-0.70% $2,726 $1,774 $952 Large Cap Growth .............. 0.30%-0.55% 439 361 78 Mid-Cap Value ................. 0.35%-1.10% 631 544 87 Small Cap Value Opportunity ... 0.40%-0.55% 48 40 8 Emerging Markets .............. 0.60%-1.20% 1,573 1,324 249 High Yield Bond ............... 0.30%-0.52% 872 699 173 Enhanced Income ............... 0.20%-0.85% 369 267 102 Intermediate Bond ............. 0.20%-0.25% 365 122 243 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, 2008, securities lending fees paid to the Manager were as follows (in thousands): Balanced ................................................................ $208 Large Cap Growth ........................................................ 16 Mid-Cap Value ........................................................... 18 Small Cap Value Opportunity ............................................. 2 Emerging Markets ........................................................ 26 High Yield Bond ......................................................... 5 Enhanced Income ......................................................... 25 Intermediate Bond ....................................................... 48 Short-Term Bond ......................................................... 39 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 received, through September 11, 2008, an annualized fee of 0.25% of the average daily net assets of the Institutional, PlanAhead, and Service Classes of each of the Funds, except for the Institutional Class of the Intermediate Bond and Short-Term Bond Funds from which the Manager did not receive a fee. From September 12, 2008, the Manager received an annualized fee of 0.05% of the average daily net assets of the AMR Class and 0.30% of the average daily net assets of the Institutional, PlanAhead, and Service Classes of each Fund except for the Institutional Class of the Intermediate Bond and Short-Term Bond Funds from which the Manager received a fee of 0.05% of average daily net assets. 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. 91 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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 $576 and $1,777, respectively for the year ended October 31, 2008. Investment in Affiliated Funds The Fund is permitted, pursuant to an exemptive order by the Securities and Exchange Commission ("SEC") and procedures approved by the Board, to invest up to 25% of its total assets in the American Beacon Money Market Select Fund (the "Select Fund"). Cash collateral received by 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 up to 0.10% of its average daily net assets. During the year ended October 31, 2008, fees earned by the Manager from the Affiliated Funds were as follows (in thousands): SECURITIES LENDING DIRECT INVESTMENT IN COLLATERAL INVESTED AFFILIATED FUNDS IN AFFILIATED FUNDS TOTAL -------------------- ------------------- ----- Balanced ...................... $40 $192 $232 Large Cap Growth .............. 1 18 19 Mid-Cap Value ................. 5 13 18 Small Cap Value Opportunity ... -- 2 2 Emerging Markets .............. 10 18 28 High Yield Bond ............... 6 -- 6 Enhanced Income ............... 4 23 27 Intermediate Bond ............. 8 34 42 Short-Term Bond ............... 7 24 31 Interfund Lending Program Pursuant to an exemptive order by the SEC, the Funds, along with other registered investment companies having management contracts with the Manager, may participate in an interfund lending program as a borrower. This program provides an alternative credit facility allowing the Funds to borrow from other participating Funds. For the year ended October 31, 2008, the Fund did not utilize the credit facility. 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, 2008, the Manager waived or reimbursed expenses as follows: 92 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 Expense Cap ----------------------------------------------- 11/1/07 3/1/08 WAIVED OR TO TO REIMBURSED FUND CLASS 2/28/08 10/31/08 EXPENSES - ---- ------------- ------- -------- ---------- Large Cap Growth .............. Institutional 0.90% 0.90% $ 63 Mid-Cap Value ................. Institutional 0.90% 0.98% 8,564 Mid-Cap Value ................. PlanAhead 1.23% 1.23% 26,275 Mid-Cap Value ................. Service N/A 1.50% 4 Small Cap Value Opportunity ... Institutional 1.05% 1.05% 42,833 Small Cap Value Opportunity ... PlanAhead 1.30% 1.30% 580 Short-Term Bond ............... PlanAhead 0.87% N/A 1,657 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, 2008 was as follows: Balanced- Service Class EXPIRATION LIABILITY AT LIABILITY AT YEAR 10/31/07 ACCRUED EXPIRED RECOUPED 10/31/08 - ---------- ------------ ------- ------- -------- ------------ 2008 1,016 -- -- 1,016 -- 2009 13 -- -- 13 -- ------ --- --- ------ --- $1,029 $-- $-- $1,029 $-- ====== === === ====== === Emerging Markets- PlanAhead Class EXPIRATION LIABILITY AT LIABILITY AT YEAR 10/31/07 ACCRUED EXPIRED RECOUPED 10/31/08 - ---------- ------------ ------- ------- -------- ------------ 2008 4,734 -- -- 4,734 -- 2009 2,926 -- -- 2,926 -- ------ --- --- ------ --- $7,660 $-- $-- $7,660 $-- ====== === === ====== === Mid-Cap Value- AMR Class EXPIRATION LIABILITY AT LIABILITY AT YEAR 10/31/07 REVERSED EXPIRED RECOUPED 10/31/08 - ---------- ------------ -------- ------- -------- ------------ 2008 5,596 -- -- 5,596 -- 2009 2,537 2,537 -- -- -- ------ ------ --- ------ --- $8,133 $2,537 $-- $5,596 $-- ====== ====== === ====== === The remaining Funds have not recorded a liability for potential reimbursement, due to the current assessment that a reimbursement is unlikely. 3. FEDERAL INCOME AND EXCISE TAXES It is the policy of each of the Funds to comply with the requirements of Subchapter M of the Internal Revenue Code and to distribute substantially all net investment income as well as any net realized capital gains on the sale of investments. Therefore, no federal income or excise tax provision is required. The Funds adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainties in Income Taxes" ("FIN 48"), on November 1, 2007. FIN 48 sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. The implementation of FIN 48 did not result in any unrecognized tax benefits in the accompanying financial statements. Each of the tax years in the three year period ended October 31, 2008 remains subject to 93 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 examination by the Internal Revenue Service. If applicable, the Funds recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in "Other expenses" on the Statements of Operations. 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, 2008 and October 31, 2007 were as follows (in thousands) 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, 2008 2007 2008 2007 2008 2007 ----------- ----------- ----------- ----------- ----------- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME* Institutional Class .......... $ 1,997 $ 906 $ 1 $ 1 $ 139 $ 84 PlanAhead Class .............. 7,821 3,751 -- -- 618 714 Service Class ................ 453 52 -- -- -- -- AMR Class .................... 38,025 28,183 791 737 1,809 1,835 LONG-TERM CAPITAL GAIN Institutional Class .......... 1,986 1,156 3 -- 350 24 PlanAhead Class .............. 8,140 5,180 -- -- 1,887 198 Service Class ................ 467 68 -- -- -- -- AMR Class .................... 35,461 34,174 2,748 -- 4,316 494 ------- ------- ------ ---- ------ ------ TOTAL DISTRIBUTIONS PAID .. $94,350 $73,470 $3,543 $738 $9,119 $3,349 ======= ======= ====== ==== ====== ====== * 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, 2008 2007 2008 2007 2008 2007 ----------- ----------- ----------- ----------- ----------- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME* Institutional Class .......... $134 $25 $ 550 $ 412 $ 7,731 $16,871 PlanAhead Class .............. 1 1 499 135 1,837 4,915 Service Class ................ -- -- -- -- -- -- AMR Class .................... -- -- 11,725 3,613 5,774 949 LONG-TERM CAPITAL GAIN Institutional Class .......... -- -- 1,527 2,096 -- -- PlanAhead Class .............. -- -- 1,420 802 -- -- Service Class ................ -- -- -- -- -- -- AMR Class .................... -- -- 30,209 16,785 -- -- ---- --- ------- ------- ------- ------- TOTAL DISTRIBUTIONS PAID .. $135 $26 $45,930 $23,843 $15,342 $22,735 ==== === ======= ======= ======= ======= * For tax purposes, short-term capital gains are considered ordinary income distributions. 94 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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, 2008 2007 2008 2007 2008 2007 ----------- ----------- ----------- ----------- ----------- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME* Institutional Class .......... $ -- $ -- $7,053 $4,946 $6,084 $4,046 PlanAhead Class .............. 5,674 4,171 -- 13 220 227 AMR Class .................... -- -- -- -- -- -- LONG-TERM CAPITAL GAIN -- -- -- -- -- -- Institutional Class .......... -- -- -- -- -- -- PlanAhead Class .............. 1,461 74 -- -- -- -- AMR Class .................... -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ TOTAL DISTRIBUTIONS PAID .. $7,135 $4,245 $7,053 $4,959 $6,304 $4,273 ====== ====== ====== ====== ====== ====== * For tax purposes, short-term capital gains are considered ordinary income distributions. As of October 31, 2008, the components of distributable earnings on a tax basis were as follows (in thousands): SMALL CAP VALUE EMERGING BALANCED LARGE CAP GROWTH MID-CAP VALUE OPPORTUNITY MARKETS --------- ---------------- ------------- ----------- --------- Cost basis of investments for federal income tax purposes $ 990,253 $ 83,133 $ 89,217 $ 6,873 $146,978 Unrealized appreciation 35,914 1,198 202 85 486 Unrealized depreciation (175,980) (13,999) (28,283) (1,509) (54,609) --------- ------- -------- ------- -------- Net unrealized appreciation/(depreciation) (140,066) (12,801) (28,081) (1,424) (54,123) Undistributed ordinary income 27,937 611 937 64 2,109 Undistributed long-term gain/(loss) (68,541) (15,053) (13,378) (4,586) 12,822 --------- -------- -------- ------- -------- Distributable earnings $(180,670) $(27,243) $(40,522) $(5,946) $(39,192) ========= ======== ======== ======= ======== HIGH YIELD BOND ENHANCED INCOME INTERMEDIATE BOND SHORT-TERM BOND --------------- --------------- ----------------- --------------- Cost basis of investments for federal income tax purposes $170,655 $ 129,681 $188,642 $327,774 Unrealized appreciation 89 189 179 2,414 Unrealized depreciation (51,731) (11,201) (8,928) (3,065) -------- -------- ------- -------- Net unrealized appreciation/(depreciation) (51,642) (11,012) (8,749) (651) Undistributed ordinary income 325 107 502 528 Undistributed long-term gain/(loss) (16,104) (2,058) (1,744) (11,183) -------- -------- ------- -------- Distributable earnings $(67,421) $(12,963) $(9,991) $(11,306) ======== ======== ======= ======== 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. 95 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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, 2008 (in thousands): LARGE CAP MID-CAP SMALL CAP VALUE EMERGING HIGH ENHANCED INTERMEDIATE SHORT-TERM BALANCED GROWTH VALUE OPPORTUNITY MARKETS YIELD BOND INCOME BOND BOND -------- --------- -------- --------------- -------- ---------- -------- ------------ ---------- Paid-in-capital .................. $ 7 $(1) $ 34 $ 1 $ 122 $-- $ 407 $(7,045) $(1,218) Undistributed net investment income ........................ 697 (18) (138) (30) (784) (1) 444 2 367 Accumulated net realized gain (loss) ........................ (704) 19 104 29 663 -- (851) 7,043 852 Unrealized appreciation (depreciation) of investments, futures contracts and foreign currency .............. -- -- -- -- (1) 1 -- -- (1) At October 31, 2008, capital loss carry forward positions for federal income tax purposes were as follows (in thousands): FUND 2009 2010 2011 2012 2013 2014 2015 2016 TOTAL - ---- ---- ---- ---- ---- ------ ------ ---- ------- ------- Balanced ........................ $-- $ -- $ -- $ -- $ -- $ -- $ -- $68,541 $68,541 Large Cap Growth ................ -- -- -- -- -- -- -- 15,053 15,053 Mid-Cap Value ................... -- -- -- -- -- -- -- 13,378 13,378 Small Cap Value Opportunity ..... -- -- -- -- -- -- 313 $ 4,273 4,586 High Yield Bond ................. -- -- -- -- -- 1,772 -- 14,332 16,104 Enhanced Income ................. -- -- -- -- -- -- -- 2,058 2,058 Intermediate Bond ............... -- 328 -- -- 318 1,098 -- -- 1,744 Short-Term Bond ................. -- 913 161 800 1,256 2,387 467 5,199 11,183 The Intermediate Bond Fund utilized $61 of net capital loss carryovers, and the Intermediate Bond and Short-Term Bond Fund had $7,046 and $1,218, respectively of expired capital loss carryovers for the year ended October 31, 2008. 4. INVESTMENT TRANSACTIONS The aggregate cost of purchases and proceeds from sales and maturities of long-term investments during the year ended October 31, 2008 were as follows (in thousands): LARGE CAP MID-CAP SMALL CAP VALUE EMERGING HIGH ENHANCED INTERMEDIATE SHORT-TERM BALANCED GROWTH VALUE OPPORTUNITY MARKETS YIELD BOND INCOME BOND BOND -------- --------- -------- --------------- -------- ---------- -------- ------------ ---------- Purchases (excluding U.S. government securities) ........ $399,609 $ 86,822 $23,984 $ 7,400 $152,065 $269,436 $61,730 $ 88,468 $ 37,475 Sales and maturities (excluding U.S. government securities) ................... 429,255 101,604 69,603 28,905 240,711 313,927 42,041 47,523 23,016 Purchases of U.S. government securities .................... 109,870 -- -- -- -- -- 32,328 99,298 169,278 Sales and maturities of U.S. government securities ......... 194,476 -- -- -- -- -- 37,548 101,058 5,687 A summary of the Funds' direct transactions in Affiliated Funds for the year ended October 31, 2008 is set forth below (in thousands): 96 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 OCTOBER 31, 2007 OCTOBER 31, 2008 AFFILIATE SHARES/MARKET VALUE PURCHASES SALES SHARES/MARKET VALUE ----------- ------------------- --------- -------- ------------------- Balanced ..................... Select Fund $57,102 $416,472 $439,568 $34,006 Large Cap Growth ............. Select Fund 4,534 52,331 53,414 3,451 Mid-Cap Value ................ Select Fund 2,299 82,118 80,220 4,196 Small Cap Value Opportunity .. Select Fund 30 1,809 1,749 90 Emerging Markets ............. Select Fund 17,218 138,745 150,659 5,304 High Yield Bond .............. Select Fund 7,084 109,507 110,829 5,762 Enhanced Income .............. Select Fund 3,297 106,499 106,739 3,057 Intermediate Bond ............ Select Fund 3,359 105,703 101,694 7,368 Short-Term Bond .............. Select Fund 7,599 112,346 118,704 1,241 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. It is the Funds' policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. The amount of this temporary difference at October 31, 2008 is disclosed as the calculated mark in the table below. Prior to June 1, 2008, 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. From June 1, 2008, the Funds, 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, borrowers pay the Fund negotiated lenders' fees, which are divided between the Fund, the Agent, and the Manager using the same percentages as above. 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. Securities lending transactions pose certain risks to the Funds, including that the borrower may not provide additional collateral when required or return the securities when due, that the value of the short-term investments will be less than the amount of cash collateral required to be returned to the borrower, and that the cash collateral investments could become illiquid and unable to be used to return collateral to the borrower. The Funds could also experience delays and costs in gaining access to the collateral. The Funds bear the risk of any deficiency in the amount of the collateral available for return to the borrower due to any loss on the collateral invested. At October 31, 2008, the value of outstanding securities on loan and the value of collateral was as follows (in thousands): 97 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 CASH COLLATERAL UNREALIZED LOSS MARKET VALUE OF NON-CASH POSTED BY ON CASH TOTAL VALUE FUND SECURITIES ON LOAN COLLATERAL BORROWER COLLATERAL CALCULATED MARK OF COLLATERAL - ---- ------------------ ---------- --------------- --------------- --------------- ------------- Balanced $97,848 $-- $99,593 669 638 100,900 Large Cap Growth 13,436 20 13,469 90 260 13,839 Mid-Cap Value 8,536 10 8,621 58 161 8,850 Small Cap Value Opportunity 1,072 -- 1,047 7 57 1,111 Emerging Markets 10,569 -- 11,083 74 48 11,205 Enhanced Income 18,205 -- 18,668 125 (83) 18,710 Intermediate Bond 33,921 -- 34,668 233 (54) 34,847 Short-Term Bond 65,307 -- 66,677 448 (35) 67,090 Cash collateral for each Fund, was invested in a joint investment account, which is comprised of an investment in the Select Fund and other short-term investments. The underlying securities allocated to the Funds are stated at market value and have been included as investments on each Fund's Schedule of Investments and Statements of Assets and Liabilities. Income earned on these investments is reported as Income derived from securities lending and unrealized losses are included in the Change in unrealized appreciation and depreciation of investments on the Fund's 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. At the close of business on October 9, 2008, the joint investment account in which the Fund's invest redeemed for cash and securities on behalf of the Funds its shares in the Cash Trust as follows (in thousands): FUND CASH SECURITIES - ---- -------- ---------- Balanced ..................................... $74,101 $69,036 Large Cap Growth.............................. 7,173 6,683 Mid-Cap Value ................................ 5,390 5,021 Small Cap Value Opportunity .................. 607 566 Emerging Markets.............................. 6,931 6,457 Enhanced Income .............................. 10,989 10,238 Intermediate Bond............................. 21,085 19,644 Short-Term Bond .............................. 36,829 34,312 The cash proceeds were invested in other money market funds and the securities were invested in the Securities Liquidating AB Trust. 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, 2008 INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS ------------------- ------------------ ---------------- ----------------- BALANCED FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - ------------- ------- --------- ------- -------- ------ ------- ------ -------- Shares sold ..................... 1,198 $ 16,083 2,230 $ 28,546 297 $ 3,951 2,713 $ 35,215 Reinvestment of dividends ....... 272 3,895 1,160 15,508 70 920 5,368 73,485 Shares redeemed ................. (1,225) (16,311) (6,179) (76,210) (218) (2,729) (6,818) (86,507) ------ -------- ------ -------- ---- ------- ------ -------- Net increase (decrease) in shares outstanding .................. 245 $ 3,667 (2,789) $(32,156) 149 $ 2,142 1,263 $ 22,193 ====== ======== ====== ======== ==== ======= ====== ======== 98 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 INSTITUTIONAL CLASS AMR CLASS ------------------- ------------------ LARGE CAP GROWTH FUND SHARES AMOUNT SHARES AMOUNT - --------------------- ------- --------- ------- -------- Shares sold ..................... 4 $ 22 5,386 $ 34,835 Reinvestment of dividends ....... --- 4 492 3,539 Shares redeemed ................. (1) (8) (6,432) (41,424) --- ---- ------ -------- Net increase (decrease) in shares outstanding .................. 3 $(18) (554) $ (3,050) === ==== ====== ======== INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS ------------------- ------------------ ---------------- ----------------- MID-CAP VALUE FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - ------------------ ------- --------- ------- -------- ------ ------- ------ -------- Shares sold ..................... 322 $ 2,868 1,423 $ 12,385 -- $-- 1,756 $ 15,252 Reinvestment of dividends ....... 50 469 263 2,504 -- -- 641 6,125 Shares redeemed ................. (541) (4,589)* (2,825) (25,705)* -- -- * (3,772) (33,445)* ---- ------- ------ -------- --- --- ------ -------- Net (decrease) in shares outstanding .................. (169) $(1,252) (1,139) $(10,816) -- $-- (1,375) $(12,068) ==== ======= ====== ======== === === ====== ======== * Net of Redemption Fees INSTITUTIONAL CLASS PLANAHEAD CLASS ------------------- ------------------ SMALL CAP VALUE OPPORTUNITY FUND SHARES AMOUNT SHARES AMOUNT - -------------------------------- ------- --------- ------- -------- Shares sold ..................... 164 $ 1,406 24 $ 204 Reinvestment of dividends ....... 14 134 -- 1 Shares redeemed ................. (2,405) (22,928) (17) (145) ------ -------- --- ----- Net increase (decrease) in shares outstanding .................. (2,227) $(21,388) 7 $ 60 ====== ======== === ===== INSTITUTIONAL CLASS PLANAHEAD CLASS AMR CLASS ------------------- ------------------ ------------------ EMERGING MARKETS FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - --------------------- ------- --------- ------- -------- ------ --------- Shares sold ..................... 7 $ 117 540 $ 9,707 1,030 $ 18,331 Reinvestment of dividends ....... 109 2,039 101 1,876 2,222 41,934 Shares redeemed ................. (76) (1,074)* (544) (9,254)* (6,393) (102,395)* --- ------- ---- ------- ------ --------- Net increase (decrease) in shares outstanding .................. 40 $ 1,082 97 $ 2,329 (3,141) $ (42,130) === ======= ==== ======= ====== ========= * Net of Redemption Fees INSTITUTIONAL CLASS PLANAHEAD CLASS AMR CLASS ------------------- ------------------ ------------------ HIGH YIELD BOND FUND SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT - -------------------- ------- --------- ------- -------- ------ --------- Shares sold ..................... 3,029 $ 28,128 2,332 $ 21,959 2,416 $ 22,523 Reinvestment of dividends ....... 645 5,835 193 1,751 639 5,778 Shares redeemed ................. (5,867) (54,359) (3,309) (31,075) (4,693) (43,303) ------ -------- ------ -------- ------ -------- Net (decrease) in shares outstanding .................. (2,193) $(20,396) (784) $ (7,365) (1,638) $(15,002) ====== ======== ====== ======== ====== ======== PLANAHEAD CLASS ------------------- ENHANCED INCOME FUND SHARES AMOUNT - -------------------- ------- --------- Shares sold ..................... 8,011 $ 79,277 Reinvestment of dividends ....... 714 7,127 Shares redeemed ................. (6,812) (67,105) ------ --------- Net increase in shares outstanding .................. 1,913 $ 19,299 ====== ========= 99 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS October 31, 2008 INSTITUTIONAL CLASS ------------------- INTERMEDIATE BOND FUND SHARES AMOUNT - ---------------------- ------- --------- Shares sold ..................... 10,030 $103,092 Reinvestment of dividends ....... 695 7,052 Shares redeemed ................. (6,232) (63,295) ------ -------- Net increase in shares outstanding .................. 4,493 $ 46,849 ====== ======== INSTITUTIONAL CLASS PLANAHEAD CLASS ------------------- ----------------- SHORT-TERM BOND FUND SHARES AMOUNT SHARES AMOUNT - --------------------- ------- --------- ------- ------- Shares sold ..................... 22,147 $193,487 816 $ 7,146 Reinvestment of dividends ....... 696 6,082 17 154 Shares redeemed ................. (3,197) (27,969) (271) (2,372) ------ -------- ---- ------- Net increase in shares outstanding .................. 19,646 $171,600 562 $ 4,928 ====== ======== ==== ======= PERIOD 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 ===== ======== ====== ========= ==== ======= ====== ======== 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 ....... 2 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 100 AMERICAN BEACON FUNDS NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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) ====== ======== 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 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) ===== ======= ==== ======= 101 AMERICAN BEACON BALANCED FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class PlanAhead Class ------------------------------------------- ----------------------------------------------- Year Ended October 31, Year Ended October 31, ------------------------------------------- ----------------------------------------------- 2008 2007 2006 2005 2004 2008 2007 2006 2005 2004 ------- ------- ------- ------- ------ -------- -------- -------- ------- ------- Net asset value, beginning of period ....................... $ 16.09 $ 15.83 $ 15.00 $ 14.31 $12.99 $ 15.09 $ 14.91 $ 14.20 $ 13.62 $ 12.40 ------- ------- ------- ------- ------ -------- -------- -------- ------- ------- Income from investment operations: Net investment income(A)......... 0.47 0.50 0.39 0.36 0.29 0.41 0.41 0.35 0.34 0.27 Net gains (losses) on securities (both realized and unrealized) .............. (4.70) 0.90 1.54 1.11 1.36 (4.39) 0.87 1.44 1.01 1.25 ------- ------- ------- ------- ------ -------- -------- -------- ------- ------- Total income (loss) from investment operations ...................... (4.23) 1.40 1.93 1.47 1.65 (3.98) 1.28 1.79 1.35 1.52 ------- ------- ------- ------- ------ -------- -------- -------- ------- ------- Less distributions: Dividends from net investment income ....................... (0.44) (0.42) (0.38) (0.31) (0.33) (0.41) (0.38) (0.36) (0.30) (0.30) Distributions from net realized gains on securities .......... (0.79) (0.72) (0.72) (0.47) -- (0.79) (0.72) (0.72) (0.47) -- ------- ------- ------- ------- ------ -------- -------- -------- ------- ------- Total distributions ................ (1.23) (1.14) (1.10) (0.78) (0.33) (1.20) (1.10) (1.08) (0.77) (0.30) ------- ------- ------- ------- ------ -------- -------- -------- ------- ------- Net asset value, end of period ..... $ 10.63 $ 16.09 $ 15.83 $ 15.00 $14.31 $ 9.91 $ 15.09 $ 14.91 $ 14.20 $ 13.62 ======= ======= ======= ======= ====== ======== ======== ======== ======= ======= Total return ....................... (28.23)% 9.31% 13.60% 12.78% 10.53% (28.39)% 9.06% 13.31% 10.12% 12.44% ======= ======= ======= ======= ====== ======== ======== ======== ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands) ................... $36,557 $51,399 $22,587 $14,122 $8,378 $105,473 $202,750 $111,837 $86,875 $21,571 Ratios to average net assets (annualized): Expenses, net of waivers ........ 0.56% 0.57% 0.59% 0.56% 0.63% 0.82% 0.83% 0.85% 0.86% 0.93% Expenses, before waivers ........ 0.56% 0.57% 0.59% 0.56% 0.63% 0.82% 0.83% 0.85% 0.86% 0.93% Net investment income, net of waivers ...................... 3.37% 2.91% 2.81% 2.45% 2.15% 3.12% 2.65% 2.55% 2.14% 1.84% Net investment income (loss), before waivers ............... 3.37% 2.91% 2.81% 2.45% 2.15% 3.12% 2.65% 2.55% 2.14% 1.84% Portfolio turnover rate ......... 53% 50% 59% 58% 62% 53% 50% 59% 58% 62% (A) Through October 31, 2005, net investment income was calculated by subtracting class expenses per share from the Fund's net investment income per share before class expenses. (B) Not annualized. (C) Annualized. (D) Portfolio turnover rate is for the period from November 1, 2004 through October 31, 2005. 102 Service Class AMR Class ------------------------------------ ------------------------------------------------- May 31 to Year Ended October 31, October Year Ended October 31, ------------------------- 31, ------------------------------------------------- 2008 2007 2006 2005 2008 2007 2006 2005 2004 ------- ------ ------- --------- -------- -------- -------- -------- -------- Net asset value, beginning of period ....................... $ 14.95 $14.83 $ 14.16 $ 13.96 $ 15.49 $ 15.27 $ 14.49 $ 13.87 $ 12.60 ------- ------ ------- --------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income(A)......... 0.34 0.41 0.38 0.09 0.49 0.50 0.45 0.39 0.32 Net gains (losses) on securities (both realized and unrealized) .............. (4.31) 0.83 1.35 0.11 (4.52) 0.89 1.46 1.05 1.31 ------- ------ ------- --------- -------- -------- -------- -------- -------- Total income (loss) from investment operations ...................... (3.97) 1.24 1.73 0.20 (4.03) 1.39 1.91 1.44 1.63 ------- ------ ------- --------- -------- -------- -------- -------- -------- Less distributions: Dividends from net investment income ....................... (0.42) (0.40) (0.34) -- (0.48) (0.45) (0.41) (0.35) (0.36) Distributions from net realized gains on securities .......... (0.79) (0.72) (0.72) -- (0.79) (0.72) (0.72) (0.47) -- ------- ------ ------- --------- -------- -------- -------- -------- -------- Total distributions ................ (1.21) (1.12) (1.06) -- (1.27) (1.17) (1.13) (0.82) (0.36) ------- ------ ------- --------- -------- -------- -------- -------- -------- Net asset value, end of period ..... $ 9.77 $14.95 $ 14.83 $ 14.16 $ 10.19 $ 15.49 $ 15.27 $ 14.49 $ 13.87 ======= ====== ======= ========= ======== ======== ======== ======== ======== Total return ....................... (28.58)% 8.76% 13.01% 1.43%(B) (28.08)% 9.59% 13.98% 10.63% 13.13% ======= ====== ======= ========= ======== ======== ======== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands) ................... $ 7,674 $9,504 $ 1,562 $ 1 $604,209 $898,584 $817,333 $712,073 $636,420 Ratios to average net assets (annualized): Expenses, net of waivers ........ 1.07% 1.07% 1.22% 1.09%(C) 0.31% 0.31% 0.33% 0.33% 0.37% Expenses, before waivers ........ 1.07% 1.07% 1.22% 360.24%(C) 0.31% 0.31% 0.33% 0.33% 0.37% Net investment income, net of waivers ...................... 2.86% 2.34% 2.18% 1.52%(C) 3.62% 3.21% 3.08% 2.70% 2.40% Net investment income (loss), before waivers ............... 2.86% 2.34% 2.17% (357.63)%(C) 3.62% 3.21% 3.08% 2.70% 2.40% Portfolio turnover rate ......... 53% 50% 59% 58%(D) 53% 50% 59% 58% 62% 103 AMERICAN BEACON LARGE CAP GROWTH FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class ---------------------------------------------- Year Ended October 31, ---------------------------------------------- 2008 2007 2006(A) 2005 2004 ------- ------ ------- ------ ------- Net asset value, beginning of period ................................. $ 7.67 $ 6.89 $ 6.18 $ 5.82 $ 5.47 ------- ------ ------ ------ ------- Income from investment operations: Net investment income ............................................. 0.05 0.04 0.04 0.04 0.02 Net gains (losses) on securities (both realized and unrealized) ... (2.97) 0.77 0.70 0.37 0.35 ------- ------ ------ ------ ------- Total income (loss) from investment operations ....................... (2.92) 0.81 0.74 0.41 0.37 ------- ------ ------ ------ ------- Less distributions: Dividends from net investment income .............................. (0.04) (0.03) (0.03) (0.05) (0.02) Distributions from net realized gains on securities ............... (0.22) -- -- -- ------- ------ ------ ------ ------- Total distributions .................................................. (0.26) (0.03) (0.03) (0.05) (0.02) ------- ------ ------ ------ ------- Net asset value, end of period ....................................... $ 4.49 $ 7.67 $ 6.89 $ 6.18 $ 5.82 ======= ====== ====== ====== ======= Total return ......................................................... (39.48)% 11.84% 12.04% 7.06% 6.71% ======= ====== ====== ====== ======= Ratios and supplemental data: Net assets, end of period (in thousands) .......................... $ 83 $ 119 $ 110 $ 105 $ 1 Ratios to average net assets (annualized): Expenses, net of waivers .......................................... 0.89% 0.90% 0.90% 0.89% 0.84% Expenses, before waivers .......................................... 0.95% 1.06% 0.99% 4.64% 13.22% Net investment income (loss), net of waivers ...................... 0.74% 0.58% 0.56% (0.18)% 0.18% Net investment income (loss), before waivers ...................... 0.68% 0.42% 0.48% (3.93)% (12.20)% Portfolio turnover rate ........................................... 112% 128% 181% 164% 131% (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. 104 AMR Class ------------------------------------------------- Year Ended October 31, ------------------------------------------------- 2008 2007 2006(A) 2005 2004 ------- -------- ------- ------- ------- Net asset value, beginning of period ................................. $ 7.72 $ 6.95 $ 6.21 $ 5.84 $ 5.48 ------- -------- ------- ------- ------- Income from investment operations: Net investment income ............................................. 0.07 0.06 0.05 0.06 0.02 Net gains (losses) on securities (both realized and unrealized) ... (2.99) 0.77 0.73 0.36 0.36 ------- -------- ------- ------- ------- Total income (loss) from investment operations ....................... (2.92) 0.83 0.78 0.42 0.38 ------- -------- ------- ------- ------- Less distributions: Dividends from net investment income .............................. (0.06) (0.06) (0.04) (0.05) (0.02) Distributions from net realized gains on securities ............... (0.22) -- -- -- ------- -------- ------- ------- ------- Total distributions .................................................. (0.28) (0.06) (0.04) (0.05) (0.02) ------- -------- ------- ------- ------- Net asset value, end of period ....................................... $ 4.52 $ 7.72 $ 6.95 $ 6.21 $ 5.84 ======= ======== ======= ======= ======= Total return ......................................................... (39.17)% 12.07% 12.52% 7.22% 6.88% ======= ======== ======= ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands) .......................... $56,976 $101,698 $82,042 $63,183 $55,121 Ratios to average net assets (annualized): Expenses, net of waivers .......................................... 0.59% 0.60% 0.59% 0.64% 0.71% Expenses, before waivers .......................................... 0.59% 0.60% 0.59% 0.64% 0.71% Net investment income (loss), net of waivers ...................... 1.05% 0.85% 0.88% 0.98% 0.34% Net investment income (loss), before waivers ...................... 1.05% 0.85% 0.88% 0.98% 0.34% Portfolio turnover rate ........................................... 112% 128% 181% 164% 131% 105 AMERICAN BEACON MID-CAP VALUE FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class PlanAhead Class Service Class --------------------------- ---------------------------- ------------------- Year Ended November Year Ended February Year June October 31, 30 to October 31, 28 to Ended 29 to ---------------- October ----------------- October October October 2008 2007 31, 2006 2008 2007 31, 2006 31, 2008 31, 2007 ------- ------ --------- ------- ------- --------- -------- -------- Net asset value, beginning of period .......... $ 11.01 $10.81 $12.09 $ 10.96 $ 10.80 $ 9.80 $ 10.94 $11.73 ------- ------ ------ ------- ------- ------- ------- ------ Income from investment operations: Net investment income ...................... 0.16 0.12 0.21 0.14 0.10 0.01 0.10 0.01 Net gains (losses) on securities (both realized and unrealized) ................ (4.31) 0.41 1.25 (4.31) 0.40 0.99 (4.27) (0.80) ------- ------ ------ ------- ------- ------- ------- ------ Total income (loss) from investment operations ................................. (4.15) 0.53 1.46 (4.17) 0.50 1.00 (4.17) (0.79) ------- ------ ------ ------- ------- ------- ------- ------ Less distributions: Dividends from net investment income ....... (0.16) (0.07) (0.16) (0.11) (0.08) -- (0.14) -- Distributions from net realized gains on securities .............................. (0.76) (0.26) (2.58) (0.76) (0.26) -- (0.76) -- ------- ------ ------ ------- ------- ------- ------- ------ Total distributions ........................... (0.92) (0.33) (2.74) (0.87) (0.34) -- (0.90) -- ------- ------ ------ ------- ------- ------- ------- ------ Redemption fees added to beneficial interests(G) ............................... -- -- -- -- -- -- -- -- Net asset value, end of period ................ $ 5.94 $11.01 $10.81 $5.92 $ 10.96 $ 10.80 $ 5.87 $10.94 ======= ====== ====== ======= ======= ======= ======= ====== Total return .................................. (40.96)% 4.87% 15.30%(C) (41.14)% 4.68% 10.20%(C) (41.24)% (6.65)%(C) ======= ====== ====== ======= ======= ======= ======= ====== Ratios and supplemental data: Net assets, end of period (in thousands) ... $ 2,256 $6,047 $3,396 $16,550 $43,158 $27,240 $ 1 $ 1 Ratios to average net assets (annualized): Expenses, net of waivers ................... 0.98% 0.92% 1.19%(D) 1.23% 1.23% 1.49%(D) 1.50% 1.50%(D) Expenses, before waivers ................... 1.16% 1.09% 1.19%(D) 1.32% 1.26% 1.61%(D) 2.04% 1.80%(D) Net investment income, net of waivers ...... 1.51% 1.22% 1.11%(D) 1.27% 0.93% 0.57%(D) 1.02% 0.32%(D) Net investment income, before waivers ...... 1.33% 1.05% 1.11%(D) 1.18% 0.90% 0.44%(D) 0.48% 0.02%(D) Portfolio turnover rate .................... 28% 35% 42%(E) 28% 35% 42%(E) 28% 35%(F) (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. (G) Amounts represent less than $0.01 per share. 106 AMR Class (formerly Institutional Class prior to December 1, 2005)(A) ------------------------------------------------- June Year Ended October 31, 30 to -------------------------------------- October 2008 2007 2006 2005 31, 2004 ------- ------- ------- ------- -------- Net asset value, beginning of period ................................. $ 11.07 $ 10.87 $ 11.72 $ 10.27 $ 10.00 ------- ------- ------- ------- ------- Income from investment operations: Net investment income ............................................. 0.18 0.18 0.12 0.13 0.02(B) Net gains (losses) on securities (both realized and unrealized) ... (4.35) 0.36 1.75 1.37 0.25 ------- ------- ------- ------- ------- Total income (loss) from investment operations ....................... (4.17) 0.54 1.87 1.50 0.27 ------- ------- ------- ------- ------- Less distributions: Dividends from net investment income .............................. (0.17) (0.08) (0.14) (0.05) -- Distributions from net realized gains on securities ............... (0.76) (0.26) (2.58) -- -- ------- ------- ------- ------- ------- Total distributions .................................................. (0.93) (0.34) (2.72) (0.05) -- ------- ------- ------- ------- ------- Redemption fees added to beneficial interests(G) ..................... -- -- -- -- -- Net asset value, end of period ....................................... $ 5.97 $ 11.07 $ 10.87 $ 11.72 $ 10.27 ======= ======= ======= ======= ======= Total return ......................................................... (40.87)% 5.19% 19.16% 14.63% 2.70%(C) ======= ======= ======= ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands) .......................... $34,253 $78,794 $66,290 $44,342 $25,546 Ratios to average net assets (annualized): Expenses, net of waivers .......................................... 0.82% 0.75% 0.97% 1.01% 1.14%(D) Expenses, before waivers .......................................... 0.82% 0.75% 0.92% 1.02% 1.34%(D) Net investment income, net of waivers ............................. 1.68% 1.41% 1.38% 0.92% 0.73%(D) Net investment income, before waivers ............................. 1.68% 1.40% 1.42% 0.91% 0.53%(D) Portfolio turnover rate ........................................... 28% 35% 42% 298% 6%(C) 107 AMERICAN BEACON SMALL CAP VALUE OPPORTUNITY FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class ---------------------------------------- Year Ended October 31, ---------------------- March 31 to 2008 2007 October 31, 2006 ------ ------- ---------------- Net asset value, beginning of period ................................. $10.33 $ 10.26 $10.00 ------ ------- ------ Income from investment operations: Net investment income ............................................. 0.09 0.11(A) 0.01 Net gains (losses) on securities (both realized and unrealized) ... (3.61) --(A) 0.25 ------ ------- ------ Total income (loss) from investment operations ....................... (3.52) 0.11 0.26 ------ ------- ------ Less distributions: Dividends from net investment income .............................. (0.12) (0.03) -- Distributions from net realized gains on securities ............... -- (0.01) -- ------ ------- ------ Total distributions .................................................. (0.12) (0.04) -- ------ ------- ------ Net asset value, end of period ....................................... $ 6.69 $ 10.33 $10.26 ====== ======= ====== Total return ......................................................... (34.49)% 1.08% 2.60%(B) ====== ======= ====== Ratios and supplemental data: Net assets, end of period (in thousands) .......................... $4,268 $29,596 $4,693 Ratios to average net assets (annualized): Expenses, net of waivers .......................................... 1.05% 1.05% 1.03% Expenses, before waivers .......................................... 1.56% 1.27% 6.12% Net investment income, net of waivers ............................. 1.22% 0.96% 0.30% Net investment income (loss), before waivers ...................... 0.71% 0.73% (4.80)% Portfolio turnover rate ........................................... 75% 58% 32%(B) (A) Based upon average shares outstanding. (B) Not annualized. 108 PlanAhead Class ---------------------------------------- Year Ended October 31, ---------------------- March 31 to 2008 2007 October 31, 2006 ------ ------- ---------------- Net asset value, beginning of period ................................. $ 10.28 $10.26 $10.00 ------- ------ ------ Income from investment operations: Net investment income ............................................. 0.10 0.14(A) 0.01 Net gains (losses) on securities (both realized and unrealized) ... (3.63) (0.05)(A) 0.25 ------- ------ ------ Total income (loss) from investment operations ....................... (3.53) 0.09 0.26 ------- ------ ------ Less distributions: Dividends from net investment income .............................. (0.10) (0.06) -- Distributions from net realized gains on securities ............... -- (0.01) -- ------- ------ ------ Total distributions .................................................. (0.10) (0.07) -- ------- ------ ------ Net asset value, end of period ....................................... $ 6.65 $10.28 $10.26 ======= ====== ====== Total return ......................................................... (34.60)% 0.96% 2.60%(B) ======= ====== ====== Ratios and supplemental data: Net assets, end of period (in thousands) .......................... $ 106 $ 91 $ 70 Ratios to average net assets (annualized): Expenses, net of waivers .......................................... 1.26% 1.30% 1.28% Expenses, before waivers .......................................... 1.82% 1.70% 20.05% Net investment income, net of waivers ............................. 0.93% 0.97% 0.21% Net investment income (loss), before waivers ...................... 0.37% 0.57% (18.56)% Portfolio turnover rate ........................................... 75% 58% 32%(B) 109 AMERICAN BEACON EMERGING MARKETS FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGH THE PRIOD) Institutional Class ------------------------------------------------- Year Ended October 31, ------------------------------------------------- 2008 2007 2006 2005 2004 ------- ------- ------- ------ ------ Net asset value, beginning of period ................................ $ 24.20 $ 17.42 $ 15.10 $12.64 $10.62 ------- ------- ------- ------ ------ Income from investment operations: Net investment income ............................................ 0.23 0.26 0.11 0.15 0.07 Net gains (losses) on securities (both realized and unrealized) .. (11.78) 9.11 4.63 3.45 2.01 ------- ------- ------- ------ ------ Total income (loss) from investment operations ...................... (11.55) 9.37 4.74 3.60 2.08 ------- ------- ------- ------ ------ Less distributions: Dividends from net investment income ............................. (0.10) (0.10) (0.21) (0.06) (0.06) Distributions from net realized gains on securities .............. (3.55) (2.49) (2.21) (1.08) -- ------- ------- ------- ------ ------ Total distributions ................................................. (3.65) (2.59) (2.42) (1.14) (0.06) ------- ------- ------- ------ ------ Redemption fees added to beneficial interests ....................... --(A) --(A) --(A) --(A) --(A) Net asset value, end of period ...................................... $ 9.00 $ 24.20 $ 17.42 $15.10 $12.64 ======= ======= ======= ====== ====== Total return ........................................................ (55.59)% 60.83% 34.49% 30.11% 19.65% ======= ======= ======= ====== ====== Ratios and supplemental data: Net assets, end of period (in thousands) ......................... $ 5,478 $13,773 $16,552 $9,348 $7,282 Ratios to average net assets (annualized): Expenses, net of waivers ......................................... 1.38% 1.60% 1.56% 1.52% 1.85% Expenses, before waivers ......................................... 1.38% 1.60% 1.56% 1.52% 1.85% Net investment income, net of waivers ............................ 1.35% 0.93% 0.80% 1.22% 0.74% Net investment income, before waivers ............................ 1.35% 0.93% 0.80% 1.22% 0.74% Portfolio turnover rate .......................................... 82% 81% 67% 63% 76% (A) Amounts represent less than 50.01 per share. 110 PlanAhead Class ------------------------------------------------ Year Ended October 31, ------------------------------------------------ 2008 2007 2006 2005 2004 ------- ------- ------ ------ ------ Net asset value, beginning of period ................................ $ 23.91 $ 17.22 $14.98 $12.53 $10.55 ------- ------- ------ ------ ------ Income from investment operations: Net investment income ............................................ 0.17 0.11 0.09 0.15 0.04 Net gains (losses) on securities (both realized and unrealized) .. (11.60) 9.11 4.55 3.41 1.99 ------- ------- ------ ------ ------ Total income (loss) from investment operations ...................... (11.43) 9.22 4.64 3.56 2.03 ------- ------- ------ ------ ------ Less distributions: Dividends from net investment income ............................. (0.08) (0.04) (0.19) (0.03) (0.05) Distributions from net realized gains on securities .............. (3.55) (2.49) (2.21) (1.08) -- ------- ------- ------ ------ ------ Total distributions ................................................. (3.63) (2.53) (2.40) (1.11) (0.05) ------- ------- ------ ------ ------ Redemption fees added to beneficial interests ....................... --(A) --(A) --(A) --(A) --(A) Net asset value, end of period ...................................... $ 8.85 $ 23.91 $17.22 $14.98 $12.53 ======= ======= ====== ====== ====== Total return ........................................................ (55.77)% 60.17% 34.16% 29.95% 19.33% ======= ======= ====== ====== ====== Ratios and supplemental data: Net assets, end of period (in thousands) ......................... $ 5,183 $11,694 $5,841 $2,592 $1,214 Ratios to average net assets (annualized): Expenses, net of waivers ......................................... 1.72% 1.96% 2.04% 1.75% 2.14% Expenses, before waivers ......................................... 1.72% 1.96% 1.91% 2.01% 2.20% Net investment income, net of waivers ............................ 1.00% 0.65% 0.49% 1.16% 0.37% Net investment income, before waivers ............................ 1.00% 0.65% 0.62% 0.90% 0.31% Portfolio turnover rate .......................................... 82% 81% 67% 63% 76% AMR Class -------------------------------------------------- Year Ended October 31, -------------------------------------------------- 2008 2007 2006 2005 2004 ------- -------- -------- ------- ------- Net asset value, beginning of period ................................ $ 24.37 $ 17.52 $ 15.17 $ 12.68 $ 10.66 ------- -------- -------- ------- ------- Income from investment operations: Net investment income ............................................ 0.33 0.19 0.15 0.24 0.10 Net gains (losses) on securities (both realized and unrealized) .. (11.91) 9.30 4.65 3.42 2.00 ------- -------- -------- ------- ------- Total income (loss) from investment operations ...................... (11.58) 9.49 4.80 3.66 2.10 ------- -------- -------- ------- ------- Less distributions: Dividends from net investment income ............................. (0.18) (0.15) (0.24) (0.09) (0.08) Distributions from net realized gains on securities .............. (3.55) (2.49) (2.21) (1.08) -- ------- -------- -------- ------- ------- Total distributions ................................................. (3.73) (2.64) (2.45) (1.17) (0.08) ------- -------- -------- ------- ------- Redemption fees added to beneficial interests ....................... --(A) --(A) -- -- -- Net asset value, end of period ...................................... $ 9.06 $ 24.37 $ 17.52 $ 15.17 $ 12.68 ======= ======== ======== ======= ======= Total return ........................................................ (55.48)% 61.19% 34.87% 30.43% 20.00% ======= ======== ======== ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands) ......................... $72,516 $271,726 $135,146 $94,864 $74,199 Ratios to average net assets (annualized): Expenses, net of waivers ......................................... 1.17% 1.37% 1.30% 1.25% 1.59% Expenses, before waivers ......................................... 1.17% 1.37% 1.30% 1.25% 1.59% Net investment income, net of waivers ............................ 1.46% 1.25% 1.01% 1.60% 1.01% Net investment income, before waivers ............................ 1.46% 1.25% 1.01% 1.60% 1.01% Portfolio turnover rate .......................................... 82% 81% 67% 63% 76% 111 AMERICAN BEACON HIGH YIELD BOND FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class --------------------------------------------------- Year Ended October 31, --------------------------------------------------- 2008(E) 2007 2006(A) 2005 2004 ------- -------- -------- -------- -------- Net asset value, beginning of period ............................... $ 10.11 $ 10.20 $ 10.22 $ 10.86 $ 10.73 ------- -------- -------- -------- -------- Income from investment operations: Net investment income ........................................... 0.78 0.77 0.88 0.76 0.78 Net gains (losses) on securities (both realized and unrealized) .................................................. (3.34) (0.09) 0.09 (0.84) 0.27 ------- -------- -------- -------- -------- Total income (loss) from investment operations ..................... (2.56) 0.68 0.97 (0.08) 1.05 ------- -------- -------- -------- -------- Less distributions: Dividends from net investment income ............................ (0.78) (0.77) (0.88) (0.76) (0.78) Distributions from net realized gains on securities ............. -- -- (0.11) 0.20 (0.14) ------- -------- -------- -------- -------- Total distributions ................................................ (0.78) (0.77) (0.99) (0.56) (0.92) ------- -------- -------- -------- -------- Net asset value, end of period ..................................... $ 6.77 $ 10.11 $ 10.20 $ 10.22 $ 10.86 ======= ======== ======== ======== ======== Total return ....................................................... (27.03)% 6.85% 8.78% 3.03% 10.19% ======= ======== ======== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands) ........................ $62,138 $114,911 $231,693 $216,744 $241,777 Ratios to average net assets (annualized): Expenses, net of waivers ........................................ 0.85% 0.85% 0.85% 0.84% 0.88% Expenses, before waivers ........................................ 0.85% 0.86% 0.85% 0.84% 0.92% Net investment income, net of waivers ........................... 8.38% 7.55% 7.55% 7.24% 7.27% Net investment income, before waivers ........................... 8.38% 7.54% 7.55% 7.24% 7.23% Portfolio turnover rate ......................................... 157% 92% 88% 128% 138% (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. (E) On May 21, 2008, Post Advisory Group, LLC ceased managing a portion of the High Yield Bond Fund and on May 22, 2008 Logan Circle Partners, L.P. began managing a portion of the High Yield Bond Fund. 112 PlanAhead Class ------------------------------------------------- Year Ended October 31, ------------------------------------------------- 2008(E) 2007 2006(A) 2005 2004 ------- ------- ------- -------- -------- Net asset value, beginning of period ............................... $ 10.11 $ 10.21 $ 10.22 $ 10.87 $ 10.73 ------- ------- ------- -------- -------- Income from investment operations: Net investment income ........................................... 0.75 0.75 0.85 0.74 0.74 Net gains (losses) on securities (both realized and unrealized) .................................................. (3.34) (0.10) 0.10 (0.85) 0.28 ------- ------- ------- -------- -------- Total income (loss) from investment operations ..................... (2.59) 0.65 0.95 (0.11) 1.02 ------- ------- ------- -------- -------- Less distributions: Dividends from net investment income ............................ (0.75) (0.75) (0.85) (0.74) (0.74) Distributions from net realized gains on securities ............. -- -- (0.11) 0.20 (0.14) ------- ------- ------- -------- -------- Total distributions ................................................ (0.75) (0.75) (0.96) (0.54) (0.88) ------- ------- ------- -------- -------- Net asset value, end of period ..................................... $ 6.77 $ 10.11 $ 10.21 $ 10.22 $ 10.87 ======= ======= ======= ======== ======== Total return ....................................................... (27.24)% 6.52% 8.63% 2.69% 9.94% ======= ======= ======= ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands) ........................ $13,949 $28,758 $80,284 $120,360 $148,266 Ratios to average net assets (annualized): Expenses, net of waivers ........................................ 1.10% 1.08% 1.08% 1.08% 1.20% Expenses, before waivers ........................................ 1.10% 1.08% 1.08% 1.08% 1.20% Net investment income, net of waivers ........................... 8.06% 7.32% 7.33% 7.00% 6.95% Net investment income, before waivers ........................... 8.06% 7.32% 7.33% 7.00% 6.95% Portfolio turnover rate ......................................... 157% 92% 88% 128% 138% AMR Class ----------------------- Year September Ended 04 to October October 31, 2008(E) 31, 2007 ----------- --------- Net asset value, beginning of period ............................... $ 10.11 $ 9.94 ------- ------- Income from investment operations: Net investment income ........................................... 0.80 0.12 Net gains (losses) on securities (both realized and unrealized) .................................................. (3.34) 0.17 ------- ------- Total income (loss) from investment operations ..................... (2.54) 0.29 ------- ------- Less distributions: Dividends from net investment income ............................ (0.80) (0.12) Distributions from net realized gains on securities ............. -- -- ------- ------- Total distributions ................................................ (0.80) (0.12) ------- ------- Net asset value, end of period ..................................... $ 6.77 $ 10.11 ======= ======= Total return ....................................................... (26.84)% 2.94%(B) ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands) ........................ $44,060 $82,322 Ratios to average net assets (annualized): Expenses, net of waivers ........................................ 0.58% 0.61%(C) Expenses, before waivers ........................................ 0.58% 0.61%(C) Net investment income, net of waivers ........................... 8.64% 7.54%(C) Net investment income, before waivers ........................... 8.64% 7.54%(C) Portfolio turnover rate ......................................... 157% 92%(D) 113 AMERICAN BEACON ENHANCED INCOME FUND FINANCIAL HIGHLIGHTS PlanAhead Class --------------------------------------------------- Year Ended October 31, --------------------------------------------------- 2008 2007 2006 2005 2004 -------- ------- -------- -------- -------- Net asset value, beginning of period .................................... $ 10.50 $ 10.25 $ 9.98 $ 10.16 $ 9.96 -------- ------- -------- -------- -------- Income from investment operations: Net investment income ................................................ 0.41 0.36 0.33 0.29 0.26 Net gains (losses) on securities (both realized and unrealized) ...... (1.39) 0.32 0.29 (0.16) 0.20 -------- ------- -------- -------- -------- Total income (loss) from investment operations .......................... (0.98) 0.68 0.62 0.13 0.46 -------- ------- -------- -------- -------- Less distributions: Dividends from net investment income ................................. (0.49) (0.42) (0.35) (0.31) (0.26) Distributions from net realized gains on securities .................. (0.23) (0.01) -- -- -- -------- ------- -------- -------- -------- Total distributions ..................................................... (0.72) (0.43) (0.35) (0.31) (0.26) -------- ------- -------- -------- -------- Net asset value, end of period .......................................... $ 8.80 $ 10.50 $ 10.25 $ 9.98 $ 10.16 ======== ======= ======== ======== ======== Total return ............................................................ (10.02)% 6.75% 6.36% 1.32% 4.70% ======== ======= ======== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands) ............................. $100,469 $99,789 $125,915 $112,341 $103,897 Ratios to average net assets (annualized): Expenses ............................................................. 0.92% 0.94% 0.93% 0.92% 1.00% Net investment income ................................................ 3.64% 3.69% 3.21% 2.79% 2.54% Portfolio turnover rate .............................................. 76% 103% 65% 41% 72% 114 AMERICAN BEACON INTERMEDIATE BOND FUND FINANCIAL HIGHLIGHTS Institutional Class (formerly AMR Class prior to 3/1/05) ------------------------------------------------- Year Ended October 31, ------------------------------------------------- 2008 2007 2006 2005(A) 2004 -------- -------- ------- ------- ------- Net asset value, beginning of period .................................... 10.10 10.02 10.01 10.33 10.24 -------- -------- ------- ------- ------- Income from investment operations: Net investment income(B) ............................................. 0.50 0.50 0.46 0.42 0.40 Net gains (losses) on securities (both realized and unrealized) ...... (0.51) 0.07 0.02 (0.29) 0.14 -------- -------- ------- ------- ------- Total income from investment operations ................................. (0.01) 0.57 0.48 0.13 0.54 -------- -------- ------- ------- ------- Less distributions: Dividends from net investment income ................................. (0.48) (0.49) (0.47) (0.45) (0.45) Distributions from net realized gains on securities .................. -- -- -- -- -- -------- -------- ------- ------- ------- Total distributions ..................................................... (0.48) (0.49) (0.47) (0.45) (0.45) -------- -------- ------- ------- ------- Net asset value, end of period .......................................... $ 9.61 $ 10.10 $ 10.02 $ 10.01 $ 10.33 ======== ======== ======= ======= ======= Total return ............................................................ (0.26)% 5.83% 4.96% 1.26% 5.38% ======== ======== ======= ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands) ............................. $147,634 $109,674 $97,319 $93,270 $96,242 Ratios to average net assets (annualized): Expenses, net of waivers ............................................. 0.30% 0.34% 0.35% 0.31% 0.34% Expenses, before waivers ............................................. 0.30% 0.34% 0.35% 0.31% 0.34% Net investment income, net of waivers ................................ 4.70% 4.86% 4.64% 4.12% 3.97% Net investment income, before waivers ................................ 4.70% 4.86% 4.64% 4.12% 3.97% Portfolio turnover rate .............................................. 105% 85% 122% 119% 106% (A) On March 1, 2005, the existing Institutional Class shares were terminated and exchanged for a AMR Class shares at a conversion rate of 1.0202. Following this exchange, the former AMR Class Shares were re-named Institutional Class. 115 AMERICAN BEACON SHORT-TERM BOND FUND FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class --------------------------------------------------- Year Ended October 31, --------------------------------------------------- 2008 2007 2006 2005(A) 2004 -------- ------- ------- ------- ------- Net asset value, beginning of period ................................ $ 8.79 $ 8.74 $ 8.75 $ 9.07 $ 9.31 -------- ------- ------- ------- ------- Income from investment operations: Net investment income ............................................ 0.35(B) 0.39(B) 0.32(B) 0.29 0.27 Net gains (losses) on securities (both realized and unrealized) .. (0.15) 0.09 0.07 (0.20) (0.05) -------- ------- ------- ------- ------- Total income from investment operations ............................. 0.20 0.48 0.39 0.09 0.22 -------- ------- ------- ------- ------- Less distributions: Dividends from net investment income ............................. (0.41) (0.43) (0.40) (0.41) (0.46) Distributions from net realized gains on securities .............. -- -- -- -------- ------- ------- ------- ------- Total distributions ................................................. (0.41) (0.43) (0.40) (0.41) (0.46) -------- ------- ------- ------- ------- Net asset value, end of period ...................................... $ 8.58 $ 8.79 $ 8.74 $ 8.75 $ 9.07 ======== ======= ======= ======= ======= Total return ........................................................ 2.21% 5.61% 4.56% 1.00% 2.39% ======== ======= ======= ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands) ......................... $255,725 $89,427 $73,417 $79,683 $80,504 Ratios to average net assets (annualized): Expenses, net of waivers ......................................... 0.31% 0.37% 0.35% 0.33% 0.33% Expenses, before waivers ......................................... 0.31% 0.37% 0.35% 0.33% 0.33% Net investment income, net of waivers ............................ 3.75% 4.48% 3.64% 3.15% 3.00% Net investment income, before waivers ............................ 3.75% 4.48% 3.64% 3.15% 3.00% Portfolio turnover rate .......................................... 21% 40% 48% 38% 41% (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. 116 PlanAhead Class -------------------------------------------- Year Ended October 31, -------------------------------------------- 2008 2007 2006 2005 2004 ------ ------ ------ ------ ------ Net asset value, beginning of period ................................ $ 8.81 $ 8.76 $ 8.77 $ 9.09 $ 9.33 ------ ------ ------ ------ ------ Income from investment operations: Net investment income ............................................ 0.29 0.35(B) 0.27(B) 0.28 0.25 Net gains (losses) on securities (both realized and unrealized) .. (0.15) 0.09 0.07 (0.24) (0.07) ------ ------ ------ ------ ------ Total income from investment operations ............................. 0.14 0.44 0.34 0.04 0.18 ------ ------ ------ ------ ------ Less distributions: Dividends from net investment income ............................. (0.36) (0.39) (0.35) (0.36) (0.42) Distributions from net realized gains on securities .............. -- -- -- -- ------ ------ ------ ------ ------ Total distributions ................................................. (0.36) (0.39) (0.35) (0.36) (0.42) ------ ------ ------ ------ ------ Net asset value, end of period ...................................... $ 8.59 $ 8.81 $ 8.76 $ 8.77 $ 9.09 ====== ====== ====== ====== ====== Total return ........................................................ 1.54% 5.08% 4.01% 0.46% 1.84% ====== ====== ====== ====== ====== Ratios and supplemental data: Net assets, end of period (in thousands) ......................... $7,733 $2,976 $7,189 $8,582 $7,781 Ratios to average net assets (annualized): Expenses, net of waivers ......................................... 0.85% 0.87% 0.88% 0.87% 0.87% Expenses, before waivers ......................................... 0.88% 0.98% 0.90% 0.94% 0.87% Net investment income, net of waivers ............................ 3.19% 3.91% 3.10% 2.59% 2.44% Net investment income, before waivers ............................ 3.16% 3.81% 3.08% 2.52% 2.44% Portfolio turnover rate .......................................... 21% 40% 48% 38% 41% 117 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. 118 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, 2008, which is designated as qualifying for the dividends-received deduction, is as follows: Balanced Fund 22.15% Large Cap Growth Fund 19.22% Mid-Cap Value Fund 30.11% Small Cap Value Opportunity Fund 40.88% Enhanced Income Fund 2.37% For shareholders in the Funds, the percentage of dividend income distributed for the year ended October 31, 2008, which is designated as qualified dividends income under the Jobs and Growth Tax Relief Act of 2003, is as follows: Balanced Fund 25.48% Large Cap Growth Fund 100.00% Mid-Cap Value Fund 46.16% Small Cap Value Opportunity Fund 89.59% Emerging Markets Fund 19.05% Enhanced Income Fund 2.15% Shareholders will receive notification in January 2009 of the percentage applicable to the preparation of their 2008 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, 2008. Balanced Fund $46,053,838 Large Cap Growth 2,751,162 Mid-Cap Value Fund 6,553,236 Emerging Markets Fund 33,156,178 Enhanced Income Fund 1,461,366 119 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUNDS (Unaudited) At its May 21, 2008 meeting, the Board of Trustees ("Board" or "Trustees") considered the renewal of each existing Management Agreement (each, a "Current Agreement" and collectively, the "Current Agreements") between the Manager and the American Beacon Funds ("Beacon Trust") (collectively, the "Funds") and each Investment Advisory Agreement between the Manager and a subadvisor ("Current Investment Advisory Agreement"). In preparation for the Board's consideration to renew these Current 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 9, 2008 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. On May 21, May 22 and June 4, 2008, the Board met to determine, among other matters, whether to approve a new investment management agreement ("New Agreement") between the Manager and the Funds. The New Agreement was necessary because, on April 16, 2008, AMR Corporation ("AMR"), the parent company of the Manager, entered into an agreement with Lighthouse Holdings, Inc. ("Lighthouse") pursuant to which Lighthouse would acquire all of the capital stock of the Manager ("Transaction") in exchange for cash and 10% of the capital stock of the parent corporation of Lighthouse. Upon the closing of the Transaction on September 12, 2008 ("Closing"), the Manager ceased to be a wholly owned subsidiary of AMR and became a subsidiary of Lighthouse. This change in control was deemed to be an "assignment" under the Investment Company Act of 1940 ("1940 Act") of each Fund's Current Agreement with the Manager. As required by the 1940 Act, each Fund's Current Agreement provided for its automatic termination in the event of an assignment, and each, therefore, terminated upon the Closing. To provide for the continuity of management for the Funds, the Board met to consider the New Agreement with the Manager. The New Agreement for each Fund reflects substantially the same terms as the Current Agreement for each Fund. In addition, the Current Agreements have been updated and modernized. As part of this process, the primary administrative services provided by the Manager to the Funds have been transferred to one single administrative services agreement ("New Administrative Services Agreement"). The Manager previously provided administrative services to the Funds pursuant to its Current Agreement and an Administrative Services Agreement ("Current Administrative Services Agreement"). The aggregate fee rates for each Fund under the New Agreement and the New Administrative Services Agreement are the same as the fee rates imposed under the existing agreements which they replaced. In preparation for the Board's consideration to approve the New Agreement and New Investment Advisory Agreements, the Board considered the impact to the Funds once Lighthouse directly controlled the Manager. Lighthouse indicated that it did not anticipate making any changes to the organization or structure of the Funds, to the service providers or to the aggregate fee rates under the Current Agreement. In addition, the portfolio managers at the Manager that manage the Funds were expected to continue to manage the Funds after the Closing. In that regard, the Manager and Lighthouse anticipated entering into employment contracts with certain key personnel performing or overseeing the Funds' investment programs. The Board considered that there could be no assurance that these personnel would choose to remain employed by the Manager before or after the Closing. The Board noted that the Manager and the Funds would continue to operate under their existing names. Potential benefits to the Funds as a result of the Transaction included Lighthouse's intention to devote additional resources to product development and distribution of Fund shares. The Board also considered that any resulting growth of Fund assets would potentially produce economies of scale that would benefit shareholders of the Funds. 120 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS With respect to certain Funds, the Manager had entered into Current Investment Advisory Agreements with various subadvisors on behalf of those Funds. Upon the Closing, these Current Investment Advisory Agreements terminated automatically upon the termination of each Current Agreement. Pursuant to an exemptive order issued by the Securities and Exchange Commission ("SEC"), the Manager was permitted to enter into new or modified investment advisory agreements with existing or new subadvisors ("New Investment Advisory Agreements") without approval of a Fund's shareholders, but subject to the approval of a Fund's Board. Each New Investment Advisory Agreement reflected substantially the same terms as the Current Investment Advisory Agreement for each applicable Fund. In preparation for the Board's consideration to approve the New Agreement and New Investment Advisory Agreements, the Board held preliminary conference call meetings on April 15, 16 and 21, 2008, to discuss the New Agreement and New Investment Advisory Agreements and the effect that approving the New Agreement and New Investment Advisory Agreements would have on the Funds. The Board received a memorandum and related advice from their independent legal counsel detailing the Board's responsibilities in considering the New Agreement and New Investment Advisory Agreements. In connection with Board's consideration of the Current Agreement, Current Investment Advisory Agreements, New Agreement and New Investment Advisory Agreements, the Trustees considered, among other materials, responses by the Manager and the subadvisors to inquiries requesting: - a description of the Transaction, the effects of the Transaction on the Beacon Trust and the Board, and any proposed changes to the Beacon Trust, their service providers or fee structure and other information; - 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 Form ADV registration statement with the SEC; - 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 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; 121 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS - 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 regard to the services provided to the Funds. In addition to the foregoing, the Manager provided the following information specific to the renewal of each Fund's Current Agreement and the approval of each Fund's New 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. In connection with the Current Agreements, Current Investment Advisory Agreements, New Agreement and New Investment Advisory Agreements, 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 with more than one class of shares, the class of shares used for comparative purposes was the class with the longest performance history, which in most cases was 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 Current Agreements, Current Investment Advisory Agreements, New Agreement and New Investment Advisory Agreements are each referenced to herein as an "Agreement" and collectively, the "Agreements." The Trustees also received memoranda from their legal counsel detailing the Board's responsibilities pertaining to the approval of each Agreement. These memoranda explained the regulatory requirements surrounding the Trustees' process for evaluating investment advisors and the terms of the contracts. In connection with the Board's consideration of the New Agreement and each New Investment Advisory Agreement, the Trustees considered, among other information, the following factors: 1. The manner in which each Fund's assets are managed will not change as a result of the Transaction, and the same people who manage the Fund's assets are expected to continue to do so after the Transaction; 2. The aggregate fee rates payable by each Fund under the New Agreement and the New Administrative Services Agreement are the same as the fee rates payable under the Current Agreement and the Current Administrative Services Agreement; 122 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS 3. The material terms regarding advisory services pursuant to the New Agreement are substantially the same as the terms of the Current Agreements; 4. The qualifications of the Manager's personnel who will provide advisory and administrative services to the Funds are not expected to change; 5. The Manager's financial condition and the post-Closing capitalization of Lighthouse; 6. The impact of the Transaction on the Manager's day-to-day operations; 7. The capabilities, experience, corporate structure and capital resources of Lighthouse; 8. The long-term business goals of Lighthouse with regard to the Manager and the Beacon Trust; 9. Fund shareholders will not bear any costs in connection with the Transaction, inasmuch as AMR and Lighthouse plan to bear equally the costs, fees and expenses incurred by the Funds in connection with obtaining shareholder approval of the New Agreement, the fees and expenses of accountants and attorneys relating to the Transaction and obtaining shareholder approval of the New Agreement, the fees and expenses incurred by the Funds in connection with the Transaction, and the meeting fees of the Boards for meetings held in connection with the Transaction; 10. The Funds may realize benefits as a result of the Transaction, including long-term economies of scale; 11. The potential for increased costs to the Beacon Trust in order to satisfy existing obligations under the current Trustees' retirement plan; and 12. The advisory relationship with each subadvisor would continue in the same manner as before the Transaction and that each New Investment Advisory Agreement would be substantially the same as each Current Investment Advisory Agreement. Provided below is an overview of the other primary factors the Board considered at its May 21, May 22 and June 4, 2008 meetings. The Board did not identify any particular information that was most relevant to its consideration to renew the Current Agreement and Current Investment Advisory Agreements and approve the New Agreement and New Investment Advisory Agreements, and each Trustee may have afforded different weight to the various factors. Legal counsel to the Non-interested Trustees provided the Board with memoranda regarding its responsibilities pertaining to the renewal of the Current Agreement and Current Investment Advisory Agreements and approve the New Agreement and New Investment Advisory Agreements. Based on its evaluation, the Board unanimously concluded that the terms of each Current Agreement and Current Investment Advisory Agreement were reasonable and fair and that the renewal of each Current Agreement and Current Investment Advisory Agreement was in the best interests of the Fund and its shareholders. The Board also unanimously concluded that the terms of the New Agreement and New Investment Advisory Agreements were reasonable and fair and that the approval of the New Agreement and New Investment Advisory Agreements was in the best interests of the Fund and its shareholders. CONSIDERATIONS WITH RESPECT TO ALL FUNDS In determining whether to renew the Current Agreement and the Current Investment Advisory Agreements and approve the New Agreement and New Investment Advisory Agreements, the Trustees considered the best interests of each Fund separately. While the Current Agreement and Current Investment Advisory Agreements for all of the Funds were considered at the Board meetings on May 21, 2008, and the New Agreement and New Investment Advisory Agreement for all of the Funds were considered at the meetings on May 21, May 22 and June 4, 2008, 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 a Fund and, as applicable, each subadvisor for a Fund; (3) the costs incurred by the Manager and (to the extent provided) the subadvisors in rendering their services and their resulting profits or losses; (4) the extent to which economies of scale have been taken into account in setting each 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 123 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS 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 and Lighthouse regarding certain key aspects of the materials submitted in support of the renewal. Nature, Extent and Quality of Services. With respect to the renewal of each Fund's Current Agreement and the approval of each Fund's New 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. With respect to the renewal of the Current Investment Advisory Agreements and the approval of the New 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, determined to renew the Current Agreement and Current Investment Advisory Agreements, and approve each New Agreement and New Investment Advisory Agreements for each Fund. 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. 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." 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, Inc. Costs of the Services to be Provided to the Funds and the Projected Profits to be Realized by the Manager from its Relationship with the Funds. 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. The profits or losses were noted at both an individual Fund level and at an aggregate level for all Funds. The Board also considered that the Current and New Agreements for the Beacon Trust stipulate that, to the extent that a Fund invests all of its investable assets in another registered investment company (i.e., is a Feeder Fund), the Fund will not pay the Manager a management fee. With respect to the Short-Term Bond Fund, the Board also considered the Manager's advisory fees for services provided by the Manager to institutional separate accounts with similar investment strategies. 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 subadvised Fund pays the Manager the amounts due to its subadvisors, and the Manager remits these 124 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS 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 Board considered that the Manager receives management fees for overseeing the securities lending relationships on behalf of various Funds. The Board also noted that certain classes of the Funds maintain higher expense ratios in order to compensate third-party distributors. 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. A discussion regarding the Board's considerations with respect to each Fund's fee rates is set forth below under "Additional Considerations and Conclusions with Respect to Each Fund." 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 many subadvisory fee rates. The Board also noted that, for purposes of determining the fee rates chargeable to the Funds, many subadvisors have agreed to take into account other assets of AMR and its pension plans that are managed by the subadvisors. Thus, the Funds are able to receive lower effective fee rates. The Board also noted that certain Funds have grown their shareholder base, which has spread fixed costs over a larger shareholder and asset base. 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 for each Fund provides 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 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 Manager's relationship with the Funds 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 Beacon Trust at a relatively low cost. In this regard, the Board considered that the benefit plans of AMR have invested substantial assets in the Funds, which helps reduce costs for other Fund shareholders, just as the investment of other Fund shareholders helps to reduce costs for AMR's benefit plans. In addition, the Board considered that certain of the subadvisors reimburse the Manager for certain of its costs relating to distribution activities for the Funds. The Board also considered that Funds did not pay commissions to any affiliated broker-dealer of the Manager during the most recent fiscal year ended October 31, 2007, though during that period certain Funds did pay commissions to affiliated broker-dealers of the relevant subadvisor, as set forth in the following table. FUND BROKER AFFILIATED WITH COMMISSION - ------------------------------------- ------------------------------------ ----------------------------------------- ---------- American Beacon Large Cap Growth Fund Goldman, Sachs & Co. Goldman Sachs Asset Management, L.P. $1,020 American Beacon Emerging Markets Fund JM Morgan Stanley Securities Limited Morgan Stanley Investment Management Inc. $ 326 125 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS The percentage of total commissions of the American Beacon Large Cap Growth Fund and Emerging Markets Fund paid to affiliated broker-dealers in 2007 was 4.13% and 0.07%, respectively. Based on the foregoing information, the Board concluded that the potential benefits accruing to the Manager and the subadvisors by virtue of its relationships with the Funds appear to be fair and reasonable. ADDITIONAL CONSIDERATIONS AND CONCLUSIONS WITH RESPECT TO THE BALANCED FUND In considering the renewal of the Current Agreement and the approval of the New Agreement with respect to the Balanced Fund, the Trustees considered the following additional factors: (1) the Balanced Fund outperformed the peer universe median for the five- and ten-year periods ended March 31, 2008, but underperformed for the one- and three-year periods; (2) the Manager outperformed its market index with respect to its portion of the Fund's fixed income assets for the one-, three- and five-year periods ended March 31, 2008; and (3) the expense ratio of the Institutional Class of Fund shares was lower than its Lipper expense group median. In considering the renewal of the Current Investment Advisory Agreements and the approval of the New 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 outperformed the peer universe median for the five- and ten-year periods ended March 31, 2008 but underperformed for the one- and three- year period; (2) Brandywine outperformed the peer universe median for the one-, three-, five- and ten-year periods ended March 31, 2008; (3) Hotchkis outperformed its market benchmark index with respect to its allocated portion of the Fund's equity assets for the five- and ten-year periods ended March 31, 2008 but underperformed for the one- and three- year periods; (4) 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 impact to the Fund; and (5) the Manager's recommendation to continue to retain each subadvisor. Based on these and other considerations, the Trustees concluded that the fees paid to the Manager and the subadvisors under the Agreements are fair and reasonable, determined that the Balanced Fund and its shareholders would benefit from the Manager's and subadvisors' continued management of the Fund, approved the renewal of the Current Agreement and Current Investment Advisory Agreements and approved the New Agreement and New Investment Advisory Agreements with respect to the Balanced Fund. ADDITIONAL CONSIDERATIONS AND CONCLUSIONS WITH RESPECT TO THE EMERGING MARKETS FUND In considering the renewal of the Current Agreement and the approval of the New Agreement, the Trustees considered the following additional factors: (1) the Emerging Markets Fund underperformed the peer universe median for the one-, three-, and five-year periods ended March 31, 2008 and (2) the current expense ratio of the Institutional Class of the Fund was lower than its Lipper expense group median. In considering the renewal of the Current Investment Advisory Agreements and the approval of the New Investment Advisory Agreements with The Boston Company Asset Management, LLC ("TBC") 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 ended March 31, 2008; (2) TBC underperformed the peer universe median for the one-, three- and five-year periods ended March 31, 2008; (3) 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 and (4) the Manager's recommendation to continue to retain each subadvisor. 126 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS Based on these and other considerations, the Trustees concluded that the fees paid to the Manager and the subadvisors under the Agreements are fair and reasonable, determined that the Emerging Markets Fund and its shareholders would benefit from the Manager's and subadvisors' continued management of the Fund, approved the renewal of the Current Agreement and Current Investment Advisory Agreements and approved the New Agreement and New Investment Advisory Agreements with respect to the Emerging Markets Fund. ADDITIONAL CONSIDERATIONS AND CONCLUSIONS WITH RESPECT TO THE ENHANCED INCOME FUND In considering the renewal of the Current Agreement and the approval of the New Agreement, the Trustees considered the following additional factors: (1) the Enhanced Income Fund outperformed the peer universe median for the one- and three-year periods ended March 31, 2008; (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; and (3) the expense ratio of the Fund was lower than its Lipper expense group median. In considering the renewal of the Current Investment Advisory Agreement and the approval of the New Investment Advisory Agreement with Calamos Advisors LLC ("Calamos"), the Trustees considered the following additional factors: (1) Calamos outperformed the Merrill Lynch All U.S. Convertibles Index for the one- and three-year periods ended March 31, 2008; (2) 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 (3) the Manager's recommendation to continue to retain Calamos. Based on these and other considerations, the Trustees concluded that the fees paid to the Manager and the subadvisor under the Agreements are fair and reasonable, determined that the Enhanced Income Fund and its shareholders would benefit from the Manager's and subadvisor's continued management of the Fund, approved the renewal of the Current Agreement and Current Investment Advisory Agreement and approved the New Agreement and New Investment Advisory Agreement with respect to the Enhanced Income Fund. ADDITIONAL CONSIDERATIONS AND CONCLUSIONS WITH RESPECT TO THE HIGH YIELD BOND FUND In considering the renewal of the Current Agreement and the approval of the New Agreement, the Trustees considered the following additional factors: (1) the High Yield Bond Fund outperformed the peer universe median for the one- and three-year periods ended March 31, 2008, but underperformed its peer universe median for the five-year period and (2) the current expense ratio of the Institutional Class was lower than its Lipper expense group median. In considering the renewal of the Current Investment Advisory Agreement and the approval of the New Investment Advisory Agreement with Franklin Advisors, Inc. ("Franklin"), the Trustees considered the following additional factors: (1) Franklin outperformed the peer universe median for the one-year period ended March 31, 2008 and (2) the Manager's recommendation to continue to retain Franklin. Based on these and other considerations, the Trustees concluded that the fees paid to the Manager and the subadvisor under the Agreements are fair and reasonable, determined that the High Yield Bond Fund and its shareholders would benefit from the Manager's and subadvisor's continued management of the Fund, approved the renewal of the Current Agreement and Current Investment Advisory Agreement, and approved the New Agreement and New Investment Advisory Agreement with respect to the High Yield Bond Fund. ADDITIONAL CONSIDERATIONS AND CONCLUSIONS WITH RESPECT TO THE INTERMEDIATE BOND FUND In considering the renewal of the Current Agreement and the approval of the New Agreement, the Trustees considered the following additional factors: (1) the Intermediate Bond Fund outperformed the peer universe median for the one-, three- five- and ten-year periods ended March 31, 2008; (2) the Manager outperformed the universe peer median with respect to its allocated portion of the Fund's assets for the one-, 127 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS three-, five- and ten-year periods ended March 31, 2008; and (3) the expense ratio of the Institutional Class of Fund shares was the lowest of its Lipper expense group. In considering the renewal of the Current Investment Advisory Agreement and the approval of the New 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-, five- and ten-year periods ended March 31, 2008; and (2) the Manager's recommendation to continue to retain Barrow. Based on these and other considerations, the Trustees concluded that the fees paid to the Manager and subadvisor under the Agreements are fair and reasonable, determined that the Intermediate Bond Fund and its shareholders would benefit from the Manager's and subadvisor's continued management of the Fund, approved the renewal of the Current Agreement and Current Investment Advisory Agreement and approved the New Agreement and New Investment Advisory Agreement with respect to the Intermediate Bond Fund. ADDITIONAL CONSIDERATIONS AND CONCLUSIONS WITH RESPECT TO THE LARGE CAP GROWTH FUND In considering the renewal of the Current Agreement and the approval of the New Agreement, the Trustees considered the following additional factors: (1) the Large Cap Growth Fund underperformed the peer universe median for the one-, three- and five-year periods ended March 31, 2008 and (2) the expense ratio of the Institutional Class of Fund shares was lower than the Lipper expense group median. In considering the renewal of the Current Investment Advisory Agreements and the approval of the New 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-, three- and five-year period ended March 31, 2008; (2) RIM underperformed the peer universe median for the one-year period ended March 31, 2008; (4) 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; and (5) the Manager's recommendation to continue to retain each subadvisor. Based on these and other considerations, the Trustees concluded that the fees paid to the Manager and the subadvisors under the Agreements are fair and reasonable, determined that the Large Cap Growth Fund and its shareholders would benefit from the Manager's and subadvisors' continued management of the Fund, approved the renewal of the Current Agreement and Current Investment Advisory Agreements and approved the New Agreement and New Investment Advisory Agreements with respect to the Large Cap Growth Fund. ADDITIONAL CONSIDERATIONS AND CONCLUSIONS WITH RESPECT TO THE MID-CAP VALUE FUND In considering the renewal of the Current Agreement and the approval of the New Agreement, the Trustees considered the following additional factors: (1) the Mid-Cap Value Fund underperformed its peer universe median for the one- and three-year periods ended March 31, 2008 and (2) the expense ratio of the Institutional Class of Fund shares was lower than its Lipper expense group median (after consideration of the Manager's waiver). In considering the renewal of the Current Investment Advisory Agreements and the approval of the New Investment Advisory Agreements with Barrow and Pzena Investment Management, LLC ("Pzena"), the Trustees considered the following additional factors: (1) Barrow and Pzena underperformed the peer universe median for the one- and three-year periods ended March 31, 2008; (2) 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; and (3) the Manager's recommendation to continue to retain each subadvisor. 128 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF INVESTMENT ADVISORY AGREEMENTS Based on these and other considerations, the Trustees concluded that the fees paid to the Manager and the subadvisors under the Agreements are fair and reasonable, determined that the Mid-Cap Value Fund and its shareholders would benefit from the Manager's and subadvisors' continued management of the Fund, approved the renewal of the Current Agreement and Current Investment Advisory Agreements and approved the New Agreement and New Investment Advisory Agreements with respect to the Mid-Cap Value Fund. ADDITIONAL CONSIDERATIONS AND CONCLUSIONS WITH RESPECT TO THE SHORT-TERM BOND FUND In considering the renewal of the Current Agreement and the approval of the New Agreement, the Trustees considered the following additional factors: (1) the Short-Term Bond Fund outperformed its benchmark index for the one-, three-, five- and ten-year periods for the period ended March 31, 2008; (2) the Short-Term Bond Fund outperformed the Lipper Index for all reported periods ended March 31, 2008; and (3) the expense ratio of the Institutional Class of Fund shares was the lowest of its Lipper expense group average. Based on these and other considerations, the Trustees (1) concluded that the fees paid to the Manager under the Agreement are fair and reasonable, (2) determined that the Short-Term Bond Fund and its shareholders would benefit from the Manager's continued management of the Fund, (3) approved the renewal of the Current Agreement and (4) approved the New Agreement with respect to the Short-Term Bond Fund. ADDITIONAL CONSIDERATIONS AND CONCLUSIONS WITH RESPECT TO THE SMALL CAP VALUE OPPORTUNITY FUND In considering the renewal of the Current Agreement and the approval of the New Agreement, the Trustees considered the following additional factors: (1) the Small Cap Value Opportunity Fund underperformed the peer universe median for the one- and two-year periods ended March 31, 2008 and (2) the expense ratio of the Institutional Class of Fund shares was lower than its Lipper expense group median. In considering the renewal of the Current Investment Advisory Agreement and the approval of the New Investment Advisory Agreement with PanAgora Asset Management ("PanAgora"), the Trustees considered the following additional factors: (1) PanAgora underperformed the peer universe median for the one- and two-year periods ended March 31, 2008; (2) the Fund only has two years of performance data and it is reasonable to permit the subadvisor to continue to manage the Fund to appropriately assess performance; and (3) the Manager's recommendation to continue to retain the subadvisor. Based on these and other considerations, the Trustees concluded that the fees paid to the Manager and the subadvisor under the Agreements are fair and reasonable, determined that the Small Cap Value Opportunity Fund and its shareholders would benefit from the Manager's and subadvisor's continued management of the Fund, approved the renewal of the Current Agreement and Current Investment Advisory Agreement and approved the New Agreement and New Investment Advisory Agreement with respect to the Small Cap Value Opportunity Fund. 129 RESULTS OF SHAREHOLDER MEETING (Unaudited) A special meeting of shareholders of each of the portfolios of the American Beacon Funds (the "Trust") was held on August 22, 2008. The shareholders of the Balanced, Emerging Markets, Enhanced Income, High Yield Bond, Intermediate Bond, Short-Term Bond, Large Cap Growth, Small Cap Value Opportunity and Mid-Cap Value Funds (the "Funds") approved a new investment management agreement between American Beacon Advisors, Inc. and the Funds. This proposal required a majority of shareholders of each Fund to achieve a quorum. The following are the results of the shareholder votes for this proposal: FUND FOR AGAINST ABSTAIN NON-VOTING ---- ---------------- ------------ ------------ ------------- Mid-Cap Value 54,196,976.73 39,547.38 66,994.80 7,753,931.46 Balanced 817,348,398.34 318,946.97 714,168.19 58,089,239.09 Emerging Markets 173,546,497.25 9,350.50 329,446.10 6,351,160.92 Enhanced Income 131,472,046.68 -- -- 1,117,281.25 High Yield Bond 121,620,671.08 1,059,361.20 1,312,096.58 22,276,310.46 Intermediate Bond 153,203,480.55 -- 11,648.24 5,760,779.16 Large Cap Growth 84,026,829.46 -- -- -- Short-Term Bond 92,926,803.91 17,283.48 25,143.41 4,447,423.65 Small Cap Value Opportunity 5,258,529.22 -- -- 61,636.92 A special meeting of the shareholders of the American Beacon Funds (the "Trust") was held on August 22, 2008. The shareholders of the Trust approved the re-election of five of the current Trustees to the Board of the American Beacon Trust and to elect three additional Trustees to the Board. This proposal required a majority of the shareholders of the Trust to vote to achieve a quorum. The following are the results of the election of each Trustee: ALAN D. FELD Affirmative....... 12,634,553,751.62 Withhold.......... 519,818,259.90 W. HUMPHREY BOGART Affirmative....... 12,999,746,162.82 Withhold.......... 154,625,848.70 BRENDA A. CLINE Affirmative....... 13,009,050,779.42 Withhold.......... 145,321,232.10 RICHARD A. MASSMAN Affirmative....... 13,004,756,096.42 Withhold.......... 149,615,915.10 R. GERALD TURNER Affirmative....... 13,004,259,224.92 Withhold.......... 150,112,786.60 THOMAS M. DUNNING Affirmative....... 13,003,350,236.48 Withhold.......... 151,021,775.04 EUGENE J. DUFFY Affirmative....... 12,985,296,316.39 Withhold.......... 169,075,695.13 PAUL J. ZUCCONI Affirmative....... 12,985,296,316.39 Withhold.......... 169,075,695.13 130 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* Alan D. Feld** (71) Trustee since 1996 Sole Shareholder of a professional corporation which is a Partner in the law firm of Akin, Gump, Strauss, Hauer & Feld, LLP (1960-Present); Director, Clear Channel Communications (1984-Present); Trustee, CenterPoint Properties (1994-2006); Member, Board of Trustees, Southern Methodist University; Member, Board of Visitors, M.D. Anderson Hospital; Board of Visitors, Zale/Lipshy Hospital. NON-INTERESTED TRUSTEES Term Lifetime of Trust until removal, resignation or retirement* W. Humphrey Bogart (64) Trustee since 2004 Board Member, Baylor University Medical Center Foundation (1992-2004); Consultant, New River Canada Ltd. (mutual fund servicing company) (1998-2003); 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). Brenda A. Cline (47) 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 (1999-2007). Eugene J. Duffy (54) Trustee since 2008 Principal and Executive Vice President, Paradigm Asset Management (1994-Present); Director, Sunrise Bank of Atlanta (2008-Present); Chairman, Special Contributions Fund Board of Trustees, National Association for the Advancement of Colored People (2007-Present); Trustee, National Association for the Advancement of Colored People (2000-Present); Board of Visitors, Emory University (2006-Present); Trustee, Atlanta Botanical Garden (2006-Present); Board Member, Willie L. Brown Jr. Institute on Politics and Public Service (2001-Present); Chair, National Association of Securities Professionals (2000-2002); Deputy Chief Administrative Officer, City of Atlanta (1985-1990). Thomas M. Dunning (65) Trustee since 2008 Consultant, (2008-Present); Chairman (2003-2008) and Chief Executive Officer (2003-2007), Lockton Dunning Benefits (consulting firm in employee benefits); Director, Oncor Electric Delivery Company LLC; Advisory Director, Comerica Texas; Immediate Past Chairman and Board Member, Dallas Citizens Council; Director, Baylor Health Care System Foundation; State Vice Chair, State Fair of Texas; Board Member, Southwestern Medical Foundation. 131 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 - ------------------------ ------------------- ------------------------------------------------------------------------------------ Richard A. Massman (65) Trustee since 2004 Senior Vice President and General Counsel, Hunt Consolidated, Inc. (holding company Chairman since 2008 engaged in oil and gas exploration and production, refining, real estate, farming, ranching and venture capital activities) (1994-Present). Chairman (2007-Present) and Director (2005-Present), The Dallas Opera Foundation; Chairman (2006-Present) and Director (2005-Present), Temple Emanu-El Foundation; Trustee, Presbyterian Hospital Foundation (2006-Present). R. Gerald Turner (62) 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 Worldwide Dallas, Texas 75275 Inc. (chemical manufacturing) (2003-Present); Director, First Broadcasting Investment Partners, LLC (2003-2007); Member, Salvation Army of Dallas Board of Directors; Member, Methodist Hospital Advisory Board; Co-Chair, Knight Commission on Intercollegiate Athletics. Paul J. Zucconi,CPA (67) Trustee since 2008 Director, Affirmative Insurance Holdings, Inc. (producer of nonstandard automobile insurance) (2004-present); Director, Titanium Metals Corporation (producer of titanium melted and mill products and sponge) (2002- present); Director, Torchmark Corporation (life and health insurance products) (2002-present); Director, National Kidney Foundation of North Texas (2003-Present); Director, Dallas Chapter of National Association of Corporate Directors (2004-Present); Partner, KPMG (1976-2001). OFFICERS Term One Year William F. Quinn** (60) President from Chairman (2006-Present) and CEO (2006-2007), President (1986-2006) and Director 1987 to 2007 (2003-Present), American Beacon Advisors, Inc.; Chairman (1989-2003) and Director and 2008 to Present (1979-1989, 2003-Present), American Airlines Federal Credit Union; Director, Executive Vice Crescent Real Estate Equities, Inc.(1994-2007); Director, Pritchard, Hubble & Herr, President from LLC (investment advisor) (2001-2006); Director of Investment Committee, Southern 2007 to 2008 Methodist University Endowment Fund (1996-Present); Member, Southern Methodist Trustee from University Cox School of Business Advisory Board (1999-2002); Member, New York 1987 to 2008 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 (1995-2008); Trustee, American Beacon Select Funds (1999-2008); Trustee, American Beacon Master Trust (1995-2008). Rosemary K. Behan (49) VP, Secretary and Vice President, Legal and Compliance, American Beacon Advisors, Inc. Chief Legal (2006-Present); Assistant General Counsel, First Command Financial Planning, Inc. Officer since 2006 (2004-2006); Enforcement Attorney (2002-2004) and Branch Chief (2000-2002), Securities and Exchange Commission. Brian E. Brett (48) 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 (42) 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 (54) VP since 1989 Vice President, Fixed Income Investments, American Beacon Advisors, Inc. (1988-Present). 132 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 - ------------------------ ------------------- ------------------------------------------------------------------------------------ Rebecca L. Harris (41) Treasurer since Vice President, Finance, American Beacon Advisors, Inc. (1995-Present). 1995 Christina E. Sears (37) Chief Compliance Chief Compliance Officer, American Beacon Advisors, Inc. (2004-Present); Senior Officer since 2004 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, provided, however, that the Board may determine to grant one or more annual exemptions to this requirement. ** Mr. Feld is deemed to be an "interested person" of the Trusts, as defined by the 1940 Act. Mr. Feld's law firm of Akin, Gump, Strauss, Hauer & Feld LLP has provided legal services within the past two fiscal years to the Manager and one or more of the Trust's and Master Trust's sub-advisors. 133 (AMERICAN BEACON FUNDS(SM) 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 Class(SM) 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 A description of the policies and procedures provided in each semi-annual and annual the Fund uses to determine how to vote report, the Fund files a complete schedule of proxies relating to portfolio securities is its portfolio holdings with the Securities available in the Fund's Statement of and Exchange Commission ("SEC") on Form N-Q Additional Information, is available free of as of the first and third fiscal quarters. charge on the Fund's website The Fund's Forms N-Q are available on the (www.americanbeaconfunds.com) and by calling SEC's website at www.sec.gov. The Forms N-Q 1-800-967-9009 or by accessing the SEC's may also be reviewed and copied at the SEC's website at www.sec.gov. The Fund's proxy Public Reference Room, 450 Fifth Street, NW, voting record for the most recent year ended Washington, DC 20549. Information regarding June 30 is filed annually with the SEC on the operation of the SEC's Public Reference Form N-PX. The Fund's Forms N-PX are Room may be obtained by calling available on the SEC's website at www.sec.gov. 1-800-SEC-0330. A complete schedule of the The Fund's proxy voting record may also Fund's portfolio holdings is also available be obtained by calling 1-800-967-9009. 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 TRUST BOSTON FINANCIAL DATA PUBLIC ACCOUNTING FIRM FORESIDE FUND SERVICES Boston, Massachusetts SERVICES ERNST & YOUNG LLP Portland, Maine Kansas City, Missouri 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, 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. AR 10/08 64674 GUIDANCE | VISION | EXPERIENCE (AMERICAN BEACON FUNDS(SM) LOGO) ANNUAL REPORT (GRAPHIC) October 31, 2008 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 ................................... 21 Schedule of Investments ........................................... 71 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, 2008 (PHOTO OF WILLIAM F. QUINN) FELLOW SHAREHOLDERS, Enclosed is the American Beacon International Equity Fund Annual Report for the twelve months ended October 31, 2008. During the past twelve months, we experienced unprecedented market turmoil in all asset classes. Initially, the sub-prime mortgage crisis and rising oil and food prices contributed to an economic slowdown that culminated in a market-wide credit crisis and squeeze on liquidity. The situation reached once-in-a-lifetime crisis proportions in mid-September with the bankruptcy of Lehman Brothers, the resulting losses incurred by investors in money market funds, and the unprecedented government intervention in the financial system. From September 15th to October 31st, the Dow Jones Industrial Average declined almost 20% on the threat of a global recession. The International Equity Fund-Institutional Class reported a total return of -44.81% for the one-year period. The MSCI EAFE Index reported a return of - -46.62% for the same period. During these times, it is important to remember that the American Beacon International Equity Fund's investment strategy is based on long-term investing. Short-term pain can lead to long-term gains as we saw when the positive performance by our value-oriented Funds followed the burst of the technology bubble earlier this decade. We believe the Funds' fundamental value investment philosophies and lower than average expense ratios will continue to serve the Funds well over the longer term. Please review the enclosed market overview, portfolio listings, and detailed financial data. As always, we welcome the opportunity to serve your financial needs. To obtain further details about the American Beacon Funds family or to access your account information, please visit our website at www.americanbeaconfunds.com. Thank you for your continued confidence in the American Beacon Funds. Sincerely, /s/ William F. Quinn William F. Quinn President American Beacon Funds 1 INTERNATIONAL EQUITY MARKET OVERVIEW OCTOBER 31, 2008 (UNAUDITED) During the last quarter of 2007, global equity markets bid farewell to a five-year bull market resulting from recessionary concerns in the U.S. and a significant slowdown across the developed market economies as the MSCI EAFE Index fell 46.6% for the twelve-month period ending October 31, 2008. In fact, global stock markets started 2008 with their worst quarterly performance in nearly five years. The credit crisis deepened on March 17th of this year when the Federal Reserve ("Fed") startled the global equity markets with an announced bailout of Bear Stearns, the fifth largest investment bank in the U.S. to avert a bankruptcy. For the balance of the year, market participants witnessed a series of truly historic events: the U.S. government takeover of Fannie Mae and Freddie Mac, the non-takeover and subsequent bankruptcy of Lehman Brothers, the shotgun merger of Merrill Lynch with Bank of America, the bailout of the insurance giant AIG, and the end of the independent investment bank business model as Goldman Sachs and Morgan Stanley decided to reorganize as bank holding companies. In three short months toward the end of the period, we witnessed the vaporization of most of what was the U.S. financial sector. It was not only a U.S. phenomenon; we are only beginning to see the early cracks in the U.K. and European financials. International markets remained under pressure for the balance of the year from the financial meltdown hitting the U.S., U.K., and most of continental Europe. Inter-bank lending froze, cutting off critical funding to the corporate commercial paper market. Europe followed the U.S. in launching an unprecedented bank bailout and coordinated rate cut. U.K. banks were heavily hit, forcing the government to inject capital and guarantee bank debt. Spain and Germany also stepped in to support the financial sector. The spectacle sent most commodities reeling, aside from gold, which was viewed as a safe haven. However, the correction was more severe than anticipated as the credit crisis caused economists to slash world growth forecasts. Japan's banks remained the more solvent and stepped in to pick up distressed U.S. assets. The yen also attracted investors leery of the U.S. dollar testing new lows. Japan's ongoing reliance on external demand, however, has not helped equity markets. 2 PERFORMANCE OVERVIEW AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) OCTOBER 31, 2008 (UNAUDITED) The Institutional Class of the International Equity Fund returned -44.81% for the twelve months ended October 31, 2008. The Fund outperformed the MSCI EAFE Index (the "Index") return of -46.62% and the Lipper International Funds Index return of -46.77% for the period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 10/31/98 THROUGH 10/31/08 (PERFORMANCE GRAPH) ANNUALIZED TOTAL RETURNS VALUE OF PERIODS ENDED 10/31/08 $10,000 --------------------------- 10/31/98- 1 YEAR 5 YEARS 10 YEARS 10/31/08 ------ ------- -------- --------- Institutional Class(1, 4)............... -44.81% 3.80% 3.82% $14,547 PlanAhead Class(1, 4)................... -44.96% 3.53% 3.59% 14,232 Service Class(1, 2, 4).................. -45.10% 3.26% 3.43% 14,013 AMR Class(1, 4) ........................ -44.65% 4.09% 4.09% 14,928 Lipper Int'l. Funds Index(3)............ -46.77% 3.94% 2.90% 13,306 MSCI EAFE Index (3)..................... -46.62% 3.60% 1.69% 11,799 (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 ten-year period represents the total returns achieved by the PlanAhead Class from 10/31/98 up to 5/1/03, the inception date of the Service Class, and the returns of the Service Class since its inception. Expenses of the Service Class are higher than those of the PlanAhead Class. As a result, total returns shown may be higher than they would have been had the Service Class been in existence since 10/31/98. 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. One cannot directly invest in an index. The MSCI EAFE Index is a market capitalization weighted index of international stock performance composed of equities from developed markets excluding the U.S. and Canada. (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 0.68%, 0.93%, 1.15% and 0.42%, 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 by 1.81% over the twelve-month period due to stock selection, while country allocation detracted value. Stock selection had a significantly positive impact overall, specifically in France, the United Kingdom, and Switzerland, while stock selections in Norway, Germany, and Italy detracted from performance. The Fund benefited from French companies Sanofi-Aventis (down 25.3%), France Telecom (down 25.4%), and Total (down 30.0%). In the United Kingdom, GlaxoSmithKline (down 21.0%), BP (down 34.0%), British American Tobacco (down 25.0%) and Unilever (down 31.1%) contributed to the relative outperformance, as did Swiss health care company Novartis (down 3.0%). Investments in Aker Solutions (down 84.0%) in Norway, Deutsche Post (down 62.1%) in Germany and Unicredit (down 70.4%) in Italy hurt performance. Country allocation detracted from relative performance, primarily due to underweighting Japan (down 37.5%), overweighting Ireland (down 68.9%), and investing in South Korea (down 60.0%). Ireland was the second-worst performing market in the Index, while Japan was the second-best performing market in the Index over the twelve-month period. Underweighting Australia (down 55.2%) aided performance for the period. 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, 2008 (UNAUDITED) TOP TEN HOLDINGS % OF NET ASSETS ---------- Vodafone Group plc.................. 2.7% Sanofi-Aventis...................... 2.6% BP plc.............................. 2.1% Total S.A........................... 2.1% Royal Dutch Shell plc............... 1.9% GlaxoSmithKline plc................. 1.8% HSBC Holdings plc................... 1.8% BAE Systems plc..................... 1.7% Siemens AG.......................... 1.7% E.ON AG............................. 1.7% SECTOR ALLOCATION % OF EQUITIES -------- Financials.......................... 19.6% Consumer Discretionary.............. 13.0% Industrials......................... 12.9% Energy.............................. 11.0% Telecommunications Services......... 10.2% Health Care......................... 9.5% Consumer Staples.................... 9.3% Information Technology.............. 5.4% Materials........................... 4.6% Utilities........................... 4.5% 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, 2008 (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, 2008 through October 31, 2008. 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 Value Value During Period* 5/1/08 10/31/08 5/1/08-10/31/08 --------- --------- --------------- INSTITUTIONAL CLASS Actual $1,000.00 $598.99 $2.69 Hypothetical $1,000.00 $1,021.77 $3.40 (5% return before expenses) PLANAHEAD CLASS Actual $1,000.00 $598.15 $3.70 Hypothetical $1,000.00 $1,020.51 $4.67 (5% return before expenses) SERVICE CLASS Actual $1,000.00 $597.03 $4.98 Hypothetical $1,000.00 $1,018.90 $6.29 (5% return before expenses) AMR CLASS Actual $1,000.00 $599.81 $ 9.49 Hypothetical $1,000.00 $1,013.27 $11.94 (5% return before expenses) * Expenses are equal to the Fund's annualized expense ratios for the six-month period of 0.67%, 0.92%, 1.24% and 2.36% 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 (366) 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, 2008, 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, 2008, 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 at October 31, 2008, 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 23, 2008 6 AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) AUSTRALIA - 0.78% COMMON STOCKS - 0.78% Insurance Australia Group Ltd. ................ 2,000,831 $ 5,074 National Australia Bank Ltd. + ................ 323,483 5,249 ----------- TOTAL AUSTRALIA 10,323 ----------- AUSTRIA - 0.19% COMMON STOCKS - 0.19% Telekom Austria AG ............................ 202,700 2,516 ----------- BELGIUM - 0.53% COMMON STOCKS - 0.53% Delhaize Group ................................ 125,190 7,001 ----------- CANADA - 1.48% COMMON STOCKS - 1.48% Jean Coutu Group PJC, Inc. .................... 350,300 2,119 Precision Drilling Trust + .................... 282,880 3,051 TELUS Corp. ................................... 424,093 14,394 ----------- TOTAL CANADA 19,564 ----------- FINLAND - 1.21% COMMON STOCKS - 1.21% Nokia Oyj ..................................... 728,185 11,107 UPM-Kymmene Oyj ............................... 348,330 4,935 ----------- TOTAL FINLAND 16,042 ----------- FRANCE - 12.93% COMMON STOCKS - 12.93% Accor S.A. .................................... 50,500 1,968 AXA S.A. ...................................... 580,943 11,195 BNP Paribas ................................... 117,268 8,513 Bouygues S.A. ................................. 72,700 3,097 Carrefour S.A. ................................ 192,060 8,116 Compagnie Generale des Etablissements Michelin ................................... 90,220 4,647 Credit Agricole S.A. .......................... 530,773 7,739 EDF ........................................... 149,208 8,940 France Telecom S.A. ++ ........................ 724,571 18,284 GDF Suez ...................................... 169,100 7,530 Groupe Danone ................................. 46,900 2,601 Sanofi-Aventis S.A. ++ ........................ 549,422 34,582 Technip S.A. .................................. 289,013 8,641 Thomson ## .................................... 341,240 480 Total S.A. + .................................. 505,976 27,791 VINCI S.A. + .................................. 291,935 10,502 Vivendi S.A. .................................. 246,510 6,448 ----------- TOTAL FRANCE 171,074 ----------- SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) GERMANY - 8.24% COMMON STOCKS - 7.85% adidas AG ..................................... 55,200 $ 1,931 Allianz SE .................................... 29,702 2,224 Bayer AG ...................................... 77,972 4,279 Bayerische Motoren Werke AG ................... 178,770 4,628 Celesio AG .................................... 245,480 7,288 Daimler AG .................................... 78,100 2,697 Deutsche Post AG .............................. 1,157,137 12,874 E.ON AG ....................................... 595,443 22,726 Infineon Technologies AG ## ................... 646,190 2,047 Linde AG ...................................... 54,335 4,499 Merck KGAA .................................... 57,150 5,060 Muenchener Rueckversicherungs-Gesellschaft AG ......................................... 45,297 5,926 SAP AG ........................................ 140,910 5,010 Siemens AG .................................... 380,292 22,753 ----------- TOTAL COMMON STOCKS 103,942 ----------- PREFERRED STOCKS - 0.39% Henkel AG & Co. KGaA .......................... 177,139 5,127 ----------- TOTAL GERMANY 109,069 ----------- GREECE - 1.18% COMMON STOCKS - 1.18% National Bank of Greece S.A. .................. 99,244 2,211 OPAP S.A. ..................................... 319,870 7,009 Public Power Corp. S.A. ....................... 509,620 6,341 ----------- TOTAL GREECE 15,561 ----------- HONG KONG/CHINA - 1.29% COMMON STOCKS - 1.29% Cheung Kong Holdings Ltd. ..................... 472,500 4,601 Hutchison Whampoa Ltd. ........................ 187,000 1,024 Swire Pacific Ltd. ............................ 622,100 4,341 Yue Yuen Industrial Holdings Ltd. ++ .......... 3,597,167 7,123 ----------- TOTAL HONG KONG/CHINA 17,089 ----------- IRELAND - 1.45% COMMON STOCKS - 1.45% Allied Irish Banks plc ........................ 723,256 3,982 C&C Group plc ................................. 1,173,494 1,666 CRH plc ....................................... 376,689 8,305 CRH plc, ADR .................................. 179,025 3,993 Smurfit Kappa Group plc ++ .................... 688,413 1,232 ----------- TOTAL IRELAND 19,178 ----------- See accompanying notes 7 AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) ITALY - 3.00% COMMON STOCKS - 3.00% Eni S.p.A. .................................... 577,716 $ 13,766 Intesa Sanpaolo S.p.A ......................... 588,622 2,154 Mediaset S.p.A. + ............................. 1,491,676 8,098 Telecom Italia S.p.A. ......................... 3,044,870 3,505 UniCredit S.p.A. .............................. 4,990,079 12,198 ----------- TOTAL ITALY 39,721 ----------- JAPAN - 12.84% COMMON STOCKS - 12.84% Aeon Co. Ltd. + ............................... 769,200 7,340 Canon, Inc. ................................... 194,200 6,683 Canon, Inc., ADR .............................. 4,812 165 Chiyoda Corp. + ............................... 513,000 2,927 Chuo Mitsui Trust Holdings, Inc. .............. 1,093,400 4,301 Daito Trust Construction Co. Ltd. ............. 143,200 6,016 East Japan Railway Co. ........................ 582 4,136 Fanuc Ltd. .................................... 110,500 7,500 FUJIFILM Holdings Corp. ....................... 107,900 2,390 Haseko Corp. + ................................ 4,297,018 3,840 Honda Motor Co. Ltd. .......................... 359,000 8,916 HOYA Corp. .................................... 139,300 2,582 INPEX Corp. ................................... 378 2,198 Japan Tobacco, Inc. ........................... 1,490 5,291 JS Group Corp. ................................ 345,400 4,597 KDDI Corp. .................................... 676 4,039 Konica Minolta Holdings, Inc. + ............... 471,000 3,066 Mitsubishi Corp. .............................. 145,200 2,410 Mitsubishi Gas Chemical Co., Inc. ............. 902,000 3,388 Mitsubishi UFJ Financial Group, Inc. + ........ 1,198,900 7,383 NGK Spark Plug Co. Ltd. + ..................... 809,000 7,712 Nidec Corp. + ................................. 49,000 2,521 Nintendo Co. Ltd. ............................. 11,400 3,595 Olympus Corp. + ............................... 126,800 2,422 Sankyo Co. Ltd. ............................... 131,500 5,941 Secom Co. Ltd. ................................ 67,900 2,628 SMC Corp. ..................................... 9,700 926 Sony Corp. .................................... 102,302 2,340 Sony Financial Holdings, Inc. ++ .............. 1,915 6,310 Sumitomo Mitsui Financial Group, Inc. ......... 1,191 4,835 T&D Holdings, Inc. ............................ 56,000 2,155 Takeda Pharmaceutical Co. Ltd. ................ 186,800 9,414 THK Co. Ltd. + ................................ 579,600 7,888 Tokyo Electron Ltd. ........................... 103,100 3,408 Tokyo Gas Co. Ltd. ............................ 914,000 3,981 Toyota Motor Corp. ............................ 211,700 8,346 Yamaha Motor Co. Ltd. ......................... 574,300 6,307 ----------- TOTAL JAPAN 169,897 ----------- SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) NETHERLANDS - 5.48% COMMON STOCKS - 5.48% Akzo Nobel N.V. + ............................. 212,509 $ 8,843 ASML Holding N.V. ............................. 283,200 4,942 Heineken N.V. ................................. 67,790 2,288 ING Groep N.V. ................................ 814,855 7,534 Koninklijke Philips Electronics NV ............ 741,901 13,697 Randstad Holding N.V. + ....................... 55,060 1,070 Reed Elsevier N.V. ............................ 546,545 7,313 SBM Offshore N.V. + ........................... 258,280 4,540 TNT N.V. ...................................... 432,526 9,055 Unilever N.V. + ............................... 550,154 13,263 ----------- TOTAL NETHERLANDS 72,545 ----------- NORWAY - 0.70% COMMON STOCKS - 0.70% Aker Solutions ASA ............................ 474,650 2,587 Stolt-Nielsen S.A. + .......................... 120,384 1,248 Telenor ASA ................................... 918,940 5,473 ----------- TOTAL NORWAY 9,308 ----------- PORTUGAL - 0.37% COMMON STOCKS - 0.37% Portugal Telecom, SGPS, S.A. .................. 747,760 4,946 ----------- SINGAPORE - 1.87% COMMON STOCKS - 1.87% DBS Group Holdings Ltd. ....................... 1,565,455 11,985 Flextronics International Ltd. ## ............. 848,510 3,547 Singapore Telecommunications Ltd. ............. 5,502,000 9,257 ----------- TOTAL SINGAPORE 24,789 ----------- SOUTH KOREA - 1.57% COMMON STOCKS - 1.57% Hyundai Heavy Industries ...................... 53,884 7,048 KB Financial Group, Inc., ADR ## + ............ 132,710 3,266 Korea Electric Power Corp. .................... 81,980 1,640 Samsung Electronics Co. Ltd. .................. 15,525 6,488 Samsung Electronics Co. Ltd., GDR ++ .......... 11,100 2,284 ----------- TOTAL SOUTH KOREA 20,726 ----------- SPAIN - 2.34% COMMON STOCKS - 2.34% Banco Popular Espanol S.A. .................... 387,311 3,540 Banco Santander S.A. .......................... 329,542 3,564 Banco Santander S.A., GDR ..................... 400,828 4,332 Repsol YPF S.A. ............................... 257,990 4,920 See accompanying notes 8 AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) Telefonica S.A. ............................... 791,496 $ 14,640 ----------- TOTAL SPAIN 30,996 ----------- SWEDEN - 2.29% COMMON STOCKS - 2.29% Atlas Copco AB + .............................. 1,330,037 11,117 Nordea Bank AB + .............................. 582,370 4,812 Securitas AB .................................. 193,530 1,863 Telefonaktiebolaget LM Ericsson ............... 1,774,560 12,514 ----------- TOTAL SWEDEN 30,306 ----------- SWITZERLAND - 7.30% COMMON STOCKS - 7.30% Adecco S.A. ................................... 130,550 4,564 Credit Suisse Group AG ........................ 95,611 3,649 Lonza Group AG ................................ 63,420 5,279 Nestle S.A. ................................... 385,700 15,034 Novartis AG ................................... 380,220 19,235 Roche Holding AG .............................. 56,100 8,587 Swiss Reinsurance ............................. 276,678 11,527 Swisscom AG ................................... 11,000 3,364 UBS AG ## ..................................... 942,989 16,091 Zurich Financial Services AG .................. 45,729 9,250 ----------- TOTAL SWITZERLAND 96,580 ----------- UNITED KINGDOM - 20.72% COMMON STOCKS - 20.72% Anglo American plc ............................ 70,380 1,738 Aviva plc ..................................... 1,667,106 9,997 BAE Systems plc ............................... 4,059,043 22,804 BG Group plc .................................. 163,700 2,408 BP plc ........................................ 3,377,386 27,911 British American Tobacco plc .................. 432,455 11,876 British Sky Broadcasting Group plc + .......... 863,040 5,262 Cadbury plc ................................... 499,764 4,592 Centrica plc .................................. 1,242,280 6,107 Compass Group plc ............................. 735,520 3,441 Debenhams plc + ............................... 364,089 224 Diageo plc + .................................. 242,543 3,715 GlaxoSmithKline plc ........................... 1,254,048 24,173 HSBC Holdings plc ............................. 1,941,321 23,481 Imperial Tobacco Group plc .................... 229,110 6,161 Kingfisher plc + .............................. 1,256,400 2,308 Lloyds TSB Group plc .......................... 53,510 174 National Grid plc ............................. 258,281 2,933 Old Mutual plc ................................ 2,510,769 2,042 Pearson plc + ................................. 534,980 5,244 Prudential plc ................................ 634,200 3,256 Reckitt Benckiser Group plc ................... 65,800 2,766 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) Rio Tinto plc 93,300 $ 4,351 Rolls-Royce Group plc C Shares Entitlement Jan. 09 ## # ............................... 58,552,208 94 Rolls-Royce Group plc ## ...................... 1,023,640 5,429 Royal Bank of Scotland Group plc .............. 3,968,239 4,377 Royal Dutch Shell plc, A Shares ............... 325,118 8,959 Royal Dutch Shell plc, B Shares ............... 608,913 16,275 Smiths Group plc + ............................ 275,620 3,545 Standard Chartered plc + ...................... 167,390 2,779 Tesco plc + ................................... 411,700 2,250 Unilever plc .................................. 773,756 17,445 Vodafone Group plc ............................ 18,357,390 35,359 Yell Group plc + .............................. 765,760 759 ----------- TOTAL UNITED KINGDOM 274,235 ----------- UNITED STATES - 0.32% COMMON STOCKS - 0.32% Invesco Ltd. .................................. 160,415 2,392 News Corp. .................................... 172,040 1,830 ----------- TOTAL UNITED STATES 4,222 ----------- SHORT TERM INVESTMENTS - 11.21% American Beacon Money Market Select Fund * .................................... 26,918,283 26,918 Columbia Treasury Reserves Fund ............... 121,503,771 121,504 ----------- TOTAL SHORT TERM INVESTMENTS 148,422 ----------- SECURITIES LENDING COLLATERAL - 8.78% JP Morgan U.S. Government Money Market Fund ....................................... 24,295,960 24,296 Securities Liquidating AB Trust ............... 67,595,680 67,596 Wells Fargo Advantage Government Money Market Fund ................................ 24,295,960 24,296 ----------- TOTAL SECURITIES LENDING COLLATERAL 116,188 ----------- TOTAL INVESTMENTS 108.07% - (COST $1,804,483) 1,430,298 LIABILITIES, NET OF OTHER ASSETS - (8.07%) (106,782) ----------- TOTAL NET ASSETS - 100.00% $ 1,323,516 =========== See accompanying notes 9 AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS October 31, 2008 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, 2008. ++ 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 $69,815 or 5.27% of net assets. The Fund has no right to demand registration of these securities. # Valued at fair value pursuant to procedures approved by the Board of Trustees. * The Fund 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 ........ 73 Dec 2008 $ 4,860 $ (1,083) Canada S&PCDA 60 Index ..... 85 Dec 2008 8,265 (2,200) France CAC 40 Index ........ 217 Dec 2008 9,539 (1,925) Germany DAX Index .......... 50 Dec 2008 8,028 (1,566) Hang Seng Index ............ 19 Nov 2008 1,707 221 Italy MIB 30 Index ......... 23 Dec 2008 3,094 (888) Netherlands 200 AEX Index .. 33 Nov 2008 2,230 (62) Spain IBEX 35 Index ........ 31 Nov 2008 3,538 (412) Sweden OMX Index ........... 207 Nov 2008 1,684 (142) Tokyo FE TOPIX Index ....... 226 Dec 2008 19,624 (5,228) UK FTSE 100 Index .......... 278 Dec 2008 19,667 (3,508) ------- -------- $82,236 $(16,793) ======= ======== See accompanying notes 10 AMERICAN BEACON INTERNATIONAL EQUITY FUND SCHEDULE OF INVESTMENTS October 31, 2008 FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS (DOLLARS IN THOUSANDS) SETTLEMENT MARKET UNREALIZED DATE VALUE GAIN/(LOSS) ---------- -------- -------------- CONTRACTS TO DELIVER 7,750 Australian Dollar ......... 12/12/2008 $ 5,129 $ 823 10,309 Canadian Dollar ........... 12/12/2008 8,552 977 22,309 Euro Currency ............. 12/12/2008 28,396 2,755 2,235,028 Japanese Yen .............. 12/12/2008 22,733 (1,264) 13,248 Pound Sterling ............ 12/12/2008 21,266 2,043 16,627 Swedish Krona ............. 12/12/2008 2,140 260 7,159 Swiss Franc ............... 12/12/2008 6,178 194 TOTAL CONTRACTS TO DELIVER -------- -------- (RECEIVABLE AMOUNT $100,182) $ 94,394 $ 5,788 -------- -------- CONTRACTS TO RECEIVE 14,749 Australian Dollar ......... 12/12/2008 $ 9,761 $ (2,428) 18,731 Canadian Dollar ........... 12/12/2008 15,539 (2,369) 39,869 Euro Currency ............. 12/12/2008 50,747 (7,168) 4,278,677 Japanese Yen .............. 12/12/2008 43,519 2,820 23,401 Pound Sterling ............ 12/12/2008 37,563 (4,886) 28,859 Swedish Krona ............. 12/12/2008 3,715 (667) 15,804 Swiss Franc ............... 12/12/2008 13,637 (883) TOTAL CONTRACTS TO RECEIVE -------- -------- (PAYABLE AMOUNT $190,062) $174,481 $(15,581) -------- -------- NET CURRENCY FLUCTUATION $ (9,793) ======== SECTOR DIVERSIFICATION Percent of Net Assets ---------- Consumer Discretionary ..................................... 11.40% Consumer Staples ........................................... 8.20% Energy ..................................................... 9.67% Financials ................................................. 17.26% Health Care ................................................ 8.37% Industrials ................................................ 11.37% Information Technology ..................................... 4.78% Materials .................................................. 4.06% Telecommunication Services ................................. 8.98% Utilities .................................................. 3.98% Short Term Investments ..................................... 20.00% Liabilities, Net of Other Assets ........................... (8.07)% ------ 100.00% ====== See accompanying notes 11 AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2008 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS: Investments in unaffiliated securities, at value (A C) ........ $ 1,403,380 Investments in affiliated securities, at value (B) ............ 26,918 Foreign currency, at value (D) ................................ 1,805 Deposit with brokers for futures contracts .................... 18,055 Receivable for investments sold ............................... 7,383 Dividends and interest receivable ............................. 3,786 Receivable for fund shares sold ............................... 2,551 Receivable for tax reclaims ................................... 350 Prepaid expenses .............................................. 66 ----------- TOTAL ASSETS ............................................... 1,464,294 ----------- LIABILITIES: Payable for investments purchased ............................. 2,382 Payable upon return of securities loaned ...................... 116,188 Payable for fund shares redeemed .............................. 9,595 Payable for variation margin on open futures contracts ........ 376 Management and investment advisory fees payable (Note 2) ...... 1,696 Administrative service and service fees payable ............... 393 Net unrealized depreciation on foreign currency contracts ..... 9,793 Other liabilities ............................................. 355 ----------- TOTAL LIABILITIES .......................................... 140,778 ----------- NET ASSETS ....................................................... $1,323,516 =========== ANALYSIS OF NET ASSETS: Paid-in-capital ............................................... 1,639,461 Undistributed net investment income ........................... 70,764 Accumulated net realized gain ................................. 16,087 Unrealized depreciation of investments, futures contracts, and foreign currency ....................................... (402,796) ----------- NET ASSETS ....................................................... $1,323,516 =========== SHARES OUTSTANDING (NO PAR VALUE): Institutional Class ........................................... 43,205,488 =========== PlanAhead Class ............................................... 32,922,805 =========== Service Class ................................................. 120,172 =========== AMR Class ..................................................... 24,768,412 =========== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE: Institutional Class ........................................... $ 13.13 =========== PlanAhead Class ............................................... $ 12.95 =========== Service Class ................................................. $ 12.86 =========== AMR Class ..................................................... $ 13.25 =========== - ---------- (A) Cost of investments in unaffiliated securities ............... $ 1,777,565 (B) Cost of investments in affiliated securities ................. $ 26,918 (C) Market value of securities on loan ........................... $ 109,821 (D) Cost of foreign currency ..................................... $ 1,800 See accompanying notes 12 AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 2008 (IN THOUSANDS) INVESTMENT INCOME: Dividend income from unaffiliated securities (net of foreign taxes)* .................................... $ 82,911 Dividend income from affiliated securities .................... 833 Interest income ............................................... 1,084 Income derived from securities lending, net ................... 3,481 ----------- TOTAL INVESTMENT INCOME ................................. 88,309 ----------- EXPENSES: Management and investment advisory fees (Note 2) .............. 8,364 Administrative service fees (Note 2): Institutional Class ........................................ 2,862 PlanAhead Class ............................................ 1,940 Service Class .............................................. 8 AMR Class .................................................. 25 Transfer agent fees: Institutional Class ........................................ 63 PlanAhead Class ............................................ 70 Service Class .............................................. 1 AMR Class .................................................. 20 Custody and fund accounting fees .............................. 892 Professional fees ............................................. 59 Registration fees and expenses ................................ 74 Service fees: PlanAhead Class (Note 2) ................................... 1,907 Service Class (Note 2) ..................................... 8 Distribution fees - Service Class (Note 2) .................... 8 Prospectus and shareholder reports ............................ 172 Other expenses ................................................ 237 ----------- TOTAL EXPENSES .......................................... 16,710 ----------- NET INVESTMENT INCOME ............................................ 71,599 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from: Investments ................................................ (72,684) Commission recapture (Note 1) .............................. 60 Foreign currency transactions .............................. 126,900 Futures contracts .......................................... (21,213) Change in net unrealized appreciation or depreciation of: Investments ................................................ (987,972) Foreign currency translations .............................. (322,358) Futures contracts .......................................... (19,451) ----------- NET LOSS ON INVESTMENTS ................................. (1,296,718) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............. $(1,225,119) =========== * Foreign taxes ............................................... $ 8,817 See accompanying notes 13 AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) STATEMENT OF CHANGES OF NET ASSETS (IN THOUSANDS) Year Ended Year Ended October 31, October 31, 2008 2007 ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income ................................... $ 71,599 $ 78,060 Net realized gain on investments, futures contracts, and foreign currency transactions .................... 33,063 314,273 Change in net unrealized appreciation or (depreciation) of investments, futures contracts, and foreign currency translations ................................ (1,329,781) 217,790 ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ........................................ (1,225,119) 610,123 ----------- ----------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class .................................. (40,937) (31,129) PlanAhead Class ...................................... (20,913) (14,581) Service Class ........................................ (105) (64) AMR Class ............................................ (18,454) (12,610) Net realized gain on investments: Institutional Class .................................. (155,609) (114,385) PlanAhead Class ...................................... (87,859) (59,491) Service Class ........................................ (482) (327) AMR Class ............................................ (63,681) (41,178) ----------- ----------- NET DISTRIBUTIONS TO SHAREHOLDERS ................. (388,040) (273,765) ----------- ----------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares ........................... 443,828 572,603 Reinvestment of dividends and distributions ............. 366,395 259,288 Cost of shares redeemed ................................. (1,148,081) (783,879) Redemption fees ......................................... 868 505 ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS ................................ (336,990) 48,517 ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS ...................... (1,950,149) 384,875 ----------- ----------- NET ASSETS: Beginning of period ..................................... 3,273,665 2,888,790 ----------- ----------- END OF PERIOD * ......................................... $ 1,323,516 $3,273,665 =========== =========== *Includes undistributed net investment income of ........... $ 70,764 $ 81,197 =========== =========== See accompanying notes 14 AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES American Beacon Funds (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, (the "Act"), as amended as a no load, diversified, open-end management investment company. These financial statements and notes to the financial statements relate to the American Beacon International Equity Fund (the "Fund"), a series of the Trust. Effective September 12, 2008, American Beacon Advisors, Inc. (the "Manager") became a wholly-owned subsidiary of Lighthouse Holdings, Inc., which is indirectly owned by investment funds affiliated with Pharos Capital Group, LLC and TPG Capital, L.P., two leading private equity firms. Prior to September 12, the Manager was a wholly-owned subsidiary of AMR Corporation ("AMR"), the parent company of American Airlines, Inc. ("American"). 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: - ------ ----------- INSTITUTIONAL CLASS Investors making an initial investment of $2 million PLANAHEAD CLASS General public and investors investing through an intermediary SERVICE CLASS Investors investing through an intermediary AMR CLASS Investors in the tax-exempt retirement and benefit plans of AMR Corporation and its affiliates Administrative service fees, service fees and distribution fees vary amongst the classes as described more fully in footnote 2. 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 Board of Trustees (the "Board"). 15 AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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. 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 16 AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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. Recently Issued Accounting Pronouncements 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, 2008, 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. In March 2008, FASB issued Statement on Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS 161"), which is effective for fiscal years and interim 17 AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 periods beginning after November 15, 2008. FAS 161 requires enhanced disclosures about derivative and hedging activities, including how such activities are accounted for and their effect on financial position, performance and cash flows. The Manager is currently evaluating the impact the adoption of FAS 161 will have on the Fund's financial statements and related disclosures. 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 amounts paid by the Manager to sub-advisors hired by the Manager plus, through September 11, 2008, 0.10% of the average daily net assets and from September 12, 2008, 0.05% of the average daily net assets. Management fees paid during the year ended October 31, 2008 were as follows (dollars in thousands): AMOUNTS PAID NET AMOUNTS MANAGEMENT MANAGEMENT TO INVESTMENT RETAINED BY FEE RATE FEE ADVISORS MANAGER - ---------- ---------- ------------- ----------- 0.20%-0.60% $8,364 $6,041 $2,323 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, 2008, securities lending fees paid to the Manager were $459,900. 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 received, through September 11, 2008, an annualized fee of 0.25% of the average daily net assets of the Institutional, PlanAhead and Service Classes of the Fund. From September 12, 2008, the Manager received an annualized fee of 0.30% of the average daily net assets of the Institutional, PlanAhead, and Service Classes of the Fund and 0.05% of the average daily net assets of the AMR Class 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 18 AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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. Brokerage Commissions Affiliated entities of a sub-advisor to the Fund received net commissions on purchases and sales of the Fund's portfolio securities totaling $1,171 for the year ended October 31, 2008. 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 up to to 0.10% of its average daily net assets. During the year ended October 31, 2008, the Manager earned fees from the Affiliated Funds totaling $53,239 on the Fund's direct investment in the Affiliated Funds and $53,239 from the Fund's securities lending collateral invested in the Affiliated Funds. Interfund Lending Program Pursuant to an exemptive order by the SEC, the Fund, along with other registered investment companies having management contracts with the Manager, may participate in an interfund lending program as a borrower. This program provides an alternative credit facility allowing the Fund to borrow from other participating Funds. The Fund did not utilize the credit facility during the year ended October 31, 2008. 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, 2008, there were no waived fees or reimbursed expenses subject to potential recovery. 19 AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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. The Fund adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainties in Income Taxes" ("FIN 48), on November 1, 2007. FIN 48 sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. The implementation of FIN 48 did not result in any unrecognized tax benefits in the accompanying financial statements. Each of the tax years in the three year period ended October 31, 2008 remains subject to examination by the Internal Revenue Service. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in "Other expenses" on the Statement of Operations. 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, 2008 and October 31, 2007 were as follows (in thousands): YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, 2008 2007 ----------- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME* Institutional Class.. $ 69,221 $ 55,466 PlanAhead Class...... 36,886 27,239 Service Class........ 193 133 AMR Class............ 30,031 21,371 LONG-TERM CAPITAL GAIN Institutional Class.. 127,324 90,048 PlanAhead Class...... 71,886 46,834 Service Class........ 395 257 AMR Class............ 52,104 32,417 -------- -------- TOTAL DISTRIBUTIONS PAID... $388,040 $273,765 ======== ======== * For tax purposes, short-term capital gains are considered ordinary income distributions. As of October 31, 2008, the components of distributable earnings on a tax basis were as follows (in thousands): Cost basis of investments for federal income tax purposes ............................................. $1,839,421 Unrealized appreciation ................................. 92,628 Unrealized depreciation ................................. (501,751) ---------- Net unrealized appreciation/(depreciation) .............. (409,123) Undistributed ordinary income ........................... 61,209 Undistributed long-term gain/(loss) ..................... 27,587 ---------- Distributable earnings .................................. $ (320,327) ========== 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 20 AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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, 2008 (in thousands): Paid-in-capital ............................... $ 5,158 Undistributed net investment income ........... (1,623) Accumulated net realized loss ................. (3,535) Unrealized 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, 2008 were (in thousands) $719,857 and $1,496,031, respectively. A summary of the Fund's direct transactions in Affiliated Funds for the year ended October 31, 2008 is set forth below (in thousands): OCTOBER 31, 2007 OCTOBER 31, 2008 AFFILIATE SHARES/MARKET VALUE PURCHASES SALES SHARES/MARKET VALUE - --------- ------------------- ---------- ---------- ------------------- Select Fund $71,709 $1,189,401 $1,234,192 $26,918 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. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. 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. Securities lending transactions pose certain risks to the Fund including that the borrower may not provide additional collateral when required or return the securities when due, that the value of the short-term investments will be less than the amount of cash collateral required to be returned to the borrower, and that the cash collateral investments could become illiquid and unable to be used to return collateral to the 21 AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 borrower. The Fund could also experience delays and costs in gaining access to the collateral. The Fund bears the risk of any deficiency in the amount of the collateral available for return to the borrower due to any loss on the collateral invested. At October 31, 2008, securities with a market value of approximately $109,820,708 were loaned by the Fund. Cash collateral held by the custodian for the Fund in an investment in the Select and other short-term investments totaled $116,187,599. At the close of business on October 3, 2008, the Fund redeemed for cash and securities its shares in the Cash Trust as follows (in thousands): Cash................................. $33,425 Securities (at market value)......... $31,120 The cash proceeds were invested in other money market funds and the securities were invested in the Securities Liquidating AB Trust. 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, 2008 INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS --------------------- --------------------- ----------------- -------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT -------- ---------- -------- ---------- ------ -------- ------- ---------- Shares sold ......................... 6,925 $ 137,615 12,711 $ 257,961 40 $ 790 2,312 $ 47,462 Reinvestment of dividends ........... 7,822 177,012 4,768 106,664 26 585 3,605 82,134 Shares redeemed ..................... (33,276) (680,261)* (18,249) (352,680)* (130) (2,617)* (5,574) (111,655)* ------- --------- ------- --------- ---- ------- ------ --------- Net increase (decrease) in shares outstanding ...................... (18,529) $(365,634) (770) $ 11,945 (64) $(1,242) 343 $ 17,941 ======= ========= ======= ========= ==== ======= ====== ========= 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 ======= ========= ======= ========= ==== ======= ====== ========= - ---------- * Net of Redemption Fees 22 AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Institutional Class ------------------------------------------------------------ Year Ended October 31, ------------------------------------------------------------ 2008 2007 2006 2005 2004(A) -------- ---------- ---------- ---------- ---------- Net asset value, beginning of period ........................... $ 27.32 $ 24.68 $ 20.98 $ 18.47 $ 15.46 -------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income(B, C) ...... 0.77 0.65 0.60 0.44 0.30 Net gains (losses) on securities (both realized and unrealized)(B) ................ (11.60) 4.31 4.86 2.31 3.12 -------- ---------- ---------- ---------- ---------- Total income (loss) from investment operations ....................... (10.83) 4.96 5.46 2.75 3.42 -------- ---------- ---------- ---------- ---------- Less distributions: Dividends from net investment income ........................ (0.70) (0.50) (0.43) (0.24) (0.41) Distributions from net realized gains on securities ........... (2.66) (1.82) (1.33) -- -- -------- ---------- ---------- ---------- ---------- Total distributions ................. (3.36) (2.32) (1.76) (0.24) (0.41) -------- ---------- ---------- ---------- ---------- Redemption fees added to beneficial interest(D) ........... 0.00 0.00 0.00 0.00 0.00 -------- ---------- ---------- ---------- ---------- Net asset value, end of period ...... $ 13.13 $ 27.32 $ 24.68 $ 20.98 $ 18.47 ======== ========== ========== ========== ========== Total return ........................ (44.81)% 21.54% 27.49% 15.04% 22.49% ======== ========== ========== ========== ========== Ratios and supplemental data: Net assets, end of period (in thousands) ................ $567,414 $1,686,668 $1,549,521 $1,286,441 $1,029,272 Ratios to average net assets (annualized): Expenses, net of waivers(B) ... 0.66% 0.67% 0.71% 0.70% 0.76% Expenses, before waivers(B) ... 0.66% 0.67% 0.71% 0.70% 0.76% Net investment income, net of waivers(B) .............. 2.91% 2.46% 2.52% 2.17% 1.69% Net investment income (loss), before waivers(B) .......... 2.91% 2.46% 2.52% 2.17% 1.69% Portfolio turnover rate(E)........ 31% 38% 40% 37% 36% - ---------- (A) The Boston Company Asset Management, LLC was added as an investment advisor to the International Equity Fund on September 27, 2004. (B) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the American Beacon International Equity Portfolio through February 28, 2006. (C) Through October 31, 2005, net investment income per share was calculated by subtracting class expenses per share from the Fund's net investment income per share before class expenses. (D) Amounts represent less than $0.01 per share. (E) 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 American Beacon International Equity Portfolio. 23 AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) PlanAhead Class --------------------------------------------------- Year Ended October 31, --------------------------------------------------- 2008 2007 2006 2005 2004(A) -------- -------- ------- -------- -------- Net asset value, beginning of period ........................... $ 26.99 $ 24.42 $ 20.79 $ 18.31 $ 15.34 -------- -------- ------- -------- -------- Income from investment operations: Net investment income(B, C) ...... 0.66 0.58 0.50 0.41 0.26 Net gains (losses) on securities (both realized and unrealized)(B) ............... (11.41) 4.26 4.84 2.29 3.08 -------- -------- ------- -------- -------- Total income (loss) from investment operations ....................... (10.75) 4.84 5.34 2.70 3.34 -------- -------- ------- -------- -------- Less distributions: Dividends from net investment income ........................ (0.63) (0.45) (0.38) (0.22) (0.37) Distributions from net realized gains on securities ........... (2.66) (1.82) (1.33) -- -- -------- -------- ------- -------- -------- Total distributions ................. (3.29) (2.27) (1.71) (0.22) (0.37) -------- -------- ------- -------- -------- Redemption fees added to beneficial interest(D) ...................... 0.00 0.00 0.00 0.00 0.00 -------- -------- ------- -------- -------- Net asset value, end of period ...... $ 12.95 $ 26.99 $ 24.42 $ 20.79 $ 18.31 ======== ======== ======= ======== ======== Total return ........................ (44.96)% 21.22% 27.20% 14.73% 22.16% ======== ======== ======= ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands) ................ $426,473 $909,385 $771,298 $560,770 $310,540 Ratios to average net assets (annualized): Expenses, net of waivers(B) ... 0.92% 0.93% 0.96% 0.95% 1.02% Expenses, before waivers(B) ... 0.92% 0.93% 0.96% 0.95% 1.02% Net investment income, net of waivers(B) .............. 2.82% 2.26% 2.25% 1.96% 1.46% Net investment income (loss), before waivers(B) .......... 2.82% 2.26% 2.25% 1.96% 1.46% Portfolio turnover rate(E) ....... 31% 38% 40% 37% 36% - ---------- (A) The Boston Company Asset Management, LLC was added as an investment advisor to the International Equity Fund on September 27, 2004. (B) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the American Beacon International Equity Portfolio through February 28, 2006. (C) Through October 31, 2005, net investment income per share was calculated by subtracting class expenses per share from the Fund's net investment income per share before class expenses. (D) Amounts represent less than $0.01 per share. (E) 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 American Beacon International Equity Portfolio. 24 AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) Service Class ---------------------------------------------------- Year Ended October 31, ---------------------------------------------------- 2008 2007 2006 2005 2004(A) ------- ------- ------- ------- ------- Net asset value, beginning of period ................. $ 26.83 $ 24.24 $ 20.61 $ 18.24 $ 15.31 ------- ------- ------- ------- ------- Income from investment operations: Net investment income(B, C) ....................... 0.62 0.56 0.46 0.37 0.30 Net gains (losses) on securities (both realized and unrealized)(B) ................................. (11.35) 4.20 4.76 2.26 2.99 ------- ------- ------- ------- ------- Total income (loss) from investment operations ....... (10.73) 4.76 5.22 2.63 3.29 ------- ------- ------- ------- ------- Less distributions: Dividends from net investment income .............. (0.58) (0.35) (0.26) (0.26) (0.36) Distributions from net realized gains on securities ..................................... (2.66) (1.82) (1.33) -- -- ------- ------- ------- ------- ------- Total distributions .................................. (3.24) (2.17) (1.59) (0.26) (0.36) ------- ------- ------- ------- ------- Redemption fees added to beneficial interest(D) ...... 0.00 0.00 0.00 0.00 0.00 ------- ------- ------- ------- ------- Net asset value, end of period ....................... $ 12.86 $ 26.83 $ 24.24 $ 20.61 $ 18.24 ======= ======= ======= ======= ======= Total return ......................................... (45.10)% 20.85% 26.89% 14.45% 21.88% ======= ======= ======= ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands) .......... $ 1,546 $ 4,932 $ 4,740 $ 2,987 $ 739 Ratios to average net assets (annualized): Expenses, net of waivers(B) .................... 1.19% 1.12% 1.16% 1.21% 1.27% Expenses, before waivers(B) .................... 1.19% 1.15% 1.19% 1.21% 6.26% Net investment income, net of waivers(B) ....... 2.36% 2.04% 2.09% 1.70% 0.81% Net investment income (loss), before waivers(B) .................................. 2.36% 2.01% 2.05% 1.70% (4.18)% Portfolio turnover rate(E) ........................ 31% 38% 40% 37% 36% - ---------- (A) The Boston Company Asset Management, LLC was added as an investment advisor to the International Equity Fund on September 27, 2004. (B) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the American Beacon International Equity Portfolio through February 28, 2006. (C) Through October 31, 2005, net investment income per share was calculated by subtracting class expenses per share from the Fund's net investment income per share before class expenses. (D) Amounts represent less than $0.01 per share. (E) 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 American Beacon International Equity Portfolio. 25 AMERICAN BEACON INTERNATIONAL EQUITY FUND(SM) FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) AMR Class -------------------------------------------------------- Year Ended October 31, -------------------------------------------------------- 2008 2007 2006 2005 2004(A) -------- -------- -------- -------- -------- Net asset value, beginning of period ................. $ 27.54 $ 24.86 $ 21.12 $ 18.58 $ 15.54 -------- -------- -------- -------- -------- Income from investment operations: Net investment income(B, C) ....................... 0.72 0.73 0.63 0.50 0.34 Net gains (losses) on securities (both realized and unrealized)(B) ................................. (11.58) 4.33 4.92 2.33 3.14 -------- -------- -------- -------- -------- Total income (loss) from investment operations........ (10.86) 5.06 5.55 2.83 3.48 -------- -------- -------- -------- -------- Less distributions: Dividends from net investment income .............. (0.77) (0.56) (0.48) (0.29) (0.44) Distributions from net realized gains on securities ..................................... (2.66) (1.82) (1.33) -- -- -------- -------- -------- -------- -------- Total distributions .................................. (3.43) (2.38) (1.81) (0.29) (0.44) -------- -------- -------- -------- -------- Redemption fees added to beneficial interest(D) ...... 0.00 0.00 0.00 0.00 0.00 -------- -------- -------- -------- -------- Net asset value, end of period ....................... $ 13.25 $ 27.54 $ 24.86 $ 21.12 $ 18.58 ======== ======== ======== ======== ======== Total return ......................................... (44.65)% 21.86% 27.88% 15.32% 22.84% ======== ======== ======== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands) .......... $328,083 $672,680 $563,231 $448,096 $460,114 Ratios to average net assets (annualized): Expenses, net of waivers(B) .................... 0.41% 0.42% 0.45% 0.44% 0.49% Expenses, before waivers(B) .................... 0.41% 0.42% 0.45% 0.44% 0.49% Net investment income, net of waivers(B) ....... 3.24% 2.77% 2.76% 2.49% 1.97% Net investment income (loss), before waivers(B) .................................. 3.24% 2.77% 2.76% 2.49% 1.97% Portfolio turnover rate(E) ........................ 31% 38% 40% 37% 36% - ---------- (A) The Boston Company Asset Management, LLC was added as an investment advisor to the International Equity Fund on September 27, 2004. (B) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the American Beacon International Equity Portfolio through February 28, 2006. (C) Through October 31, 2005, net investment income per share was calculated by subtracting class expenses per share from the Fund's net investment income per share before class expenses. (D) Amounts represent less than $0.01 per share. (E) 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 American Beacon International Equity Portfolio. 26 AMERICAN BEACON FUNDS PRIVACY POLICY & FEDERAL TAX INFORMATION OCTOBER 31, 2008 (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, 2008, which is designated as qualifying for the dividends-received deduction, was 0.33%. For shareholders in the Fund, the percentage of dividend income distributed for the year ended October 31, 2008, which is designated as qualified dividend income under the Jobs Growth Tax Relief Act of 2003, was 40.06%. Shareholders will receive notification in January 2009 of the percentage applicable to the preparation of their 2008 income tax returns. The Fund designated a foreign tax credit of $8,733,025 and recognized foreign source income of $92,609,303. Pursuant to Section 852 of the Internal Revenue Code, the Fund designated $251,708,449 as long-term capital gain dividends for the tax year ended October 31, 2008. 27 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) At its May 21, 2008 meeting, the Board of Trustees ("Board" or "Trustees") considered the renewal of the existing Management Agreement ("Current Agreement") between the Manager and the American Beacon Funds ("Beacon Trust") on behalf of its International Equity Fund (the "Fund") and each Investment Advisory Agreement between the Manager and a subadvisor ("Current Investment Advisory Agreement"). In preparation for the Board's consideration to renew these Current 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 9, 2008 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. On May 21, May 22 and June 4, 2008, the Board met to determine, among other matters, whether to approve a new investment management agreement ("New Agreement") between the Manager and the Fund. The New Agreement was necessary because, on April 16, 2008, AMR Corporation ("AMR"), the parent company of the Manager, entered into an agreement with Lighthouse Holdings, Inc. ("Lighthouse") pursuant to which Lighthouse would acquire all of the capital stock of the Manager ("Transaction") in exchange for cash and 10% of the capital stock of the parent corporation of Lighthouse. Upon the closing of the Transaction on September 12, 2008 ("Closing"), the Manager ceased to be a wholly owned subsidiary of AMR and became a subsidiary of Lighthouse. This change in control was deemed to be an "assignment" under the Investment Company Act of 1940 ("1940 Act") of the Fund's Current Agreement with the Manager. As required by the 1940 Act, the Fund's Current Agreement provided for its automatic termination in the event of an assignment and therefore terminated upon the Closing. To provide for the continuity of management for the Fund, the Board met to consider the New Agreement with the Manager. The New Agreement for the Fund reflects substantially the same terms as the Current Agreement for the Fund. In addition, the Current Agreement has been updated and modernized. As part of this process, the primary administrative services provided by the Manager to the Fund have been transferred to one single administrative services agreement ("New Administrative Services Agreement"). The Manager previously provided administrative services to the Fund pursuant to its Current Agreement and an Administrative Services Agreement ("Current Administrative Services Agreement"). The aggregate fee rates for the Fund under the New Agreement and the New Administrative Services Agreement are the same as the fee rates imposed under the existing agreements which they replaced. In preparation for the Board's consideration to approve the New Agreement and New Investment Advisory Agreements, the Board considered the impact to the Fund once Lighthouse directly controlled the Manager. Lighthouse indicated that it did not anticipate making any changes to the organization or structure of the Fund, to the service providers or to the aggregate fee rates under the Current Agreement. In addition, the portfolio managers at the Manager that manage the Fund were expected to continue to manage the Fund after the Closing. In that regard, the Manager and Lighthouse anticipated entering into employment contracts with certain key personnel performing or overseeing the Fund's investment program. The Board considered that there could be no assurance that these personnel would choose to remain employed by the Manager before or after the Closing. The Board noted that the Manager and the Fund would continue to operate under their existing names. Potential benefits to the Fund as a result of the Transaction included Lighthouse's intention to devote additional resources to product development and distribution of Fund shares. The Board also considered that any resulting growth of Fund assets would potentially produce economies of scale that would benefit shareholders of the Fund. With respect to the Fund, the Manager had entered into Current Investment Advisory Agreements with various subadvisors on behalf of the Fund. Upon the Closing, these Current Investment Advisory Agreements terminated automatically upon the termination of the Current Agreement. Pursuant to an exemptive order 28 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) issued by the Securities and Exchange Commission ("SEC"), the Manager was permitted to enter into new or modified investment advisory agreements with the subadvisors ("New Investment Advisory Agreements") without approval of the Fund's shareholders, but subject to the approval of the Fund's Board. Each New Investment Advisory Agreement reflected substantially the same terms as the Current Investment Advisory Agreement for the Fund. In preparation for the Board's consideration to approve the New Agreement and New Investment Advisory Agreements, the Board held preliminary conference call meetings on April 15, 16 and 21, 2008, to discuss the New Agreement and New Investment Advisory Agreements and the effect that approving the New Agreement and New Investment Advisory Agreements would have on the Fund. The Board received a memorandum and related advice from their independent legal counsel detailing the Board's responsibilities in considering the New Agreement and New Investment Advisory Agreements. In connection with Board's consideration of the Current Agreement, Current Investment Advisory Agreements, New Agreement and New Investment Advisory Agreements, the Trustees considered, among other materials, responses by the Manager and the subadvisors to inquiries requesting: - a description of the Transaction, the effects of the Transaction on the Beacon Trust and the Board, and any proposed changes to the Beacon Trust, its service providers or fee structure and other information; - 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 Form ADV registration statement with the SEC; - 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 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 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 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; 29 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) - 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 regard to the services provided to the Fund. In addition to the foregoing, the Manager provided the following information specific to the renewal of the Fund's Current Agreement and the approval of the Fund's New 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 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 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. In connection with the Current Agreement, Current Investment Advisory Agreements, New Agreement and New Investment Advisory Agreements, 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 of shares used for comparative purposes was the class with the longest performance history, which was 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 Current Agreement, Current Investment Advisory Agreements, New Agreement and New Investment Advisory Agreements are each referenced to herein as an "Agreement" and collectively, the "Agreements." The Trustees also received memoranda from their legal counsel detailing the Board's responsibilities pertaining to the approval of each Agreement. These memoranda explained the regulatory requirements surrounding the Trustees' process for evaluating investment advisors and the terms of the contracts. In connection with the Board's consideration of the New Agreement and each New Investment Advisory Agreement, the Trustees considered, among other information, the following factors: (1) The manner in which the Fund's assets are managed will not change as a result of the Transaction, and the same people who manage the Fund's assets are expected to continue to do so after the Transaction; (2) The aggregate fee rates payable by the Fund under the New Agreement and the New Administrative Services Agreement are the same as the fee rates payable under the Current Agreement and the Current Administrative Services Agreement; (3) The material terms regarding advisory services pursuant to the New Agreement are substantially the same as the terms of the Current Agreement; (4) The qualifications of the Manager's personnel who will provide advisory and administrative services to the Fund are not expected to change; 30 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) (5) The Manager's financial condition and the post-Closing capitalization of Lighthouse; (6) The impact of the Transaction on the Manager's day-to-day operations; (7) The capabilities, experience, corporate structure and capital resources of Lighthouse; (8) The long-term business goals of Lighthouse with regard to the Manager and the Beacon Trust; (9) Fund shareholders will not bear any costs in connection with the Transaction, inasmuch as AMR and Lighthouse plan to bear equally the costs, fees and expenses incurred by the Fund in connection with obtaining shareholder approval of the New Agreement, the fees and expenses of accountants and attorneys relating to the Transaction and obtaining shareholder approval of the New Agreement, the fees and expenses incurred by the Fund in connection with the Transaction, and the meeting fees of the Boards for meetings held in connection with the Transaction; (10) The Fund may realize benefits as a result of the Transaction, including long-term economies of scale; (11) The potential for increased costs to the Beacon Trust in order to satisfy existing obligations under the current Trustees' retirement plan; and (12) The advisory relationship with each subadvisor would continue in the same manner as before the Transaction and that each New Investment Advisory Agreement would be substantially the same as each Current Investment Advisory Agreement. Provided below is an overview of the other primary factors the Board considered at its May 21, May 22 and June 4, 2008 meetings. The Board did not identify any particular information that was most relevant to its consideration to renew the Current Agreement and Current Investment Advisory Agreements and approve the New Agreement and New Investment Advisory Agreements, and each Trustee may have afforded different weight to the various factors. Legal counsel to the Non-interested Trustees provided the Board with memoranda regarding its responsibilities pertaining to the renewal of the Current Agreement and Current Investment Advisory Agreements and approve the New Agreement and New Investment Advisory Agreements. Based on its evaluation, the Board unanimously concluded that the terms of each Current Agreement and Current Investment Advisory Agreement were reasonable and fair and that the renewal of each Current Agreement and Current Investment Advisory Agreement was in the best interests of the Fund and its shareholders. The Board also unanimously concluded that the terms of the New Agreement and New Investment Advisory Agreements were reasonable and fair and that the approval of the New Agreement and New Investment Advisory Contracts was in the best interests of the Fund and its shareholders. In determining whether to renew the Current Agreement and the Current Investment Advisory Agreements and approve the New Agreement and New Investment Advisory Agreements, the Trustees considered the best interests of the Fund. While the Current Agreement and Current Investment Advisory Agreements for the Fund was considered at the Board meetings on May 21, 2008, and the New Agreement and New Investment Advisory Agreement for the Fund was considered at the meetings on May 21, May 22 and June 4, 2008, 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 each subadvisor for the Fund; (3) the costs incurred by the Manager and (to the extent provided) the subadvisors in rendering their services and their resulting profits or losses; (4) the extent to which economies of scale have been taken into account in setting each 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 and Lighthouse regarding certain key aspects of the materials submitted in support of the renewal. Nature, Extent and Quality of Services. With respect to the renewal of the Fund's Current Agreement and the approval of the Fund's New Agreement, the Board considered: the background and experience of key 31 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) 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. With respect to the renewal of the Current Investment Advisory Agreements and the approval of the New 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, determined to renew the Current Agreement and Current Investment Advisory Agreements, and approve each New Agreement and New Investment Advisory Agreements for the Fund. 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(es) and peer group. 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. In considering the renewal of the Current Agreement and the approval of the New Agreement, the Trustees considered the following additional factors: (1) the Fund underperformed the peer universe median for the one- and three-year periods ended March 31, 2008, but outperformed for the five- and ten-year periods and (2) the expense ratio of the Institutional Class of Fund shares was lower than its Lipper expense group median. In considering the renewal of the Current Investment Advisory Agreements and the approval of the New 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 ("TBC"), the Trustees considered the following additional factors: (1) Templeton outperformed the peer universe median for the one-, three-, and five-year periods ended March 31, 2008; (2) Causeway outperformed the peer universe median for the one-, and five-year periods ended March 31, 2008 but underperformed for the three-year period; (3) Lazard underperformed the peer universe median for the one-, three- and five-year periods ended March 31, 2008; (4) TBC underperformed the peer universe median for the one-, and three-year periods; (5) 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; and (6) the Manager's recommendation to continue to retain each subadvisor. Costs of the Services to be Provided to the Fund and the Projected Profits to be Realized by the Manager from its Relationship with the Fund. 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. The profits or losses were noted at both an individual Fund level and at an aggregate level for all Funds. The Board also considered that the Current and New Agreements for the Beacon Trust stipulate that, to the extent that a Fund invests all of its investable assets in another registered investment company (i.e., is a Feeder Fund), 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 Fund, the difference reflects the greater level of responsibility and regulatory requirements associated with managing the Fund. 32 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) The Board also noted that the Manager proposed to continue any expense waivers and reimbursements for the Fund and classes that were in place during the last fiscal year. 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 certain classes of the Fund may maintain higher expense ratios in order to compensate third-party distributors. 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 many subadvisory fee rates. The Board also noted that, for purposes of determining the fee rates chargeable to the Fund, many subadvisors have agreed to take into account other assets of AMR and its pension plans that are managed by the subadvisors. Thus, the Funds are able to receive lower effective fee rates. 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 for the Fund provides for a reasonable sharing of benefits from any economies of scale with the Fund. Benefits Derived from the Relationship with the Fund. 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 Manager's relationship with the Fund 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 Beacon Trust at a relatively low cost. In this regard, the Board considered that the benefit plans of AMR have invested substantial assets in the Fund, which helps reduce costs for other Fund shareholders, just as the investment of other Fund shareholders helps to reduce costs for AMR's benefit plans. In addition, the Board considered that certain of the subadvisors reimburse the Manager for certain of its costs relating to distribution activities for the Fund. The Board also considered that the Fund did not pay commissions to any affiliated broker-dealer of the Manager during the most recent fiscal year ended October 31, 2007. Based on the foregoing information, the Board concluded that the potential benefits accruing to the Manager and the subadvisors by virtue of its relationships with the Fund appears to be fair and reasonable. Conclusion. Based on these and other considerations, the Trustees concluded that the fees paid to the Manager and the subadvisors under the Agreements are fair and reasonable, determined that the International Equity Fund and its shareholders would benefit from the Manager's and subadvisors' continued management of the Fund, approved the renewal of the Current Agreement and Current Investment Advisory Agreements and approved the New Agreement and New Investment Advisory Agreements with respect to the International Equity Fund. 33 RESULTS OF SHAREHOLDER MEETING (UNAUDITED) A special meeting of shareholders of the American Beacon International Equity Fund (the "Fund") was held on August 22, 2008. The shareholders of the Fund approved a new investment management agreement between American Beacon Advisors, Inc. ("ABA") and the Fund. This proposal required a majority of shareholders of the Fund to achieve a quorum. The following are the results of the shareholder votes for this proposal: FOR AGAINST ABSTAIN NON-VOTING - ---------------- ------------ ------------- -------------- 1,191,954,203.59 4,623,609.87 14,131,612.74 637,689,199.77 A special meeting of the shareholders of the American Beacon Funds (the "Trust") was held on August 22, 2008. The shareholders of the Trust approved the re-election of five of the current Trustees to the Board of the American Beacon Trust and to elect three additional Trustees to the Board. This proposal required a majority of the shareholders of the Trust to vote to achieve a quorum. The following are the results of the election of each Trustee: ALAN D. FELD Affirmative.......... 12,634,553,751.62 Withhold............. 519,818,259.90 W. HUMPHREY BOGART Affirmative.......... 12,999,746,162.82 Withhold............. 154,625,848.70 BRENDA A. CLINE Affirmative.......... 13,009,050,779.42 Withhold............. 145,321,232.10 RICHARD A. MASSMAN Affirmative.......... 13,004,756,096.42 Withhold............. 149,615,915.10 R. GERALD TURNER Affirmative.......... 13,004,259,224.92 Withhold............. 150,112,786.60 THOMAS M. DUNNING Affirmative.......... 13,003,350,236.48 Withhold............. 151,021,775.04 EUGENE J. DUFFY Affirmative.......... 12,985,296,316.39 Withhold............. 169,075,695.13 PAUL J. ZUCCONI Affirmative.......... 12,985,296,316.39 Withhold............. 169,075,695.13 34 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* Alan D. Feld** (71) Trustee since 1996 Sole Shareholder of a professional corporation which is a Partner in the law firm of Akin, Gump, Strauss, Hauer & Feld, LLP (1960-Present); Director, Clear Channel Communications (1984-Present); Trustee, CenterPoint Properties (1994-2006); Member, Board of Trustees, Southern Methodist University ; Member, Board of Visitors, M.D. Anderson Hospital; Board of Visitors, Zale/Lipshy Hospital. NON-INTERESTED TRUSTEES Term Lifetime of Trust until removal, resignation or retirement* W. Humphrey Bogart (64) Trustee since 2004 Board Member, Baylor University Medical Center Foundation (1992-2004); Consultant, New River Canada Ltd. (mutual fund servicing company) (1998-2003); 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). Brenda A. Cline (47) 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 (1999-2007). Eugene J. Duffy (54) Trustee since 2008 Principal and Executive Vice President, Paradigm Asset Management (1994-Present); Director, Sunrise Bank of Atlanta (2008-Present); Chairman, Special Contributions Fund Board of Trustees, National Association for the Advancement of Colored People (2007-Present); Trustee, National Association for the Advancement of Colored People (2000-Present); Board of Visitors, Emory University (2006-Present); Trustee, Atlanta Botanical Garden (2006-Present); Board Member, Willie L. Brown Jr. Institute on Politics and Public Service (2001-Present); Chair, National Association of Securities Professionals (2000-2002); Deputy Chief Administrative Officer, City of Atlanta (1985-1990). Thomas M. Dunning (65) Trustee since 2008 Consultant, (2008-Present); Chairman (2003-2008) and Chief Executive Officer (2003-2007), Lockton Dunning Benefits (consulting firm in employee benefits); Director, Oncor Electric Delivery Company LLC; Advisory Director, Comerica Texas; Immediate Past Chairman and Board Member, Dallas Citizens Council; Director, Baylor Health Care System Foundation; State Vice Chair, State Fair of Texas; Board Member, Southwestern Medical Foundation. 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 - ------------------------ ------------------- ------------------------------------------------------------ Richard A. Massman (65) Trustee since 2004 Senior Vice President and General Counsel, Hunt Chairman since 2008 Consolidated, Inc. (holding company engaged in oil and gas exploration and production, refining, real estate, farming, ranching and venture capital activities) (1994-Present). Chairman (2007-Present) and Director (2005-Present), The Dallas Opera Foundation; Chairman (2006-Present) and Director (2005-Present), Temple Emanu-El Foundation; Trustee, Presbyterian Hospital Foundation (2006-Present). R. Gerald Turner (62) 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 (2003-2007); Member, Salvation Army of Dallas Board of Directors; Member, Methodist Hospital Advisory Board; Co-Chair, Knight Commission on Intercollegiate Athletics. Paul J. Zucconi,CPA (67) Trustee since 2008 Director, Affirmative Insurance Holdings, Inc. (producer of nonstandard automobile insurance) (2004-present); Director, Titanium Metals Corporation (producer of titanium melted and mill products and sponge) (2002- present); Director, Torchmark Corporation (life and health insurance products) (2002-present); Director, National Kidney Foundation of North Texas (2003-Present); Director, Dallas Chapter of National Association of Corporate Directors (2004-Present); Partner, KPMG (1976-2001). OFFICERS Term One Year William F. Quinn** (60) President from Chairman (2006-Present) and CEO (2006-2007), President 1987 to 2007 (1986-2006) and Director (2003-Present), American Beacon and 2008 to Present Advisors, Inc.; Chairman (1989-2003) and Director Executive Vice (1979-1989, 2003-Present), American Airlines Federal Credit President from Union; Director, Crescent Real Estate Equities, 2007 to 2008 Inc.(1994-2007); Director, Pritchard, Hubble & Herr, LLC Trustee from (investment advisor) (2001-2006); Director of Investment 1987 to 2008 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 (1995-2008); Trustee, American Beacon Select Funds (1999-2008); Trustee, American Beacon Master Trust (1995-2008). Rosemary K. Behan (49) 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 (48) 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 (42) 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. 36 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 - ------------------------ ------------------- ------------------------------------------------------------ Michael W. Fields (54) VP since 1989 Vice President, Fixed Income Investments, American Beacon Advisors, Inc. (1988-Present). Rebecca L. Harris (41) Treasurer since Vice President, Finance, American Beacon Advisors, Inc. 1995 (1995-Present). Christina E. Sears (37) 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, provided, however, that the Board may determine to grant one or more annual exemptions to this requirement. ** Mr. Feld is deemed to be an "interested person" of the Trusts, as defined by the 1940 Act. Mr. Feld's law firm of Akin, Gump, Strauss, Hauer & Feld LLP has provided legal services within the past two fiscal years to the Manager and one or more of the Trust's and Master Trust's sub-advisors. 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 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 portfolio holdings with the Securities the Fund's Statement of Additional and Exchange Commission ("SEC") on Information, is available free of Form N-Q as of the first and third charge on the Fund's website fiscal quarters. The Fund's Forms N-Q (www.americanbeaconfunds.com) and by are available on the SEC's website at calling 1-800-967-9009 or by accessing www.sec.gov. The Forms N-Q may also be the SEC's website at www.sec.gov. The reviewed and copied at the SEC's Fund's proxy voting record for the most Public Reference Room, 450 Fifth recent year ended June 30 is filed Street, NW, Washington, DC 20549. annually with the SEC on Form N-PX. The Information regarding the operation of Fund's Forms N-PX are available on the the SEC's Public Reference Room may be SEC's website at www.sec.gov. The obtained by calling 1-800-SEC-0330. A Fund's proxy voting record may also be complete schedule of the Fund's obtained by calling 1-800-967-9009. 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 DISTRIBUTOR STATE STREET BANK BOSTON FINANCIAL REGISTERED PUBLIC FORESIDE FUND AND TRUST DATA SERVICES ACCOUNTING FIRM SERVICES Boston, Kansas City, ERNST & YOUNG LLP Portland, Maine Massachusetts Missouri 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 and American Beacon International Equity Fund are service marks of American Beacon Advisors, Inc. AR 10/08 64673 GUIDANCE | VISION | EXPERIENCE (GRAPHIC) (AMERICAN BEACON FUNDS(SM) LOGO) ANNUAL REPORT OCTOBER 31, 2008 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, 2008 (PHOTO OF WILLIAM F. QUINN) FELLOW SHAREHOLDERS, Enclosed is the American Beacon Large Cap Value Fund Annual Report for the twelve months ended October 31, 2008. During the past twelve months, we experienced unprecedented market turmoil in all asset classes. Initially, the sub-prime mortgage crisis and rising oil and food prices contributed to an economic slowdown that culminated in a market-wide credit crisis and squeeze on liquidity. The situation reached once-in-a-lifetime crisis proportions in mid-September with the bankruptcy of Lehman Brothers, the resulting losses incurred by investors in money market funds, and the unprecedented government intervention in the financial system. From September 15th to October 31st, the Dow Jones Industrial Average declined almost 20% on the threat of a global recession. The American Beacon Large Cap Value Fund - Institutional Class reported a return of -39.59% for the one-year period ended October 31, 2008. The S&P 500 and Dow Jones Industrial Average indices reported negative returns of -36.10% and -31.13%, respectively, for this period. During these times, it is important to remember that the American Beacon Large Cap Value Fund's investment strategy is based on long-term investing. Short-term pain can lead to long-term gains as we saw when positive performance by our value-oriented Funds followed the burst of the technology bubble earlier this decade. We believe the Funds' fundamental value investment philosophies and lower than average expense ratios will continue to serve the Funds well over the longer term. Please review the enclosed market overview, portfolio listings, and detailed financial data. As always, we welcome the opportunity to serve your financial needs. To obtain further details about the American Beacon Funds family or to access your account information, please visit our website at www.americanbeaconfunds.com. Thank you for your continued confidence in the American Beacon Funds. Sincerely, /s/ William F. Quinn William F. Quinn President American Beacon Funds 1 DOMESTIC EQUITY MARKET OVERVIEW OCTOBER 31, 2008 (UNAUDITED) The financial crisis that began in August 2007 accelerated into uncharted territory in 2008, punctuated by the sharp decline in equity prices in October. Earlier concerns about rising prices for oil, food and commodities were brushed aside as the credit crisis evolved into a full-blown liquidity crisis. In early 2008, monetary policymakers were very aggressive, ultimately cutting the Fed Funds rate to 1% as deflation concerns began to displace talk of inflation. The Federal Reserve ("Fed") was innovative in contending with the financial crisis by developing (or resurrecting) policy initiatives and lending facilities in attempts to target liquidity without further pressuring the dollar or adding to worries regarding inflation. Nevertheless, in the spring of 2008, market interest rates had once again begun to move against the Fed, this time upward, as global investors anticipated a pause in, if not a completion of, the Fed's easing campaign. Market volatility prevailed in the second and third calendar quarters of 2008. Only a few months back, investors were worried about rising inflation and the potential for higher interest rates; however, events during the past few months changed those discussions. The government takeovers of Fannie Mae and Freddie Mac, the Lehman Brothers bankruptcy, the near demise of insurance giant American International Group (AIG), government-arranged bank mergers and bank failures turned the conversations to de-leveraging, deflation and declining rates. Signs of a recession accelerated as third quarter 2008 Gross Domestic Product contracted despite the massive policy response. Oil prices fell rapidly from a high of approximately $145 per barrel during the twelve-month period to close below $70 per barrel on October 31, 2008, while housing prices saw no signs of a bottom. Worries of global recession were also pervasive throughout commodities markets as major indices sold off considerably while the dollar gained against most currencies. All of this occurred in the midst of a presidential election with its attendant uncertainties. Investors took note, driving prices substantially lower in every major equity market over the past twelve months. In spite of these events, there are many long-term positives in the U.S. economy. The biggest one is the flexibility of our system and its ability to adapt: both policymakers and market participants reacted quickly (and sometimes overreacted) to changing circumstances. Other factors such as the existence of insurance safety nets, a still relatively low (though rising) unemployment rate, technology-driven productivity gains, solid balance sheets for non-financial companies and improving global competitiveness all factor into a potentially positive long-term outlook. Consequently, while households and financial firms have limited borrowing capacity and have received most of the media attention, non-financial companies are not overburdened by debt and are in a better position than in past cycles to manage their businesses in a slowing economy. While the actions taken should help to stem the current crisis, obstacles remain. However, with the full attention of world central banks, governments and regulators, fundamentals have the opportunity to prevail as financial markets make their way through the current uncertainty. 2 PERFORMANCE OVERVIEW AMERICAN BEACON LARGE CAP VALUE FUND(SM) OCTOBER 31, 2008 (UNAUDITED) The Institutional Class of the Large Cap Value Fund returned -39.59% for the twelve months ended October 31, 2008. The Fund underperformed the Russell 1000(R) Value Index (the "Index") return of -36.80% and the Lipper Large-Cap Value Funds Index return of -37.16%. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 10/31/98 THROUGH 10/31/08 (PERFORMANCE GRAPH) ANNUALIZED TOTAL RETURNS VALUE OF PERIODS ENDED 10/31/08 $10,000 ---------------------------- 10/31/98- 1 YEAR 5 YEARS 10 YEARS 10/31/08 ------- ------- -------- --------- Institutional Class(1, 4)............. -39.59% 2.44% 2.93% $13,352 PlanAhead Class(1, 4)...... -39.72% 2.19% 2.66% 13,006 Service Class(1, 2, 4)..... -39.87% 2.01% 2.57% 12,891 AMR Class(1, 4)............ -39.43% 2.72% 3.20% 13,703 Lipper Large-Cap Value Funds Index(3)................ -37.16% 0.58% 1.05% 11,105 Russell 1000 Value Index (3)............... -36.80% 1.90% 2.79% 13,165 (1.) Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1-800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. (2.) Fund performance for the five-year and ten-year periods represents the total returns achieved by the PlanAhead Class from 10/31/98 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. As a result, total returns shown may be higher than they would have been had the Service Class been in existence since 10/31/98. A portion of the fees charged to the Service Class of the Fund was waived in 2005. Performance prior to waiving fees was lower than the actual returns shown for 2005. (3.) 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. Russell 1000 Value Index is a registered trademark of the Frank Russell Company. 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. (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 0.60%, 0.84%, 1.08% and 0.33%, 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 primarily through stock selection, and to a lesser extent through sector allocation. From a stock selection standpoint, the Fund's holdings in the Financials, Consumer Staples, Consumer Discretionary, Health Care, Energy, and Industrials sectors detracted the most value relative to the Index. The companies with the greatest impact in the Financials sector were American International Group (down 96.9%), Washington Mutual (down 99.8% for the period the Fund owned the security), and Bear Stearns (down 90.7% for the period the Fund owned the security). In the Consumer Staples sector, Imperial Tobacco (down 39.4%), Diageo (down 29.9%), and L'Oreal (down 42.4%) were the largest detractors, as were Wyndham Worldwide (down 74.9%), CBS (down 64.5%), and JC Penney (down 56.5% for the period the Fund owned the security) in the Consumer Discretionary sector. In the Health Care sector, Cigna (down 68.9% for the period the Fund owned the security), Bristol Myers Squibb (down 27.5% for the period the Fund owned the security), and Wellpoint (down 50.9%) detracted the most value relative to the benchmark. ConocoPhillips (down 37.2%), Weatherford International (down 48.0%), and Sunoco (down 57.6% for the period the Fund owned the security) detracted the most value in the Energy sector, while Textron (down 74.0%), General Electric (down 50.6%), and Honeywell 3 PERFORMANCE OVERVIEW AMERICAN BEACON LARGE CAP VALUE FUND(SM) OCTOBER 31, 2008 (UNAUDITED) International (down 48.6% for the period the Fund owned the security) hurt performance most in the Industrials sector. Good stock selection in the Information Technology sector, mostly in IBM (down 18.7% for the period the Fund owned the security) and Oracle Systems (down 17.5%), added value relative to the Index but not enough to offset the poor performance from the aforementioned sectors. An underweight in Energy, one of the better performing sectors of the Index, and an overweight in Information Technology, the second-worst performing sector in the Index, detracted value through sector allocation. This was somewhat offset by an underweight in Financials, the worst performing sector in the Index, and an overweight in Consumer Staples, the best performing sector in the Index, which were positive contributors to the Fund's performance. 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..................................................... 2.9% International Business Machines Corp............................... 2.8% JPMorgan Chase & Co................................................ 2.4% AT&T, Inc.......................................................... 2.1% Bank of America Corp............................................... 1.8% Verizon Communications, Inc........................................ 1.8% Baxter International, Inc.......................................... 1.7% Dominion Resources, Inc............................................ 1.6% Hewlett-Packard Co................................................. 1.6% Diageo plc......................................................... 1.6% SECTOR ALLOCATION % OF EQUITIES -------- Financials......................................................... 17.5% Industrials........................................................ 13.3% Information Technology............................................. 12.9% Consumer Staples................................................... 12.3% Health Care........................................................ 11.8% Energy............................................................. 10.0% Consumer Discretionary............................................. 7.9% Utilities.......................................................... 6.1% Telecommunication Services......................................... 5.0% Materials.......................................................... 3.2% 4 FUND EXPENSES AMERICAN BEACON LARGE CAP VALUE FUND(SM) OCTOBER 31, 2008 (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, 2008 through October 31, 2008. 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. Ending Beginning Account Expenses Paid Account Value Value During Period* 5/1/08 10/31/08 5/1/08-10/31/08 ------------- --------- ----------------- INSTITUTIONAL CLASS Actual $1,000.00 $ 674.31 $2.44 Hypothetical $1,000.00 $1,022.22 $2.95 (5% return before expenses) PLANAHEAD CLASS Actual $1,000.00 $ 673.42 $3.49 Hypothetical $1,000.00 $1,020.96 $4.22 (5% return before expenses) SERVICE CLASS Actual $1,000.00 $ 672.51 $4.54 Hypothetical $1,000.00 $1,019.71 $5.48 (5% return before expenses) AMR CLASS Actual $1,000.00 $ 675.14 $1.39 Hypothetical $1,000.00 $1,023.48 $1.68 (5% return before expenses) * Expenses are equal to the Fund's annualized expense ratios for the six-month period of 0.58%, 0.83%, 1.08% 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 (366) 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, 2008, 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, 2008, 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 at October 31, 2008, 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 23, 2008 6 AMERICAN BEACON LARGE CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- ---------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 86.90% CONSUMER DISCRETIONARY - 6.85% AUTO COMPONENTS - 0.36% Gentex Corp. + ................................ 2,365,000 $ 22,680 ---------- HOTELS, RESTAURANTS & LEISURE - 0.98% Carnival Corp. + .............................. 1,941,200 49,306 Wyndham Worldwide Corp. ....................... 1,475,780 12,087 ---------- 61,393 ---------- HOUSEHOLD DURABLES - 0.60% Fortune Brands, Inc. .......................... 600,500 22,903 Newell Rubbermaid, Inc. ....................... 1,066,400 14,663 ---------- 37,566 ---------- INTERNET & CATALOG RETAIL - 0.08% eBay, Inc. ## ................................. 317,500 4,848 ---------- MEDIA - 2.00% CBS Corp. + ................................... 2,966,500 28,805 Interpublic Group of Cos., Inc. ## + .......... 966,000 5,014 Time Warner, Inc. ............................. 5,000,000 50,450 Walt Disney Co. Ltd. .......................... 1,183,100 30,642 Warner Music Group Corp. + .................... 2,322,000 9,613 ---------- 124,524 ---------- MULTILINE RETAIL - 1.22% J.C. Penney Company, Inc. ..................... 1,466,000 35,067 Macy's, Inc. .................................. 741,312 9,111 Target Corp. .................................. 653,800 26,230 Wal-Mart Stores, Inc. ......................... 98,900 5,519 ---------- 75,927 ---------- SPECIALTY RETAIL - 1.61% Gap, Inc. ..................................... 232,800 3,012 The Home Depot, Inc. .......................... 4,044,367 95,407 Limited Brands, Inc. .......................... 136,100 1,631 ---------- 100,050 ---------- TOTAL CONSUMER DISCRETIONARY 426,988 ---------- CONSUMER STAPLES - 10.72% BEVERAGES - 1.72% Coca-Cola Co. ................................. 134,900 5,944 Diageo plc, ADR ............................... 1,626,200 101,133 ---------- 107,077 ---------- FOOD & DRUG RETAILING - 1.53% Safeway, Inc. ................................. 2,161,600 45,977 Sysco Corp. ................................... 1,878,400 49,214 ---------- 95,191 ---------- SHARES VALUE ----------- ---------- (DOLLARS IN THOUSANDS) FOOD PRODUCTS - 2.90% Archer-Daniels-Midland Co. .................... 2,500,000 $ 51,825 ConAgra Foods, Inc. ........................... 2,450,000 42,679 Kellogg Co. ................................... 885,000 44,622 Kraft Foods, Inc. ............................. 1,369,713 39,914 Unilever plc, ADR + ........................... 73,900 1,667 ---------- 180,707 ---------- PERSONAL PRODUCTS - 0.67% L'Oreal SA .................................... 2,800,000 41,720 ---------- TOBACCO - 3.90% Altria Group, Inc. ............................ 2,256,000 43,293 Imperial Tobacco Group plc, ADR + ............. 1,394,100 74,305 Philip Morris International, Inc. ............. 1,821,000 79,159 UST, Inc. ..................................... 683,500 46,198 ---------- 242,955 ---------- TOTAL CONSUMER STAPLES 667,650 ---------- ENERGY - 8.76% ENERGY EQUIPMENT & SERVICES - 0.71% Weatherford International Ltd. ## ............. 2,600,000 43,888 ---------- OIL & GAS - 8.05% Chevron Corp. ................................. 1,094,562 81,654 ConocoPhillips ................................ 3,478,296 180,941 Devon Energy Corp. ............................ 1,132,000 91,534 Duke Energy Corp. ............................. 2,260,900 37,034 Exxon Mobil Corp. ............................. 64,100 4,751 Occidental Petroleum Corp. .................... 1,514,700 84,126 Royal Dutch Shell plc, ADR + .................. 342,600 18,942 Sunoco, Inc. + ................................ 90,000 2,745 ---------- 501,727 ---------- TOTAL ENERGY 545,615 ---------- FINANCIALS - 15.07% BANKS - 4.80% Bank of America Corp. ......................... 4,667,778 112,820 Comerica, Inc. + .............................. 64,300 1,774 East West Bancorp, Inc. + ..................... 2,068,000 35,880 KeyCorp + ..................................... 425,674 5,206 National City Corp. ........................... 3,072,700 8,296 Synovus Financial Corp. + ..................... 4,516,000 46,650 U.S. Bancorp .................................. 744,560 22,195 Wachovia Corp. + .............................. 1,537,800 9,857 Washington Mutual, Inc. + ..................... 1,765,000 110 Wells Fargo & Co. ............................. 695,900 23,696 See accompanying notes 7 AMERICAN BEACON LARGE CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- ---------- (DOLLARS IN THOUSANDS) Zions Bancorporation + ........................ 852,797 $ 32,500 ---------- 298,984 ---------- DIVERSIFIED FINANCIALS - 7.36% American Express Co. .......................... 1,748,300 48,078 Capital One Financial Corp. + ................. 1,207,400 47,233 Charles Schwab Corp. .......................... 247,620 4,734 Citigroup, Inc. ............................... 5,134,138 70,081 Discover Financial Services ................... 278,050 3,406 JP Morgan Chase & Co. ......................... 3,598,898 148,455 Merrill Lynch & Co., Inc. ..................... 2,281,900 42,421 Mitsubishi UFJ Financial Group, Inc., ADR + ... 8,256,000 51,765 Morgan Stanley Dean Witter & Co. + ............ 949,000 16,579 SLM Corp. ## + ................................ 2,435,500 25,987 ---------- 458,739 ---------- INSURANCE - 2.91% ACE Ltd. ...................................... 1,025,600 58,829 Aflac, Inc. ................................... 779,000 34,494 American International Group, Inc. + .......... 2,397,100 4,579 Conseco, Inc. ## + ............................ 330,700 615 Genworth Financial, Inc. ...................... 669,400 3,240 Hartford Financial Services Group, Inc. ....... 655,450 6,764 Lincoln National Corp. ## ..................... 60,400 1,041 MetLife, Inc. ................................. 630,159 20,934 Prudential Financial, Inc. .................... 36,000 1,080 Travelers Cos., Inc. .......................... 731,800 31,138 UnumProvident Corp. ........................... 32,600 514 XL Capital Ltd. + ............................. 1,845,400 17,900 ---------- 181,128 ---------- TOTAL FINANCIALS 938,851 ---------- HEALTH CARE - 10.25% HEALTH CARE EQUIPMENT & SUPPLIES - 1.68% Baxter International, Inc. .................... 1,735,800 104,998 ---------- HEALTH CARE PROVIDERS & SERVICES - 1.48% Cigna Corp. ................................... 1,167,300 19,027 UnitedHealth Group, Inc. ...................... 684,700 16,248 Universal Health Services, Inc. + ............. 624,130 26,238 WellPoint, Inc. ## ............................ 788,800 30,661 ---------- 92,174 ---------- PHARMACEUTICALS - 7.09% Amgen, Inc. ## ................................ 343,200 20,554 Bristol-Myers Squibb Co. ...................... 3,901,000 80,166 Eli Lilly & Co. ............................... 1,616,500 54,670 Hospira, Inc. ## .............................. 1,143,000 31,798 Johnson & Johnson ............................. 535,700 32,860 SHARES VALUE ----------- ---------- (DOLLARS IN THOUSANDS) Merck & Co., Inc. ............................. 822,600 $ 25,460 Pfizer, Inc. .................................. 5,664,000 100,309 Schering-Plough Corp. ......................... 869,700 12,602 Wyeth Corp. ................................... 2,579,800 83,018 ---------- 441,437 ---------- TOTAL HEALTH CARE 638,609 ---------- INDUSTRIALS - 11.56% AEROSPACE & DEFENSE - 3.77% Boeing Co. .................................... 1,770,400 92,539 Northrop Grumman Corp. ........................ 1,049,900 49,230 Raytheon Co. .................................. 1,097,100 56,072 United Technologies Corp. ..................... 678,400 37,285 ---------- 235,126 ---------- AIR FREIGHT & COURIERS - 0.42% FedEx Corp. ................................... 402,800 26,331 ---------- INDUSTRIAL CONGLOMERATES - 3.54% 3M Co. ........................................ 639,900 41,146 General Electric Co. .......................... 4,195,600 81,856 Honeywell International, Inc. ................. 2,418,825 73,653 Textron, Inc. ................................. 881,200 15,597 Tyco International Ltd. ....................... 326,200 8,247 ---------- 220,499 ---------- MACHINERY - 3.12% Caterpillar, Inc. ............................. 796,500 30,402 Deere & Co. ................................... 1,039,000 40,064 Eaton Corp. ................................... 430,400 19,196 Illinois Tool Works, Inc. ..................... 1,727,900 57,695 ITT Industries, Inc. .......................... 930,300 41,398 PACCAR, Inc. .................................. 183,000 5,351 ---------- 194,106 ---------- TRANSPORTATION INFRASTRUCTURE - 0.71% Burlington Northern Santa Fe Corp. ............ 499,000 44,441 ---------- TOTAL INDUSTRIALS 720,503 ---------- INFORMATION TECHNOLOGY - 11.22% COMMUNICATIONS EQUIPMENT - 0.38% Alcatel-Lucent, ADR ........................... 1,511,200 3,884 Nokia Corp., ADR + ............................ 1,317,200 19,995 ---------- 23,879 ---------- COMPUTERS & PERIPHERALS - 6.48% Apple Computer, Inc. ## + ++ .................. 640,000 68,857 EMC Corp. ## .................................. 4,765,000 56,132 Hewlett-Packard Co. ........................... 2,647,200 101,335 See accompanying notes 8 AMERICAN BEACON LARGE CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ----------- ---------- (DOLLARS IN THOUSANDS) International Business Machines Corp. ......... 1,907,300 $ 177,322 ---------- 403,646 ---------- ELECTRICAL EQUIPMENT - 0.43% Molex, Inc. ................................... 339,000 4,885 Molex, Inc. ................................... 1,688,000 21,674 ---------- 26,559 ---------- ELECTRONIC COMPONENTS - 0.49% Thomas & Betts Corp. ## ....................... 1,285,000 30,519 ---------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.95% Intel Corp. ................................... 3,196,300 51,141 Tyco Electronics Ltd. ......................... 419,500 8,155 ---------- 59,296 ---------- SEMICONDUCTOR EQUIPMENT & PRODUCTS - 0.70% Texas Instruments, Inc. ....................... 2,231,000 43,638 ---------- SOFTWARE - 1.79% CA, Inc. ...................................... 1,087,903 19,365 Microsoft Corp. ............................... 683,400 15,260 Oracle Corp. ## ............................... 4,198,700 76,794 ---------- 111,419 ---------- TOTAL INFORMATION TECHNOLOGY 698,956 ---------- MATERIALS - 2.78% CHEMICALS - 2.76% Air Products & Chemicals, Inc. ................ 1,269,200 73,779 Dow Chemical Co. .............................. 1,150,300 30,678 E. I. du Pont de Nemours & Co. ................ 1,243,600 39,795 Eastman Chemical Co. + ........................ 23,800 961 PPG Industries, Inc. .......................... 536,700 26,610 ---------- 171,823 ---------- METALS & MINING - 0.02% Alcoa, Inc. ## ................................ 105,500 1,214 ---------- TOTAL MATERIALS 173,037 ---------- TELECOMMUNICATION SERVICES - 4.38% DIVERSIFIED TELECOMMUNICATION - 4.38% AT&T, Inc. ++ ................................. 4,989,152 133,560 Fairpoint Communications, Inc. + .............. 42,246 168 Verizon Communications, Inc. .................. 3,683,746 109,297 Vodafone Group plc, ADR ....................... 1,550,000 29,868 ---------- TOTAL TELECOMMUNICATION SERVICES 272,893 ---------- SHARES VALUE ----------- ---------- (DOLLARS IN THOUSANDS) UTILITIES - 5.31% ELECTRIC UTILITIES - 4.44% CenterPoint Energy, Inc. ...................... 1,906,600 $ 21,964 Constellation Energy Group, Inc. + ............ 319,400 7,733 Dominion Resources, Inc. + .................... 2,813,900 102,088 Entergy Corp. ................................. 542,400 42,334 Exelon Corp. .................................. 590,600 32,034 FPL Group, Inc. ............................... 1,182,000 55,838 Public Service Enterprise Group, Inc. ......... 513,500 14,455 ---------- 276,446 ---------- GAS UTILITIES - 0.87% Spectra Energy Corp. .......................... 2,813,500 54,385 ---------- TOTAL UTILITIES 330,831 ---------- TOTAL COMMON STOCKS 5,413,933 ---------- CONVERTIBLE PREFERRED STOCKS - 0.16% FINANCIALS - 0.16% BANKS - 0.16% East West Bancorp, Inc. ....................... 8,763 9,862 ---------- SHORT TERM INVESTMENTS - 13.14% American Beacon Money Market Select Fund # .... 362,064,360 362,064 Columbia Treasury Reserves Fund ............... 396,524,533 396,525 PAR AMOUNT ----------- U.S. Treasury, 0.41%, Due 12/11/2008 ++ ................... $ 60,038 59,973 ---------- TOTAL SHORT TERM INVESTMENTS 818,562 ---------- SHARES ----------- SECURITIES LENDING COLLATERAL - 5.63% American Beacon Money Market Select Fund # .... 51,465,149 51,465 Securities Liquidating AB Trust ............... 175,990,482 173,619 State Street Navigator Securities Lending Prime Portfolio ............................ 125,553,664 125,554 ---------- TOTAL SECURITIES LENDING COLLATERAL 350,638 ---------- TOTAL INVESTMENTS 105.83% - (COST $8,513,783) 6,592,995 LIABILITIES, NET OF OTHER ASSETS - (5.83%) (363,348) ---------- TOTAL NET ASSETS - 100.00% $6,229,647 ========== See accompanying notes 9 AMERICAN BEACON LARGE CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 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, 2008. ++ At October 31, 2008, security pledged as collateral for open futures contracts. # The Fund is affiliated by having the same investment advisor. FUTURES CONTRACTS (DOLLARS IN THOUSANDS) UNREALIZED NUMBER OF EXPIRATION MARKET APPRECIATION/ CONTRACTS DATE VALUE (DEPRECIATION) --------- ---------- -------- -------------- Emini S&P 500 Index .... 8,111 Dec 2008 $392,289 $(102,034) ======== ========= See accompanying notes 10 AMERICAN BEACON LARGE CAP VALUE FUND(SM) STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2008 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS: Investments in unaffiliated securities, at value (A C) ...... $ 6,179,466 Investments in affiliated securities, at value B ............ 413,529 Receivable for investments sold ............................. 8,277 Dividends and interest receivable ........................... 11,982 Receivable for fund shares sold ............................. 10,723 Receivable for tax reclaims ................................. 119 Receivable for variation margin on open futures contracts ... 2,352 Prepaid expenses ............................................ 179 ------------ TOTAL ASSETS ............................................. 6,626,627 ------------ LIABILITIES: Payable for investments purchased ........................... 26,022 Payable upon return of securities loaned .................... 353,010 Payable for fund shares redeemed ............................ 9,497 Management and investment advisory fees payable (Note 2) .... 5,206 Administrative service and service fees payable ............. 2,297 Other liabilities ........................................... 948 ------------ TOTAL LIABILITIES ........................................ 396,980 ------------ NET ASSETS ..................................................... $ 6,229,647 ============ ANALYSIS OF NET ASSETS: Paid-in-capital ............................................. 9,288,234 Undistributed net investment income ......................... 133,193 Accumulated net realized loss ............................... (1,168,958) Unrealized depreciation of investments, futures contracts, and foreign currency ..................................... (2,022,822) ------------ NET ASSETS ..................................................... $ 6,229,647 ============ SHARES OUTSTANDING (NO PAR VALUE): Institutional Class ......................................... 135,804,760 ============ PlanAhead Class ............................................. 251,609,451 ============ Service Class ............................................... 7,007,430 ============ AMR Class ................................................... 33,419,432 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE: Institutional Class ......................................... $ 15.01 ============ PlanAhead Class ............................................. $ 14.29 ============ Service Class ............................................... $ 14.19 ============ AMR Class ................................................... $ 14.88 ============ - ---------- (A) Cost of investments in unaffiliated securities ............. $ 8,100,254 (B) Cost of investments in affiliated securities ............... $ 413,529 (C) Market value of securities on loan ......................... $ 355,140 See accompanying notes 11 AMERICAN BEACON LARGE CAP VALUE FUND(SM) STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 2008 (IN THOUSANDS) INVESTMENT INCOME: Dividend income from unaffiliated securities (net of foreign taxes)* .................................................. $ 209,773 Dividend income from affiliated securities .................. 16,677 Interest income ............................................. 822 Income derived from securities lending, net ................. 2,806 ------------ TOTAL INVESTMENT INCOME ............................... 230,078 ------------ EXPENSES: Management and investment advisory fees (Note 2) ............ 23,405 Administrative service fees (Note 2): Institutional Class ...................................... 6,624 PlanAhead Class .......................................... 12,471 Service Class ............................................ 274 AMR Class ................................................ 35 Transfer agent fees: Institutional Class ...................................... 148 PlanAhead Class .......................................... 246 Service Class ............................................ 5 AMR Class ................................................ 26 Custody and fund accounting fees ............................ 692 Professional fees ........................................... 132 Registration fees and expenses .............................. 123 Service fees: PlanAhead Class (Note 2) ................................. 12,209 Service Class (Note 2) ................................... 268 Distribution fees - Service Class (Note 2) .................. 268 Prospectus and shareholder reports .......................... 1,144 Other expenses .............................................. 619 ------------ TOTAL EXPENSES ........................................ 58,689 ------------ NET INVESTMENT INCOME .......................................... 171,389 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from: Investments .............................................. (923,625) Commission recapture (Note 1) ............................ 245 Futures contracts ........................................ (225,334) Change in net unrealized appreciation or depreciation of: Investments .............................................. (2,925,482) Futures contracts ........................................ (106,413) ------------ NET LOSS ON INVESTMENTS ............................... (4,180,609) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... $ (4,009,220) ============ * Foreign taxes ............................................. $ 345 See accompanying notes 12 AMERICAN BEACON LARGE CAP VALUE FUND(SM) STATEMENT OF CHANGES OF NET ASSETS (IN THOUSANDS) Year Ended Year Ended October 31, October 31, 2008 2007 ------------ ----------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income ....................................... $ 171,389 $ 120,501 Net realized gain (loss) on investments, futures contracts, and foreign currency transactions ........................ (1,148,714) 254,832 Change in net unrealized appreciation or (depreciation) of investments, futures contracts, and foreign currency translations ............................................. (3,031,895) 458,866 ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ......................................... (4,009,220) 834,199 ----------- ----------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class ...................................... (41,356) (14,678) PlanAhead Class .......................................... (76,907) (35,816) Service Class ............................................ (1,578) (422) AMR Class ................................................ (16,885) (13,818) Net realized gain on investments: Institutional Class ...................................... (71,604) (28,455) PlanAhead Class .......................................... (153,834) (78,015) Service Class ............................................ (3,382) (1,093) AMR Class ................................................ (26,071) (23,934) ----------- ----------- NET DISTRIBUTIONS TO SHAREHOLDERS ..................... (391,617) (196,231) ----------- ----------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares ............................... 3,966,783 4,667,772 Reinvestment of dividends and distributions ................. 370,495 185,535 Cost of shares redeemed ..................................... (2,471,194) (1,336,091) ----------- ----------- NET INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS ....................................... 1,866,084 3,517,216 ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS .......................... (2,534,753) 4,155,184 ----------- ----------- NET ASSETS: Beginning of period ......................................... 8,764,400 4,609,216 ----------- ----------- END OF PERIOD * ............................................. $ 6,229,647 $ 8,764,400 =========== =========== * Includes undistributed net investment income of .............. $ 133,193 $ 98,502 =========== =========== See accompanying notes 13 AMERICAN BEACON LARGE CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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. Effective September 12, 2008, American Beacon Advisors, Inc. (the "Manager") became a wholly-owned subsidiary of Lighthouse Holdings, Inc., which is indirectly owned by investment funds affiliated with Pharos Capital Group, LLC and TPG Capital, L.P., two leading private equity firms. Prior to September 12, the Manager was a wholly-owned subsidiary of AMR Corporation ("AMR"), the parent company of American Airlines, Inc. ("American"). 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: - ------ --------------------------------------------------------------------------- INSTITUTIONAL CLASS Investors making an initial investment of $2 million PLANAHEAD CLASS General public and investors investing through an intermediary SERVICE CLASS Investors investing through an intermediary AMR CLASS Investors in the tax-exempt retirement and benefit plans of AMR Corporation and its affiliates Administrative service fees, service fees and distribution fees vary amongst the classes as described more fully in footnote 2. 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 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(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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 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, 2008, 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. In March 2008, FASB issued Statement on Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS 161"), which is effective for fiscal years and interim periods beginning after November 15, 2008. FAS 161 requires enhanced disclosures about derivative and hedging activities, including how such activities are accounted for and their effect on financial position, performance and cash flows. The Manager is currently evaluating the impact the adoption of FAS 161 will have on the Fund's financial statements and related disclosures. Other Under the Trust's organizational documents, its officers and directors are indemnified against certain liability arising out of the performance of their duties to the Trust. In the normal course of business, the Trust enters into contracts that provide indemnification to the other party or parties against potential costs or liabilities. The Trust's maximum exposure under these arrangements is dependent on claims that may be made in the future and, therefore, cannot be estimated. The Trust has had no prior claims or losses pursuant to any such agreement. 2. TRANSACTIONS WITH AFFILIATES Management Agreement The Trust and the Manager are parties to a Management Agreement that obligates the Manager to provide or oversee the provision of all administrative, investment advisory, fund management, and securities lending services. Investment assets of the Fund are managed by multiple investment advisors which have entered into separate investment advisory agreements with the Manager. As compensation for performing the duties required under the Management Agreement, the Manager receives from the Fund an annualized fee equal to amounts paid by the Manager to sub-advisors hired by the Manager plus, through September 11, 2008, 0.10% of the average daily net assets, and from September 12, 2008, 0.05% of the average daily net assets. Management fees paid during the year ended October 31, 2008 were as follows (dollars in thousands): AMOUNTS PAID TO NET AMOUNTS MANAGEMENT MANAGEMENT INVESTMENT RETAINED BY FEE RATE FEE ADVISORS MANAGER - ------------ ---------- --------------- ----------- 0.175%-0.70% $23,405 $15,533 $7,872 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 16 AMERICAN BEACON LARGE CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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, 2008, securities lending fees paid to the Manager were $481,098. 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 received, through September 11, 2008, an annualized fee of 0.25% of the average daily net assets of the Institutional, PlanAhead and Service Classes of the Fund. From September 12, 2008, the Manager received an annualized fee of 0.30% of the average daily net assets of the Institutional, PlanAhead, and Service Classes of the Fund and 0.05% of the average daily net assets of the AMR Class 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, 2008, the Manager earned fees from the Affiliated Funds totaling $505,759 on the Fund's direct investment in the Affiliated Funds and $377,768 from the Fund's securities lending collateral invested in the Affiliated Funds. 17 AMERICAN BEACON LARGE CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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. During the year ended October 31, 2008, 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, 2008, there were no waived fees or reimbursed expenses subject to potential recovery. 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. The Fund adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainties in Income Taxes" ("FIN 48"), on November 1, 2007. FIN 48 sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. The implementation of FIN 48 did not result in any unrecognized tax benefits in the accompanying financial statements. Each of the tax years in the three year period ended October 31, 2008 remains subject to examination by the Internal Revenue Service. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in "Other expenses" on the Statement of Operations. 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, 2008 and October 31, 2007 were as follows (in thousands): YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, 2008 2007 ----------- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME* Institutional Class ................... $ 65,641 $ 20,725 PlanAhead Class ....................... 129,081 52,395 Service Class ......................... 2,725 18,904 AMR Class ............................. 25,728 654 LONG-TERM CAPITAL GAIN Institutional Class ................... 47,318 22,407 PlanAhead Class ....................... 101,660 61,436 Service Class ......................... 2,235 18,849 AMR Class ............................. 17,229 861 -------- -------- TOTAL DISTRIBUTIONS PAID .................... $391,617 $196,231 ======== ======== * For tax purposes, short-term capital gains are considered ordinary income distributions. As of October 31, 2008, the components of distributable earnings on a tax basis were as follows (in thousands): 18 AMERICAN BEACON LARGE CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 Cost basis of investments for federal income tax purposes $ 8,740,142 Unrealized appreciation ................................. 147,690 Unrealized depreciation ................................. (2,294,837) ----------- Net unrealized appreciation/(depreciation) .............. (2,147,147) Undistributed ordinary income ........................... 133,193 Undistributed long-term gain/(loss) ..................... (1,044,692) ----------- Distributable earnings .................................. $(3,058,646) =========== 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, 2008 (in thousands): Paid-in-capital.................................................................................... $ 13 Undistributed net investment income................................................................ 28 Accumulated net realized gain (loss)............................................................... (41) Unrealized appreciation (depreciation) of investments, futures contracts and foreign currency...... -- At October 31, 2008 the capital loss carry forward position for federal income tax purposes was $1,044,692 expiring in 2016. (in thousands) 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, 2008 were (in thousands) $3,108,204 and $2,167,143, respectively. A summary of the Fund's direct ownership and transactions in Affiliated Funds for the year ended October 31, 2008 is set forth below (in thousands): OCTOBER 31, 2007 OCTOBER 31, 2008 AFFILIATE SHARES/MARKET VALUE PURCHASES SALES SHARES/MARKET VALUE - --------- ------------------- ---------- ---------- ------------------- Select Fund $389,578 $4,566,345 $4,593,859 $362,064 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 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 money market mutual funds, and other short-term investments, provided the investments meet certain quality and diversification requirements. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation of the collateral held may be temporarily less than the 19 AMERICAN BEACON LARGE CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 value of the securities on loan. The amount of this temporary difference at October 31, 2008 is disclosed as the calculated mark in the table below. Prior to June 1, 2008, 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. From June 1, 2008, 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, borrowers pay the Fund negotiated lenders' fees, which are divided between the Fund, the Agent, and the Manager using the same percentages as above. 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. Securities lending transactions pose certain risks to the Fund, including that the borrower may not provide additional collateral when required or return the securities when due, that the value of the short-term investments will be less than the amount of cash collateral required to be returned to the borrower, and that the cash collateral investments could become illiquid and unable to be used to return collateral to the borrower. The Fund could also experience delays and costs in gaining access to the collateral. The Fund bears the risk of any deficiency in the amount of the collateral available for return to the borrower due to any loss on the collateral invested. At October 31, 2008, the value of outstanding securities on loan and the value of collateral was as follows (in thousands): MARKET VALUE OF NON-CASH CASH COLLATERAL UNREALIZED LOSS ON CALCULATED TOTAL VALUE OF SECURITIES ON LOAN COLLATERAL POSTED BY BORROWER CASH COLLATERAL MARK COLLATERAL - ------------------ ---------- ------------------ ------------------ ---------- -------------- $355,140 $-- $353,009 $(2,371) $12,754 $363,392 Cash collateral was invested in a joint investment account, which is comprised of an investment in the Select Fund and other short-term investments. The underlying securities allocated to the Fund are stated at market value and have been included as investments on the Schedule of Investments and Statement of Assets and Liabilities. Income earned on these investments is reported as Income derived from securities lending and unrealized losses are included in the Change in unrealized appreciation and depreciation of investments on the Fund's 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. At the close of business on October 9, 2008, the joint investment account in which the Fund invests redeemed for cash and securities on behalf of the Fund its shares in the Cash Trust. Cash in the amount of $167,670 and securities (at market value) of $156,209 were received (in thousands). The cash proceeds were invested in other money market funds and the securities were invested in the Securities Liquidating AB Trust. 20 AMERICAN BEACON LARGE CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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, 2008 INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS -------------------- --------------------- ----------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------ ----------- ------- ----------- ------ -------- ------- --------- Shares sold ...................... 72,124 $1,522,430 113,619 $ 2,297,576 5,559 $111,669 1,693 $ 35,108 Reinvestment of dividends ........ 4,204 99,590 9,867 222,989 220 4,960 1,833 42,956 Shares redeemed .................. (36,318) (729,713) (81,231) (1,524,704) (2,814) (55,162) (7,797) (161,615) ------- ---------- ------- ----------- ------ -------- ------ --------- Net increase (decrease) in shares outstanding ............ 40,010 $ 892,307 42,255 $ 995,861 2,965 $ 61,467 (4,271) $ (83,551) ======= ========== ======= =========== ====== ======== ====== ========= 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) ====== ========== ======= ========== ===== ======== ======= ========= 21 AMERICAN BEACON LARGE CAP VALUE FUND(SM) FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class PlanAhead Class ---------------------------------------------------- ----------------------------------- Year Ended October 31, Year Ended October 31, ---------------------------------------------------- ----------------------------------- 2008 2007 2006 2005 2004 2008 2007 2006 ---------- ---------- -------- -------- ------- ---------- ---------- ---------- Net asset value, beginning of period .................. $ 26.03 $ 23.77 $ 21.00 $ 18.23 $ 15.62 $ 24.83 $ 22.74 $ 20.16 ---------- ---------- -------- -------- ------- ---------- ---------- ---------- Income from investment operations: Net investment income(A E) ........... 0.51 0.40 0.31 0.28 0.26 0.41 0.35 0.28 Net gains (losses) on securities (both realized and unrealized) .......... (10.41) 2.78 3.48 2.74 2.62 (9.88) 2.63 3.31 ---------- ---------- -------- -------- ------- ---------- ---------- ---------- Total income (loss) from investment operations ........................... (9.90) 3.18 3.79 3.02 2.88 (9.47) 2.98 3.59 ---------- ---------- -------- -------- ------- ---------- ---------- ---------- Less distributions: Dividends from net investment income ............................ (0.41) (0.31) (0.26) (0.25) (0.27) (0.36) (0.28) (0.25) Distributions from net realized gains on securities ..................... (0.71) (0.61) (0.76) -- -- (0.71) (0.61) (0.76) ---------- ---------- -------- -------- ------- ---------- ---------- ---------- Total distributions ..................... (1.12) (0.92) (1.02) (0.25) (0.27) (1.07) (0.89) (1.01) ---------- ---------- -------- -------- ------- ---------- ---------- ---------- Net asset value, end of period .......... $ 15.01 $ 26.03 $ 23.77 $ 21.00 $ 18.23 $ 14.29 $ 24.83 $ 22.74 ========== ========== ======== ======== ======= ========== ========== ========== Total return ............................ (39.59)% 13.76% 18.69% 16.64% 18.59% (39.72)% 13.46% 18.44% ========== ========== ======== ======== ======= ========== ========== ========== Ratios and supplemental data: Net assets, end of period (in thousands) .................... $2,038,539 $2,493,451 $958,830 $201,111 $48,451 $3,594,565 $5,198,835 $2,586,410 Ratios to average net assets (annualized): Expenses, net of waivers .......... 0.58% 0.59% 0.60% 0.60% 0.66% 0.83% 0.83% 0.85% Expenses, before waivers .......... 0.58% 0.59% 0.60% 0.60% 0.66% 0.83% 0.83% 0.85% Net investment income, net of waivers ........................ 2.19% 1.82% 1.86% 1.58% 1.49% 1.94% 1.59% 1.61% Net investment income (loss), before waivers ................. 2.19% 1.82% 1.86% 1.58% 1.49% 1.94% 1.59% 1.61% Portfolio turnover rate .............. 28% 20% 26% 25% 29% 28% 20% 26% (A) Through October 31, 2005, net investment income was calculated by subtracting class expenses per share from the Fund's net investment income per share before class expenses. (B) Not annualized. (C) Annualized. (D) Portfolio turnover rate is for the period from November 1, 2004 through October 31, 2005. (E) For purposes of this calculation, through October 31, 2007, the change in undistributed net investment income per share was derived by dividing the change in undistributed net investment income by average shares outstanding. 22 PlanAhead Class Service Class ---------------------- ------------------------------------ May Year Ended October 31, Year Ended October 31, 31 to ---------------------- -------------------------- October 2005 2004 2008 2007 2006 31, 2005 -------- ------- ------- ------- ------- -------- Net asset value, beginning of period .................. $ 17.54 $ 15.05 $ 24.70 $ 22.64 $ 20.13 $ 19.33 -------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income(A E) ........... 0.27 0.23 0.32 0.28 0.26 0.01 Net gains (losses) on securities (both realized and unrealized) .......... 2.58 2.49 (9.79) 2.62 3.27 0.79 -------- ------- ------- ------- ------- ------- Total income (loss) from investment operations ........................... 2.85 2.72 (9.47) 2.90 3.53 0.80 -------- ------- ------- ------- ------- ------- Less distributions: Dividends from net investment income ............................ (0.23) (0.23) (0.33) (0.23) (0.26) -- Distributions from net realized gains on securities ..................... -- -- (0.71) (0.61) (0.76) -- -------- ------- ------- ------- ------- ------- Total distributions ..................... (0.23) (0.23) (1.04) (0.84) (1.02) -- -------- ------- ------- ------- ------- ------- Net asset value, end of period .......... $ 20.16 $ 17.54 $ 14.19 $ 24.70 $ 22.64 $ 20.13 ======== ======= ======= ======= ======= ======= Total return ............................ 16.33% 18.26% (39.87)% 13.16% 18.18% 4.14%(B) ======== ======= ======= ======= ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands) .................... $526,357 $51,489 $99,416 $99,854 $39,077 $11,604 Ratios to average net assets (annualized): Expenses, net of waivers .......... 0.86% 0.94% 1.08% 1.08% 1.09% 1.14%(C) Expenses, before waivers .......... 0.86% 0.94% 1.08% 1.08% 1.09% 1.77%(C) Net investment income, net of waivers ........................ 1.30% 1.21% 1.69% 1.32% 1.39% 1.72%(C) Net investment income (loss), before waivers ................. 1.30% 1.21% 1.69% 1.32% 1.39% 1.09%(C) Portfolio turnover rate .............. 25% 29% 28% 20% 26% 25%(D) AMR Class --------------------------------------------------- Year Ended October 31, --------------------------------------------------- 2008 2007 2006 2005 2004 -------- -------- ---------- -------- -------- Net asset value, beginning of period .................. $ 25.80 $ 23.55 $ 20.78 $ 18.02 $ 15.44 -------- -------- ---------- -------- -------- Income from investment operations: Net investment income(A E) ........... 0.51 0.45 0.35 0.31 0.30 Net gains (losses) on securities (both realized and unrealized) .......... (10.26) 2.76 3.47 2.73 2.58 -------- -------- ---------- -------- -------- Total income (loss) from investment operations ........................... (9.75) 3.21 3.82 3.04 2.88 -------- -------- ---------- -------- -------- Less distributions: Dividends from net investment income ............................ (0.46) (0.35) (0.29) (0.28) (0.30) Distributions from net realized gains on securities ..................... (0.71) (0.61) (0.76) -- -- -------- -------- ---------- -------- -------- Total distributions ..................... (1.17) (0.96) (1.05) (0.28) (0.30) -------- -------- ---------- -------- -------- Net asset value, end of period .......... $ 14.88 $ 25.80 $ 23.55 $ 20.78 $ 18.02 ======== ======== ========== ======== ======== Total return ............................ (39.43)% 14.03% 19.08% 16.95% 18.89% ======== ======== ========== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands) .................... $497,127 $972,260 $1,024,899 $848,219 $696,206 Ratios to average net assets (annualized): Expenses, net of waivers .......... 0.32% 0.32% 0.34% 0.35% 0.39% Expenses, before waivers .......... 0.32% 0.32% 0.34% 0.35% 0.39% Net investment income, net of waivers ........................ 2.44% 2.13% 2.18% 1.87% 1.79% Net investment income (loss), before waivers ................. 2.44% 2.13% 2.18% 1.87% 1.79% Portfolio turnover rate .............. 28% 20% 26% 25% 29% 23 AMERICAN BEACON LARGE CAP VALUE FUND(SM) PRIVACY POLICY & FEDERAL TAX INFORMATION OCTOBER 31, 2008 (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, 2008, which is designated as qualifying for the dividends-received deduction, was 47.52%. For shareholders in the Fund, the percentage of dividend income distributed for the year ended October 31, 2008, which is designated as qualified dividend income under the Jobs Growth Tax Relief Act of 2003 was 64.50%. Shareholders will receive notification in January 2009 of the percentage applicable to the preparation of their 2008 income tax returns. Pursuant to Section 852 of the Internal Revenue Code, the Fund designated $168,442,426 as long-term capital gain dividends for the tax year ended October 31, 2008. 24 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS (UNAUDITED) At its May 21, 2008 meeting, the Board of Trustees ("Board" or "Trustees") considered the renewal of the existing Management Agreement ("Current Agreement") between the Manager and the American Beacon Funds ("Beacon Trust") on behalf of its Large Cap Value Fund (the "Fund") and each Investment Advisory Agreement between the Manager and a subadvisor ("Current Investment Advisory Agreement"). In preparation for the Board's consideration to renew these Current 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 9, 2008 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. On May 21, May 22 and June 4, 2008, the Board met to determine, among other matters, whether to approve a new investment management agreement ("New Agreement") between the Manager and the Fund. The New Agreement was necessary because, on April 16, 2008, AMR Corporation ("AMR"), the parent company of the Manager, entered into an agreement with Lighthouse Holdings, Inc. ("Lighthouse") pursuant to which Lighthouse would acquire all of the capital stock of the Manager ("Transaction") in exchange for cash and 10% of the capital stock of the parent corporation of Lighthouse. Upon the closing of the Transaction on September 12, 2008 ("Closing"), the Manager ceased to be a wholly owned subsidiary of AMR and became a subsidiary of Lighthouse. This change in control was deemed to be an "assignment" under the Investment Company Act of 1940 ("1940 Act") of the Fund's Current Agreement with the Manager. As required by the 1940 Act, the Fund's Current Agreement provided for its automatic termination in the event of an assignment and therefore terminated upon the Closing. To provide for the continuity of management for the Fund, the Board met to consider the New Agreement with the Manager. The New Agreement for the Fund reflects substantially the same terms as the Current Agreement for the Fund. In addition, the Current Agreement had been updated and modernized. As part of this process, the primary administrative services provided by the Manager to the Fund have been transferred to one single administrative services agreement ("New Administrative Services Agreement"). The Manager previously provided administrative services to the Fund pursuant to its Current Agreement and an Administrative Services Agreement ("Current Administrative Services Agreement"). The aggregate fee rates for the Fund under the New Agreement and the New Administrative Services Agreement are the same as the fee rates imposed under the existing agreements which they replaced. In preparation for the Board's consideration to approve the New Agreement and New Investment Advisory Agreements, the Board considered the impact to the Fund once Lighthouse directly controlled the Manager. Lighthouse indicated that it did not anticipate making any changes to the organization or structure of the Fund, to the service providers or to the aggregate fee rates under the Current Agreement. In addition, the portfolio managers at the Manager that manage the Fund were expected to continue to manage the Fund after the Closing. In that regard, the Manager and Lighthouse anticipated entering into employment contracts with certain key personnel performing or overseeing the Fund's investment program. The Board considered that there could be no assurance that these personnel would choose to remain employed by the Manager before or after the Closing. The Board noted that the Manager and the Fund would continue to operate under their existing names. Potential benefits to the Fund as a result of the Transaction included Lighthouse's intention to devote additional resources to product development and distribution of Fund shares. The Board also considered that any resulting growth of Fund assets would potentially produce economies of scale that would benefit shareholders of the Fund. With respect to the Fund, the Manager had entered into Current Investment Advisory Agreements with various subadvisors on behalf of the Fund. Upon the Closing, these Current Investment Advisory Agreements terminated automatically upon the termination of the Current Agreement. Pursuant to an exemptive order issued by the Securities and Exchange Commission ("SEC"), the Manager was permitted to enter into new or modified investment advisory 25 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS (UNAUDITED) agreements with the subadvisors ("New Investment Advisory Agreements") without approval of the Fund's shareholders, but subject to the approval of the Fund's Board. Each New Investment Advisory Agreement reflected substantially the same terms as the Current Investment Advisory Agreement for the Fund. In preparation for the Board's consideration to approve the New Agreement and New Investment Advisory Agreements, the Board held preliminary conference call meetings on April 15, 16 and 21, 2008, to discuss the New Agreement and New Investment Advisory Agreements and the effect that approving the New Agreement and New Investment Advisory Agreements would have on the Fund. The Board received a memorandum and related advice from their independent legal counsel detailing the Board's responsibilities in considering the New Agreement and New Investment Advisory Agreements. In connection with Board's consideration of the Current Agreement, Current Investment Advisory Agreements, New Agreement and New Investment Advisory Agreements, the Trustees considered, among other materials, responses by the Manager and the subadvisors to inquiries requesting: - a description of the Transaction, the effects of the Transaction on the Beacon Trust and the Board, and any proposed changes to the Beacon Trust, its service providers or fee structure and other information; - 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 Form ADV registration statement with the SEC; - 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 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 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 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 regard to the services provided to the Fund. 26 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS (UNAUDITED) In addition to the foregoing, the Manager provided the following information specific to the renewal of the Fund's Current Agreement and the approval of the Fund's New 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 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 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. In connection with the Current Agreement, Current Investment Advisory Agreements, New Agreement and New Investment Advisory Agreements, 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 of shares used for comparative purposes was the class with the longest performance history, which was 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 Current Agreement, Current Investment Advisory Agreements, New Agreement and New Investment Advisory Agreements are each referenced to herein as an "Agreement" and collectively, the "Agreements." The Trustees also received memoranda from their legal counsel detailing the Board's responsibilities pertaining to the approval of each Agreement. These memoranda explained the regulatory requirements surrounding the Trustees' process for evaluating investment advisors and the terms of the contracts. In connection with the Board's consideration of the New Agreement and each New Investment Advisory Agreement, the Trustees considered, among other information, the following factors: 1. The manner in which the Fund's assets are managed will not change as a result of the Transaction, and the same people who manage the Fund's assets are expected to continue to do so after the Transaction; 2. The aggregate fee rates payable by the Fund under the New Agreement and the New Administrative Services Agreement are the same as the fee rates payable under the Current Agreement and the Current Administrative Services Agreement; 3. The material terms regarding advisory services pursuant to the New Agreement are substantially the same as the terms of the Current Agreement; 4. The qualifications of the Manager's personnel who will provide advisory and administrative services to the Fund are not expected to change; 5. The Manager's financial condition and the post-Closing capitalization of Lighthouse; 6. The impact of the Transaction on the Manager's day-to-day operations; 7. The capabilities, experience, corporate structure and capital resources of Lighthouse; 8. The long-term business goals of Lighthouse with regard to the Manager and the Beacon Trust; 27 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS (UNAUDITED) 9. Fund shareholders will not bear any costs in connection with the Transaction, inasmuch as AMR and Lighthouse plan to bear equally the costs, fees and expenses incurred by the Fund in connection with obtaining shareholder approval of the New Agreement, the fees and expenses of accountants and attorneys relating to the Transaction and obtaining shareholder approval of the New Agreement, the fees and expenses incurred by the Fund in connection with the Transaction, and the meeting fees of the Boards for meetings held in connection with the Transaction; 10. The Fund may realize benefits as a result of the Transaction, including long-term economies of scale; 11. The potential for increased costs to the Beacon Trust in order to satisfy existing obligations under the current Trustees' retirement plan; and 12. The advisory relationship with each subadvisor would continue in the same manner as before the Transaction and that each New Investment Advisory Agreement would be substantially the same as each Current Investment Advisory Agreement. Provided below is an overview of the other primary factors the Board considered at its May 21, May 22 and June 4, 2008 meetings. The Board did not identify any particular information that was most relevant to its consideration to renew the Current Agreement and Current Investment Advisory Agreements and approve the New Agreement and New Investment Advisory Agreements, and each Trustee may have afforded different weight to the various factors. Legal counsel to the Non-interested Trustees provided the Board with memoranda regarding its responsibilities pertaining to the renewal of the Current Agreement and Current Investment Advisory Agreements and approve the New Agreement and New Investment Advisory Agreements. Based on its evaluation, the Board unanimously concluded that the terms of each Current Agreement and Current Investment Advisory Agreement were reasonable and fair and that the renewal of each Current Agreement and Current Investment Advisory Agreement was in the best interests of the Fund and its shareholders. The Board also unanimously concluded that the terms of the New Agreement and New Investment Advisory Agreements were reasonable and fair and that the approval of the New Agreement and New Investment Advisory Contracts was in the best interests of the Fund and its shareholders. In determining whether to renew the Current Agreement and the Current Investment Advisory Agreements and approve the New Agreement and New Investment Advisory Agreements, the Trustees considered the best interests of the Fund. While the Current Agreement and Current Investment Advisory Agreements for the Fund was considered at the Board meetings on May 21, 2008, and the New Agreement and New Investment Advisory Agreement for the Fund was considered at the meetings on May 21, May 22 and June 4, 2008, 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 each subadvisor for the Fund; (3) the costs incurred by the Manager and (to the extent provided) the subadvisors in rendering their services and their resulting profits or losses; (4) the extent to which economies of scale have been taken into account in setting each 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 and Lighthouse regarding certain key aspects of the materials submitted in support of the renewal. Nature, Extent and Quality of Services. With respect to the renewal of the Fund's Current Agreement and the approval of the Fund's New 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 28 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS (UNAUDITED) 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. With respect to the renewal of the Current Investment Advisory Agreements and the approval of the New 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, determined to renew the Current Agreement and Current Investment Advisory Agreements, and approve each New Agreement and New Investment Advisory Agreements for the Fund. 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(es) and peer group. 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. In considering the renewal of the Current Agreement and the approval of the New Agreement, the Trustees considered the following additional factors: (1) the Large Cap Value Fund outperformed the peer universe median for the three-, five-, and ten-year periods ended March 31, 2008 and (2) the expense ratio of the Institutional Class of Fund shares was lower than its Lipper expense group median. In considering the renewal of the Current Investment Advisory Agreements and the approval of the New Investment Advisory Agreements with Barrow, Hanley, Mewhinney & 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 the following additional factors: (1) Barrow outperformed the peer universe median for the five- and ten-year periods ended March 31, 2008 but underperformed for the one- and three- year periods; (2) Brandywine outperformed the peer universe median for the one-, three-, five- and ten-year periods ended March 31, 2008; (3) Hotchkis outperformed the peer universe median for the five- and ten-year periods ended March 31, 2008 but underperformed for the one- and three- year periods; (4) MetWest outperformed the peer universe median for the one-; three- and five-year periods ended March 31, 2008; (5) 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; and (6) the Manager's recommendation to continue to retain each subadvisor. Costs of the Services to be Provided to the Fund and the Projected Profits to be Realized by the Manager from its Relationship with the Fund. 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. The profits or losses were noted at both an individual Fund level and at an aggregate level for all Funds. The Board also considered that the Current and New Agreements for the Beacon Trust stipulate that, to the extent that a Fund invests all of its investable assets in another registered investment company (i.e., is a Feeder Fund), 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 Fund, the difference reflects the greater level of responsibility and regulatory requirements associated with managing the Fund. The Board also noted that the Manager proposed to continue any expense waivers and reimbursements for the Fund and classes that were in place during the last fiscal year. 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 29 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS (UNAUDITED) 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 certain classes of the Fund may maintain higher expense ratios in order to compensate third-party distributors. 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 many subadvisory fee rates. The Board also noted that, for purposes of determining the fee rates chargeable to the Fund, many subadvisors have agreed to take into account other assets of AMR and its pension plans that are managed by the subadvisors. Thus, the Funds are able to receive lower effective fee rates. The Board also noted that the Fund has grown its shareholder base, which has spread fixed costs over a larger shareholder and asset base. 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 for the Fund provides for a reasonable sharing of benefits from any economies of scale with the Fund. Benefits Derived from the Relationship with the Fund. 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 Manager's relationship with the Fund 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 Beacon Trust at a relatively low cost. In this regard, the Board considered that the benefit plans of AMR have invested substantial assets in the Fund, which helps reduce costs for other Fund shareholders, just as the investment of other Fund shareholders helps to reduce costs for AMR's benefit plans. In addition, the Board considered that certain of the subadvisors reimburse the Manager for certain of its costs relating to distribution activities for the Fund. The Board also considered that the Fund did not pay commissions to any affiliated broker-dealer of the Manager during the most recent fiscal year ended October 31, 2007. Based on the foregoing information, the Board concluded that the potential benefits accruing to the Manager and the subadvisors by virtue of its relationships with the Fund appears to be fair and reasonable. Conclusion. Based on these and other considerations, the Trustees concluded that the fees paid to the Manager and the subadvisors under the Agreements are fair and reasonable, determined that the Large Cap Value Fund and its shareholders would benefit from the Manager's and subadvisors' continued management of the Fund, approved the renewal of the Current Agreement and Current Investment Advisory Agreements and approved the New Agreement and New Investment Advisory Agreements with respect to the Large Cap Value Fund. 30 RESULTS FROM SHAREHOLDER MEETING (UNAUDITED) A special meeting of shareholders of the American Beacon Funds (the "Trust") was held on August 22, 2008. The shareholders of the Large Cap Value Fund (the "Fund"), a portfolio of the Trust, approved a new investment management agreement between American Beacon Advisors, Inc. and the Fund. This proposal required a majority of shareholders of the Fund to achieve a quorum; however, a quorum was not present for the Fund and therefore not enough votes in favor of the proposal for shareholder approval for the Fund. The meeting was adjourned to a second special shareholder meeting on August 27, 2008 where a quorum was present, but there were not enough votes in favor of the proposal for shareholder approval. The meeting adjourned for a third special meeting of shareholders on September 9, 2008, where a quorum was present for the Fund and the proposal was approved by shareholders. The following are the results of the shareholder votes for this proposal: FOR AGAINST ABSTAIN NON-VOTING - ---------------- ------------- ------------- ------------- 3,437,073,149.94 53,020,222.65 90,146,785.36 1,505,291,140.29 A special meeting of the shareholders of the American Beacon Funds (the "Trust") was held on August 22, 2008. The shareholders of the Trust approved the re-election of five of the current Trustees to the Board of the American Beacon Trust and to elect three additional Trustees to the Board. This proposal required a majority of the shareholders of the Trust to vote to achieve a quorum. The following are the results of the election of each Trustee: Alan D. Feld Affirmative................................................. 12,634,553,751.62 Withhold.................................................... 519,818,259.90 W. Humphrey Bogart Affirmative................................................. 12,999,746,162.82 Withhold.................................................... 154,625,848.70 Brenda A. Cline Affirmative................................................. 13,009,050,779.42 Withhold.................................................... 145,321,232.10 Richard A. Massman Affirmative................................................. 13,004,756,096.42 Withhold.................................................... 149,615,915.10 R. Gerald Turner Affirmative................................................. 13,004,259,224.92 Withhold.................................................... 150,112,786.60 Thomas M. Dunning Affirmative................................................. 13,003,350,236.48 Withhold.................................................... 151,021,775.04 Eugene J. Duffy Affirmative................................................. 12,985,296,316.39 Withhold.................................................... 169,075,695.13 Paul J. Zucconi Affirmative................................................. 12,985,296,316.39 Withhold.................................................... 169,075,695.13 31 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* Alan D. Feld** (71) Trustee since 1996 Sole Shareholder of a professional corporation which is a Partner in the law firm of Akin, Gump, Strauss, Hauer & Feld, LLP (1960-Present); Director, Clear Channel Communications (1984-Present); Trustee, CenterPoint Properties (1994-2006); Member, Board of Trustees, Southern Methodist University ; Member, Board of Visitors, M.D. Anderson Hospital; Board of Visitors, Zale/Lipshy Hospital. NON-INTERESTED TRUSTEES Term Lifetime of Trust until removal, resignation or retirement* W. Humphrey Bogart (64) Trustee since 2004 Board Member, Baylor University Medical Center Foundation (1992-2004); Consultant, New River Canada Ltd. (mutual fund servicing company) (1998-2003); 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). Brenda A. Cline (47) 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 (1999-2007). Eugene J. Duffy (54) Trustee since 2008 Principal and Executive Vice President, Paradigm Asset Management (1994-Present); Director, Sunrise Bank of Atlanta (2008-Present); Chairman, Special Contributions Fund Board of Trustees, National Association for the Advancement of Colored People (2007-Present); Trustee, National Association for the Advancement of Colored People (2000-Present); Board of Visitors, Emory University (2006-Present); Trustee, Atlanta Botanical Garden (2006-Present); Board Member, Willie L. Brown Jr. Institute on Politics and Public Service (2001-Present); Chair, National Association of Securities Professionals (2000-2002); Deputy Chief Administrative Officer, City of Atlanta (1985-1990). Thomas M. Dunning (65) Trustee since 2008 Consultant, (2008-Present); Chairman (2003-2008) and Chief Executive Officer (2003-2007), Lockton Dunning Benefits (consulting firm in employee benefits); Director, Oncor Electric Delivery Company LLC; Advisory Director, Comerica Texas; Immediate Past Chairman and Board Member, Dallas Citizens Council; Director, Baylor Health Care System Foundation; State Vice Chair, State Fair of Texas; Board Member, Southwestern Medical Foundation. 32 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 - ------------------------ ------------------- -------------------------------------------------------------- Richard A. Massman (65) Trustee since 2004 Senior Vice President and General Counsel, Hunt Consolidated, Chairman since 2008 Inc. (holding company engaged in oil and gas exploration and production, refining, real estate, farming, ranching and venture capital activities) (1994-Present). Chairman (2007-Present) and Director (2005-Present), The Dallas Opera Foundation; Chairman (2006-Present) and Director (2005-Present), Temple Emanu-El Foundation; Trustee, Presbyterian Hospital Foundation (2006-Present). R. Gerald Turner (62) 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 (2003-2007); Member, Salvation Army of Dallas Board of Directors; Member, Methodist Hospital Advisory Board; Co-Chair, Knight Commission on Intercollegiate Athletics. Paul J. Zucconi, CPA (67) Trustee since 2008 Director, Affirmative Insurance Holdings, Inc. (producer of nonstandard automobile insurance) (2004-present); Director, Titanium Metals Corporation (producer of titanium melted and mill products and sponge) (2002- present); Director, Torchmark Corporation (life and health insurance products) (2002-present); Director, National Kidney Foundation of North Texas (2003-Present); Director, Dallas Chapter of National Association of Corporate Directors (2004-Present); Partner, KPMG (1976-2001). Term OFFICERS One Year William F. Quinn** (60) President from Chairman (2006-Present) and CEO (2006-2007), President 1987 to 2007 (1986-2006) and Director (2003-Present), American Beacon and 2008 to Present Advisors, Inc.; Chairman (1989-2003) and Director (1979-1989, Executive Vice 2003-Present), American Airlines Federal Credit Union; President from Director, Crescent Real Estate Equities, Inc.(1994-2007); 2007 to 2008 Director, Pritchard, Hubble & Herr, LLC (investment advisor) Trustee from (2001-2006); Director of Investment Committee, Southern 1987 to 2008 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 (1995-2008); Trustee, American Beacon Select Funds (1999-2008); Trustee, American Beacon Master Trust (1995-2008). Rosemary K. Behan (49) 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. 33 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 - ------------------------ ------------------- -------------------------------------------------------------- Brian E. Brett (48) 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 (42) 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 (54) VP since 1989 Vice President, Fixed Income Investments, American Beacon Advisors, Inc. (1988-Present). Rebecca L. Harris (41) Treasurer since Vice President, Finance, American Beacon Advisors, Inc. 1995 (1995-Present). Christina E. Sears (37) 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, provided, however, that the Board may determine to grant one or more annual exemptions to this requirement. ** Mr. Feld is deemed to be an "interested person" of the Trusts, as defined by the 1940 Act. Mr. Feld's law firm of Akin, Gump, Strauss, Hauer & Feld LLP has provided legal services within the past two fiscal years to the Manager and one or more of the Trust's and Master Trust's sub-advisors. 34 (This page intentionally left blank) 35 (This page intentionally left blank) 36 (This page intentionally left blank) 37 (AMERICAN BEACAN 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: Visit our american_beacon.funds@ambeacon.com 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 PORTFOLIO AVAILABILITY OF PROXY VOTING POLICY SCHEDULES 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 DISTRIBUTOR STATE STREET BOSTON FINANCIAL REGISTERED PUBLIC FORESIDE FUND BANK AND TRUST DATA SERVICES ACCOUNTING FIRM SERVICES Boston, Kansas City, ERNST & YOUNG LLP Portland, Maine Massachusetts Missouri 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 and American Beacon Large Cap Value Fund are service marks of American Beacon Advisors, Inc. AR 10/08 64672 GUIDANCE | VISION | EXPERIENCE (AMERICAN BEACON FUNDS(SM) LOGO) ANNUAL REPORT (GRAPHIC) October 31, 2008 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............................................ 74 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, 2008 (PHOTO OF WILLIAM F. QUINN) FELLOW SHAREHOLDERS, Enclosed is the American Beacon Small Cap Value Fund Annual Report for the twelve months ended October 31, 2008. During the past twelve months, we experienced unprecedented market turmoil in all asset classes. Initially, the sub-prime mortgage crisis and rising oil and food prices contributed to an economic slowdown that culminated in a market-wide credit crisis and squeeze in liquidity. The situation reached once-in-a-lifetime crisis proportions in mid-September with the bankruptcy of Lehman Brothers, the resulting losses incurred by investors in money market funds, and the unprecedented government intervention in the financial system. From September 15th to October 31st, the Dow Jones Industrial Average declined almost 20% on the threat of a global recession. The American Beacon Small Cap Value Fund - Institutional Class reported a return of -34.84% for the one-year period ended October 31, 2008. The S&P 500 and Dow Jones Industrial Average indices reported negative returns of - -36.10% and -31.13%, respectively, for this period. During these times, it is important to remember that the American Beacon Small Cap Value Fund's investment strategy is based on long-term investing. Short-term pain can lead to long-term gains as we saw when the positive performance by our value-oriented Funds followed the burst of the technology bubble earlier this decade. We believe the Fund's fundamental value investment philosophy and lower than average expense ratio will continue to serve it well over the longer term. Please review the enclosed market overview, portfolio listings, and detailed financial data. As always, we welcome the opportunity to serve your financial needs. To obtain further details about the American Beacon Funds family or to access your account information, please visit our website at www.americanbeaconfunds.com. Thank you for your continued confidence in the American Beacon Funds. Sincerely, /s/ William F. Quinn William F. Quinn President American Beacon Funds 1 DOMESTIC EQUITY MARKET OVERVIEW OCTOBER 31, 2008 (UNAUDITED) The financial crisis that began in August 2007 accelerated into uncharted territory in 2008, punctuated by the sharp decline in equity prices in October. Earlier concerns about rising prices for oil, food and commodities were brushed aside as the credit crisis evolved into a full-blown liquidity crisis. In early 2008, monetary policymakers were very aggressive, ultimately cutting the Fed Funds rate to 1% as deflation concerns began to displace talk of inflation. The Federal Reserve ("Fed") was innovative in contending with the financial crisis by developing (or resurrecting) policy initiatives and lending facilities in attempts to target liquidity without further pressuring the dollar or adding to worries regarding inflation. Nevertheless, in the spring of 2008, market interest rates had once again begun to move against the Fed, this time upward, as global investors anticipated a pause in, if not a completion of, the Fed's easing campaign. Market volatility prevailed in the second and third calendar quarters of 2008. Only a few months back, investors were worried about rising inflation and the potential for higher interest rates; however, events during the past few months changed those discussions. The government takeovers of Fannie Mae and Freddie Mac, the Lehman Brothers bankruptcy, the near demise of insurance giant American International Group (AIG), government-arranged bank mergers and bank failures turned the conversations to de-leveraging, deflation and declining rates. Signs of a recession accelerated as third quarter 2008 Gross Domestic Product contracted despite the massive policy response. Oil prices fell rapidly from a high of approximately $145 per barrel during the twelve-month period to close below $70 per barrel on October 31, 2008, while housing prices saw no signs of a bottom. Worries of global recession were also pervasive throughout commodities markets as major indices sold off considerably while the dollar gained against most currencies. All of this occurred in the midst of a presidential election with its attendant uncertainties. Investors took note, driving prices substantially lower in every major equity market over the past twelve months. In spite of these events, there are many long-term positives in the U.S. economy. The biggest one is the flexibility of our system and its ability to adapt: both policymakers and market participants reacted quickly (and sometimes overreacted) to changing circumstances. Other factors such as the existence of insurance safety nets, a still relatively low (though rising) unemployment rate, technology-driven productivity gains, solid balance sheets for non-financial companies and improving global competitiveness all factor into a potentially positive long-term outlook. Consequently, while households and financial firms have limited borrowing capacity and have received most of the media attention, non-financial companies are not overburdened by debt and are in a better position than in past cycles to manage their businesses in a slowing economy. While the actions taken should help to stem the current crisis, obstacles remain. However, with the full attention of world central banks, governments and regulators, fundamentals have the opportunity to prevail as financial markets make their way through the current uncertainty. 2 PERFORMANCE OVERVIEW AMERICAN BEACON SMALL CAP VALUE FUND(SM) OCTOBER 31, 2008 (UNAUDITED) The Institutional Class of the Small Cap Value Fund returned -34.84% for the twelve months ended October 31, 2008, trailing the Russell 2000(R) Value Index (the "Index") return of -30.54% and the Lipper Small-Cap Value Funds Index return of -34.03% for the same period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT FOR THE PERIOD FROM 12/31/98* THROUGH 10/31/08 * Inception of Fund (PERFORMANCE GRAPH) ANNUALIZED TOTAL RETURNS PERIODS ENDED 10/31/08 ---------------------------------------- VALUE OF $10,000 SINCE 12/31/98- 1 YEAR 5 YEARS INCEPTION 10/31/08 ------ ------- --------- --------- Institutional Class(1, 5)............ -34.84% 1.61% 7.55% $19,284 PlanAhead Class(1, 2, 5)............. -35.04% 1.36% 7.28% 18,859 Service Class(1, 3, 5)............... -35.19% 1.09% 7.12% 18,622 AMR Class(1, 2, 5)................... -34.71% 1.87% 7.84% 19,736 Lipper Small-Cap Value Funds Index(4).............. -34.03% 2.28% 6.56% 17,437 Russell 2000 Value Index(4).......................... -30.54% 3.05% 6.90% 18,882 (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 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 0.81%, 1.06%, 1.32% and 0.55%, 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 through both stock selection and sector allocation. Most of the Fund's poor performance in stock selection resulted primarily from its holdings in the Industrials, Financials, Utilities, and Materials sectors. Individual holdings that had the largest impact on performance in the Industrials sector were Crane (down 64.9%), United Rentals (down 70.0%), and Timken (down 51.2%). Conseco (down 88.2%), Protective Life (down 80.1%), and MI Developments (down 63.8%) detracted the most relative value in the Financials sector. In the Utilities sector, Great Plains Energy (down 30.6%), PNM Resources (down 51.8% for the period the Fund owned the security), and Black Hills Power & Light (down 41.0%) were the largest detractors, while Georgia Gulf (down 64.0% for the period the Fund owned the security), Westlake Chemical (down 40.7% for the period the Fund owned the security), and Tronox (down 98.3% for the period the Fund owned the security) hurt performance most in the Materials sector. The Fund's overweight in the Consumer Discretionary sector, the second worst performing sector in the Index, and an underweight in the Financials 3 PERFORMANCE OVERVIEW AMERICAN BEACON SMALL CAP VALUE FUND(SM) OCTOBER 31, 2008 (UNAUDITED) sector detracted from the Fund's performance relative to 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 ---------- Hanover Insurance Group, Inc. ........................ 1.0% Regal-Beloit Corp. ................................... 0.9% Atmos Energy Corp. ................................... 0.9% Great Plains Energy, Inc. ............................ 0.8% Korn/Ferry International ............................. 0.8% Tidewater, Inc. ...................................... 0.8% Ingram Micro, Inc. ................................... 0.7% Portland General Electric Co. ........................ 0.7% Citi National Corp. .................................. 0.7% Odyssey Re Holdings Corp. ............................ 0.6% SECTOR ALLOCATION % OF EQUITIES -------- Financials ........................................... 25.6% Industrials .......................................... 21.6% Consumer Discretionary ............................... 13.8% Information Technology ............................... 12.7% Utilities ............................................ 7.1% Health Care .......................................... 6.2% Energy ............................................... 5.8% Materials ............................................ 3.4% Consumer Staples ..................................... 2.7% Telecommunication Services ........................... 1.1% 4 AMERICAN BEACON SMALL CAP VALUE FUND(SM) FUND EXPENSES OCTOBER 31, 2008 (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, 2008 through October 31, 2008. 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. Beginning Ending Expenses Paid Account Account During Value Value Period* 5/1/08 10/31/08 5/1/08-10/31/08 --------- --------- --------------- INSTITUTIONAL CLASS Actual $1,000.00 $ 712.33 $3.44 Hypothetical $1,000.00 $1,021.11 $4.06 (5% return before expenses) PLANAHEAD CLASS Actual $1,000.00 $ 711.29 $4.52 Hypothetical $1,000.00 $1,019.86 $5.33 (5% return before expenses) SERVICE CLASS Actual $1,000.00 $ 710.60 $5.55 Hypothetical $1,000.00 $1,018.65 $6.55 (5% return before expenses) AMR CLASS Actual $1,000.00 $ 713.14 $2.41 Hypothetical $1,000.00 $1,022.32 $2.85 (5% return before expenses) * Expenses are equal to the Fund's annualized expense ratios for the six-month period of 0.80%, 1.05%, 1.29% and 0.56% 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 (366) 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, 2008, 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, 2008, 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 at October 31, 2008, 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 23, 2008 6 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) COMMON STOCKS - 87.87% COMMUNICATIONS - 0.56% MEDIA - 0.56% AH Belo Corp. + ............................... 85,440 $ 283 Courier Corp. + ............................... 53,379 929 Cox Radio, Inc. ## + .......................... 150,000 817 Hearst-Argyle Television, Inc. + .............. 36,100 541 Meredith Corp. + .............................. 193,090 3,740 New York Times Co. + .......................... 313,519 3,135 Westwood One, Inc. ## ......................... 2,022,000 526 ----------- TOTAL COMMUNICATIONS 9,971 ----------- CONSUMER DISCRETIONARY - 12.11% AUDIO/VIDEO PRODUCTS - 0.04% Harman International Industries, Inc. + ....... 38,560 708 ----------- AUTO COMPONENTS - 1.04% American Axle & Manufacturing Holdings, Inc. + ..................................... 1,015,600 3,646 ArvinMeritor, Inc. + .......................... 127,000 752 ATC Technology Corp. ## ....................... 22,200 487 Autoliv, Inc. ## .............................. 16,000 342 BorgWarner, Inc. .............................. 21,863 491 Gentex Corp. + ................................ 770,170 7,386 Lear Corp. ## + ............................... 779,700 1,567 Modine Manufacturing Co. + .................... 99,950 740 Superior Industries International, Inc. + ..... 59,900 856 TRW Automotive Holdings Corp. ## .............. 323,600 2,045 ----------- 18,312 ----------- DISTRIBUTORS - 0.14% WESCO International, Inc. ## .................. 125,300 2,491 ----------- HOTELS, RESTAURANTS & LEISURE - 1.53% Ameristar Casinos, Inc. + ..................... 654,300 6,026 CBRL Group, Inc. + ............................ 97,911 1,951 CEC Entertainment, Inc. ## .................... 15,000 385 Darden Restaurants, Inc. ...................... 45,000 998 Domino's Pizza, Inc. ## + ..................... 154,900 922 Jack in the Box, Inc. ## + .................... 202,000 4,060 JAKKS Pacific, Inc. ## + ...................... 134,300 3,004 Lodgian, Inc. ## .............................. 492,700 2,513 Panera Bread Co. ## + ......................... 96,760 4,366 PF Chang's China Bistro, Inc. ## + ............ 57,340 1,173 Speedway Motorsports, Inc. .................... 108,600 1,732 ----------- 27,130 ----------- SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) HOUSEHOLD DURABLES - 1.27% Black & Decker Corp. + ........................ 14,300 $ 724 Blyth, Inc. ................................... 52,000 447 Cavco Industries, Inc. ## + ................... 35,930 1,223 Ethan Allen Interiors, Inc. + ................. 197,990 3,542 Furniture Brands International, Inc. + ........ 190,800 1,086 Knoll, Inc. ................................... 194,600 2,814 Lancaster Colony Corp. + ...................... 27,597 870 M.D.C. Holdings, Inc. + ....................... 127,320 4,282 NVR, Inc. ## + ................................ 3,720 1,823 Russ Berrie & Co., Inc. ## .................... 35,800 97 Ryland Group, Inc. + .......................... 150,280 2,824 Stanley Works ................................. 64,800 2,121 Universal Electronics, Inc. ## ................ 26,202 554 ----------- 22,407 ----------- INTERNET & CATALOG RETAIL - 0.31% Insight Enterprises, Inc. ## .................. 258,400 2,514 NutriSystem, Inc. + ........................... 34,300 486 School Specialty, Inc. ## + ................... 34,300 720 Systemax, Inc. + .............................. 128,400 1,818 ----------- 5,538 ----------- LEISURE EQUIPMENT & PRODUCTS - 0.30% Brunswick Corp. + ............................. 350,624 1,217 Polaris Industries, Inc. + .................... 42,600 1,434 Scholastic Corp. + ............................ 147,300 2,735 ----------- 5,386 ----------- MULTILINE RETAIL - 0.28% BJ's Wholesale Club, Inc. ## + ................ 141,080 4,966 ----------- SPECIALTY RETAIL - 5.59% Aaron Rents, Inc. + ........................... 156,100 3,870 American Greetings Corp. + .................... 95,300 1,113 AnnTaylor Stores Corp. ## ..................... 158,390 1,991 Asbury Automotive Group, Inc. + ............... 119,320 388 AutoNation, Inc. ## + ......................... 393,300 2,702 Bebe Stores, Inc. + ........................... 160,180 1,419 Cabela's, Inc. ## + ........................... 571,700 4,545 Charming Shoppes, Inc. ## + ................... 167,200 184 Childrens Place Retail Stores, Inc. ## + ...... 66,070 2,209 Conn's, Inc. ## + ............................. 27,800 377 Dick's Sporting Goods, Inc. ## + .............. 179,661 2,752 Dress Barn, Inc. ## + ......................... 250,500 2,395 Family Dollar Stores, Inc. .................... 392,000 10,549 Finish Line, Inc., Class A Shares ............. 4,555 43 Foot Locker, Inc. ............................. 712,270 10,413 Group 1 Automotive, Inc. + .................... 307,100 3,086 See accompanying notes 7 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) Gymboree Corp. ## ............................. 165,700 $ 4,285 Hibbett Sports, Inc. ## + ..................... 43,840 781 Interline Brands, Inc. ## ..................... 16,600 177 J Crew Group, Inc. ## ......................... 69,800 1,413 Jos. A. Bank Clothiers, Inc. ## + ............. 137,980 3,514 Lululemon Athletica, Inc. ## .................. 20,650 293 MarineMax, Inc. ## + .......................... 303,400 704 Men's Wearhouse, Inc. + ....................... 567,800 8,682 OfficeMax, Inc. ............................... 394,243 3,174 O'Reilly Automotive, Inc. ## .................. 54,160 1,468 Penske Auto Group, Inc. + ..................... 320,300 2,623 RadioShack Corp. .............................. 232,700 2,946 Regis Corp. ................................... 88,010 1,089 Rent-A-Center, Inc. ## ........................ 541,350 7,904 Sonic Automotive, Inc., A Shares + ............ 491,930 2,524 Stage Stores, Inc. + .......................... 132,420 1,021 Tractor Supply Co. ## + ....................... 82,520 3,429 Williams-Sonoma, Inc. + ....................... 258,984 2,144 Zale Corp. ## + ............................... 152,600 2,603 ----------- 98,810 ----------- TEXTILES & APPAREL - 1.61% Brown Shoe Company, Inc. + .................... 138,200 1,457 Columbia Sportswear Co. + ..................... 67,256 2,480 Jones Apparel Group, Inc. + ................... 499,300 5,547 Kenneth Cole Productions, Inc. + .............. 66,281 880 K-Swiss, Inc. + ............................... 82,339 1,246 Phillips-Van Heusen Corp. ..................... 97,100 2,380 Quiksilver, Inc. ## ........................... 1,014,400 2,627 Skechers U.S.A., Inc. ## ...................... 406,650 5,522 Timberland Co. ## ............................. 110,330 1,335 Warnaco Group, Inc. ## ........................ 72,700 2,167 Wolverine World Wide, Inc. .................... 122,345 2,875 ----------- 28,516 ----------- TOTAL CONSUMER DISCRETIONARY 214,264 ----------- CONSUMER STAPLES - 2.40% FOOD & DRUG RETAILING - 1.01% Casey's General Stores, Inc. + ................ 153,173 4,626 Ingles Markets, Inc. .......................... 55,000 1,026 Spartan Stores, Inc. + ........................ 228,800 6,175 United Natural Foods, Inc. ## + ............... 50,174 1,121 Whole Foods Market, Inc. + .................... 215,329 2,309 Winn-Dixie Stores, Inc. ## + .................. 171,170 2,571 ----------- 17,828 ----------- FOOD PRODUCTS - 1.17% Cal-Maine Foods, Inc. + ....................... 82,800 2,433 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) Chiquita Brands International, Inc. ## + ...... 178,900 $ 2,442 Del Monte Foods Co. ........................... 837,600 5,285 Herbalife Ltd. ................................ 44,500 1,087 Lance, Inc. + ................................. 54,357 1,125 Ralcorp Holdings, Inc. ## ..................... 112,050 7,584 Sanderson Farms, Inc. + ....................... 2,300 72 Smithfield Foods, Inc. ## + ................... 4,800 50 TreeHouse Foods, Inc. ## + .................... 23,400 708 ----------- 20,786 ----------- TOBACCO - 0.22% Universal Corp. + ............................. 97,500 3,860 ----------- TOTAL CONSUMER STAPLES 42,474 ----------- ENERGY - 5.05% ENERGY EQUIPMENT & SERVICES - 2.88% Basic Energy Services, Inc. ## ................ 112,600 1,540 CARBO Ceramics, Inc. + ........................ 42,056 1,820 Complete Production Services, Inc. ## ......... 284,800 3,529 Dril-Quip, Inc. ## ............................ 74,050 1,829 Grey Wolf, Inc. + ............................. 265,544 1,705 Gulf Island Fabrication, Inc. ................. 23,200 457 Gulfmark Offshore, Inc. ## .................... 112,100 4,148 Helmerich & Payne, Inc. ....................... 36,800 1,263 Key Energy Services, Inc. ## .................. 189,730 1,176 Oil States International, Inc. ## ............. 229,500 5,308 Parker Drilling Co. ## + ...................... 215,100 1,101 Patterson-UTI Energy, Inc. .................... 78,300 1,039 SEACOR Holdings, Inc. ## ...................... 61,500 4,131 Tidewater, Inc. ............................... 311,570 13,588 Unit Corp. ## ................................. 222,275 8,344 ----------- 50,978 ----------- OIL & GAS - 2.17% Arena Resources, Inc. ## ...................... 66,650 2,032 Cabot Oil & Gas Corp. ......................... 65,232 1,831 Callon Petroleum Co. ## ....................... 163,050 1,683 Cimarex Energy Co. ............................ 27,000 1,092 CNX Gas Corp. ## + ............................ 61,005 1,543 Encore Acquisition Co. ## ..................... 93,500 2,913 EXCO Resources, Inc. ## + ..................... 430,400 3,955 Holly Corp. + ................................. 170,650 3,350 Mariner Energy, Inc. ## ....................... 56,300 810 Parallel Petroleum Corp. ## ................... 415,800 1,667 Penn Virginia Corp. ........................... 55,120 2,049 Pioneer Drilling Co. ## ....................... 69,700 540 St. Mary Land & Exploration Co. ............... 175,471 4,367 Stone Energy Corp. ## ......................... 105,900 3,213 See accompanying notes 8 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) Swift Energy Co. ## + ......................... 200,250 $ 6,424 W&T Offshore, Inc. ............................ 43,100 826 ----------- 38,295 ----------- TOTAL ENERGY 89,273 ----------- FINANCIALS - 22.44% BANKS - 8.56% 1st Source Corp. .............................. 18,000 386 Associated Banc-Corp + ........................ 273,100 6,025 BancorpSouth, Inc. + .......................... 261,560 6,348 BOK Financial Corp. ## ........................ 10,155 486 Cathay General Bancorp ........................ 49,400 1,209 Chemical Financial Corp. + .................... 25,531 671 City National Corp. + ......................... 215,433 11,532 Colonial BancGroup, Inc. + .................... 237,441 964 Commerce Bancshares, Inc. ..................... 58,040 2,744 Community Trust Bancorp, Inc. ................. 7,300 244 Cullen/Frost Bankers, Inc. .................... 135,948 7,609 F.N.B. Corp. + ................................ 127,100 1,665 First Horizon National Corp. + ................ 651,709 7,762 First Midwest Bancorp, Inc. + ................. 140,700 3,125 First Niagara Financial Group, Inc. ........... 367,400 5,794 FirstMerit Corp. + ............................ 281,420 6,563 Flushing Financial Corp. + .................... 80,910 1,258 Frontier Financial Corp. + .................... 29,000 193 Fulton Financial Corp. + ...................... 464,523 4,877 Home Federal Bancorp Inc. ..................... 189,700 2,199 Huntington Bancshares, Inc. + ................. 90,267 853 IBERIABANK Corp. + ............................ 24,500 1,248 International Bancshares Corp. ................ 144,654 3,757 Intervest Bancshares Corp. .................... 60,460 362 MB Financial, Inc. + .......................... 53,900 1,601 National Penn Bancshares, Inc. + .............. 319,325 5,409 NewAlliance Bancshares, Inc. + ................ 584,388 8,065 Old National Bancorp + ........................ 130,777 2,477 Pacific Capital Bancorp NA + .................. 257,302 5,053 Park National Corp. + ......................... 20,600 1,499 Popular, Inc. + ............................... 280,600 2,133 Prosperity Bancshares, Inc. + ................. 111,100 3,690 Provident Financial Services, Inc. ............ 241,900 3,546 Southwest Bancorp, Inc. ....................... 86,070 1,246 Sterling Bancshares, Inc. ..................... 168,450 1,341 Susquehanna Bancshares, Inc. + ................ 278,400 4,312 Synovus Financial Corp. + ..................... 87,832 907 Umpqua Holdings Corp. + ....................... 50,500 859 United Bankshares, Inc. + ..................... 64,571 2,060 Washington Federal, Inc. + .................... 516,754 9,105 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) Washington Trust Bancorp, Inc. + .............. 32,410 $ 691 Webster Financial Corp. + ..................... 396,500 7,351 WesBanco, Inc. + .............................. 101,000 2,745 Whitney Holding Corp. + ....................... 462,795 8,793 Wintrust Financial Corp. + .................... 28,500 730 ----------- 151,487 ----------- DIVERSIFIED FINANCIALS - 2.64% Cash America International, Inc. .............. 93,038 3,291 Credit Acceptance Corp. ## + .................. 65,400 1,003 Ezcorp, Inc. ## ............................... 331,850 5,257 Financial Federal Corp. + ..................... 210,340 4,869 First Cash Financial Services, Inc. ## + ...... 196,100 3,014 Investment Technology Group, Inc. ## .......... 396,945 8,102 Jefferies Group, Inc. + ....................... 349,790 5,537 Knight Capital Group, Inc. ## ................. 186,650 2,699 Lazard Ltd. ## ................................ 61,232 1,847 Nelnet, Inc. + ................................ 94,400 1,381 Piper Jaffray Co. ## + ........................ 115,263 4,547 Raymond James Financial, Inc. + ............... 56,380 1,313 World Acceptance Corp. ## + ................... 204,100 3,772 ----------- 46,632 ----------- INSURANCE - 8.95% Allied World Assurance Co. Holdings Ltd. ...... 27,200 872 Ambac Financial Group, Inc. + ................. 216,633 581 American Equity Investment Life Holding Co. + ...................................... 215,000 972 American Financial Group, Inc. ................ 195,800 4,451 American National Insurance Co. ............... 10,900 744 AmTrust Financial Services, Inc. .............. 42,600 418 Argo Group International Holdings Ltd. ## + .................................. 115,457 3,683 Aspen Insurance Holdings Ltd. ................. 445,370 10,226 Assured Guaranty Ltd. + ....................... 47,000 528 CNA Surety Corp. ## ........................... 166,200 2,302 Conseco, Inc. ## + ............................ 119,400 222 Delphi Financial Group, Inc. .................. 336,700 5,303 Employers Holdings, Inc. ...................... 391,700 4,998 Endurance Specialty Holdings Ltd. ............. 42,900 1,297 FBL Financial Group, Inc. + ................... 73,508 1,284 Fidelity National Financial, Inc. ............. 265,963 2,396 First American Corp. + ........................ 136,110 2,778 Hanover Insurance Group, Inc. ................. 439,620 17,255 Harleysville Group, Inc. ...................... 121,104 3,825 HCC Insurance Holdings, Inc. .................. 228,570 5,042 Horace Mann Educators Corp. ................... 58,200 463 Infinity Property and Casualty Corp. .......... 65,798 2,620 IPC Holdings Ltd. + ........................... 40,400 1,115 Max Capital Group Ltd. ........................ 39,800 635 See accompanying notes 9 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) MBIA, Inc. + .................................. 38,174 $ 375 Mercury General Corp. + ....................... 135,100 6,940 Montpelier Re Holdings Ltd. + ................. 69,000 987 National Western Life Insurance Co. ........... 2,200 415 Navigators Group, Inc. ## ..................... 141,300 7,137 Odyssey Re Holdings Corp. + ................... 276,894 10,921 Old Republic International Corp. .............. 119,200 1,098 OneBeacon Insurance Group Ltd. ................ 20,000 276 Phoenix Cos., Inc. + .......................... 326,200 2,111 Platinum Underwriters Holdings Ltd. ........... 17,400 552 PMA Capital Corp. ## + ........................ 98,600 456 Presidential Life Corp. ....................... 111,300 1,044 ProAssurance Corp. ## ......................... 48,630 2,672 Protective Life Corp. ......................... 219,500 1,833 Reinsurance Group of America, Inc. + .......... 226,300 8,450 RLI Corp. + ................................... 41,300 2,370 Safety Insurance Group, Inc. .................. 61,200 2,325 Selective Insurance Group, Inc. ............... 189,000 4,489 StanCorp Financial Group, Inc. ................ 315,050 10,737 State Auto Financial Corp. + .................. 26,800 706 Stewart Information Services Corp. + .......... 199,900 3,318 Torchmark Corp. ............................... 89,300 3,730 Tower Group, Inc. + ........................... 17,000 358 United America Indemnity Ltd. ## + ............ 593,497 7,110 United Fire & Casualty, Co. ................... 77,400 1,793 Unitrin, Inc. + ............................... 52,700 1,107 Zenith National Insurance Corp. ............... 34,200 1,124 ----------- 158,444 ----------- REAL ESTATE - 2.29% Acadia Realty Trust ........................... 41,480 749 Alexandria Real Estate Equities, Inc. + ....... 19,660 1,367 BioMed Realty Trust, Inc. ..................... 315,870 4,438 CapLease, Inc. + .............................. 912,900 6,162 Care Investment Trust, Inc. + ................. 30,644 343 Cohen & Steers, Inc. + ........................ 102,778 1,867 Corrections Corp. of America ## ............... 86,820 1,659 DiamondRock Hospitality Co. ................... 432,450 2,240 Entertainment Properties Trust + .............. 63,150 2,365 Health Care Real Estate Investment Trust, Inc. ....................................... 45,940 2,045 Hilltop Holdings, Inc. ## ..................... 16,700 157 Jones Lang LaSalle, Inc. + .................... 12,110 399 LaSalle Hotel Properties + .................... 219,160 3,086 Lexington Realty Trust + ...................... 287,300 2,307 MI Developments, Inc. ......................... 425,100 4,821 Mission West Properties, Inc. + ............... 113,800 985 Redwood Trust, Inc. + ......................... 99,655 1,519 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) Urstadt Biddle Properties, Inc. ............... 18,890 $ 309 U-Store-It Trust + ............................ 546,200 3,747 ----------- 40,565 ----------- TOTAL FINANCIALS 397,128 ----------- HEALTH CARE - 5.45% BIOTECHNOLOGY - 0.21% Charles River Laboratories International, Inc. ## .................................... 17,928 642 Invitrogen Corp. ## + ......................... 41,870 1,206 Viropharma, Inc. ## + ......................... 152,600 1,914 ----------- 3,762 ----------- HEALTH CARE EQUIPMENT & SUPPLIES - 0.57% Advanced Medical Optics, Inc. ## + ............ 410,200 2,531 Bio-Rad Laboratories, Inc. ## ................. 9,780 835 Hillenbrand, Inc. ............................. 51,677 982 Hill-Rom Holdings, Inc. + ..................... 38,070 866 IMS Health, Inc. .............................. 87,800 1,259 Invacare Corp. + .............................. 111,800 2,034 Kensey Nash Corp. ## + ........................ 63,740 1,618 ----------- 10,125 ----------- HEALTH CARE PROVIDERS & SERVICES - 3.35% Air Methods Corp. ## + ........................ 89,500 1,502 AMERIGROUP Corp. ## + ......................... 330,350 8,259 Healthspring, Inc. ## ......................... 628,460 10,382 LifePoint Hospitals, Inc. ## + ................ 359,900 8,627 Lincare Holdings, Inc. ## + ................... 240,000 6,324 Magellan Health Services, Inc. ## ............. 113,410 4,189 MAXIMUS, Inc. ................................. 309,625 9,889 Odyssey HealthCare, Inc. ## + ................. 197,900 1,898 Pediatrix Medical Group, Inc. ## .............. 101,230 3,913 Res-Care, Inc. ## ............................. 275,350 4,243 ----------- 59,226 ----------- PHARMACEUTICALS - 1.32% King Pharmaceuticals, Inc. ## ................. 775,600 6,817 KV Pharmaceutical Co. ## + .................... 210,820 3,584 Medicis Pharmaceutical Corp. + ................ 145,380 2,075 NBTY, Inc. ## ................................. 386,750 9,038 Sepracor, Inc. ## ............................. 131,375 1,750 ----------- 23,264 ----------- TOTAL HEALTH CARE 96,377 ----------- INDUSTRIALS - 19.01% AEROSPACE & DEFENSE - 1.49% BE Aerospace, Inc. ## ......................... 274,940 3,538 Ceradyne, Inc. ## ............................. 129,270 3,038 See accompanying notes 10 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) Curtiss-Wright Corp. + ........................ 163,470 $ 6,032 Esterline Technologies Corp. ## ............... 83,280 3,002 Moog, Inc. ## ................................. 77,520 2,723 Spirit Aerosystems Holdings, Inc. ## .......... 22,070 358 Triumph Group, Inc. + ......................... 122,290 5,364 World Fuel Services Corp. ..................... 106,700 2,287 ----------- 26,342 ----------- BUILDING PRODUCTS - 1.81% Apogee Enterprises, Inc. + .................... 291,900 2,878 Armstrong World Industries, Inc. .............. 135,700 2,664 Crane Co. ..................................... 244,450 4,002 Drew Industries, Inc. ## + .................... 121,680 1,472 Insituform Technologies, Inc. ## + ............ 384,000 5,157 Lennox International, Inc. .................... 228,400 6,811 NCI Building Systems, Inc. ## + ............... 74,300 1,383 Simpson Manufacturing Co., Inc. + ............. 251,000 5,783 Universal Forest Products, Inc. + ............. 82,792 1,958 ----------- 32,108 ----------- COMMERCIAL SERVICES & SUPPLIES - 5.06% American Ecology Corp. + ...................... 47,400 831 Bowne & Co., Inc. ............................. 29,600 231 Brink's Co. ................................... 84,190 4,082 Casella Waste Systems, Inc. ## ................ 207,990 1,048 Clean Harbors, Inc. ## ........................ 68,618 4,499 Consolidated Graphics, Inc. ## ................ 83,000 1,080 Convergys Corp. ## ............................ 223,500 1,719 Con-way, Inc. + ............................... 199,400 6,788 Corinthian Colleges, Inc. ## + ................ 74,700 1,067 CSG Systems International, Inc. ## ............ 112,500 1,871 Dollar Financial Corp. ## + ................... 17,000 198 Ennis, Inc. ................................... 97,000 1,142 G&K Services, Inc. ............................ 38,820 877 Headwaters, Inc. ## + ......................... 179,600 1,904 Heidrick & Struggles International, Inc. + .... 126,200 3,045 Herman Miller, Inc. + ......................... 215,800 4,748 Hewitt Associates, Inc. ## .................... 48,630 1,356 Hudson Highland Group, Inc. ## ................ 510,500 2,675 Kelly Services, Inc. + ........................ 290,300 4,134 Korn/Ferry International ## ................... 1,003,350 13,936 McGrath Rentcorp + ............................ 68,108 1,549 PHH Corp. ## + ................................ 309,000 2,490 Pre-Paid Legal Services, Inc. ## + ............ 51,770 2,044 Sotheby's + ................................... 304,400 2,834 Spherion Corp. ## ............................. 1,082,100 3,441 TAL International Group, Inc. + ............... 70,100 1,161 Tetra Tech, Inc. ## ........................... 62,024 1,364 TrueBlue, Inc. ## ............................. 166,200 1,384 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) United Stationers, Inc. ## .................... 27,600 $ 1,032 Valassis Communications, Inc. ## + ............ 2,001,900 8,888 Waste Connections, Inc. ## + .................. 178,920 6,056 ----------- 89,474 ----------- CONSTRUCTION & ENGINEERING - 1.20% EMCOR Group, Inc. ## .......................... 296,400 5,267 Granite Construction, Inc. + .................. 241,540 8,616 KBR, Inc. ..................................... 27,329 406 Perini Corp. ## + ............................. 277,200 5,272 Shaw Group, Inc. ## ........................... 95,157 1,702 ----------- 21,263 ----------- DIVERSIFIED MANUFACTURING - 0.95% Acuity Brands, Inc. + ......................... 101,594 3,552 Andersons, Inc. + ............................. 72,800 1,939 Barnes Group, Inc. + .......................... 167,000 2,423 Kennametal, Inc. .............................. 421,700 8,948 ----------- 16,862 ----------- ELECTRICAL EQUIPMENT - 1.68% A.O. Smith Corp. .............................. 90,400 2,852 Anixter International, Inc. ## + .............. 151,259 5,084 Belden, Inc. .................................. 57,100 1,190 Hubbell, Inc. ................................. 107,600 3,860 Regal-Beloit Corp. + .......................... 513,150 16,708 ----------- 29,694 ----------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.60% Diebold, Inc. ................................. 311,500 9,258 PerkinElmer, Inc. ............................. 76,970 1,381 ----------- 10,639 ----------- ENGINEERING/R&D SERVICES - 0.11% URS Corp. ## .................................. 65,630 1,929 ----------- FREIGHT TRANSPORTATION - 0.11% Pacer International, Inc. ..................... 152,077 1,717 TBS International Ltd. ## + ................... 22,200 190 ----------- 1,907 ----------- INDUSTRIAL CONGLOMERATES - 0.32% Carlisle Cos., Inc. + ......................... 247,650 5,758 ----------- MACHINERY - 3.65% Actuant Corp. ................................. 90,800 1,628 Applied Industrial Technologies, Inc. + ....... 376,900 7,610 Astec Industries, Inc. ## + ................... 44,700 1,136 Brady Corp. ................................... 148,800 4,613 Dynamic Materials Corp. + ..................... 33,495 636 Flowserve Corp. ............................... 91,300 5,197 Gardner Denver, Inc. ## ....................... 153,000 3,920 See accompanying notes 11 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) Harsco Corp. .................................. 217,900 $ 5,158 Kaydon Corp. + ................................ 97,300 3,251 Miller Industries, Inc. ## .................... 231,100 1,410 Mueller Industries, Inc. ...................... 182,210 4,167 NACCO Industries, Inc. ........................ 26,790 1,650 Oshkosh Corp. + ............................... 579,700 4,440 Reliance Steel & Aluminum Co. ................. 36,580 916 RSC Holdings, Inc. ## + ....................... 211,700 1,554 Terex Corp. ## + .............................. 336,500 5,616 Timken Co. .................................... 479,950 7,621 Trinity Industries, Inc. + .................... 46,900 792 Watts Water Technologies, Inc. + .............. 120,800 3,193 ----------- 64,508 ----------- MARINE - 0.77% Cal Dive International, Inc. ## + ............. 134,800 1,147 Genco Shipping & Trading Ltd. + ............... 171,000 3,565 Hornbeck Offshore Services, Inc. ## + ......... 68,600 1,633 Kirby Corp. ## + .............................. 105,300 3,614 Overseas Shipholding Group, Inc. + ............ 96,500 3,626 ----------- 13,585 ----------- RENTAL AUTO/EQUIPMENT - 0.12% United Rentals, Inc. ## + ..................... 204,926 2,100 ----------- ROAD & RAIL - 1.06% Arkansas Best Corp. + ......................... 55,600 1,623 Bristow Group, Inc. ## + ...................... 16,400 406 Celadon Group, Inc. ## ........................ 91,440 978 GATX Corp. .................................... 119,100 3,400 Heartland Express, Inc. + ..................... 379,080 5,815 Landstar System, Inc. ......................... 78,560 3,032 Werner Enterprises, Inc. + .................... 159,297 3,125 YRC Worldwide, Inc. ## + ...................... 81,160 372 ----------- 18,751 ----------- TRADING COMPANIES & DISTRIBUTORS - 0.08% MSC Industrial Direct Co., Inc. + ............. 39,440 1,414 ----------- TOTAL INDUSTRIALS 336,334 ----------- INFORMATION TECHNOLOGY - 11.15% COMMUNICATIONS - 0.05% ModusLink Global Solutions, Inc. ## ........... 159,100 885 ----------- COMMUNICATIONS EQUIPMENT - 0.87% Avocent Corp. ## + ............................ 131,350 1,973 Black Box Corp. ............................... 38,600 1,174 Ciena Corp. ## + .............................. 107,840 1,036 Comtech Telecommunications Corp. ## + ......... 87,480 4,236 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) F5 Networks, Inc. ## + ........................ 39,970 $ 992 Harmonic, Inc. ## ............................. 89,260 635 Sonus Networks, Inc. ## + ..................... 590,757 1,305 Sycamore Networks, Inc. ## .................... 1,204,400 4,023 ----------- 15,374 ----------- COMPUTERS & PERIPHERALS - 1.24% Cray, Inc. ## + ............................... 266,460 837 Electronics for Imaging, Inc. ## .............. 243,006 2,576 Imation Corp. + ............................... 168,200 2,072 Ingram Micro, Inc. ## ......................... 976,700 13,019 Lexmark International, Inc. ## ................ 35,100 907 Mercury Computer Systems, Inc. ## + ........... 355,200 2,550 ----------- 21,961 ----------- ELECTRONIC COMPONENTS - 0.54% Plexus Corp. ## + ............................. 476,100 8,884 Thomas & Betts Corp. ## ....................... 26,210 622 ----------- 9,506 ----------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 2.18% Analogic Corp. ................................ 17,750 784 Arrow Electronics, Inc. ## .................... 113,650 1,983 AVX Corp. ..................................... 150,900 1,361 Benchmark Electronics, Inc. ## ................ 677,550 8,124 Coherent, Inc. ## ............................. 10,000 253 IKON Office Solutions, Inc. ................... 153,800 2,650 Littelfuse, Inc. ## + ......................... 303,700 5,667 Methode Electronics, Inc. ..................... 792,663 6,016 MTS Systems Corp. ............................. 68,920 2,239 OSI Systems, Inc. ## .......................... 58,530 673 Vishay Intertechnology, Inc. ## ............... 2,052,400 8,846 ----------- 38,596 ----------- INTERNET SOFTWARE & SERVICES - 0.42% Akamai Technologies, Inc. ## + ................ 30,540 439 DealerTrack Holdings, Inc. ## + ............... 113,469 1,218 Interwoven, Inc. ## ........................... 142,600 1,798 Netgear, Inc. ## .............................. 106,985 1,182 NIC, Inc. + ................................... 139,200 748 United Online, Inc. ........................... 277,880 2,056 ----------- 7,441 ----------- IT CONSULTING & SERVICES - 1.54% CACI International, Inc. ## ................... 137,000 5,642 Ciber, Inc. ## ................................ 73,500 397 First Advantage Corp. ## ...................... 86,912 950 ManTech International Corp. ## ................ 72,300 3,900 MPS Group, Inc. ## ............................ 399,900 3,115 Ness Technologies, Inc. ## .................... 222,400 1,643 Patni Computer Systems Ltd., ADR + ............ 355,400 2,061 See accompanying notes 12 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) SRA International, Inc. ## .................... 191,670 $ 3,542 SYNNEX Corp. ## + ............................. 139,400 2,151 Tech Data Corp. ## ............................ 175,600 3,767 Unisys Corp. ## ............................... 51,500 78 ----------- 27,246 ----------- SEMICONDUCTOR EQUIPMENT & PRODUCTS - 2.30% Amkor Technology, Inc. ## ..................... 736,500 2,990 Applied Micro Circuits Corp. ## ............... 69,200 354 Brooks Automation, Inc. ## + .................. 991,300 6,791 Cymer, Inc. ## + .............................. 130,100 3,184 Entegris, Inc. ## ............................. 467,300 1,257 FEI Co. ## + .................................. 102,770 2,159 Formfactor, Inc. ## + ......................... 63,560 1,107 Integrated Device Technology, Inc. ## ......... 318,500 2,026 MKS Instruments, Inc. ## ...................... 351,790 6,526 Novellus Systems, Inc. ## ..................... 81,840 1,293 ON Semiconductor Corp. ## + ................... 1,876,000 9,586 Rudolph Technologies, Inc. ## ................. 122,410 410 Teradyne, Inc. ## ............................. 308,270 1,572 Ultra Clean Holdings ## ....................... 136,400 412 Varian Semiconductor Equipment Associates, Inc. ## ........................ 55,830 1,095 ----------- 40,762 ----------- SOFTWARE - 2.01% American Reprographics Co. ## ................. 88,400 941 Aspen Technology, Inc. ## ..................... 174,610 1,367 Cerner Corp. ## + ............................. 18,110 674 EPIQ Systems, Inc. ## + ....................... 164,593 2,237 infoGROUP, Inc. ............................... 16,300 73 Informatica Corp. ## .......................... 70,330 988 JDA Software Group, Inc. ## ................... 377,000 5,383 Lawson Software, Inc. ## ...................... 375,800 1,999 Manhattan Associates, Inc. ## + ............... 245,900 4,134 Mentor Graphics Corp. ## ...................... 746,800 5,481 Novell, Inc. ## ............................... 655,400 3,054 Omnicell, Inc. ## + ........................... 159,190 1,748 Parametric Technology Corp. ## ................ 131,013 1,702 RealNetworks, Inc. ## ......................... 574,000 2,457 Sybase, Inc. ## + ............................. 81,251 2,164 Synopsys, Inc. ## ............................. 36,778 672 THQ, Inc. ## .................................. 59,180 441 ----------- 35,515 ----------- TOTAL INFORMATION TECHNOLOGY 197,286 ----------- SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) MATERIALS - 3.02% CHEMICALS - 1.84% Ashland, Inc. ................................. 161,200 $ 3,641 Cytec Industries, Inc. ........................ 21,000 595 H.B. Fuller Co. ............................... 25,750 455 Hercules, Inc. ................................ 411,900 6,924 NewMarket Corp. ## ............................ 24,700 931 Olin Corp. .................................... 267,600 4,860 PolyOne Corp. ## + ............................ 1,813,500 8,614 RPM International, Inc. ....................... 363,600 5,163 Tronox, Inc. Class A + ........................ 167,200 23 Tronox, Inc. Class B + ........................ 230,700 32 Westlake Chemical Corp. + ..................... 77,100 1,405 ----------- 32,643 ----------- CONTAINERS & PACKAGING - 0.37% Packaging Corp. of America .................... 214,520 3,610 Sonoco Products Co. ........................... 28,700 723 Temple-Inland, Inc. + ......................... 360,850 2,140 ----------- 6,473 ----------- METALS & MINING - 0.63% A.M. Castle & Co. ............................. 10,600 129 AMCOL International Corp. + ................... 50,730 1,244 Foundation Coal Holdings, Inc. ................ 180,600 3,749 Gibraltar Industries, Inc. + .................. 51,500 682 GrafTech Int'l Ltd. ## ........................ 317,700 2,577 Schnitzer Steel Industries, Inc. + ............ 14,800 399 Worthington Industries, Inc. + ................ 189,100 2,283 ----------- 11,063 ----------- PAPER & FOREST PRODUCTS - 0.18% Glatfelter .................................... 123,340 1,272 Louisiana-Pacific Corp. + ..................... 176,290 846 Wausau Paper Corp. + .......................... 117,800 1,091 ----------- 3,209 ----------- TOTAL MATERIALS 53,388 ----------- TELECOMMUNICATION SERVICES - 0.43% DIVERSIFIED TELECOMMUNICATION - 0.39% Cincinnati Bell, Inc. ## ...................... 1,137,710 2,719 Harris Stratex Networks, Inc. ## .............. 117,610 780 NeuStar, Inc. ## .............................. 172,600 3,400 ----------- 6,899 ----------- WIRELESS TELECOMMUNICATION SERVICES - 0.04% Telephone and Data Systems, Inc. .............. 27,420 736 ----------- TOTAL TELECOMMUNICATION SERVICES 7,635 ----------- See accompanying notes 13 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) UTILITIES - 6.25% ELECTRIC UTILITIES - 4.19% Avista Corp. .................................. 105,200 $ 2,089 Black Hills Corp. ............................. 188,670 4,764 CH Energy Group, Inc. + ....................... 47,800 1,971 El Paso Electric Co. ## ....................... 141,960 2,629 Great Plains Energy, Inc. ..................... 728,700 14,166 Hawaiian Electric Industries, Inc. + .......... 142,310 3,788 Idacorp, Inc. + ............................... 287,350 7,661 OGE Energy Corp. .............................. 371,500 10,142 Pike Electric Corp. ## ........................ 60,290 528 Pinnacle West Capital Corp. ................... 234,100 7,409 Portland General Electric Co. ................. 565,150 11,597 Westar Energy, Inc. + ......................... 377,900 7,365 ----------- 74,109 ----------- GAS UTILITIES - 2.06% AGL Resources, Inc. ........................... 310,400 9,436 Atmos Energy Corp. ............................ 670,550 16,274 Energen Corp. ## .............................. 62,922 2,112 Nicor, Inc. + ................................. 42,240 1,952 Southwest Gas Corp. ........................... 53,100 1,387 UGI Corp. ..................................... 78,990 1,886 WGL Holdings, Inc. ............................ 108,600 3,496 ----------- 36,543 ----------- TOTAL UTILITIES 110,652 ----------- TOTAL COMMON STOCKS 1,554,782 ----------- SHORT TERM INVESTMENTS - 12.02% American Beacon Money Market Select Fund ++ ... 93,828,958 93,829 Columbia Treasury Reserves Fund ............ 99,125,305 99,125 PAR AMOUNT ------------ U.S. Treasury, 0.41%, Due 12/11/2008 # ....................... $ 19,745 19,731 ----------- TOTAL SHORT TERM INVESTMENTS 212,685 ----------- SHARES ------------ SECURITIES LENDING COLLATERAL - 23.28% American Beacon Money Market Select Fund ++ ... 60,443,710 60,444 Securities Liquidating AB Trust ............... 206,693,614 203,909 SHARES VALUE ------------ ----------- (DOLLARS IN THOUSANDS) State Street Navigator Securities Lending Prime Portfolio ............................... $147,457,637 $ 147,458 ----------- TOTAL SECURITIES LENDING COLLATERAL 411,811 ----------- TOTAL INVESTMENTS 123.17% - (COST $2,720,310) 2,179,278 LIABILITIES, NET OF OTHER ASSETS - (23.17%) (409,970) ----------- TOTAL NET ASSETS - 100.00% $ 1,769,308 =========== See accompanying notes 14 AMERICAN BEACON SMALL CAP VALUE FUND SCHEDULE OF INVESTMENTS October 31, 2008 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, 2008. ++ The Fund is affiliated by having the same investment advisor. # At October 31, 2008, 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 ......... 1,810 Dec 2008 $97,107 $(33,913) ======= ======== See accompanying notes 15 AMERICAN BEACON SMALL CAP VALUE FUND(SM) STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2008 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS: Investments in unaffiliated securities, at value (A) (C) .... $ 2,025,005 Investments in affiliated securities, at value (B) .......... 154,273 Receivable for investments sold ............................. 13,629 Dividends and interest receivable ........................... 1,216 Receivable for fund shares sold ............................. 2,982 Receivable for variation margin on open futures contracts ... 3,620 Prepaid expenses ............................................ 50 ----------- TOTAL ASSETS ............................................. 2,200,775 ----------- LIABILITIES: Payable for investments purchased ........................... 8,565 Payable upon return of securities loaned .................... 414,595 Payable for fund shares redeemed ............................ 4,026 Management and investment advisory fees payable (Note 2) .... 3,293 Administrative service and service fees payable ............. 579 Other liabilities ........................................... 409 ----------- TOTAL LIABILITIES ........................................ 431,467 ----------- NET ASSETS ..................................................... $ 1,769,308 =========== ANALYSIS OF NET ASSETS: Paid-in-capital ............................................. 2,601,452 Undistributed net investment income ......................... 23,220 Accumulated net realized loss ............................... (280,419) Unrealized depreciation of investments, futures contracts, and foreign currency ..................................... (574,945) ----------- NET ASSETS ..................................................... $ 1,769,308 =========== SHARES OUTSTANDING (NO PAR VALUE): Institutional Class ......................................... 65,946,807 =========== PlanAhead Class ............................................. 57,246,214 =========== Service Class ............................................... 2,760,048 =========== AMR Class ................................................... 16,819,409 =========== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE: Institutional Class ......................................... $ 12.53 =========== PlanAhead Class ............................................. $ 12.22 =========== Service Class ............................................... $ 12.13 =========== AMR Class ................................................... $ 12.48 =========== - ---------- A Cost of investments in unaffiliated securities ............... $ 2,566,037 B Cost of investments in affiliated securities ................. $ 154,273 C Market value of securities on loan ........................... $ 425,608 16 AMERICAN BEACON SMALL CAP VALUE FUND(SM) STATEMENT OF OPERATIONS OCTOBER 31, 2008 (IN THOUSANDS) INVESTMENT INCOME: Dividend income from unaffiliated securities (net of foreign taxes)* .................................. $ 45,151 Dividend income from affiliated securities .................. 3,708 Interest income ............................................. 110 Income derived from securities lending, net ................. 6,182 ----------- TOTAL INVESTMENT INCOME ............................... 55,151 ----------- EXPENSES: Management and investment advisory fees (Note 2) ............ 12,974 Administrative service fees (Note 2): Institutional Class ...................................... 2,948 PlanAhead Class .......................................... 2,619 Service Class ............................................ 138 AMR Class ................................................ 16 Transfer agent fees: Institutional Class ...................................... 52 PlanAhead Class .......................................... 65 Service Class ............................................ 4 AMR Class ................................................ 17 Custody and fund accounting fees ............................ 208 Professional fees ........................................... 54 Registration fees and expenses .............................. 60 Service fees: PlanAhead Class (Note 2) ................................. 2,565 Service Class (Note 2) ................................... 135 Distribution fees - Service Class (Note 2) .................. 135 Prospectus and shareholder reports .......................... 366 Other expenses .............................................. 189 ----------- TOTAL EXPENSES ........................................ 22,545 ----------- NET INVESTMENT INCOME .......................................... 32,606 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from: Investments .............................................. (237,057) Commission recapture (Note 1) ............................ 298 Futures contracts ........................................ (29,528) Change in net unrealized appreciation or depreciation of: Investments .............................................. (749,725) Futures contracts ........................................ (35,608) ----------- NET LOSS ON INVESTMENTS ............................... (1,051,620) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... $(1,019,014) =========== * Foreign taxes ............................................. $ 46 See accompanying notes 17 AMERICAN BEACON SMALL CAP VALUE FUND(SM) STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS) Year Ended Year Ended October 31, October 31, 2008 2007 ----------- ----------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income ......................................... $ 32,606 $ 29,550 Net realized gain (loss) on investments, futures contracts, and foreign currency transactions .............................. (266,287) 344,695 Change in net unrealized depreciation of investments, futures contracts, and foreign currency translations ............... (785,333) (182,874) ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ........................................... (1,019,014) 191,371 ----------- ---------- DISTRIBUTIONS TO SHAREHOLDERS: Net investment income: Institutional Class ........................................ (13,291) (10,903) PlanAhead Class ............................................ (9,332) (8,142) Service Class .............................................. (298) (295) AMR Class .................................................. (4,903) (4,490) Net realized gain on investments: Institutional Class ........................................ (152,714) (90,742) PlanAhead Class ............................................ (145,952) (94,401) Service Class .............................................. (7,763) (5,063) AMR Class .................................................. (43,605) (28,623) ----------- ---------- NET DISTRIBUTIONS TO SHAREHOLDERS ....................... (377,858) (242,659) ----------- ---------- CAPITAL SHARE TRANSACTIONS: Proceeds from sales of shares ................................. 463,771 808,393 Reinvestment of dividends and distributions ................... 371,165 237,930 Cost of shares redeemed ....................................... (879,196) (920,892) ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS ......................................... (44,260) 125,431 ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS ............................ (1,441,132) 74,143 ----------- ---------- NET ASSETS: Beginning of period ........................................... 3,210,440 3,136,297 ----------- ---------- END OF PERIOD * ............................................... $ 1,769,308 $3,210,440 =========== ========== *Includes undistributed net investment income of ................. $ 23,220 $ 20,863 =========== ========== See accompanying notes 18 AMERICAN BEACON SMALL CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES American Beacon Funds (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, (the "Act"), as amended as a no load, diversified, open-end management investment company. These financial statements and notes to the financial statements relate to the American Beacon Small Cap Value Fund (the "Fund"), a series of the Trust. Effective September 12, 2008, American Beacon Advisors, Inc. (the "Manager") became a wholly-owned subsidiary of Lighthouse Holdings, Inc., which is indirectly owned by investment funds affiliated with Pharos Capital Group, LLC and TPG Capital, L.P., two leading private equity firms. Prior to September 12, the Manager was a wholly-owned subsidiary of AMR Corporation ("AMR"),the parent company of American Airlines, Inc. ("American"). 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: - ------ ----------- INSTITUTIONAL CLASS Investors making an initial investment of $2 million PLANAHEAD CLASS General public and investors investing through an intermediary SERVICE CLASS Investors investing through an intermediary AMR CLASS Investors in the tax-exempt retirement and benefit plans of AMR Corporation and its affiliates Administrative service fees, service fees and distribution fees vary amongst the classes as described more fully in footnote 2. 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 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 market prices are not readily available or are not reflective of the fair value of the security, as determined by the Manager, will be priced at fair value following procedures approved by the Board of Trustees (the "Board"). 19 AMERICAN BEACON SMALL CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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. 20 AMERICAN BEACON SMALL CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2008 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 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, 2008, 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. In March 2008, FASB issued Statement on Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS 161"), which is effective for fiscal years and interim periods beginning after November 15, 2008. FAS 161 requires enhanced disclosures about derivative and hedging activities, including how such activities are accounted for and their effect on financial position, performance and cash flows. The Manager is currently evaluating the impact the adoption of FAS 161 will have on the Fund's financial statements and related disclosures. Other Under the Trust's organizational documents, its officers and directors are indemnified against certain liability arising out of the performance of their duties to the Trust. In the normal course of business, the Trust enters into contracts that provide indemnification to the other party or parties against potential costs or liabilities. The Trust's maximum exposure under these arrangements is dependent on claims that may be made in the future and, therefore, cannot be estimated. The Trust has had no prior claims or losses pursuant to any such agreement. 2. TRANSACTIONS WITH AFFILIATES Management Agreement The Trust and the Manager are parties to a Management Agreement that obligates the Manager to provide or oversee the provision of all administrative, investment advisory, fund management, and securities lending services. Investment assets of the Fund are managed by multiple investment advisors which have entered into separate investment advisory agreements with the Manager. As compensation for performing the duties required under the Management Agreement, the Manager receives from the Fund an annualized fee equal to amounts paid by the Manager to sub-advisors hired by the Manager plus, through September 11, 2008, 0.10% of the average daily net assets, and from September 12, 2008, 0.05% of the average daily net assets. Management fees paid during the year ended October 31, 2008 were as follows (dollars in thousands): AMOUNTS PAID TO NET AMOUNTS MANAGEMENT FEE RATE MANAGEMENT FEE INVESTMENT ADVISORS RETAINED BY MANAGER - ------------------- -------------- ------------------- ------------------- 0.30%-0.60% $12,974 $10,564 $2,410 21 AMERICAN BEACON SMALL CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS October 31, 2008 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, 2008, securities lending fees paid to the Manager were $991,637. 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 received, through September 11, 2008, an annualized fee of 0.25% of the average daily net assets of the Institutional, PlanAhead and Service Classes of the Fund. From September 12, 2008, the Manager received an annualized fee of 0.30% of the average daily net assets of the Institutional, PlanAhead, and Service Classes of the Fund and 0.05% of the average daily net assets of the AMR Class 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. Brokerage Commissions Affiliated entities of a sub-advisor to the Fund received net commissions on purchases and sales of the Fund's portfolio securities totaling $12,095 for the year ended October 31, 2008. 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 up to 0.10% of its average daily net assets. During the year ended October 31, 2008, 22 AMERICAN BEACON SMALL CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS October 31, 2008 the Manager earned fees from the Affiliated Funds totaling $112,814 on the Fund's direct investment in the Affiliated Funds and $586,901 from the Fund's securities lending collateral invested in the Affiliated Funds. Interfund Lending Program Pursuant to an exemptive order by the SEC, the Fund, along with other registered investment companies having management contracts with the Manager, may participate in an interfund lending program as a borrower. This program provides an alternative credit facility allowing the Fund to borrow from other participating Funds. During the year ended October 31, 2008, 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, 2008, there were no waived fees or reimbursed expenses subject to potential recovery. 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. The Fund adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainties in Income Taxes" ("FIN 48"), on November 1, 2007. FIN 48 sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. The implementation of FIN 48 did not result in any unrecognized tax benefits in the accompanying financial statements. Each of the tax years in the three year period ended October 31, 2008 remains subject to examination by the Internal Revenue Service. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in "Other expenses" on the Statement of Operations. 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, 2008 and October 31, 2007 were as follows (in thousands): YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, 2008 2007 ----------- ----------- DISTRIBUTIONS PAID FROM: ORDINARY INCOME* Institutional Class .. $ 37,816 $ 36,981 PlanAhead Class ...... 32,770 35,272 Service Class ........ 1,545 1,750 AMR Class ............ 11,905 12,717 LONG-TERM CAPITAL GAIN Institutional Class... 128,189 64,664 PlanAhead Class ...... 122,514 67,270 Service Class ........ 6,516 3,608 AMR Class ............ 36,603 20,397 -------- -------- TOTAL DISTRIBUTIONS PAID ... $377,858 $242,659 ======== ======== * For tax purposes, short-term capital gains are considered ordinary income distributions. 23 AMERICAN BEACON SMALL CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS October 31, 2008 As of October 31, 2008, the components of distributable earnings on a tax basis were as follows (in thousands): Cost basis of investments for federal income tax purposes ... $ 2,772,633 Unrealized appreciation ..................................... 66,121 Unrealized depreciation ..................................... (659,476) ----------- Net unrealized appreciation/(depreciation) .................. (593,355) Undistributed ordinary income ............................... 21,179 Undistributed long-term gain/(loss) ......................... (259,968) ----------- Distributable earnings ...................................... $ (832,144) =========== 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, 2008 (in thousands): Paid-in-capital ...................................... $ (1) Undistributed net investment income (loss) ........... (2,425) Accumulated net realized gain (loss) ................. 2,425 Unrealized appreciation (depreciation) of investments, futures contracts and foreign currency ............ 1 At October 31, 2008 the capital loss carry forward position for federal income tax purposes was $259,968 expiring in 2016. (in thousands) 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, 2008 were (in thousands) $1,511,341 and $2,072,369, respectively. A summary of the Fund's direct transactions in Affiliated Funds for the year ended October 31, 2008 is set forth below (in thousands): OCTOBER 31, 2007 OCTOBER 31, 2008 AFFILIATE SHARES/MARKET VALUE PURCHASES SALES SHARES/MARKET VALUE --------- ------------------- ---------- ---------- ------------------- Select Fund $87,216 $1,306,161 $1,299,548 $93,829 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 money market mutual funds, and other short-term investments, provided the investments meet certain quality and diversification requirements. It is the Fund's policy to obtain additional 24 AMERICAN BEACON SMALL CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS October 31, 2008 collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. The amount of this temporary difference at October 31, 2008 is disclosed as the calculated mark in the table below. Prior to June 1, 2008, the Fund, the Agent, and the Manager retained 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. From June 1, 2008, 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, borrowers pay the Fund negotiated lenders' fees, which are divided between the Fund, the Agent, and the Manager using the same percentages as above. 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. Securities lending transactions pose certain risks to the Fund, including that the borrower may not provide additional collateral when required or return the securities when due, that the value of the short-term investments will be less than the amount of cash collateral required to be returned to the borrower, and that the cash collateral investments could become illiquid and unable to be used to return collateral to the borrower. The Fund could also experience delays and costs in gaining access to the collateral. The Fund bears the risk of any deficiency in the amount of the collateral available for return to the borrower due to any loss on the collateral invested. At October 31, 2008, the value of outstanding securities on loan and the value of collateral was as follows (in thousands): MARKET VALUE OF NON-CASH CASH COLLATERAL UNREALIZED LOSS ON CALCULATED TOTAL VALUE OF SECURITIES ON LOAN COLLATERAL POSTED BY BORROWER CASH COLLATERAL MARK COLLATERAL - ------------------ ---------- ------------------ ------------------ ---------- -------------- $425,608 $917 $414,595 $(2,784) $22,562 $435,290 Cash collateral was invested in a joint investment account, which is comprised of an investment in the Select Fund and other short-term investments. The underlying securities allocated to the Fund are stated at market value and have been included as investments on the Schedule of Investments and Statement of Assets and Liabilities. Income earned on these investments is reported as Income derived from securities lending and unrealized losses are included in the Change in unrealized appreciation and depreciation of investments on the Fund's 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. At the close of business on October 9, 2008, the joint investment account in which the Fund invests redeemed for cash and securities on behalf of the Fund its shares in the Cash Trust as follows (in thousands): Cash ............................ $260,093 Securitites (at market value) ... $242,315 The cash proceeds were invested in other money market funds and the securities were invested in the Securities Liquidating AB Trust. 25 AMERICAN BEACON SMALL CAP VALUE FUND(SM) NOTES TO FINANCIAL STATEMENTS October 31, 2008 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, 2008 INSTITUTIONAL CLASS PLANAHEAD CLASS SERVICE CLASS AMR CLASS ------------------- ------------------- ----------------- ------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------- --------- ------- --------- ------ -------- ------ --------- Shares sold ..................... 14,496 $ 244,453 10,422 $ 172,430 888 $ 14,694 1,925 $ 32,194 Reinvestment of dividends ....... 8,983 161,791 8,677 152,805 460 8,061 2,708 48,508 Shares redeemed ................. (21,496) (364,982) (22,737) (376,472) (1,809) (29,610) (6,475) (108,132) ------- --------- ------- --------- ------ -------- ------ --------- Net increase (decrease) in shares outstanding .................. 1,983 $ 41,262 (3,638) $ (51,237) (461) $ (6,855) (1,842) $ (27,430) ======= ========= ======= ========= ====== ======== ====== ========= 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 ======= ========= ======= ========= ====== ======== ====== ========= 26 This page intentionally left blank. 27 AMERICAN BEACON SMALL CAP VALUE FUND (SM) FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) Institutional Class Year Ended October 31, ----------------------------------------------------------- 2008 2007 2006 2005(A) 2004(B) -------- ---------- ---------- ---------- -------- Net asset value, beginning of period ................... $ 22.10 $ 22.53 $ 20.43 $ 18.85 $ 16.21 -------- ---------- ---------- ---------- -------- Income from investment operations: Net investment income ....... 0.25 0.22 0.19 0.11 0.07 Net gains (losses) on securities (both realized and unrealized) .......... (7.13) 1.10 2.94 2.31 3.09 -------- ---------- ---------- ---------- -------- Total income (loss) from investment operations ....... (6.88) 1.32 3.13 2.42 3.16 -------- ---------- ---------- ---------- -------- Less distributions: Dividends from net investment income ................... (0.22) (0.19) (0.14) (0.07) (0.08) Distributions from net realized gains on securities ............... (2.47) (1.56) (0.89) (0.77) (0.44) -------- ---------- ---------- ---------- -------- Total distributions ............ (2.69) (1.75) (1.03) (0.84) (0.52) -------- ---------- ---------- ---------- -------- Net asset value, end of period ...................... $ 12.53 $ 22.10 $ 22.53 $ 20.43 $ 18.85 ======== ========== ========== ========== ======== Total return ................... (34.84)% 6.10% 15.80% 12.90% 19.86% ======== ========== ========== ========== ======== Ratios and supplemental data: Net assets, end of period (in thousands) ........... $826,232 $1,413,734 $1,319,024 $1,076,909 $429,540 Ratios to average net assets (annualized): Expenses, net of waivers ............... 0.81% 0.80% 0.82% 0.87% 0.89% Expenses before waivers .. 0.81% 0.80% 0.82% 0.87% 0.89% Net investment income (loss), net of waivers ............... 1.36% 0.94% 0.83% 0.66% 0.57% Net investment income (loss), before waivers ............... 1.36% 0.94% 0.83% 0.66% 0.57% Portfolio turnover rate ..... 62% 52% 48% 47% 35% PlanAhead Class Year Ended October 31, ----------------------------------------------------------- 2008 2007 2006 2005(A) 2004(B) -------- ---------- ----------- ---------- --------- Net asset value, beginning of period ................... $ 21.62 $ 22.08 $ 20.04 $ 18.54 $ 15.95 -------- ---------- ---------- ---------- -------- Income from investment operations: Net investment income ....... 0.20 0.16 0.13 0.09 0.08 Net gains (losses) on securities (both realized and unrealized) .......... (6.97) 1.07 2.89 2.24 2.98 -------- ---------- ---------- ---------- -------- Total income (loss) from investment operations ....... (6.77) 1.23 3.02 2.33 3.06 -------- ---------- ---------- ---------- -------- Less distributions: Dividends from net investment income ................... (0.16) (0.13) (0.09) (0.06) (0.03) Distributions from net realized gains on securities ............... (2.47) (1.56) (0.89) (0.77) (0.44) -------- ---------- ---------- ---------- -------- Total distributions ............ (2.63) (1.69) (0.98) (0.83) (0.47) -------- ---------- ---------- ---------- -------- Net asset value, end of period ...................... $ 12.22 $ 21.62 $ 22.08 $ 20.04 $ 18.54 ======== ========== ========== ========== ======== Total return ................... (35.04)% 5.83% 15.56% 12.63% 19.56% ======== ========== ========== ========== ======== Ratios and supplemental data: Net assets, end of period (in thousands) ........... $699,670 $1,316,188 $1,333,814 $1,320,853 $466,364 Ratios to average net assets (annualized): Expenses, net of waivers ............... 1.06% 1.05% 1.06% 1.10% 1.15% Expenses before waivers .. 1.06% 1.05% 1.06% 1.10% 1.15% Net investment income (loss), net of waivers ........... 1.12% 0.70% 0.59% 0.42% 0.33% Net investment income (loss), before waivers ............... 1.12% 0.70% 0.59% 0.42% 0.33% Portfolio turnover rate ..... 62% 52% 48% 47% 35% (A) Opus Capital Group, LLC was added as an investment advisor on February 1, 2005 and Metropolitan West Capital Management, LLC and Dreman Value Management, LLC were added as investment advisors on August 31, 2005. (B) The Boston Company Asset Management, LLC was added as an investment advisor to the Small Cap Value Fund on September 27, 2004. 28 Service Class Year Ended October 31, ------------------------------------------------ 2008 2007 2006 2005(A) 2004(B) ------- ------- ------- ------- ------- Net asset value, beginning of period ................... $ 21.46 $ 21.94 $ 19.94 $ 18.49 $ 15.92 ------- ------- ------- ------- ------- Income from investment operations: Net investment income ....... 0.16 0.10 0.07 0.04 0.01 Net gains (losses) on securities (both realized and unrealized) .......... (6.93) 1.07 2.88 2.23 3.00 ------- ------- ------- ------- ------- Total income (loss) from investment operations ....... (6.77) 1.17 2.95 2.27 3.01 ------- ------- ------- ------- ------- Less distributions: Dividends from net investment income ................... (0.09) (0.09) (0.06) (0.05) -- Distributions from net realized gains on securities ............... (2.47) (1.56) (0.89) (0.77) (0.44) ------- ------- ------- ------- ------- Total distributions ............ (2.56) (1.65) (0.95) (0.82) (0.44) ------- ------- ------- ------- ------- Net asset value, end of period ...................... $ 12.13 $ 21.46 $ 21.94 $ 19.94 $ 18.49 ======= ======= ======= ======= ======= Total return ................... (35.19)% 5.55% 15.23% 12.32% 19.24% ======= ======= ======= ======= ======= Ratios and supplemental data: Net assets, end of period (in thousands) ........... $33,479 $69,112 $70,602 $44,709 $11,828 Ratios to average net assets (annualized): Expenses, net of waivers ............... 1.31% 1.32% 1.34% 1.40% 1.38% Expenses before waivers .. 1.31% 1.32% 1.34% 1.40% 1.69% Net investment income (loss), net of waivers ............... 0.86% 0.43% 0.31% 0.12% 0.17% Net investment income (loss), before waivers ............... 0.86% 0.43% 0.31% 0.12% (0.14)% Portfolio turnover rate ..... 62% 52% 48% 47% 35% AMR Class Year Ended October 31, ----------------------------------------------------- 2008 2007 2006 2005(A) 2004(B) -------- -------- -------- -------- -------- Net asset value, beginning of period ................... $ 22.05 $ 22.48 $ 20.38 $ 18.78 $ 16.13 -------- -------- -------- -------- -------- Income from investment operations: Net investment income ....... 0.33 0.30 0.27 0.21 0.14 Net gains (losses) on securities (both realized and unrealized) .......... (7.15) 1.08 2.91 2.26 3.04 -------- -------- -------- -------- -------- Total income (loss) from investment operations ....... (6.82) 1.38 3.18 2.47 3.18 -------- -------- -------- -------- -------- Less distributions: Dividends from net investment income ................... (0.28) (0.25) (0.19) (0.10) (0.09) Distributions from net realized gains on securities ............... (2.47) (1.56) (0.89) (0.77) (0.44) -------- -------- -------- -------- -------- Total distributions ............ (2.75) (1.81) (1.08) (0.87) (0.53) -------- -------- -------- -------- -------- Net asset value, end of period ...................... $ 12.48 $ 22.05 $ 22.48 $ 20.38 $ 18.78 ======== ======== ======== ======== ======== Total return ................... (34.71)% 6.39% 16.12% 13.23% 20.12% ======== ======== ======== ======== ======== Ratios and supplemental data: Net assets, end of period (in thousands) ........... $209,927 $411,406 $412,857 $424,965 $438,353 Ratios to average net assets (annualized): Expenses, net of waivers ............... 0.56% 0.54% 0.55% 0.58% 0.60% Expenses before waivers .. 0.56% 0.54% 0.55% 0.58% 0.60% Net investment income (loss), net of waivers ........... 1.62% 1.21% 1.10% 0.94% 0.84% Net investment income (loss), before waivers .............. 1.62% 1.21% 1.10% 0.94% 0.84% Portfolio turnover rate ..... 62% 52% 48% 47% 35% 29 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, 2008, which is designated as qualifying for the dividends-received deduction, was 21.74%. For shareholders in the Fund, the percentage of dividend income distributed for the year ended October 31, 2008, which is designated as qualified dividend income under the Jobs Growth Tax Relief Act of 2003, was 27.78%. Shareholders will receive notification in January 2009 of the percentage applicable to the preparation of their 2008 income tax returns. Pursuant to Section 852 of the Internal Revenue Code, the Fund designated $293,821,907 as long-term capital gain dividends for the tax year ended October 31, 2008. 30 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) At its May 21, 2008 meeting, the Board of Trustees ("Board" or "Trustees") considered the renewal of the existing Management Agreement ("Current Agreement") between the Manager and the American Beacon Funds ("Beacon Trust") on behalf of its Small Cap Value Fund (the "Fund") and each Investment Advisory Agreement between the Manager and a subadvisor ("Current Investment Advisory Agreement"). In preparation for the Board's consideration to renew these Current 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 9, 2008 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. On May 21, May 22 and June 4, 2008, the Board met to determine, among other matters, whether to approve a new investment management agreement ("New Agreement") between the Manager and the Fund. The New Agreement was necessary because, on April 16, 2008, AMR Corporation ("AMR"), the parent company of the Manager, entered into an agreement with Lighthouse Holdings, Inc. ("Lighthouse") pursuant to which Lighthouse would acquire all of the capital stock of the Manager ("Transaction") in exchange for cash and 10% of the capital stock of the parent corporation of Lighthouse. Upon the closing of the Transaction on September 12, 2008 ("Closing"), the Manager ceased to be a wholly owned subsidiary of AMR and became a subsidiary of Lighthouse. This change in control was deemed to be an "assignment" under the Investment Company Act of 1940 ("1940 Act") of the Fund's Current Agreement with the Manager. As required by the 1940 Act, the Fund's Current Agreement provided for its automatic termination in the event of an assignment and therefore terminated upon the Closing. To provide for the continuity of management for the Fund, the Board met to consider the New Agreement with the Manager. The New Agreement for the Fund reflects substantially the same terms as the Current Agreement for the Fund. In addition, the Current Agreement had been updated and modernized. As part of this process, the primary administrative services provided by the Manager to the Fund have been transferred to one single administrative services agreement ("New Administrative Services Agreement"). The Manager previously provided administrative services to the Fund pursuant to its Current Agreement and an Administrative Services Agreement ("Current Administrative Services Agreement"). The aggregate fee rates for the Fund under the New Agreement and the New Administrative Services Agreement are the same as the fee rates imposed under the existing agreements which they replaced. In preparation for the Board's consideration to approve the New Agreement and New Investment Advisory Agreements, the Board considered the impact to the Fund once Lighthouse directly controlled the Manager. Lighthouse indicated that it did not anticipate making any changes to the organization or structure of the Fund, to the service providers or to the aggregate fee rates under the Current Agreement. In addition, the portfolio managers at the Manager that manage the Fund were expected to continue to manage the Fund after the Closing. In that regard, the Manager and Lighthouse anticipated entering into employment contracts with certain key personnel performing or overseeing the Fund's investment program. The Board considered that there could be no assurance that these personnel would choose to remain employed by the Manager before or after the Closing. The Board noted that the Manager and the Fund would continue to operate under their existing names. Potential benefits to the Fund as a result of the Transaction included Lighthouse's intention to devote additional resources to product development and distribution of Fund shares. The Board also considered that any resulting growth of Fund assets would potentially produce economies of scale that would benefit shareholders of the Fund. With respect to the Fund, the Manager had entered into Current Investment Advisory Agreements with various subadvisors on behalf of the Fund. Upon the Closing, these Current Investment Advisory Agreements terminated automatically upon the termination of the Current Agreement. Pursuant to an exemptive order 31 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) issued by the Securities and Exchange Commission ("SEC"), the Manager was permitted to enter into new or modified investment advisory agreements with the subadvisors ("New Investment Advisory Agreements") without approval of the Fund's shareholders, but subject to the approval of the Fund's Board. Each New Investment Advisory Agreement reflected substantially the same terms as the Current Investment Advisory Agreement for the Fund. In preparation for the Board's consideration to approve the New Agreement and New Investment Advisory Agreements, the Board held preliminary conference call meetings on April 15, 16 and 21, 2008, to discuss the New Agreement and New Investment Advisory Agreements and the effect that approving the New Agreement and New Investment Advisory Agreements would have on the Fund. The Board received a memorandum and related advice from their legal counsel detailing the Board's responsibilities in considering the New Agreement and New Investment Advisory Agreements. In connection with Board's consideration of the Current Agreement, Current Investment Advisory Agreements, New Agreement and New Investment Advisory Agreements, the Trustees considered, among other materials, responses by the Manager and the subadvisors to inquiries requesting: - a description of the Transaction, the effects of the Transaction on the Beacon Trust and the Board, and any proposed changes to the Beacon Trust, its service providers or fee structure and other information; - 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 Form ADV registration statement with the SEC; - 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 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 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 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; 32 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) - 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 regard to the services provided to the Fund. In addition to the foregoing, the Manager provided the following information specific to the renewal of the Fund's Current Agreement and the approval of the Fund's New 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 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 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. In connection with the Current Agreement, Current Investment Advisory Agreements, New Agreement and New Investment Advisory Agreements, 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 of shares used for comparative purposes was the class with the longest performance history, which was 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 Current Agreement, Current Investment Advisory Agreements, New Agreement and New Investment Advisory Agreements are each referenced to herein as an "Agreement" and collectively, the "Agreements." The Trustees also received memoranda from their legal counsel detailing the Board's responsibilities pertaining to the approval of each Agreement. These memoranda explained the regulatory requirements surrounding the Trustees' process for evaluating investment advisors and the terms of the contracts. In connection with the Board's consideration of the New Agreement and each New Investment Advisory Agreement, the Trustees considered, among other information, the following factors: 1. The manner in which the Fund's assets are managed will not change as a result of the Transaction, and the same people who manage the Fund's assets are expected to continue to do so after the Transaction; 2. The aggregate fee rates payable by the Fund under the New Agreement and the New Administrative Services Agreement are the same as the fee rates payable under the Current Agreement and the Current Administrative Services Agreement; 3. The material terms regarding advisory services pursuant to the New Agreement are substantially the same as the terms of the Current Agreement; 4. The qualifications of the Manager's personnel who will provide advisory and administrative services to the Fund are not expected to change; 5. The Manager's financial condition and the post-Closing capitalization of Lighthouse; 6. The impact of the Transaction on the Manager's day-to-day operations; 7. The capabilities, experience, corporate structure and capital resources of Lighthouse; 33 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) 8. The long-term business goals of Lighthouse with regard to the Manager and the Beacon Trust; 9. Fund shareholders will not bear any costs in connection with the Transaction, inasmuch as AMR and Lighthouse plan to bear equally the costs, fees and expenses incurred by the Fund in connection with obtaining shareholder approval of the New Agreement, the fees and expenses of accountants and attorneys relating to the Transaction and obtaining shareholder approval of the New Agreement, the fees and expenses incurred by the Fund in connection with the Transaction, and the meeting fees of the Boards for meetings held in connection with the Transaction; 10. The Fund may realize benefits as a result of the Transaction, including long-term economies of scale; 11. The potential for increased costs to the Beacon Trust in order to satisfy existing obligations under the current Trustees' retirement plan; and 12. The advisory relationship with each subadvisor would continue in the same manner as before the Transaction and that each New Investment Advisory Agreement would be substantially the same as each Current Investment Advisory Agreement. Provided below is an overview of the other primary factors the Board considered at its May 21, May 22 and June 4, 2008 meetings. The Board did not identify any particular information that was most relevant to its consideration to renew the Current Agreement and Current Investment Advisory Agreements and approve the New Agreement and New Investment Advisory Agreements, and each Trustee may have afforded different weight to the various factors. Legal counsel to the Non-interested Trustees provided the Board with memoranda regarding its responsibilities pertaining to the renewal of the Current Agreement and Current Investment Advisory Agreements and approve the New Agreement and New Investment Advisory Agreements. Based on its evaluation, the Board unanimously concluded that the terms of each Current Agreement and Current Investment Advisory Agreement were reasonable and fair and that the renewal of each Current Agreement and Current Investment Advisory Agreement was in the best interests of the Fund and its shareholders. The Board also unanimously concluded that the terms of the New Agreement and New Investment Advisory Agreements were reasonable and fair and that the approval of the New Agreement and New Investment Advisory Contracts was in the best interests of the Fund and its shareholders. In determining whether to renew the Current Agreement and the Current Investment Advisory Agreements and approve the New Agreement and New Investment Advisory Agreements, the Trustees considered the best interests of the Fund. While the Current Agreement and Current Investment Advisory Agreements for the Fund was considered at the Board meetings on May 21, 2008, and the New Agreement and New Investment Advisory Agreement for the Fund was considered at the meetings on May 21, May 22 and June 4, 2008, 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 each subadvisor for the Fund; (3) the costs incurred by the Manager and (to the extent provided) the subadvisors in rendering their services and their resulting profits or losses; (4) the extent to which economies of scale have been taken into account in setting each 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 and Lighthouse regarding certain key aspects of the materials submitted in support of the renewal. Nature, Extent and Quality of Services. With respect to the renewal of the Fund's Current Agreement and the approval of the Fund's New 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 34 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) 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. With respect to the renewal of the Current Investment Advisory Agreements and the approval of the New 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, determined to renew the Current Agreement and Current Investment Advisory Agreements, and approve each New Agreement and New Investment Advisory Agreements for the Fund. 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(es) and peer group. 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. In considering the renewal of the Current Agreement and the approval of the New Agreement, the Trustees considered the following additional factors: (1) the Small Cap Value Fund outperformed the peer universe median for the one- and five-year periods ended March 31, 2008 but underperformed for the three-year period; and (2) the expense ratio of the Institutional Class of Fund shares was the lowest of its Lipper expense group. In considering the renewal of the Current Investment Advisory Agreements and the approval of the New Investment Advisory Agreements with Barrow Hanley, Mewhinney & 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"), The Boston Company Asset Management, LLC ("TBC"), and Opus Capital Group, LLC ("Opus"), the Trustees considered the following additional factors: (1) Hotchkis outperformed the peer universe median for the five-year period ended March 31, 2008 but underperformed for the one- and three-year periods; (2) Brandywine outperformed the peer universe median for the one- and five-year periods ended March 31, 2008 but underperformed for the three-year period; (3) Barrow and TBC outperformed the peer universe median for the one- and three-year periods ended March 31, 2008; (4) Opus outperformed the peer universe median for the one-year period ended March 31, 2008 but underperformed for the three-year period; (5) Dreman and MetWest have not been allocated a portion of Fund assets to date; (6) Barrow, Brandywine, Hotchkis, and TBC 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; and (7) the Manager's recommendation to continue to retain each subadvisor. Costs of the Services to be Provided to the Fund and the Projected Profits to be Realized by the Manager from its Relationship with the Fund. 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. The profits or losses were noted at both an individual Fund level and at an aggregate level for all Funds. The Board also considered that the Current and New Agreements for the Beacon Trust stipulate that, to the extent that a Fund invests all of its investable assets in another registered investment company (i.e., is a Feeder Fund), 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 Fund, the difference reflects the greater level of responsibility and regulatory requirements associated with managing the Fund. The Board also noted that the Manager proposed to continue any expense waivers and reimbursements for the Fund and classes that were in place during the last fiscal year. The Board further considered that the 35 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENTS OF THE FUND (UNAUDITED) 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 certain classes of the Fund may maintain higher expense ratios in order to compensate third-party distributors. 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 many subadvisory fee rates. The Board also noted that, for purposes of determining the fee rates chargeable to the Fund, many subadvisors have agreed to take into account other assets of AMR and its pension plans that are managed by the subadvisors. Thus, the Funds are able to receive lower effective fee rates. 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 for the Fund provides for a reasonable sharing of benefits from any economies of scale with the Fund. Benefits Derived from the Relationship with the Fund. 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 Manager's relationship with the Fund 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 Beacon Trust at a relatively low cost. In this regard, the Board considered that the benefit plans of AMR have invested substantial assets in the Fund, which helps reduce costs for other Fund shareholders, just as the investment of other Fund shareholders helps to reduce costs for AMR's benefit plans. In addition, the Board considered that certain of the subadvisors reimburse the Manager for certain of its costs relating to distribution activities for the Fund. The Board also considered that the Fund did not pay commissions to any affiliated broker-dealer of the Manager during the most recent fiscal year ended October 31, 2007. Based on the foregoing information, the Board concluded that the potential benefits accruing to the Manager and the subadvisors by virtue of its relationships with the Fund appears to be fair and reasonable. Conclusion. Based on these and other considerations, the Trustees concluded that the fees paid to the Manager and the subadvisors under the Agreements are fair and reasonable, determined that the Small Cap Value Fund and its shareholders would benefit from the Manager's and subadvisors' continued management of the Fund, approved the renewal of the Current Agreement and Current Investment Advisory Agreements, and approved the New Agreement and New Investment Advisory Agreements with respect to the Small Cap Value Fund. 36 VOTING RESULTS OF SHAREHOLDER MEETING (UNAUDITED) A special meeting of shareholders of the American Beacon Funds (the "Trust") was held on August 22, 2008. The shareholders of the Small Cap Value Fund (the "Fund"), a portfolio of the Trust, approved a new investment management agreement between American Beacon Advisors, Inc. and the Fund. This proposal required a majority of shareholders of the Fund to achieve a quorum; however, a quorum was not present for the Fund and therefore not enough votes in favor of the proposal for shareholder approval for the Fund. The meeting was adjourned to a second special shareholder meeting on August 27, 2008 where a quorum was present, but there were not enough votes in favor of the proposal for shareholder approval. The meeting adjourned for a third special meeting of shareholders on September 9, 2008, where a quorum was present for the Fund and the proposal was approved by shareholders. The following are the results of the shareholder votes for this proposal: FOR AGAINST ABSTAIN NON-VOTING - ---------------- ------------ ------------- -------------- 1,054,957,475.04 7,669,964.83 38,832,166.28 205,680,782.85 A special meeting of the shareholders of the American Beacon Funds (the "Trust") was held on August 22, 2008. The shareholders of the Trust approved the re-election of five of the current Trustees to the Board of the American Beacon Trust and to elect three additional Trustees to the Board. This proposal required a majority of the shareholders of the Trust to vote to achieve a quorum. The following are the results of the election of each Trustee: ALAN D. FELD Affirmative ........................ 12,634,553,751.62 Withhold ........................... 519,818,259.90 W. HUMPHREY BOGART Affirmative ........................ 12,999,746,162.82 Withhold ........................... 154,625,848.70 BRENDA A. CLINE Affirmative ........................ 13,009,050,779.42 Withhold ........................... 145,321,232.10 RICHARD A. MASSMAN Affirmative ........................ 13,004,756,096.42 Withhold ........................... 149,615,915.10 R. GERALD TURNER Affirmative ........................ 13,004,259,224.92 Withhold ........................... 150,112,786.60 THOMAS M. DUNNING Affirmative ........................ 13,003,350,236.48 Withhold ........................... 151,021,775.04 EUGENE J. DUFFY Affirmative ........................ 12,985,296,316.39 Withhold ........................... 169,075,695.13 PAUL J. ZUCCONI Affirmative ........................ 12,985,296,316.39 Withhold ........................... 169,075,695.13 37 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* Alan D. Feld** (71) Trustee since 1996 Sole Shareholder of a professional corporation which is a Partner in the law firm of Akin, Gump, Strauss, Hauer & Feld, LLP (1960-Present); Director, Clear Channel Communications (1984-Present); Trustee, CenterPoint Properties (1994-2006); Member, Board of Trustees, Southern Methodist University; Member, Board of Visitors, M.D. Anderson Hospital; Board of Visitors, Zale/Lipshy Hospital. NON-INTERESTED TRUSTEES Term Lifetime of Trust until removal, resignation or retirement* W. Humphrey Bogart (64) Trustee since 2004 Board Member, Baylor University Medical Center Foundation (1992-2004); Consultant, New River Canada Ltd. (mutual fund servicing company) (1998-2003); 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). Brenda A. Cline (47) 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 (1999-2007). Eugene J. Duffy (54) Trustee since 2008 Principal and Executive Vice President, Paradigm Asset Management (1994-Present); Director, Sunrise Bank of Atlanta (2008-Present); Chairman, Special Contributions Fund Board of Trustees, National Association for the Advancement of Colored People (2007-Present); Trustee, National Association for the Advancement of Colored People (2000-Present); Board of Visitors, Emory University (2006-Present); Trustee, Atlanta Botanical Garden (2006-Present); Board Member, Willie L. Brown Jr. Institute on Politics and Public Service (2001-Present); Chair, National Association of Securities Professionals (2000-2002); Deputy Chief Administrative Officer, City of Atlanta (1985-1990). Thomas M. Dunning (65) Trustee since 2008 Consultant, (2008-Present); Chairman (2003-2008) and Chief Executive Officer (2003-2007), Lockton Dunning Benefits (consulting firm in employee benefits); Director, Oncor Electric Delivery Company LLC; Advisory Director, Comerica Texas; Immediate Past Chairman and Board Member, Dallas Citizens Council; Director, Baylor Health Care System Foundation; State Vice Chair, State Fair of Texas; Board Member, Southwestern Medical Foundation. 38 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 - ------------------------ ------------------- ----------------------------------------------------------------------------------- Richard A. Massman (65) Trustee since 2004 Senior Vice President and General Counsel, Hunt Consolidated, Inc. (holding company Chairman since 2008 engaged in oil and gas exploration and production, refining, real estate, farming, ranching and venture capital activities) (1994-Present). Chairman (2007-Present) and Director (2005-Present), The Dallas Opera Foundation; Chairman (2006-Present) and Director (2005-Present), Temple Emanu-El Foundation; Trustee, Presbyterian Hospital Foundation (2006-Present). R. Gerald Turner (62) 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 Worldwide Dallas, Texas 75275 Inc. (chemical manufacturing) (2003-Present); Director, First Broadcasting Investment Partners, LLC (2003-2007); Member, Salvation Army of Dallas Board of Directors; Member, Methodist Hospital Advisory Board; Co-Chair, Knight Commission on Intercollegiate Athletics. Paul J. Zucconi,CPA (67) Trustee since 2008 Director, Affirmative Insurance Holdings, Inc. (producer of nonstandard automobile insurance) (2004-present); Director, Titanium Metals Corporation (producer of titanium melted and mill products and sponge) (2002- present); Director, Torchmark Corporation (life and health insurance products) (2002-present); Director, National Kidney Foundation of North Texas (2003-Present); Director, Dallas Chapter of National Association of Corporate Directors (2004-Present); Partner, KPMG (1976-2001). OFFICERS Term One Year William F. Quinn** (60) President from Chairman (2006-Present) and CEO (2006-2007), President (1986-2006) and Director 1987 to 2007 (2003-Present), American Beacon Advisors, Inc.; Chairman (1989-2003) and Director and 2008 to Present (1979-1989, 2003-Present), American Airlines Federal Credit Union; Director, Executive Vice Crescent Real Estate Equities, Inc.(1994-2007); Director, Pritchard, Hubble & Herr, President from LLC (investment advisor) (2001-2006); Director of Investment Committee, Southern 2007 to 2008 Methodist University Endowment Fund (1996-Present); Member, Southern Methodist Trustee from University Cox School of Business Advisory Board (1999-2002); Member, New York 1987 to 2008 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 (1995-2008); Trustee, American Beacon Select Funds (1999-2008); Trustee, American Beacon Master Trust (1995-2008). Rosemary K. Behan (49) VP, Secretary and Vice President, Legal and Compliance, American Beacon Advisors, Inc. Chief Legal (2006-Present); Assistant General Counsel, First Command Financial Planning, Inc. Officer (2004-2006); Enforcement Attorney (2002-2004) and Branch Chief (2000-2002), since 2006 Securities and Exchange Commission. Brian E. Brett (48) 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 (42) 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. 39 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 - ------------------------ ------------------- ----------------------------------------------------------------------------------- Michael W. Fields (54) VP since 1989 Vice President, Fixed Income Investments, American Beacon Advisors, Inc. (1988-Present). Rebecca L. Harris (41) Treasurer since Vice President, Finance, American Beacon Advisors, Inc. (1995-Present). 1995 Christina E. Sears (37) Chief Compliance Chief Compliance Officer, American Beacon Advisors, Inc. (2004-Present); Senior Officer since 2004 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, provided, however, that the Board may determine to grant one or more annual exemptions to this requirement. ** Mr. Feld is deemed to be an "interested person" of the Trusts, as defined by the 1940 Act. Mr. Feld's law firm of Akin, Gump, Strauss, Hauer & Feld LLP has provided legal services within the past two fiscal years to the Manager and one or more of the Trust's and Master Trust's sub-advisors. 40 This page intentionally left blank. 41 (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 PUBLIC ACCOUNTING FIRM FORESIDE FUND TRUST DATA SERVICES ERNST & YOUNG LLP SERVICES Boston, Massachusetts Kansas City, Dallas, Texas Portland, Maine 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 and American Beacon Small Cap Value Fund are service marks of American Beacon Advisors, Inc. AR 10/08 64671 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, nor 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 - ---------- ----------------- $265,722 10/31/2006 (revised) $92,179 12/31/2006 $280,229 10/31/2007 $85,006 12/31/2007 $294,836 10/31/2008 </Table> (b) <Table> <Caption> Audit-Related Fees Fiscal Year Ended - ------------------ ----------------- $23,164* 10/31/2006 (revised) $0 12/31/2006 $8,750** 10/31/2007 $6,250** 12/31/2007 (revised) $0 10/31/2008 </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 - -------- ----------------- $0 10/31/2006 $0 12/31/2006 $29,199** 10/31/2007 $11,141 12/31/2007 $12,698* 10/31/2008 </Table> <FN> * For review of 2007 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 10/31/2006 $0 12/31/2006 $0 10/31/2007 $0 12/31/2007 $0 10/31/2008 </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 $11,141 $0 N/A 12/31/2007 $12,698 $0 N/A 10/31/2008 </Table> (h) Not applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. The schedules of investments for each series of the Trust are included in the shareholder report presented in Item 1. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Trust has made no material changes to the procedures by which shareholders may recommend nominees to the Trust's Board of Trustees since the Trust last disclosed such procedures in Schedule 14A. ITEM 11. CONTROLS AND PROCEDURES. (a) Based upon an evaluation within 90 days of the filing date of this report, the principal executive and financial officers concluded that the disclosure controls and procedures of the Trust are effective. (b) There were no changes in the Trust's internal control over financial reporting during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Trust's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Filed herewith as EX-99.CODE ETH. (a)(2) A separate certification for each principal executive officer and principal financial officer of the Trust as required by Rule 30a-2(a) under the Investment Company Act of 1940 is attached hereto as EX-99.CERT. (a)(3) Not applicable. (b) The certifications required by Rule 30a-2(b) under the Investment Company Act of 1940 are attached hereto as EX-99.906CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant): American Beacon Funds By /s/ William F. Quinn ---------------------- William F. Quinn President Date: January 8, 2009 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ William F. Quinn ---------------------- William F. Quinn President Date: January 8, 2009 By /s/ Rebecca L. Harris --------------------- Rebecca L. Harris Treasurer Date: January 8, 2009